|Summary: This article provides answers on whether it makes sense to reduce income and assets to meet the age pension eligibility tests, the rules on deceased estates and capital gains tax, the treatment of principal residences and CGT, paying a SMSF’s tax expenses using external funds, and on tax refunds for dividend franking credits.|
|Key take-out: A comparison must be done between the extra income and savings received by qualifying for the age pension versus how much would be lost by reducing other after-tax income to qualify for the government pension.|
|Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation.|
The age pension balancing act
Many retirees employ a strategy – one assumes after first getting some form of professional advice – of ensuring their level of income is such that they can get a part pension and hence the apparent “golden ring” of the health care card. When does this strategy become economically viable? That is, what is the health care card worth in terms of foregone income?
For example, if I have the opportunity of using part of my current income earning capital to buy a new home, thus losing the income-producing capital and associated income, how much would make this worthwhile if I was then able to get the health care card?
Answer: The question you ask is a complicated one. The only way that the correct answer can be given is if your total financial situation is taken into account. This means to get the correct answer, you should seek professional advice. There are, however, some things that you should be aware of when it comes to the tests applied by Centrelink.
The main test that you refer to is the assets test. If your only source of income is a pension from a super fund, there is a reasonable chance, which results from being able to deduct the purchase price of the pension, that the income test would not affect your ability to receive an age pension.
It would appear that you are considering using some of your investment capital to upgrade your current home to the point where your income will drop below the cut-off point under the income test. For a couple, the cut-off point under the income test at which an age pension will not be received is $72,010 a year.
The other test that must be considered is the assets test. As a person’s home is not counted in the assets test, this can be another reason why you would be converting investment capital into a more costly home. The point at which the total value of a couple’s assets results in them not being eligible for the age pension is $1,110,500.
In the final analysis, the comparison must be done between how much your after-tax income will decrease if you do upgrade your home, compared to the extra income and savings you will receive by qualifying for the age pension.
Deceased estates and capital gains tax
Generally, following the death of an owner, the deceased property, including the “principal residence”, passes to an executor pending transfer to beneficiaries in accordance with the deceased’s will. For what period of time from the date of death of the deceased is a principal residence capital gains tax exemption viable? Assuming that during the executor’s period of administration the residence remains CGT exempt, what administrative actions of an executor (for example, earning rental income from leasing the residence), would invalidate the principal residence CGT exemption?
Answer: Any capital gain made on the disposal of a deceased’s residence is not counted for income tax purposes if the property is sold within two years of the person’s death. This tax-free treatment of the residence is not changed, even if the residence is rented out during the two-year period.
This capital gains tax exemption period can be extended where the residence is not used to produce rent and the spouse of the deceased lives in the house, a person occupies the house as a result of the deceased will, or a beneficiary disposes of the dwelling as a beneficiary. This is a complicated area of capital gains tax law and you should seek professional advice before making any final decisions.
Principal residences and CGT
Two years ago we moved from Adelaide to Queensland. We tried to sell our house in an inner suburb in Adelaide but could not get a satisfactory price at that time and have rented it on a long-term lease since then. The house was originally bought off the plan as part of a seven property development in 2002, and cost us all up around $520,000. In 2010-2011 we built a new home in Queensland, which became our principal place of residence in late 2011.
There is an obvious capital gain since the Adelaide house was built, but most, if not all of this, was in the period 2002 to 2011. I have read that no CGT is payable if a previously occupied PPR is sold within six years. Is this correct, and therefore we can hold the Adelaide property till 2017? If not, and should we sell in the next year or so, do we need to apportion the capital gain according to the time the property was rented? This seems unfair as the capital gain was mostly when the property was a PPR?
Answer: In most cases a person or couple can only obtain the PPR exemption for one property. There is a limited exemption when the original PPR takes some time to sell, but in general terms the exemption will not apply to two properties. The six-year rule that you mention only applies when a person is absent from their PPR and does not own another PPR.
The capital gain you will be paying income tax on will be the increase in the value of the property from when it ceased to be your PPR. You will need to engage the services of a professional valuer, who can place a value on your previous home at the time you started renting it.
Can a trustee pay a SMSF’s tax expenses?
We have a SMSF in pension mode. Is it possible to pay accounting fees for the SMSF tax return from the trustee’s personal account, or do the fees need to be paid from an account within the SMSF?
Answer: Trustees can pay an expense on behalf of an SMSF depending on the age of the member and whether they have exceeded any of the superannuation contribution limits in the year they pay the expense.
Where a member is under 65 years of age, and they have not exceeded either the concessional or non-concessional contribution limits, they can pay an expense on behalf of an SMSF. In this case the amount paid is treated as a contribution by the member.
If a member is 65 or older and not working, or the member has exceeded their concessional and non-concessional limits, they cannot pay an expense on behalf of their SMSF. In this situation they would in the first case not be eligible to make contributions. In the second case, making a contribution would result in an excess contribution.
Given the complexities relating to paying amounts on behalf of an SMSF, it is best practice if the fund pays its own expenses.
Tax refunds of dividend franking credits
For 2012-13 my income will be about $17,000 to $18,000, but probably just under the tax threshold. Some of that income is dividends from fully-franked shares. Should I lodge a tax return? Is there anything to be gained?
Answer: Once you take into account the low income tax offset a person can earn up to approximately $20,500 and not pay income tax. This means that if you have received franking credits you will more than likely be eligible for a refund. You could either lodge a tax return or an “Application for refund of franking credits for individuals” form that can be downloaded from the Australian Tax Office website.
Max Newnham is a partner with TaxBiz Australia, a chartered accounting firm specialising in small businesses and SMSFs.
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.
Do you have a question for Max? Send an email to firstname.lastname@example.org