Nick Bruining Q+A: Plan to rent out your home when you buy a new place? Here’s one CGT problem to consider

Question

My daughter currently lives in a unit which she bought five years ago.

Along with her partner, they are now thinking of buying a house together and moving into the new property.

Would she be able to negatively gear her unit under the “grandfathering” rules recently introduced as part of the Federal Government’s tax reforms?

Answer

The changes you refer to were announced in this year’s Federal Budget and are now law.

They will impact her two ways with respect to the deductibility of expenses and capital gains tax. As she acquired the unit before 7.30pm (AEST) on May 12, she will be able to claim the interest costs and the associated expenses when the property is made available for rent and when she rents it.

The existing negative gearing rules will apply even though the property was used as her primary dwelling. Indeed, this exact example is provided in the explanatory memorandum that accompanies the Bill that is now law.

As far as CGT is concerned, she cannot hold two primary dwellings at the same time. If her new home becomes their primary dwelling, the unit will become subject to CGT from the date her primary dwelling status changes.

From that date until July 1, 2027 any gains incurred over that period will be subject to the 50 per cent discount rule and effectively “frozen”.

Growth from July 1, 2027 will be subject to the new “growth above inflation” rule and subject to a minimum 30 per cent tax on that part of the growth when it is finally sold.

She will need to obtain a valuation as at July 1, or use the yet-to-be-released estimating tool provided by the Australian Taxation Office.

Question

We are retirees. I am 79 and my wife is 76.

We currently have our superannuation invested in a popular wrap fund and we are looked after by a local financial advice firm which is part of a larger organisation.

We currently have about $600,000 in the fund with it all invested in my wife’s name.

The financial adviser charges a flat $4500 annual fee. We have one update visit a year. The platform charges us about $5000 a year which includes all investment cost as well.

Are these fees fair and acceptable, or should we look elsewhere?

Answer

In reality, the fees you are paying are lower than many others, but it will depend entirely on what services are being provided and whether or not you believe you are receiving value for money.

With the information provided, it seems highly likely that you and your wife are entitled to receive a part-age pension from Centrelink.

In my view, a financial adviser providing comprehensive retirement advice and services should be assisting you with this aspect of your finances, including updates and liaising with Centrelink on your behalf.

While you may only have a physical visit once a year, the adviser should be active in the background across the entire 12 months. This includes adjustments to the portfolio when required and you should have access to the adviser between visits when questions arise or there is a change in circumstances.

You should feel comfortable that you can call and ask any question at any time.

Your adviser should also be across aged care issues if they arise later in life. While this is becoming a specialist area in its own right, competent financial planners will know how the system works.

If the adviser is merely managing the investment aspects of your wife’s superannuation and only makes changes at the annual review, then it may be time to question the value of the services received.

If not happy, the first action should be to call or visit the financial planner and to express your concerns. You may decide to request a rewording of any service agreements you entered into.

If still dissatisfied, it may be time for a change. Information on the moneysmart.gov.au website may assist you in choosing a new adviser.

Nick Bruining is an independent financial adviser and a member of the Certified Independent Financial Advisers Association.