If you are retired or about to retire, ensure your assets are structured to make the most of government benefits. The right arrangements could boost your age pension entitlements and maybe even entitle you to the age pension you thought you may never receive. Read on to see some of the issues you need to consider.

Funding your retirement

Although the age pension plays an important role by qualifying you for the pensioner concession card which gives you discounts on prescriptions, utility bills, council rates and other expenses, in most cases it is merely enough to fund a comfortable retirement solely on its own. Furthermore, Centrelink has strict guidelines on who is entitled to receive and how much the entitlement will be.

Using your superannuation

The way you choose to use your super can affect the amount of tax you have to pay and also your Centrelink entitlements. You have three options for using your super to fund your retirement.

• Income streams – you can use your super money to purchase an income stream for retirement. You have two main types of income streams: pensions and annuities
• Lump sum – take a lump sum payment and use the funds to live on
• Lump sum and income stream – you can take a lump sum amount from your superannuation and use the remaining balance to purchase an income stream. You will have access to a lump sum amount now and have an ongoing income to live on.

Set up an income stream

By setting up an income stream from your super fund, it will help you receive a favourable Centrelink income test treatment. In addition, assuming you are over 60, you will not be taxed on the income stream you receive or the earnings in the super fund. Unfortunately, leaving all your money accumulating in super can have a negative effect. The assets in your super fund will be ‘deemed’ by Centrelink as earning a specific rate of return, whereas if you start an income stream, Centrelink disregards a portion for income test purposes.

It is important that you speak to a financial planner and or your accountant to ensure you are setting yourself up to be at the most effective and beneficial position possible. After all, the purpose of retirement is to worry less and enjoy what you have been working hard for!

Most loans for investment properties have redraw facilities that allow you to withdraw funds available that are above the minimum repayments obligations. Don’t assume that redrawing the extra funds from the facility will not affect the deductibility of interest incurred relevant for income earning purposes. Your chance of using the funds for private purposes and still claiming 100% of the loan interest in your tax return is most likely NIL!

How can I avoid interest apportionment hassles for mixed-purpose loans?

Consider setting up an interest or mortgage offset account. These types of accounts are deposit type accounts where you do not receive interest on monies deposited. Instead the interest incurred on the existing loan account is reduced. This allows for your money deposited into the offset account to reduce the interest payable on the investment loan whilst you still use the funds for private purposes as you require. You can then claim the full interest as a deduction for the rental property.

For example:

John and Daisy acquired a $500,000 investment loan with an interest offset account to purchase a rental property on a 50/50 split basis. A year after acquiring the property, Daisy received $50,000 from her aunt’s estate. She deposits this into the offset account. Six months later John and Daisy decided to redraw $10,000 to go on a holiday. The remaining amount in credit in the interest offset account will still be reducing the amount of interest payable on the loan and therefore the loan’s purpose is still solely for the purpose of an income-earning activity.

What if I take out $5,000 for private purposes and I repay the same amount a month later?

In a recent case, it was held that the repayment for a loan without an offset account which was partly used for private purposes does not apply directly back to private withdrawal and therefore it must be apportioned against each private/income producing purposes of the loan balance. Only the interest that accrues on the outstanding loan balance that is relevant to the rental property is deductible.

What’s a solution to the repayment problem?

One planning technique you can utilise is to refinance the mixed-purpose loan by borrowing an equivalent amount under two separate loans or sub-accounts separated by the portion for private/income producing purposes. This way you can direct your repayment to the separate private sub-account and reducing the non-deductible interest for this loan. The investment sub-account will be accepted by the ATO to have full interest deductibility. BEWARE! Always consider the termination loan fees such as interest penalties, loan discharge fees etc before jumping to this solution.

It is always best to set up your loans with sub-accounts or interest offset accounts right from the start if you are intending to use it for mixed-purposes. Your finance provider will be able to advise you on the type of accounts they have available for this purpose and of course, always speak to your accountant or your financial adviser before purchasing an investment property to get the best advice right from the beginning.

‘It is important to have a valid Will and to review it regularly to make sure it is still in line with your intentions’

Estate planning is an important step in financial planning. It helps ensure that your estate will be distributed as much as possible according to you your wishes. Planning can also minimise complications for your family and other beneficiaries during a difficult time.

A Will sets outs how you want your estate to be managed and distributed after your death. It can also include the appointment of a guardian for your minor children. Without a will, administration of your estate will be costly, time consuming and must be distributed according to state based legislation rather than what you would have wanted for your family and your beneficiaries. Therefore, it is important to have a valid Will and to review it regularly to make sure it is still in line with your intentions.

Enduring power of attorney

If you were to become incapable of handling your affairs, the control of your assets could revert to a person appointed by a court. It would be more useful if you had an enduring power of attorney set up now so that if you cannot manage your own affairs, someone you trust who you have chosen to act for you can make the important decisions affecting you and your affairs.

Set up a trust

Setting up a trust with a nominated trustee, who has responsibility for distributing the estate to your nominated beneficiaries can have tax benefits. It can also be used to protect assets from dependents’ creditors or in cases where a dependent is not capable of managing money.

What happens to your superannuation if you die?

