Nick Bruining Q+A: Rejigging finances to get a Centrelink pension could help seniors dodge new CGT rules

Question

I am an octogenarian retiree, living off my superannuation fund with assets just above the maximum amount to be eligible for a pension.

I also receive some dividends from an investment in a private company which I’ve held for about 14 years.

I intend to sell these shares within the next 12 months to avoid paying the new minimum 30 per cent tax on capital gains.

Under the old system my marginal tax rate was zero, which meant no tax was payable.

Is there any consideration under the new capital gains tax rules for people such as me?

Answer

There may be some confusion with the new rules.

The minimum 30 per cent tax payable by individuals on capital gains will only apply to the growth above inflation which occurs after July 1 next year. In essence, the current growth in value between your original purchase date and July 1, 2027 (or if you sell earlier) will be effectively “locked in” as of July 1 next year.

Because your period of ownership was greater than 12 months, half of that gross profit will be added to your other income in the year the shares are sold. As a senior, if that realised capital gain and your other taxable income this financial year exceeds $35,813, you will be paying tax anyway, and you will be in the 30 per cent marginal tax band.

If assessable income exceeds $45,000 you will be paying the higher rate of 37 per cent tax, plus the 2 per cent Medicare levy on income above $45,000.

If you decide to hold the shares beyond July next year, you will need to establish a value as of July 1 to “crystallise” the gain to that point. You should look closely at the income being generated by the shares and weigh that up against the alternative investments you might use.

Remember that the amount to be invested may be less because of the CGT payable. You may discover that selling the shares is not such a good idea after all.

You should also explore accessing a part-pension from Centrelink. Any recipient of any Centrelink income support payment is exempt from the minimum 30 per cent tax.

The asset test cut-off threshold for a single homeowner is currently $733,500, excluding the value of the home. Non-homeowners are allowed an additional $267,000.

This figure increases through indexation three times a year in September, March and July.

At some point in the future, you may become eligible anyway. Similarly, renovating your home, giving some money to your loved ones, or even pre-paying your funeral are all legal and valid strategies to reduce your assessable assets which may make you eligible for a part-pension.

Question

My wife and I have a self-managed super fund which produces moderate returns.

A family friend recommended a financial planner to look over our mix of investments some time ago. We were underweight on Australian equities at the time and she recommended we buy shares in the parent company of the firm she worked for.

They were soon to drop in value, and now 19 years later the shares are worth a quarter of the purchase price.

Did this planner have a conflict of interest, and do we have any recourse?

Answer

At the time the recommendation was made (and now), the adviser was required to disclose any conflicts of interest.

It is true that disclosure laws in 2007 were not as rigorous as they are now, but disclosure of the planner’s parent firm would have been included in the financial services guide which would have been provided to you. These guides became law and mandatory in 2001.

In reality, this is probably a situation where the business circumstances of the parent firm have changed dramatically over the past 20 years.

You only need to consider the fortunes of many other financial service companies over the same period of time.

Unfortunately, shares don’t always go up.

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