Question 1: I have an investment property worth $340,000 with a loan of $340,000. The property is secured by the investment property plus our home. Do they cancel each other out or is a reduced amount taken to claim a partial pension?

It’s not uncommon these days to see individuals reaching retirement age and having an investment property, and your question comes up often.

Generally, for social security purposes, the value of an asset can be reduced by any outstanding loan (or charge or encumbrance) on that asset. But there are exceptions.

Depending on your situation, a loan cannot be deducted from the value of property if the property on which it is secured is exempt from the property test (i.e. your principal residence).

Therefore, the amount reported to Centrelink for your investment property depends on what is used as collateral on the loan:

  • If the investment property is used as collateral on the loan, the equity is reported to Centrelink, i.e. the value of the investment property less the loan on the property
  • If the principal residence is used as collateral on the loan, the gross value is reported to Centrelink, ie the full value of the investment property (without deduction).

Now your situation is a bit more complicated, because you used both your investment property and your principal residence as collateral. In these cases, Centrelink uses a formula:

  • (Loan Value x Taxable Asset Value) / Secured Asset Value

Example:

Barry has an outstanding loan of $300,000 secured by his principal residence (worth $500,000) and his investment property (worth $400,000). Because his primary residence is exempt property, only a portion of the loan will reduce Barry’s taxable property.

The assessed value of Barry’s investment properties will be reduced as follows:

($300,000 x $400,000)/$900,000 = $133,333

Therefore, the taxable value for old age pension purposes of the investment property is $266,667 ($400,000 minus $133,333).

This is not commonly understood and should be considered for those looking to purchase an investment property and expecting to receive a full or partial pension in the future.

Issue 2: How is rental income from an investment property assessed by Centrelink for the purposes of the income test?

Net income from investment property is assessed by Centrelink on an income test.

Generally, the rules for assessing income from investment property are the same as the rules for income tax and Centrelink can use your most recent tax return.

However, some items are tax deductible and not social security deductible. These include:

  • Capital amortization and development costs
  • Borrowing costs (e.g. bank fees and commissions)
  • Compensation for losses between rental properties.

Where a tax return is not available (for example the first year of renting a property), Centrelink will reduce rental income by at least one third to cover expenses, plus a deduction is allowed for interest charges.

If net property income is negative, income for social security purposes is zero (it cannot become negative and offset against other income).

Note that the next two investment property questions were answered together.

Issue 3: I have an investment property. When it is sold, it will be subject to the CGT. I understand that. But if I die and leave it to my son, I understand that he won’t have to pay CGT unless he sells it afterwards. Is that the case? And is there a time limit, or will this property still be subject to CGT in the long term?

Issue 4: Hi Craig, Your articles are fantastic.

Thanks to you, friends have been convinced to consider obtaining a part-age pension. And they succeeded.

I have a question about the CGT. If I sell my investment property, I know that the CGT is payable. If I transfer my investment property to my daughter, I assume that will also trigger a CGT event. If my daughter inherits the property, is the CGT payable upon transfer? Or only payable if it resells the property later? Well done Coxy

Hi Coxy,

Thank you for your comments and happy to hear that your friends have succeeded in obtaining the old age pension. Many people don’t realize they can get a benefit, so it’s always worth investigating.

Regarding Capital Gains Tax (CGT), you are correct that if you sell or transfer your property, it triggers a CGT event and tax will be due.

If you die and leave your child an investment property, they inherit not only the property, but also the “cost base” for capital gains tax (CGT) purposes.

the basic cost of a CGT asset is generally what it cost you to buy it, plus any other costs you incur to hold and dispose of it.

If you purchased the property before CGT was introduced in Australia (20 September 1985), the base price will be the value of the property on the date of your death.

So initially there is no CGT immediately payable, but your daughter (or whoever inherits the property) will owe CGT when she sells it, on the sale price less the base cost and any other discount.

There is no time limit – she will eventually be liable for CGT.

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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