Using a bank account to shelter children's assets comes at a cost, writes George Cochrane.
I'M A self-funded retiree expecting to receive a part pension in a few years' time. I've suggested to my children to park some of their savings into my bank savings account to save on the amount of tax on the interest paid as my tax rate is much lower than theirs. Is my suggestion legal and will it jeopardise my application for a part pension in future? T.W.
Yes, such a plan may reduce your Centrelink age pension in the future. The income and assets means tests will assume the money is yours and calculate your grant of pension accordingly. If single, the income test begins to reduce your pension for income levels above $150 a fortnight and cuts it out completely at $1648 a fortnight. The assets test begins to reduce your income for assets above $186,750 for a single home owner and cuts it off at $686,000.
The means tests look back five years to see if you have gifted away larger amounts than permitted, in which case the money that has gone will be counted for a further five years.
It's also a bad idea because if, for example, you were to meet with a car accident or encounter some other means of shuffling off this mortal coil, the money would be deemed to be part of your estate and subject to your will. The children who have deposited money with you may then see their savings divided up among all your other heirs, which they might find irritating.
Tax breaks for non-residents
My sister and I are executors of our mother's will. We have yet to distribute her shares as the market went down before probate was granted and has still not returned to what it was at the date of her death. We have until June 30 next year to deal with them. One third goes to our brother who lives permanently overseas. We have been told that as a non-resident he would not have to pay CGT. Can this possibly be true? Could you explain our position in relation to inherited shares please? F.B.
I understand that to be correct although, as I have pointed out before, I am not a tax agent. Prior to December 2006, non-residents who disposed of CGT assets with the "necessary connection" with Australia were liable to pay CGT. The types of assets that had the "necessary connection" included shares or units in Australian companies or unit trusts, unless the asset was less than 10 per cent of the shares in a publicly listed company, or the units in a public unit trust.
Under rules introduced in December 2006, the concept of necessary connection was replaced with the concept of "taxable Australian property", which excluded shares and units in Australian companies and unit trusts and thus your brother would be exempt.
Don't forget that if your mother bought some or all of the shares before September 20, 1985, their cost base for capital gains tax purposes is the value at the date of death. If you are using the "three-year rule" in managing the estate, then I presume death occurred in 2009-10, when the overall sharemarket index was higher than it is now. Depending on the shares owned, if their price is now lower and the investments are showing a net capital loss, then none of you are liable for CGT.
Making the cap fit
I am a 61-year-old man, working full time. I am considering making deductible (concessional) contributions to my superannuation fund up to the amount allowed by law, which I believe would be $50,000 subtracted by the amount my employer contributes. My main objective is to reduce the CGT after selling each of my three investment properties during the next two to three years. Am I allowed to contribute with a lump sum equivalent to the deductible contributions just before the end of each financial year with the proceeds of the sale of each investment property? Or can the contribution only be done through salary sacrificing on a monthly basis? I would prefer to be able to contribute with a lump sum because I need to have a reasonable cash flow in order to meet the repayments of the loans on my investment properties. If I contribute to my superannuation fund through salary sacrificing, am I allowed to withdraw from super the amount equivalent to each contribution, in order to meet my loan repayments? I have heard that "transition-to-retirement" could be an option, however I do not know much about it. M.B.
It sounds as though you are an employee and as such can only make deductible contributions via salary sacrifice. Hence no lump sum deductible contributions can be made at will unless your employer is exceptionally accommodating and allows irregular salary sacrificed amounts, all agreed to before you carry out the relevant work.
Since you are still employed, I assume you have no non-preserved components in your super fund and thus you cannot withdraw lump sums. However, being over "preservation age" of 55, you can begin a transition-to-retirement or TTR pension, which allows you to take up to 10 per cent of assets as at July as a pension that financial year from your preserved components. However, not all super funds offer a TTR pension, so you need to check.
At this stage there is uncertainty about the maximum concessional contribution allowable in 2012-13. At the moment, it is supposed to drop to $25,000 although a proposal was made that the cap remains at $50,000 for people with superannuation benefits under $500,000. No further comment has been made about this.
The proposal to make the cap equal throughout a person's working life is unfair to the over 50s in that it ignores the reality of life today whereby working families devote much of their income to bringing up families. Only later in life, when the kids are gone and the mortgage is paid off, or almost paid off, can they focus on saving a larger portion of their income for their retirement. From its behaviour, one would think the government wants to swell the welfare bill.
If you have a question for George Cochrane, send it to Personal Investment, PO Box 3001, Tamarama, NSW, 2026. Helplines: Banking Ombudsman, 1300 780 808 pensions, 13 23 00.