I am a widower, retired, 79, and in good health. I operate a self-managed super fund. My current position as of last financial return is $2.6 million, principally cash and shares. My home and another property, both debt free, would be worth around $7 million combined. I do not intend to sell either, particularly the investment, as the capital gains tax would be too severe. My history is real estate and when the real estate market corrects I intend buying two properties, assisted by borrowing, one with future redevelopment potential in Sydney and, if I can afford it, a substantial rural property capable of at least sustaining itself. The object is to eventually provide education opportunities for my young grandchildren and a rural retreat for future generations. I would greatly appreciate your advice in terms of the imminent proposed changes in superannuation. G.Y.
With $2.6 million in your super fund, you are $1 million above the transfer balance cap that restricts untaxed pension funds to $1.6 million from July 1.
You have a number of choices on how to adapt. You can simply leave things as they are, taking the necessary steps before June 30 to convert the excess above $1.6 million into the accumulation phase where they will be taxed. Since you have over $1.6 million, you will not be allowed to run a "segregated" fund where you allocate some assets to an untaxed pension account and some to a taxed accumulation account within the fund.
Thus, the easiest approach for you as trustee is to leave all investments as they stand and administer the fund proportionately. Be sure to read the Tax Office's Consumer Practice Guideline 2017/18, on its website, that lists the steps you must take to partially commute a super pension.
As part of the process, investments held continuously in the pension fund between November 9, 2016, and June 30, 2017, can have their cost base reset to the close of trading on June 30. Note that this also resets the 12-month waiting period for the 33 per cent exemption from capital gains tax when investments are sold.
Under the proportionate method, the pension's tax exemption is determined by dividing the average value of pension assets by the average value of its accumulation assets over the year, which determines how much of the fund's income is tax exempt. In other words, fees and other costs will be averaged, which will not necessarily produce the same result if applied to specific assets. Also, the ratio of tax-free and taxable components are fixed in the pension phase but not within the accumulation phase.
In my search for transparency and ease of administration, separating the money into separate taxed accumulation and untaxed pension funds appears a logical approach. The administration cost of a second fund, about $2000 a year, is an insignificant 0.02 per cent of $1 million. However, the Tax Office has made noises, primarily through an interview in the Financial Review on April 23 in which an ATO officer stated: "??? the ATO ???would take a dim view of trustees who set up a second fund to reduce their tax bill." Since you would not be obtaining CGT relief for your $1.6 million pension fund, I have trouble understanding why they are making such threats. However, you should be aware of them.
It is interesting that you expect a correction in the real estate market, where most of our younger generation have given up hope.
We are thinking about buying some shares, say $200 worth each, for our young teenage grandchildren, in their names, as the current bank interest isn't very encouraging. Would we be able to do this and would there be any problems? We are both retired on an aged pension. We feel it would be good for them to follow the market and learn how it works, and interest them in saving and building good ideas for the future. J.S.
Buying shares on the ASX requires brokerage to be paid. CBA's Comsec, among the cheapest, requires a minimum parcel size of $500 and charges $19.95 for small parcels of shares if bought over the net or $59.95 if over the phone. Comsec also offers "share packs" but the smallest costs $4000 with a $66 brokerage fee.
If you can manage it, then, given the ongoing selloff in bank shares, it might be a good time to buy a parcel of, say, NAB (because it offers the highest dividend yield among the big four banks and has also got rid of its poorly performing UK banks) and sign up for its dividend reinvestment plan. Be sure to keep good records.
Having worked in finance previously, I have devised the following idea to help some old friends and would appreciate your comments. The married pensioner couple are finding their mortgage-free home too much to maintain and are seeking to downsize. Their assessable assets for Centrelink pension benefits are in the order of $700,000, comprised of cash, shares and allocated pensions. Does the following plan makes good financial sense - sell their home for $900,000 net and buy a townhouse/apartment/villa or unit in a retirement village for $1.1 million funding the $200,000 out of their assessable assets? This would reduce their assessable assets to $500,000 and should increase their pension by $600 per fortnight, or $15,600 per year. After strata levies etc, I estimate they have a net gain of $9600 per year. Does this make good financial sense to you, or am I misunderstanding something? J.M.
I always thought downsizing meant buying a lower cost residence, not a more expensive one that requires people to dip into their savings, the latter being there to fund their retirement.
Problems can arise when an elderly couple reduce their liquid assets. For one thing it diminishes the options for a couple facing the likely problem that one partner will fall ill and require entry into a care residence while the other one will not. Entry costs of $500,000 to $600,000 are not uncommon today.
I'd be more in favour of a move that results in the couple having more in the bank afterwards, rather than less. If they are worried about losing their part-age pension, then perhaps they should reconsider any move, and hire a weekly gardener and cleaner to help around the house, using the Government-subsidised homecare packages.
I'd strongly advise you not to adopt the role of an unlicensed planner. Any complaint that reached the ears of ASIC or the Tax Practitioners Board (which requires all advisers to be registered) would see you in court.
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.
