A mixed month for pensioners
IT has been a mixed month for most pensioners. On the one hand they received a welcome increase in their pension, but at the same time the government increased the deeming rates.
This had the effect of reducing the pension for those who are assessed under the income test, and many pensioners found their net benefit hardly changed as the increase in one hand was cancelled out by a reduction in pension on the other.
This means it is time to refresh our knowledge of the deeming rules that determine the income that Centrelink applies to pensioners’ financial assets. The new rates for a couple are 3% on the first $70,000, and 4.5% on the balance.
For a single pensioner the first $42,000 is assessed at 3%, and the balance at 4.5%. The assets that are subject to deeming include bank accounts, shares and managed funds, debentures, superannuation when the owner has reached pensionable age, and deprived assets such as excess gifts.
For example, if a couple of pensionable age had financial assets totalling $350,000, the income from these would be deemed by Centrelink to be $14,700 made up of 3% on the first $70,000 ($2,100) and 4.5% on $280,000 ($12,600).
These rates apply irrespective of the amount actually earned on investments, so pensioners can gain an advantage if they can get safe returns that are higher than the deeming rates.
Unfortunately, many pensioners don’t understand this and leave their savings in the “deeming accounts”. The problem with many of these is that they may pay interest rates that are lower than what can be obtained safely elsewhere.
Right now, there are major banks offering up to 5% on online savings, and over 6% for term deposits. Pensioners and their families should check these rates out because the purpose of the deeming rates is to encourage pensioners to become interest rate savvy. As always, take advice and stick with safe institutions.
Noel Whittaker is a director of Whittaker Macnaught Pty Ltd. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. His email is firstname.lastname@example.org.
Question: A friend earns around $67,000 a year. She salary packages through her employer which reduces her taxable income. She has a rental property leased at $360 per week, and rents a property for herself at $300 per week. Would she be better off financially if she continued renting and negatively gearing rather than living in her own property and paying off a mortgage; or does it come down to personal preference? Should she return to living in her own property how does this affect capital gains tax when she sells? The property has been rented for one year and she lived in it one year prior to that.
Answer: Your friend is the only one who can decide what is the best option for herself, but by owning an investment property and living in rental accommodation she is in a position where she is enjoying the tax benefits of owning investment property and at the same time living in an area where she want to be. As she initially lived in the property, and then rented it out, she is entitled to take advantage of the six year rule and so can be absent from that property for up to six years without losing the CGT exemption as long as she does not claim any other property as her residence in that time. Based on the information supplied, I believe she has her affairs pretty well under control.
Question: We bought a new property in July 2007 and shifted into it in December 2007, renting out our previous home of 17 years. We are paying off the loan with rental income and some wages. We refinanced the loan through a different lending institute in October 2008, but nothing else has changed. In a recent column, concerning a similar situation, I interpret from your answer that the interest would be a tax deduction once we rented out our previous house. When we had our tax done our accountant said it wasn't a tax deduction because the original loan was for another rental property we sold to buy our new residence. Will our refinancing for our previous home (now rented) make a difference to tax deductibility?
Answer: The fundamental principal is that you can only claim a tax deduction for interest on a loan if that loan was used to buy income producing assets such as property and shares. However, a loan can change character so that an existing loan on a non income producing property can become a deductible loan if the property starts to be used to produce income. If the loan was solely to buy the property you now live in, the interest will not be tax deductible. But if there was a residual loan on the older property before you bought the new one, the interest on the balance of that loan before buying the new property will be tax deductible.