YOUR QUESTIONS

INHERITANCE QUANDARY

By InvestSMART · 2 Sep 2012

By InvestSMART ·
2 Sep 2012

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INHERITANCE QUANDARY

Nine months ago, I received a small inheritance from my father's estate in Britain. I am on the age pension and informed Centrelink, who reduced my pension. Will I have to complete a tax return for the 2012 financial year and pay tax? I do not normally pay any tax and no tax is payable to Inland Revenue in Britain on inheritance. D.H.

As you receive an age pension, you will need to submit a tax return (by October 31) if your income in 2011-12 was more than $30,451 if you were single, widowed or separated at any time during the year or $24,823 if you lived with your spouse for the full year or $29,490 if you had a spouse but had to live apart due to illness.

For those with more complex finances, these thresholds are not simply comprised of assessable income but also, added to this, deductible super contributions, any net financial or rental property losses plus adjusted fringe benefits, the sum of which are called your "rebate income". If in doubt, Google "ATO Do you need to lodge a tax return? 2012"

GRANNY FLAT TAX POSER

My wife and I have lived in our current home since 1976, but in 1987 we built a two-bedroom unit (granny flat) for my parents in our backyard under the Victorian "dual occupancy" rule. Apart from a period of about 18 months in 2002-03 when it was rented out following the death of my parents, the unit has always been occupied by family members. As far as I can ascertain, the property (house and unit) is still on the one title. Initially, we paid two council rates, until some five to six years ago, in one of the council re-valuations, it was consolidated into just the one rate. We are now contemplating selling and moving to a smaller house or unit. I'm wondering if we would be liable for capital gains tax (CGT)? We are hoping to put any money saved in this move into our superannuation fund while we still can as we're both coming close to retirement age. P.L.

Your granny flat is a post-1985 capital improvement to your pre-1985 property and has been used for income-producing purposes, so some CGT would be assessable. You might have an argument that the flat forms part of your principal place of residence, although it is apparently a separate structure, and whether that would sway the ATO depends on the facts of the case. You will need to talk to a tax accountant and possibly seek a private ruling.

If you have a question for George Cochrane, send it to Personal Investment, PO Box 3001, Tamarama, NSW, 2026. Help lines: Financial Ombudsman, 1300 780 808 pensions, 13 23 00.

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Frequently Asked Questions about this Article…

Do I need to lodge a tax return after receiving an inheritance while on the Age Pension?

Possibly. The article explains that Age Pension recipients must lodge a tax return for 2011–12 if their income exceeded the relevant ATO lodging thresholds. Whether the inheritance pushes your income over those thresholds will determine if you need to lodge — if in doubt, check the ATO tool “Do you need to lodge a tax return? 2012” or speak to a tax adviser.

What were the 2011–12 income thresholds that determine if an Age Pensioner must lodge a tax return?

For the 2011–12 year the article lists the ATO lodging thresholds as: $30,451 if you were single, widowed or separated at any time during the year; $24,823 if you lived with your spouse for the full year; and $29,490 if you had a spouse but lived apart because of illness. These thresholds can include more than just assessable income (see rebate income).

How can an inheritance affect my Centrelink Age Pension payments?

An inheritance can affect your pension entitlement because Centrelink treats lump sums and changes in assets/income as part of its means tests. In the article the reader reported the inheritance to Centrelink and their pension was reduced. Always notify Centrelink when you receive inheritance funds so they can reassess your pension.

Does receiving an inheritance from Britain mean I’ll automatically pay tax to the UK or Australia?

The reader noted no tax was payable to the UK’s Inland Revenue on the inheritance, as reported in the article. The article does not state that UK non-taxation removes any Australian tax or reporting obligations. What it does say is that you may need to lodge an Australian tax return if your income (including relevant amounts) exceeds ATO thresholds for the year. If you’re unsure, check the ATO guidance or consult a tax accountant.

What is “rebate income” and what counts toward the ATO lodging thresholds?

According to the article, rebate income is not just assessable income. It also includes deductible super contributions, any net financial or rental property losses, and adjusted fringe benefits. The sum of those items can determine whether you breach the ATO’s lodging thresholds for the year.

Will I have to pay Capital Gains Tax (CGT) if I sell a house that has a granny flat?

Possibly. The article explains that a granny flat built in 1987 is a post‑1985 capital improvement on a pre‑1985 property and has been used for income-producing purposes, so some CGT would be assessable. The exact CGT outcome depends on the facts of the case and whether any principal place of residence exemption applies to the flat.

Can the granny flat be treated as part of my principal place of residence to avoid CGT?

You might have an argument that the granny flat forms part of your principal place of residence, but the article notes it’s a separate structure and whether the ATO accepts that depends on the specific facts. The recommendation in the article is to discuss your circumstances with a tax accountant and possibly seek a private ruling from the ATO.

Who should I contact for personalised help about inheritance, Age Pension changes or granny flat CGT?

The article suggests talking to a tax accountant and, if needed, seeking a private ruling from the ATO. For general help lines mentioned in the article you can contact the Financial Ombudsman on 1300 780 808 or Centrelink pensions on 13 23 000. The article’s columnist also invited questions to Personal Investment, PO Box 3001, Tamarama NSW 2026.