There are only limited opportunities to defer capital gains tax

You recently mentioned deferring a capital gains tax (CGT) liability. How do you defer the tax liability after selling one investment property with capital gains being $220,000, and place the money into another property? Does all money have to go into the new property, or can you keep some out to use now? R.S.

If you are thinking of a recent item in this column about deferring CGT when a property was sold, it was only mentioned in the context that the sale might have been classified as an involuntary disposal, where a property may be “lost, destroyed or compulsorily acquired”.

CGT can be deferred where a small business re-structures or replaces an asset, or there is a relationship breakdown, or a scrip-for-scrip takeover or a demerger.Credit: Kerrie Leishman.

If you are simply selling a property and reinvesting in another there are only limited opportunities to defer CGT. For example, where a strata title is converted, or a person (or a partnership or a trustee) transfers an asset to a wholly owned company, or related companies transfer an asset between them.

More generally, CGT can be deferred where a small business re-structures or replaces an asset, or there is a relationship breakdown, or a scrip-for-scrip takeover or a demerger.

Even if you believe you have a case to defer CGT, which I suspect you may not, don’t even think about buying another property without confirming your belief with a well-grounded tax accountant.

I’m 72 years old and my husband is 75. We are on the full age pension and we own our home. A few years ago, my husband was diagnosed with diabetes and became paralysed and had to go into a nursing home. His pension is used to pay for it. For me, I am on the full single age pension. We have two grown up children. All four of us own a property, which is shared equally among us. Centrelink estimates my share is about $168,000. At the moment, we are still paying the mortgage and are not able to use the rent, which is $450 per week. Later, when we can use the rent, each share would be $112 per week, before agent’s fees, rates etc. We don’t have money in the bank or shares. I have a car. Could you please tell us how that income ($112 per week each) would affect my husband staying in the nursing home and my age pension? For now, we don’t have to pay for his care at the nursing home as he does not have any money. M.N.

As background, pensioner couples separated by illness each receive the single age pension ($933.40 a fortnight) instead of the married pension ($1407) but are still assessed on their combined income and assets.

Under Centrelink’s assets test, all homeowner couples – even if separated by illness – can have up to $394,500 in assets before their pensions begin to reduce.

The test counts the combined share of your investment property, reduced by your share of the mortgage, so it sounds as though the test counts $336,000 for the two of you. However, this is likely to grow once the mortgage is paid off. Above the threshold, the pension is reduced by $3 a fortnight for every extra $1000.

Without knowing the size of your mortgage, I cannot estimate the effect on your assets test.

The income test for couples separated by illness allows income of $174 a fortnight each, or twice the singles threshold, before their pensions begin to reduce at the rate of 50 cents per fortnight for every additional dollar.

Your rent, once it starts to flow through to you, could be reduced by about 10 per cent, or more, once agent’s fees and other costs are factored in, in which case you could expect combined net rent between the two of you of about $400 a fortnight. I estimate this would reduce your fortnightly pension by about $13 each.

As an alternative, could your children buy your share of the property?

I sold my home in Coogee for $2.4 million and bought a unit for $1.46 million. After paying out necessary expenses and furnishing the unit, I was left with about $750,000. Prior to selling my home, I was on the aged pension, although still working casually. After three years in the unit without the pension I find myself with a balance of about $640,000 in the bank. My income from this, with the current low interest rate, is about $800 a month. I work 1-3 days a week and my average income is about $200-$300, minus tax ($29 an hour before tax). My expenses are quite high and I need to continually draw on my savings. How do I return to being on the age pension to assist me with car registration, doctor’s bills etc? I have about $11,000 in super and I am 78 years old. I am becoming anxious as to how long my money will last and don’t want to depend on my children. V.E.

A single person is able to claim a part age pension once their assets fall below $574,500, a figure which should rise with indexation each March and September.

Your bank account is falling at a rate of about $36,000 a year, which implies that, if things go on as before, you should be eligible within about two years.

In this period of low interest rates, and amid the Reserve Bank of Australia’s warnings that it is likely to continue for the foreseeable future, people who have lodged their savings in banks for a lifetime are being forced to look elsewhere for a decent return on their money, which means taking on higher risk.

To my mind, the lowest-risk option that meets this goal is to invest in a balanced fund, which spread its money across a variety of different sectors – from fixed interest to property to shares and the many sub sectors in between.

In fewer cases, people are ready to accept the lessons of history that, in the long run, shares provide the highest returns.

I prefer a master trust with a range of options, an example of which is the Colonial First State Wholesale investment fund, which offers a dozen funds titled “Balanced”, “Moderate” or “Diversified”, as well as top share funds such as the Fidelity, Blackrock and CFS Imputation Australian share funds.

You pay your money and you takes your choice, as the old saying goes.

If you have a question for George Cochrane, send it to Personal Investment, PO Box 3001, Tamarama, NSW, 2026. Help lines: Australian Financial Complaints Authority, 1800 931 678; Centrelink pensions 13 23 00. All letters answered.

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