Nick Bruining Q+A: How to bank the proceeds of a home sale and also maximise your Centrelink age pension

Question

I am 77 and a full-time carer for my 84-year-old husband receiving a full age pension.

Our home is too much to look after and we want to downsize to another home valued at $800,000.

Our current home is expected to fetch about $1.7 million. I am wondering what tax we will have to pay and what to do with the leftover money.

Answer

There are a few issues to consider. Assuming your home is your primary dwelling and was not used for business purposes, no capital gains or other tax will apply.

While you could use superannuation downsizer provisions to contribute up to $300,000 each into super there appears little benefit in doing so.

I would simply place the money into high interest-earning bank accounts because you may need access to capital for aged care accommodation and other needs. Based on a return of, say, 4 per cent, the income from your accounts could be around $36,000 a year.

The bigger issue is that the left over $900,000 will affect your age pension entitlements under the asset means test.

Assuming your contents and cars are valued at $25,000, you will be $455,000 over the $470,000 homeowner’s asset test threshold.

Each $1000 over the limit reduces your pension by a combined $3 a fortnight. I estimate that your pension will be just $367.20 a fortnight. Added to the possible interest income, total annual income could be about $45,500.

To boost your pension, you need to spend money. Remember that each $10,000 spent would increase your fortnightly pension by $30.

You could renovate or alter your new home. You could each prepay your funerals up to $15,500 using special prepaid funeral funds.

You could give away up to $10,000 each financial year with a maximum of $30,000 over a rolling five-year period. Lastly, you could enjoy the proceeds by spending some money on yourselves.

Question

I am the executor of a deceased estate from late last year where the deceased was advised not to lodge a tax return after 2006 because of her low income.

Her assets include bank accounts and a managed investment fund purchased in 2000. Distributions were reinvested and bought additional units in the fund.

The beneficiaries want the investment sold and the proceeds distributed. I am wondering if I will now need to lodge a tax return?

Answer

Without specific values, it is difficult to accurately assess the tax situation, but the normal principles will apply.

When the investment is sold, a capital gains tax event will occur and the taxable income will determine whether a return is required. As will be seen, other issues may justify you lodging anyway.

Each of the reinvestments created its own CGT transaction. All of the acquisition values and dates could be loaded on to a spreadsheet to help simplify the calculations. In many cases, the fund manager will be able to provide you with a single consolidated report showing all of the tax information required.

As all of the units appear to have been held for 12 months or more, only half of the profit becomes taxable income. This applies to each reinvestment as well as the original investment. If the total taxable annual income of the estate is less than $18,200, you may not have to lodge a return.

However, it is very likely that a substantial amount of franking credits are being held by the Australian Taxation Office. It may be worthwhile lodging tax returns or a “refund of franking credits” form for each year dividends were distributed.

If you need help, you may be able to access the government-funded National Tax Clinic service that operates in a number of universities through their schools of accounting, or engage an accountant.

You might negotiate a fixed amount for the work required to obtain all of the refunds. The refunded money can be either paid to the estate or used to pay any tax liabilities.

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