Issue 1: Hello, I am 52 years old and my husband is 61 years old. We have our family pension of around $1.3 million together. We expect to sell our investment property in June 2023, by which time we will have owned it for over 20 years.
If we can realize a capital gain of about $1.69 million, what is the best way to minimize our tax, as we both still work full time and earn around $50,000 each, have three children and plan to give them money to help them buy their first home? Also, we would like to put some money in our super. Can we put $330,000 each in our super?
From a purely tax perspective, you can offset your gain by any capital loss you have or by selling another asset which will incur a capital loss.
Will you have similar income next year to this year? Selling an asset with a large capital gain when your income is lower means you will pay lower capital gains tax.
You may also consider advancing any other tax deductions you may have to reduce your income in that year.
Making concessional (pre-tax) contributions to the super will also reduce your taxable income and reduce your capital gains tax.
This can be done either through a salary sacrifice or through tax-deductible personal contributions. However, there is a cap on concessional contributions of $27,500 per individual for each fiscal year (in 2021-22). This amount also includes any SG contributions from the employer.
If any of you have a Total Super Balance of less than $500,000, you can use the “carry over” provisions and contribute a higher amount. You can check your eligibility through your MyGov account.
Of course, taxation should not be your only consideration. It is important to achieve a good sale price and to plan the sale in relation to other financial objectives.
You can put more of the proceeds from the sale into the super by making non-concessional (after-tax) contributions. Although this will not immediately reduce your tax, it will put the funds in a very tax-friendly environment and help build funds for retirement.
The annual cap for non-concessional contributions is $110,000, but you can “roll forward” two future years of contributions and make a total contribution of up to $330,000 each.
Before making the contribution, you should check your individual “total super balance” as of the previous June 30 to see the maximum amount you can contribute.
The table below summarizes this:
Given your goals and financial situation, I recommend that you seek personalized financial advice.
Question 2: We need to sell our house and downsize and buy something for a disabled son without losing our pension. We are 69 and 68 and our son is 44.
Downsizing to a smaller home and freeing up funds is a common and often appropriate thing to do as you get older.
However, the value of your primary place of residence is exempt from the income and wealth test and when you release funds these then begin to be assessed for old age pension purposes.
As I wrote before, generally if you donate more than $10,000 per year, or $30,000 over five years, it falls under Centrelink’s deprivation rules and they will still treat those assets as your own for five years (the funds will be counted in the income and asset test over this period).
You may want to consider a special disability trust where eligible family members can donate up to $500,000 to one of these trusts and avoid falling under the deprivation rules.
Under these provisions, your son would have to meet one of three definitions of a severe disability.
Special disability trusts have to be set up in a certain way and I suggest seeking legal advice on whether your son is eligible and the best way to implement the trusts.
Question 3: Due to the housing bubble, my parents offered to use their property as collateral for our home loan approval. However, they fear it will affect their pension payments. Can you please advise if this is the case?
No, if your parents agree to their property being used as collateral for your mortgage, this will not affect their old age pension.
For your parents, there will be plenty of other things to consider, and there may be an option to only secure part of the loan, so once you’ve built up some equity, their property can be put up as collateral. .
You should speak to a mortgage broker or loan specialist and your parents should seek legal advice.
Craig Sankey is a Certified Financial Advisor and Head of Technical Services and Advisory Enablement at Industry Fund Services
Warning: The answers provided are of a general nature and although inspired by the questions asked, they have been prepared without taking into account all of your objectives, your financial situation or your needs.
Before relying on any information, please ensure that you consider the information’s relevance to your objectives, financial situation or needs. To the extent permitted by law, no liability for errors or omissions is accepted by IFS and its representatives.
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