The assets test can prevent someone from getting a full or part aged pension. A way around this might be to ‘double dip’ by spending up to reduce your assets. But that is wasteful. Spending $150k wastefully just to get an extra $10k doesn’t seem to be wise (yet people actually do this!).
A better way would be to upgrade the main residence. But this is also wasteful in terms of suffering stamp duty and other costs – you will lose roughly 10% of the value in selling one house to acquire another.
Another solution is to build a granny flat or second dwelling in the existing house. This will use up a chuck of cash, but also add value to the property.
As long as the granny flat is not rented out, or family stay there it will be treated as a part of the main residence and there will be no income taken into account.
This could help a person both get the pension as well as help family out by allowing them cheap accommodation.
Section 11A(1) of the Social Security Act
As of July 2019 the assets test for a single pensioner is $258,500 for a home owner. That is a single pensioner can have assets of $258,500 or less, other than their home, and still get the full pension.
Homer’s wife Marge just died and he is on a single pension. He has a $400,000 house on a large block as well as $400,000 in the bank. Homer could get a part pension only with his assets exceeding the assets test level.
His pension would be $12,836 per year
If he used $141,500 to build a granny flat the pension would jump to $22,509 pa
Using this great calculator: http://yourpension.com.au/APCalc/index.html#CalcForm
Homer uses $141,500 to build a granny flat in the back yard.
His pension increases by almost $10k per year.
He let’s his son Bart stay there and Bart helps around the home. Bart is now saving $300 per week on rent – so he is $15,000 per year better off.
If Bart moves out or if Homer ever needs more money he can always rent the granny flat out, but this would reduce his pension. If he rented the flat out for $300 pw he would get $15,000 pa rent plus $16,377 for the pension. $31,377 pa
He could also sell the property by about $180,000 more with the granny flat
So, all up building the granny flat has benefitted Homer in at least 4 ways:
Retirement can be funded from 5 basic classes of income/assets, which are:
Income is the obvious one. You invest in shares or property and receive dividends or rents. You could also work if you had to.
Capital gains is also relatively obvious, but often not considered by the ‘never sell’ type.
Capital gains are often better than income because they are taxed at half the rate of income (using the 50% CGT discount). Capital gains can be obtained by selling longer term held assets such as shares or property.
Capital, or Corpus, is not usually considered directly, but many financial planners and government websites assume you will eat into your assets so that on the day you die you will have $1 in the bank. This is similar to capital gains, but different because you are eating into the original cash you have contributed to the investment there is no tax payable.
This could be cash in offset accounts – which can be a great way to fund retirement as where the offset is attached to an investment loan the increased interest will be tax deductible.
It could also be from the proceeds of shares of property after they are sold.
Borrowing is still possible, but it will be very unlikely most people will be able to utilise this in their retirement. One way to possibly do it is to borrow as much as possible just before retirement and to slowly use these funds. Another way is the reverse mortgage products.
One method rarely considered though is borrowing from children to fund your retirement. This can benefit both parent and child because instead of selling that property and losing future growth, paying extra tax etc, the child could lend you some money on the expectation of inheriting the property at a later date.
The pension is the backup strategy for many– government will fund your retirement if all else fails. Some can also get a part pension combined with part from one or more of the other classes above.
Note that I didn’t include superannuation as a separate category above, as income from super wil be in one of the above forms anyway.
If you moved to a cheaper area to live and took a haircut on your wage, it might not be as bad as you think. This is can speed up financial independence and reduce stress and give you a better quality life.
Example of a $20,000 wage reduction
After tax income on $100,000 would be $73,883 (2018-19 tax year)
After tax income on $80,000 would be $61,383
So, a $20,000 reduction in gross income means only a $12,500 reduction in real terms
Try working it out yourself at https://www.taxcalc.com.au/
But the real benefit may be the savings with home ownership.
An equivalent house costing say $1mil in Sydney v $600,000 in Adelaide (for example)
Repayments on $1mil at 4% pa are
Repayments on $600k at 4% pa are
The repayments on the smaller loan mean a cash flow saving of $22,920 per year – which more than makes up for the lower wage income.
Furthermore, if you consider commuting times – you might be saving 1 or 2 hours per day living outside of Sydney.
Living costs may also be generally cheaper. Consumer prices are supposedly about 12.75% higher in Sydney than Adelaide:
Consider also the quality of life.
It can be worth moving out of Sydney and living elsewhere and this can be the case even if you were to take a substantial haircut on your income.
If someone sells a property and has a large capital gain is it worthwhile taking a whole year off work to save tax? In my view it is always great to take a year off work, but it might not actually save you that much tax.
