Tax with Max: Borrowing against a home

Considering a loan against a home, helping children to buy a house, capital gains tax and trading Telstra.

Summary: A couple getting the full pension and no other income may consider borrowing against their home. This would provide them with a larger bank balance. But it would decrease the amount of age pension they receive.

Key take-out: It may not make a great deal of financial sense to borrow against a home until there is a lot less remaining in the homeowners’ bank account.

Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation.

Borrowing against a home

My wife and I are both in our 70s, getting the full pension, have $120,000 in the bank, and have no other income coming in. We are thinking of going to Homesafe and getting $150,000 to make $270,000 in the bank. If we did what would happen to the pension?

Answer: We are not licensed to give personal advice, but here are some general observations. I am not sure why someone with $120,000 in the bank would borrow $150,000 against their home, especially if the funds are only going to be sitting in their bank account.

The problem with this plan is that it would give someone a financial asset worth $270,000, and because the advance from Homesafe will be secured against their residence, a loan that will not be taken into account to reduce the value of their financial assets.

This will mean that under both the income and assets tests the amount of pension they receive will be decreased. Their deemed income on $270,000 in the bank will be $318 a fortnight. With $284 a fortnight being what can be earned without it affecting the age pension, this would result in a decrease in the age pension of $17 a fortnight.

When the value of a motor vehicle, home contents, jewellery and any other assets are added to the $270,000 someone in this situation would more than likely exceed the $286,500 asset limit, and therefore could lose some pension under the assets test.

I am not sure whether this proposal makes a great deal of financial sense. From a review of the Homesafe website there does not appear to be an upper age limit on obtaining funds from them. This would lead me to suggest not obtaining the financial assistance until there is a lot less in the bank account.

Due to the complexities of this plan, and because it would appear that there would be a decrease in the age pension if $150,000 were obtained from Homesafe, you should seek advice from a fee for service professional that specialises in this area.

Helping children to buy a house

I recently read an article about parents assisting their children with buying a house and of the possible capital gains tax consequences. My parents have just assisted me and my husband in the purchase of a house, by contributing cash and having 10% equity on title. Our solicitor has advised that when that is bequeathed to me, it will not be subject to capital gains tax. Are you able to shed any light on the matter?

Answer: One of the few times when an asset is not taxable for capital gains tax purposes upon the death of the owners is when it is their principal place of residence. Another time is when the asset was purchased before September 1985, and therefore is a pre-CGT asset, and it is sold while the estate is in the course of administration.

One of the other situations where no capital gains tax will be payable is in a situation like this. As the child would be receiving the 10% share of their home upon the death of their parents, because it is their principal place of residence, no capital gains tax would be payable by the child when they sold it.

If on the other hand the child sold their current residence before their parents died, the parents would make a capital gain on the 10% that they own. Capital gains tax would also be payable by the parents if they decided to transfer their 10% to the child prior to their death.

CGT after a parent’s death

My mother died in a care home four years after leaving her home. Land tax was charged on her two properties because she did not live in her home for more than six months.  It was always a family home and family members lived in it except for one year when it was rented. She also owned a beach house worth $650,000 that was never rented.

We are now renovating the family home and intend to sell it for $900,000 after spending about $40,000 on painting and renovation work. My mother died nine months ago. Do we have to pay CGT on the family home? Can my sisters disclaim ownership of the beach house property thus avoiding tax on it?

Answer: For there to be no capital gains tax payable on the sale of your mother’s former home it must first be classed as her main residence. Clearly it was her home before she moved into aged care and, apart from the 12 months it was rented, family members were living it. In my estimate, despite your mother having not lived in the home for four years, it should still be classed as her principal residence.

As long as she did not pay a bond and end up with an ownership interest in the unit in the aged care facility, and as she did not have another home that she was living in that she owned, the property should still be classed as the main residence.

One of the reasons I believe this is because a person can leave their main residence for up to six years, as long as they do not purchase another home, and they will still receive the main residence exemption even if it is rented out over that period. This should mean that when the estate sells her home no capital gains tax will be payable.

You will need to seek legal advice as to whether your sisters can disclaim ownership of the beach house. If they did this it would result in them not being able to benefit from the proceeds of the sale of that property. If the beach house had been purchased pre-September 1985 no capital gains tax would be payable when it is sold by the estate.

Because of the complexities surrounding the CGT exemption for main residence you should seek professional advice before taking any action.

Trading Telstra

If an SMSF is in pension mode, and therefore paying no tax, sells shares in the Telstra buyback and subsequently repurchases Telstra shares on the market, will the fund face a risk with the franking credits under the ATO’s dividend washing rules?

Answer: The ATO in August announced that it would be commencing the next phase of its dividend washing compliance program. This compliance activity is centered on investors that have been trying to obtain two sets of franking credits from one dividend event.

This means the crackdown by the ATO with regard to dividend washing is aimed at those taxpayers that sold shares while still retaining the right to receive a franked dividend, or purchased an equivalent parcel of shares that also had a franked dividend attached to them using a special ASX trading market.

If an SMSF will be selling the Telstra shares that it has owned for a number of years, and then purchasing a new set of Telstra shares on the market, the dividend washing provisions will not apply.

At the heart of the dividend washing rules are the requirement for a shareholder to hold shares at risk for more than 45 days for them to be eligible to receive the franking credits attached to the shares. As long as an SMSF does not sell the new Telstra shares that it buys back until they have been owned for at least 45 days it has no risk under the dividend washing provisions.

Max Newnham is a partner with TaxBiz Australia, a chartered accounting firm specialising in small businesses and SMSFs. Also go to

Note: We make every attempt to provide answers to readers’ questions, however, answers are of a general nature only. Subscribers should seek independent professional advice for more in-depth information that is specific to their situation.

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