Should We Sell Our Investment Property Now Or After We Retire?

We are a couple, both aged 64 and both working full-time. We own our home in Drummoyne and have had an investment unit in Gladesville worth $700,000 to $750,000, since 2005. Obviously, we would like to retire in a couple of years. We only have about $400,000 each in super, mine in Australian Super and my wife's in First State. I also have about $250,000 in shares. Our tax agent said that we should look at selling the unit (we owe about $250,000 on it) and rolling the difference into our super to avoid capital gains tax. What are your thoughts? Otherwise, if we wait until we retire, we will have to pay CGT as well as not being able to put any of it into superannuation. C.S.

Rolling over the capital gain into a super fund does not automatically allow you to avoid CGT. That's a dangerous assumption!

For instance, let's assume your investment is in joint names and that you bought your investment unit for $300,000 back in 2005 and you now sell for $750,000. That means your initial profit is ($750,000-$350,000=) $450,000. Let's further assume that your buying costs (stamp duty, legal, valuation and bank fees, etc) and selling costs (legal costs, auction fees, sales commission, etc) plus any undepreciated capital expenses over the 12 years, come to $50,000, reducing your profit to $400,000, or $200,000 each.

Since you have owned the asset for more than 12 months, you can each apply a 50 per cent discount and thus each add $100,000 to your taxable income that year. You can each reduce your taxable income by making the maximum $25,000 deductible contribution into super. Note that, since you are presumably working as employees, then this figure is reduced by your employer's compulsory deductible contributions of 9.5 per cent of your salary plus any holiday pay, etc.

Now, if you sell before turning 65, you can each place up to $300,000 into super as a non-tax deductible contribution (or "non-concessional contribution", in the jargon), assuming no previous use of this "three-year rollup" option. After 65, and still working you cannot use the "three-year rollup option" and thus can only contribute $100,000 each financial year.

I don't like to sell a good property but I generally like to see people retire debt-free. In your case, even though your property should be well in the black, I can't see you paying off the loan over, say the next decade, especially if rates rise as I expect them to, so perhaps it makes sense to sell at what appears to be the top of the market.

My wife and I are both working, earning about $110,000 a year each, plus I receive $20,000 dividend income from a $720,000 share portfolio and $15,000 income from a $420,000 leased farm. In super, I have $560,000 and my wife, $555,000 and we salary sacrifice the maximum $25,000 a year plus some non-concessional contributions. We own our home and have no debt. I am 49 and my wife is 48 and we have one daughter in year 8. My wife will retire at 55, while I plan on working until at least 60, health permitting. To reduce our annual taxation, which includes PAYG quarterly requirements of $3000, we have been advised to sell/transfer our shares into a self-managed super fund. I am not sure if this is the correct strategy due to the costs and capital gains tax involved, given the profit of $350,000 in the share portfolio. Or should we just bite the bullet now with over 10 years to retirement? M.B.

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The high capital gain that you have accrued in your share portfolio would be greatly diminished if you were to sell up holus bolus. You are already both in the 39.5 per cent tax bracket for incomes above $87,000 and could conceivably be pushed into the 47 per cent tax bracket for taxable incomes above $180,000. You would thus end up investing about 40 per cent less capital in your SMSF.

If you are keen to set up an SMSF and if any of your shares are showing losses, you can transfer these along with shares showing a profit, and so end up with a near zero gain. By choosing carefully, you can maximise the amount transferred and then boost it by directing your future contributions into your SMSF.

However, you seem to have done well using your public offer super funds. Bear in mind SMSFs can be recommended by service providers who then profit from charging fees. So you need to sit back and ask yourself "Do I really need an SMSF and do I have the time to manage it well?"

My wife and I have a SMSF and, in addition, I receive a defined benefit scheme pension. After the restructuring necessary to ensure that no more than $1.6 million remains in pension phase at July 1 this year, we have ended up each holding just over $1 million each in pension phase and some $673,000 in accumulation. Our joint taxable income on investments held outside super last financial year was $21,000. Questions: (a) Given that our combined taxable income was lower than the $86,000 threshold, I wrote to Centrelink and inquired whether we would be eligible to apply for the Commonwealth Seniors Health Card (the one that entitles one to cheaper pharmaceuticals). They told me that my defined benefit pension would not be taken into account in the assessment, however the pensions drawn from our SMSF would be assessed irrespective of the date they were started. I was under the impression that only pensions commenced on or after January 1, 2015, when the rules changed, would be assessed, but I was told that the commencement date of such pensions was irrelevant. Is this correct? If so, (b) does Centrelink treat all pensions drawn from the SMSF as income? And how are funds in accumulation phase treated? (c) Is a deemed rate of return applied to these and added as well? And finally, are all added together to arrive at a deemed taxable income amount made up of (a)+(b)+(c), and if the result exceeds $86,000 we become ineligible? J.M.

Before 2015, a couple could obtain a Commonwealth Seniors Heath Card if, among other requirements, their "adjusted taxable income" was below a threshold, currently $86,076 a year for couples ($53,799 for singles or $107,598 for couples separated by illness, respite care or prison).

"Adjusted taxable income" includes foreign income, net investment losses, reportable fringe benefits, reportable superannuation contributions (e.g. salary sacrifice), certain tax free benefits (e.g. disability support pension, carer payment or wife pension), and superannuation income stream benefits from unfunded super funds such as the defined benefit Commonwealth Super Scheme, which is partly taxed but with a 10 per cent tax offset after age 60.

Since the start of 2015, this income test has included deemed income from allocated pensions for new applicants for the card, regardless of when their allocated pension started. You appear to be confused because existing cardholders as at January 1, 2015, were "grandfathered" and their allocated pensions measured as before, with a "deductible amount" that was ignored.

You don't make it very clear but, if I read this right and you each have $1 million producing tax-free pensions, plus a further $673,000 in super benefits, then the total $3,346,000 would be deemed to earn $107,494 a year, apart from your defined benefit income.

With such wealth, and tax benefits, I can't help but wonder why you feel it necessary to apply for taxpayer support from poor taxpayers like me? At what level of assets does a sense of entitlement to other people's money disappear, if ever?

By George Cochrane

The Age

26 November 2017

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