Richie Rich is about to sell an investment property with a $200,000 capital gain. He is sick of it under performing and draining him with land taxand has a low yield. Richie is toying with the idea of taking a whole year off work to save CGT. Is it worth it?
Let’s assume Richie earns $100,000 in his job, and the sale will happen in the 2018-2019 financial year.
If he sells the $200,000 gain will be reduced to $100,000(due to holding it longer than 12 months) and added to his other income for the tax year. The result is an annual income of $200,000
Tax on $100,000 $26,117 Net income $73,883
Tax on $200,000 $67,097 Net income $132,903
Difference $40,980 Difference $59,020
The Capital Gain will mean $40,980 in extra tax payable for the year.
This means by giving up a year’s income from work Richie would only earn $100,000 from the capital gain. Therefore, he will save $40,980 in tax by not working.
But not working means he has less income, working the full year in which the sale occurs will net him only $59,020 as opposed to his normal $73,883 (a difference of $14,863).
He would need to determine if the effort of working is worth the pay cut of $14,863 which is about $286 per week.
He should also factor in transport costs to work and other work-related costs – clothing, lunches etc. and there are also heaps of non-financial things to consider. There would be time to do other things such as:
Written by Terry Waugh of www.structuringlawyers.com.au
There are recent amendments to the laws relating to land tax on properties located in QLD and they can oppressively burden Australian citizens living overseas. Many Aussies have invested in property in QLD and then gone and lived overseas for lifestyle and or living costs hoping to enjoy their retirement by living in their rental incomes. But they are now being taxed so high that many will either need to come back to Australia or sell their properties.
QLD is the only state that taxes Australian Citizens like this.
The issue is that there are different land tax rates for ‘absentees’. Australian citizens who are outside of Australian for more than 6 months canfall into the definition on ‘absentee’. The absentee doesn’t get the $600,000 threshold like non-absentees – their threshold is just $350,000. Plus the rate they pay is higher too. On land worth $1mil the absented rate is 1.7%but the non-absentee individual rate is just 1%.
Now there is also an ‘absentee surcharge’ that goes on top of the absentee rate. For land valued at more than $350,000 the rate is 1.5%.
This means on land worth $1mil the land tax rate would be 3.2% – every year.
Here is an example of how harsh in can be:
John is retired and has a property worth $800,000 with a land value of $500,000 in QLD.
He is getting $500 pw rent, or $400pw after costs. It is fully paid off and this would be John’s only source of income when he quits his job.
John goes and lives in Myanmar where it is cheap to live as he can live like a king on $400 per week.
Poor John didn’t factor in land tax.
Before leaving Australia there was no land tax payable.
Now, since he is living overseas he will be classed as an ‘absentee’ owner as he is not ordinarily residing in Australian.
Section 31 Land Tax Act 2010 QLD.
Because John is an ‘absentee’ Schedule 3 of the Land Tax Act applies to determine the rate of land tax John will pay.
Part 1 is the general rate and it is charged at $1,450 plus 1.7 cents for each $1 in value more than $350,000.
This equates to $4,000
But it gets worse, because Schedule 3 has a Part 2 which imposes a Surcharge Rate.
Therefore there is an additional 1.5 cents payable for each $1 in value more than $349,999.
In John’s situation this will be $2,250.
John’s total land tax went from $0 to $6,250 per year.
Poor John is now living on $280 per week. His income has been cut in half almost.
And this is before we even consider the Commonwealth tax issues of him living overseas and possibly being a non-resident for income tax. This could leave John was extra income tax of about $4,728 per year.
This would mean his annual post tax income has gone from around $20,000 to $9,821 or $188 per week.
Next year there could be a jump in values which may result in even more land tax (but possibly no increase in rents).
Have you ever heard of double dipping with the pension? This is where you spend your assets so that you can get the pension.
Here is a brief example:
A pension age couple who have $1mil in super and own their own home may not be able to get the pension because the super is over the asset threshold of $830,000.
The $1mil may be earning them $30,000 in income per year.
Another couple may have $1mil in super, but they spend $540,000 on a bloody great holiday.
Their assets are thereby reduced and they now qualify for a part pension. For the couple the pension works out to be $982 per fortnight or $25,532 per year. But they still have $500,000 cash which they could invest and get $15,000 per year at 3% return. This would total $40,532 per year.
So by blowing $540,000 on expenses a couple could increase their income by more than $10k pa.
Believe it or not many have this attitude – they think they deserve the pension and they will do almost anything to get the maximum allowable. Including spending say $540,000 to qualify for $10,000 per year extra income.
Modelled on an article from The Tax Institute https://www.taxinstitute.com.au/news/3-november-2017
Written by Terry Waugh, lawyer at Structuring Lawyers, www.structuringlawyers.com.au