If you die while you are a member of superannuation plan, your beneficiaries can claim a death benefit. This is equal to your account value, plus any insured death cover. It is important that you keep your binding death nomination up to date, in line with your personal circumstances – ideally every three years. If this is not reviewed, your death benefit may not go to the people you want it to.

A solicitor can help you plan for your estate, prepare your Will and set up an enduring power of attorney.

Leaving money or assets to a charity that is a tax deductible gift recipient, in your will can be more tax
affective with good planning. Division 30 will deny your estate a deduction for the gift unless it is to a
Cultural Bequests Program, public library, art gallery etc. A distribution from you estate is not normally
considered a donation as such. It gets even worse if you leave an asset to a charity that is simply exempt
from tax but not a tax deductible gift recipient, in this case you would have to pay the CGT, in your Date of
Death tax return.

Clear as mud? Let’s look into the tax ramifications of each possible method. For example if you had
$20,000 worth of BHP shares and $20,000 worth of Rio Tinto shares. Keeping it simple, assume both
parcels were purchased in 1995 for $10,000 each so there is a capital gain of $10,000 involved in each
parcel. If you want to bequeath the BHP shares to the local community association which is tax exempt but
not a deductible gift recipient then according to section 104-215 of the 1997 ITAA the tax must be paid on
the capital gain (in the Date of Death return) before the shares go across to the exempt association because
once in the association’s hands they will not be subject to tax. The alternative is for the estate to sell the
shares first then give the proceeds to the community association. Tax here can be avoided but only with very
careful planning by the executor of your estate. The shares should not be sold until all other matters in the
estate are finalised then the estate would be in a position to make the community association presently
entitled to the capital gain, which means that the community association is the one who pays the tax on the
gain and as it is exempt no tax would be payable. If the shares are sold before the estate can be finalised it
would be the estate that would have to pay this tax which is the difference between your cost base and the
selling price or market value if not arms length. Providing this is done within the first 3 years after you die
the estate will be entitled to the same tax rates as if you were alive ie the tax free threshold and stepping up
of the tax rates as income increases. This usually means the gain does not attract a very high tax bracket but
zero tax is always much better.

Section 104-215 also catches the Rio Tinto shares which we will say, for the sake of argument, you
intend to leave to the RSPCA. As the RSPCA is an exempt body your Date of Death tax return would have
to include any capital gain on the Rio Tinto shares, except for the operation of section 118-60 which states
that if the beneficiary is a tax deductible gift recipient then the requirement of 104-215 is ignored. So all is
well if you transfer the Rio Tinto shares in specie to the RSPCA but what if the estate sells them first to
transfer the cash. As stated above a bequest to a tax deductible gift recipient is not tax deductible because it
is not a donation. If your will simply requires the RSPCA to receive $20,000 and the estate sells the Rio
Tinto shares to pay this amount then it will have to pay the CGT, something that would not happen if the
shares were transferred in specie. Again if your executor organises for your estate to be in its final stages
just before the sale of the shares the RSPCA can become presently entitled so no tax would eventuate
Another way of making the RSPCA presently entitled is to specify in your will that they are to specifically
receive the proceeds of the sale of your Rio Tinto shares.

In short something as simple as the order of events in the process of winding up your estate can make quiet
a difference to the tax payable so it is worth getting professional advice for the executor and taxation advice
when preparing your will. Section 104-215 might have been intended to prevent CGT being avoided by
leaving assets to tax exempt bodies but all it has really achieved is catching the unwary.

Cunning readers would now be thinking how about if I leave the Rio Tinto shares to my high income
earning daughter specifying she is to donate the proceeds of the sale to the RSPCA. You see section 128-10
states that providing the beneficiary isn’t tax advantaged (ie exempt) the transfer of the asset to that
beneficiary will not attract CGT. She may have to pay tax on the capital gain when she sells them to make
the donation but she would be entitled to the 50% CGT discount and then get a tax deduction at her full
marginal rate for all the proceeds of the sale, not just the gain. The trap here is that if your will specifically
stated that a donation must be made then your daughter would not be considered the true beneficiary under
section 128-20 so the rollover relief from CGT when transferring the asset to her would not be available.

You can only explain to her before you die what a clever idea that would be. Even better still, what if the
estate sells the asset to give her an amount you set in your will. In this case the estate would have to sell
early in its administration because you wouldn’t want your daughter to be presently entitled and to this end
you would not want to specify that she receive the proceeds of the sale of a particular parcel of shares. The
estate would be taxable on the proceeds instead her and if the sale takes place within 3 years of your death
then the estate could utilise the 50% CGT discount and adult resident tax rates so probably pay less tax then
your daughter. She could then receive the distribution of cash donate it to the RSPCA and the taxman would
give her a nice fat refund cheque because you organised your affairs so well. Though she should be careful,
if the donation is large, she needs to spread it over a few years rather than use up her tax free threshold and
be wary that a donation  cannot create a carried forward loss. Again you cannot specify in your will that she
makes the donation.

BAN TACS Accountants Pty Ltd Death and Taxes Booklet – 12 –
Created by Julia Hartman B.Bus CPA, CA, Registered Tax Agent