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Rethinking retirement as politicians propose more taxes

Politicians bring up talks for a death tax. Picture: Shutterstock.
Politicians bring up talks for a death tax. Picture: Shutterstock.

The lowering interest rates, and the accompanying rises in property values and shares have increased the gap between the haves and have-nots.

Of course, this has lead to claims that we need to investigate ways to raise more revenue to make the system "fairer".

The new premier of New South Wales has been in office for a very short time, but has already flagged the possibility of replacing stamp duty on property purchases with a universal land tax, which would be levied on every residence and so affect every householder. This would be just another impost on retirees who are asset rich and cash poor.

He has also suggested that the federal government consider reducing the current 50 per cent discount on capital gains tax for assets held for more than a year on the grounds that it would discourage speculators.

The two proposals are not in sync. Abolishing stamp duty would give speculators a free kick, and every proposal in the past which canvassed an effective increase in CGT have agreed that it would not be retrospective and so would only apply to properties acquired after the changes were legislated. Imagine the spate of buying before the relevant changeover date.

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The latest one is yet another call to impose death duties in Australia. The proponents of this action claim that it's not right that many wealthy people die leaving big chunks of money to their beneficiaries. In their view a substantial death tax should be introduced to make sure the government, not the family, get a major part of your estate when you die.

They point to Britain as a great example whereby a standard inheritance tax of 40 per cent is charged on those assets above the tax-free threshold, which is currently £325,000. For example, if your estate was worth £625,000 you would pay 40 per cent of £300,000 which would be £120,000. There are certain concessions for estates left to a spouse, and the tax may reduce to 36 per cent if at least 10 per cent of your estate is left to charity.

This is not something to be rushed. For starters, if you have a death tax you must also have a gift tax, otherwise people would simply give money away before they died. In any event we have hefty taxes on your estate right now. For example, the taxable component of your superannuation is hit with a death tax of 17 per cent (15 per cent plus Medicare levy) if left to a non-dependent.

Then there is capital gains tax. I accept that CGT is not triggered by death - the liability is passed on to the beneficiaries who will pay CGT if and when they dispose of the assets bequeathed. However, in my experience there are very few beneficiaries who are prepared to wait years to cash in what they see as their rightful inheritance.

I wouldn't be too worried right away. Australia has a history of floating controversial ideas and then backing away once a rigorous analysis is carried out and problems come to light.

Remember the Henry tax review, which was commissioned by the Rudd government in 2008, and published in 2010. The report contained 138 recommendations, most of which have been ignored.

In 2014 we had the 320-page Murray report which made 44 recommendations, most of which never saw the light of day. In 2015 CEDA published a comprehensive paper "The Super Challenge of Retirement Income Policy" which pointed out that "constant tinkering around retirement income policies makes it difficult for those planning for retirement to make informed decisions about how best to fund their retirement."

What we need more than ever is a government who is prepared to leave the system as it is for the foreseeable future, so that people can plan their affairs with certainty.

Noel answers your money questions

Question

My 89-year-old mother, who is fit and healthy and receives the full pension, is moving in with us. She should get around $600,000 from her home and is keen to give this to her two grandchildren in equal shares while she is still alive. She is concerned that they may be priced out of the housing market forever. She has no other assets. Would there be any tax consequences if the transaction happened and would her age pension be affected?

Answer

Let's assume the net sale proceeds are $580,000, and she gives $5000 each to the children now, plus an interest free loan of $10,000 which will be forgiven in July next year.

This would mean that her assessable assets would be $570,000 this financial year, and $560,000 in July next year after the loan is forgiven. This will result in an age pension this financial year of $718.50 a fortnight which would be a reduction of $249 a fortnight or $6474 a year in pension (though it would rise again in July next year after the loan is forgiven).

The remaining gift of $560,000 would be held as a deemed asset for five years and then would cease to exist after which time she should revert to the full pension.

In short it's going to cost around $32,000 in lost pension over the next five years to make the gift. All she needs to do is keep at least $32,000 in hand for expenses and give the balance immediately.

Question

My wife has a share portfolio with an unrealised capital loss of about $60,000. She also has stage four cancer with about 12 months prognosis of death. I also have a share portfolio, but it has unrealised capital gains in excess of $60,000. Is there any way that I can arrange our affairs so that the $60,000 does not die with her?

Answer

If the shares are sold before her death the capital losses will die with her, but if she does have shares now where some have a capital gain and some have a capital loss she could sell sufficient now that would enable any gains to be offset against losses. If the remaining shares were left to you ,you would pick up her cost base, which would mean if the value now is less than the cost base you could use the losses against some of your own unrealised capital gains.

Question

I am 67 and widowed. I owe $360,000 on my home and have an investment unit on which I owe $350,000. It's rented for $350 a week. Repayments on that loan are principal and interest. I also have $833,000 in a good superannuation fund. Should I withdraw enough money to pay off the investment unit to save interest?

Answer

Let's assume the unit returns $13,000 a year clear and the interest on that loan at 3 per cent is $10,500 a year. Your super fund should be doing at least 7 per cent per annum, so it would make sense to let that loan take care of itself and withdraw enough money from your super fund to make the payments if there was ever a shortfall. The same thinking applies to your housing loan.

Question

I sought legal advice about my SMSF and was told that because Superannuation does not form part of my estate, it can be passed to nominated death benefit dependents by way of a binding death benefit nomination. As the rules define a member's dependent as a spouse, child or someone with whom I have an interdependency relationship, I was told that I could nominate my son as a recipient of some of my superannuation proceeds but not my grandchildren .

Can you please confirm that is correct. Also while I am alive I can change at any time both the name of the dependant that will receive part of my superannuation and also the percentage of my those proceeds that I have already allocated by making a new binding death benefit nomination.

Answer

Superannuation consultant Stuart Forsyth says the advice appears to be correct. The fact that a person is your grandchild is not in itself a basis for them to be a death benefit recipient. If you want them to obtain part or all of your superannuation it can be done via your estate. Depending on their ages it may require that a testamentary trust is set up. The SMSF deed may further restrict the options, but your lawyer would have checked that before this advice was given. If you want the proceeds to go to your grand children he suggests you go back to your lawyer and discuss how to achieve that outcome using your will and other arrangements.

The answer to your second question would require a legal analysis of your deed and the arrangements you have in place such as any pensions. Most SMSF deeds would allow for such changes, but care is needed as the requirements set out in the deed must be followed, if the deed requires a certain format then that must be used. There are many disputes as to the validity of nominations and care is needed. It may therefore be safer to obtain your lawyer's advice when making changes. Note that it is not just a question of being alive, you must still have the capacity to make decisions.

  • Noel Whittaker is the author of Retirement Made Simple and numerous other books on personal finance. Email: noel@noelwhittaker.com.au
This story Rethinking retirement as politicians propose more taxes first appeared on The Canberra Times.