In March 2001, my wife and I purchased a townhouse for $395,000, for our future retirement. This has been let as a rental property. Now we have decided to sell our residential home and downsize to a smaller property. The townhouse has been left to my daughter in our wills, but she now wishes to purchase the townhouse instead of waiting for the inheritance. If we give the townhouse to my daughter will we have to pay a capital gains tax (CGT on approximately 50 per cent of $600,000) as well as my daughter paying stamp duty and plus legal fees on transferring the townhouse to her? If we sell our home and live in the townhouse for one year, would we still have to pay CGT on transfer of our residence and would we still have to pay CGT on transfer to our daughter? This would also allow us to remove our state land tax bill. R.M.
You are correct. If you give the property away now, while still on your perch, you will pay CGT. If the market price is $600,000 and your cost base is $395,000, increased to, say, $440,000 by adding your buying and selling costs, plus any capital improvements during the past 15 years, then your total capital gain would be $160,000.
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Photo: Michael Mucci
Since you have owned it for more than 12 months, then $80,000 would be assessable. If it is in joint names, you would each add $40,000 to your assessable income in your next tax return. If you are both in the 32.5 per cent tax bracket, plus 2 per cent Medicare, (for incomes between $37,001 and $80,000), then total additional tax would be some $27,600.
Your daughter would be up for Victorian stamp duty of $31,070. However, a "principal place of residence duty concession" reduces the duty by 50 per cent if (i) she is buying a property valued up to $600,000, (ii) intends to move in within 12 months of settlement, and (iii) lives there as her primary home for at least a year. If there are two or more buyers, at least one must satisfy these requirements although it is not necessary for the same buyer to occupy the home for the whole 12 months. (She may also qualify for a first home buyer's concession.)
If you live in the townhouse for one year, claiming it as your main residence before transferring it, then CGT is proportional, ie, if you transfer after owning it for 16 years, 15/16ths of the capital gain is assessable. By claiming this property, then your current home, if not sold beforehand, loses its exemption for the year.
If you can afford to give away a $600,000 asset, and if your daughter pays your additional tax as well as her stamp duty, she would be getting it very cheaply, but I would be more concerned about your own needs. Old age is becoming very expensive.
I am a 75-year-old, fully self-funded retiree, with investments about 50:50 inside and outside of super. I have the Commonwealth Seniors Health Card and would like to downsize, but will then lose my card forever. If you are on a part-age pension, and lose it, you get the CSHC which is Income Test exempt indefinitely. This means that you can downsize and invest the excess money and be over the threshold indefinitely. What a loophole! As for myself, if I downsize, the excess income would put me over the threshold and if/when I later apply for a new card, then super deeming will kick in. This seems a double standard policy. I would like to downsize but am I missing something so I may keep the card? J.W.
Don't forget that, if receiving a part-age pension, your income, after September 20, 2016, must be below the cut-out threshold of $49,873 a year for singles ($76,357 for couples). The cut-out threshold for a person receiving the CSHC for singles is $52,796 from the 20th, ($84,472 for couples).
In other words, the gap for someone who cannot get a part age pension but can apply for a CSHC is pretty narrow. If you become ineligible for both, then Australia has been good to you and you have done well out of life. So you really don't need my taxes any more.
As an aside, the age pension's top assets test limits after January 1 can now be confirmed as $542,500 and $816,000 for homeowner singles and couples, and $742,500 and $1,016,00 for non-homeowners.
I am 66, divorced and still working in my building design business from which I derive between $70,000 and $80,000 a year. Recently, I withdrew $80,000 from my MLC super fund to pay off a business overdraft, leaving a balance of $70,000. Since then I sold an investment apartment I owned and paid off the mortgage on my apartment. The balance of $100,000 has since been reinvested every three months in a bank term deposit. Apart from my residence (probably worth $750,000), I only own a $12,000 car and about $20,000 in personal items. I am in good health and intend working for another 3-4 years. I am not sure what to do with the $100,000, whether to add it into my super fund or invest it elsewhere. I am not sure about super funds as they are so vulnerable to a global financial crisis. F.D.
I would add the cash to your super fund since, not only is the interest being earned on your term deposit a paltry amount, it is currently being taxed at 34.5c in the dollar. (I assume you have not contributed more than $500,000 as non-concessional contributions since 2007, although this 2016 Budget measure may not make it through Parliament.)
Global financial crises tend to occur many decades after the last one, when people again get careless. While I can't guarantee it, you are likely to earn more in a diversified super fund, which can then pay you an untaxed income when you retire.
However, retirement is likely to see a dramatic drop in your living standards, so I would plan on working for as long as you can.
If you have a question for George Cochrane, send it to Sunday Money, PO Box 3001, Tamarama, NSW, 2026. All questions answered. Helplines: Financial Ombudsman, 1300 780 808; Centrelink pensions, 13 23 00.