Tax with Max: Calculating capital gains on a rebuild

Working out the tax implications of rebuilding a house, making a concessional super contribution, claiming a government pension and more.

Summary: Capital gains are not based on original cost plus improvements in situations where a property ceases to be a main residence, such as when a new one is purchased and the original home is rented out. When the owners move out of their home into a new main residence, a market value of the old property at that point in time is established.

Key take-out: The market value of the old main residence at the time when the owner moves out is compared to the same property’s market value when it is later sold to work out the assessable capital gain.

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

Calculating capital gains on a property

I have a question with regards to tax implications of our home if we knock it down, rebuild and sell it in say 10 years. Will the cost of construction be considered to be a capital cost and added to the original purchase price if I sell it in future and use the property as investment property?

Answer: When a property ceases to be a main residence when a new one is purchased and the original property is rented out, the calculation of any future capital gain is not based on the original cost plus improvements.

In this situation this means that if someone knocks down their current home and builds a new residence, lives in it for 10 years, and then purchases a new home with their original property being rented out, the construction costs of the new residence are not taken into account.

The way a taxable capital gain is calculated in this situation is that upon moving out of the current home, whether it is the existing residence or a new home that has been built, a market value of the property at that point in time is established. This means if a home was worth $800,000 when the owner commenced renting it, and then it was sold for $1 million after being rented for 10 years, the profit would be $200,000 with the assessable capital gain being $100,000.

Making a concessional super contribution

I have recently been made redundant and wish to contribute money to my self-managed super fund as tax effectively as possible. My employer has contributed the regulation amount to an industry fund for about three months of this financial year, a tiny sum well short of the $35,000 concessional amount allowed.

An accountant told me that as my employer has already made concessional contributions for me this year, I am unable to contribute more. Is this true? If not is it worth the bother tax-wise?  I desire to contribute up to the $35,000 limit and make a $60,000 non-concessional contribution to my SMSF.  I am 66 years old and will have a total taxable income of about $30,000 this financial year.

Answer: What the accountant advised is correct if your salaries and wages income for the 2015 financial year make up more than 9% of your taxable income. If you found another job you could have further compulsory employer contributions made on your behalf plus sacrifice some of your salary as extra concessional contributions.

The only time that a person can make tax-deductible self-employed super contributions is when they either receive no employer superannuation support, or their salary and wages income is less than 10% of their total taxable income.

Even in a situation where it is possible to make a self-employed tax-deductible contribution it is not desirable to contribute more than $5000. This is because once a saver’s income drops below approximately $25,000 they would not be paying any income tax, but would be paying the 15% contribution tax.

Someone who has satisfied the work test in this 2015 year, of up to $180,000, is able to make a non-concessional contribution. As you are over 65 you have complete access to all of your superannuation. Someone in this situation may wish to consider withdrawing all of the superannuation from the industry fund, combining this with any other cash available, and then maximising any non-concessional contribution.

There are a number of other tax and estate planning options open to you. You should seek advice from a professional that specialises in these areas before taking any action.

Claiming a government pension

I am a single woman aged 65 and receive a fortnightly superannuation payment of $1900 from State Super. I own a small unit worth $450,000 and have no other investments. Would I be able to claim a government pension or health care card?

Answer: Of the two tests used to determine eligibility for the age pension someone receiving such payments will more than likely have a problem with the income test. Under the income test a single person can earn up to $1845.60 a fortnight before they become ineligible for the age pension.

As you are receiving $1900 a fortnight this would result in you failing the income test. The only way of qualifying under the income test is if you qualify under the current legislation to deduct a purchase price for your pension.

As the income test for the Commonwealth Seniors Health Card is set at $51,500 a year for singles, which equates to $1980.77 a fortnight, this means with someone with an income of $1900 a fortnight would be eligible for a health card. I recommend that you contact Centrelink as soon as possible to have an assessment done on your personal situation.

Deeming for an age pension

Could you tell me if deeming for an age pension is the same as deeming for a Commonwealth Seniors Health Card – i.e. is it based on funds in pension phase in super as for the CSHC or is it on the total super you have?

Answer: Under the age pension income test, superannuation held in an accumulation account has the deeming rates of income applied to its value, while currently the amount of account-based pension received is decreased by its purchase price with the net amount being counted. Under the income test for the Commonwealth Seniors Health Card none of the non-taxable account-based pension is currently counted.

From January 1, 2015 anyone of age pension age not covered by the grandfathering provisions will have the deeming rates of income applied to superannuation accounts in both the accumulation and pension phase.

As I have not seen the new legislation relating to the changes being made to the income test for the CSHC I am unsure as how the deeming rates will be applied to superannuation accounts. Currently under the income test for the CSHC amounts held in an accumulation account do not affect a person’s entitlement to the CSHC. It would be hoped therefore the deeming rates will only be applied to a superannuation account that is in pension phase.

Defining joint tenants

I believe you may have confused tenants in common and joint tenants in your article on inheriting a rental property (Tax with Max: Inheriting a rental property, November 19). My understanding is that under a joint tenancy the two owners both together own the whole undivided fee simple, and that when one dies, the other automatically takes the whole title.

Answer: The answer to my question relating to a property being inherited, and the distinction between tenants-in-common and joint tenants, is an indication that I have a better understanding of the vibe of the law but not necessarily the letter of the law. The difference between these two types of ownership is one that I have struggled with for many years.

I actually did some research in answering this question but have found, upon further checking, that the source I used was in the USA where it appears the terms have the reverse meaning to what we have in Australia.

This means when individuals own an asset as tenants-in-common they each hold the interest separately. This type of ownership is best used when a property is owned in unequal shares by a couple or several people. When a couple own property as joint tenants they each have an equal share in the property and, upon the death of one of them, ownership automatically passes to the surviving member.

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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