Age pension recipients should be wary of reducing their returns when unloading property, writes George Cochrane.
MY PARENTS and I own a house together and have equal shares among the three of us. The house has been their home for 20 years and I did not charge them rent on my portion of the house. One year ago mum and dad, who are in their 70s, moved to my brother's rental property to be near us and we rented out their old home and received $320 a week. The money is paid to my brother as rental payment from my parents. The market rent for his house should be $360 a week. Now my parents want to sell the old house but we are not sure what to do with the money after the house is sold. They want to be fair and give my brother some rent. Please suggest some ideas to deal with my parents' old home selling or renting or what to do with the proceeds. A.A.
Your parents own two-thirds of their house and their portion is exempt from capital gains tax for the period that it was their principal residence and a further six years after they began renting it and living in your brother's property. So there is no CGT reason for them to sell in a hurry.
However, you state that they wish to sell now and thus you will be subject to CGT. From your 33 per cent share, subtract one-third of the costs of buying and selling plus any capital improvements, then add 50 per cent of your net gain to your taxable income this financial year.
If your parents notified Centrelink when they moved out of the house, they are already being assessed as "non-home owners" by the assets test. This then ignores the first $265,000 before it begins to reduce their age pension.
Under the income test, rent is counted dollar for dollar and thus, at present, their two-thirds share of the rent comes to $427 a fortnight or $11,099 a year. Because a couple can have up to $264 a fortnight before their age pension is reduced, the income test would also be reducing their pension. Whichever produces the lowest pension is used.
However, if they sell the house, their cash and any other "financial investments" will be "deemed" to earn 3 per cent on the first $74,400 and 4.5 per cent on the rest. Thus, if they net $240,000 and invest this in term deposits at 5 per cent, they will earn about $12,000 a year, or $462 a fortnight. If they pay your brother $360 a week, they will still have about $102 left over. But the income test will deem them to earn $372 a fortnight or $9684, so the income test would allow a higher pension while they also receive a higher investment return.
I would stick to term deposits for now while economic uncertainty is this high.
Pension confusionThe letter "Rules Britannia" (Investor, January 29) not only attracted my interest but it was referred to in an article in The Sydney Morning Herald. Can you please explain how a self-funded retiree who clearly has income and assets above both thresholds can claim any sort of pension, let alone a generous $12,300 a year? I.B.
One of the problems with our financial jargon is that the word "pension", when used alone, can refer to both an age pension, paid by the government from taxpayers' money, or a superannuation pension, paid from an employer's fund and usually financed by employer and employee.
The clue, which you noted, was that the reader stated he (or she) was "self-funded" and hence the pension would have been superannuation. Given that the individual was receiving this and also had a lump sum in an industry super fund, I suspect it was a state or federal government superannuation fund, and the recipient probably worked long and hard to earn it.
Beware the fine printI would be most interested to know how you arrive at a figure of $1,018,000 as the disqualifying figure for receiving a part age pension in light of the (enclosed) rejection advice. I am 80 years old and my wife is 70. Our assets total $308,840, yet Centrelink assesses total combined assets at $724,274. The complicating factor is that four years ago we took half our super and bought a house for $370,000 for a dependant son, now deceased. So we have no idea and have been unsuccessful with inquiries to Centrelink as to how it arrived at its figure. Your article in Investor on February 26 would appear to be incorrect. A.H.
You are quite right that Centrelink's letter to you is headed, in 14-point bold type, "Rejection of your claim for Age Pension". However, the second line, in 10-point type, reads: "We cannot pay you an Age Pension because we have not received a reply to the letter/s we sent you."
When in doubt, read the instructions or, in this case, the second line, then reply to its letters.
Your gift to your son was more than the maximum $10,000 gift permitted in any one year (and $30,000 over five years) and hence the excess is counted by the means tests for five years. This will be dropped in a year's time.
You will soon be right in that the disqualifying figure for the married age pension for home owners is not $1,018,000 because, as from March 20, this top threshold rises to $1,024,500. It seems a bit absurd that some people (not yourself) with more than $1 million and a house should still be able to claim welfare benefits from the taxes I have to pay but that's the way it is for now. As we've seen in Europe, and especially Greece, absurd financial conditions seem to carry on for decades until economic forces instil a vicious discipline, then it all ends in tears.
If you have a question for George Cochrane, send it to Personal Investment, PO Box 3001, Tamarama, NSW, 2026. Helplines: Financial Ombudsman, 1300 780 808 pensions, 13 23 00.