All Topics / Help Needed! / Parents own too much land for pension

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  • Profile photo of redspidaredspida
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    @redspida
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    Hi everybody,

    I am seeking some advice on behalf of my parents.

    They own and live in their home, which is on 4ha of land on the outskirts of Perth. They bought the land 12 years ago as a nest egg for their retirement with the aim to subdivide at some stage and use the funds in their retirement years.
    Today the land and house is worth around $1 million.
    My parents are 6 years away from retirement and as they found out recently, a possible subdivision will be out of question during their lifetime.
    The land is clearly worth too much to receive the full pension from centrelink.
    My parents decided to hold on to the land and keep it in the family so the kids can benefit from it once they pass away.
    Now my question is:
    To be entitled to their maximum pension what would be the best way to go about this?
    Is it advisable to transfer half of the land, or even all of the land into my name or the grandkids’ names as a gift? If so, is stamp duty applicable in such a case?
    Also, I have heard about a family trust. I am not quite sure of how it works and if it would benefit us in this situation.
    Are there any other options available in circumstances like ours?
    Any advice would be greatly appreciated.
    Thanks.

    Profile photo of DerekDerek
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    @derek
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    HI Redspida,

    Without meaning to sound harsh I think your parents have got this back to front entriely.

    They have a million dollar asset that they are wanting to ‘deal with’ in order to get the pension which currently runs at a maximum of $420 each/couple.

    It seems to me they would be better off looking at ways to leverage off their asset so that they can continue to live comfortably and also provide something for the kids.

    Sure I can appreciate the difference in the thinking process but at the end of the day they need to consider their needs more prominently.

    Derek
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    Profile photo of TerrywTerryw
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    Transferring the property now will incur stamp duty. It may be a way for them to get the pension, but at $420 per fortnight is it worth the hassle and expense – Capital Gains Tax as well.

    Also with trusts, Centrelink, will still deem them to own the land if they are involved in a trust or company that owns the land.

    One thing they should do is look at setting up a testamentary trust, so when they do pass on, the land will go to the trust – keeping it safe, and saving tax.

    Terryw
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    Profile photo of units4meunits4me
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    My parents did a stupid thing. Virtually gave away (low market at the time) a whole bunch of terrific assets bringing in big yields in pursuit of a crappy pension.
    Although, your parents with their land in WA maybe best to sell now before the market goes backwards, if they intend to sell at all.

    Profile photo of tom1000000tom1000000
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    Have you heard of a “Reverse Mortgage”? They allow your parents to borrow money against the property very easily.

    The only catch is the interest accrues and they will have to sell the property when they pass away. I guess they can give their children “first option” to buy the property, but I’m not really sure.

    Profile photo of redspidaredspida
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    It seems to me they would be better off looking at ways to leverage off their asset so that they can continue to live comfortably and also provide something for the kids.

    Hi Derek,
    my parents want to stick with the property, no matter what.
    They are very family oriented.
    You mentioned leverage, what options are available without getting rid of the land?

    Profile photo of hgwellshgwells
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    With a reverse morgage you can still will the property to whoever you want, just the bank gets its cut out of the sale. I know St George does one, enquire how they work actually, it might help your situation, however they still won’t qualify for the pension if they keep the asset.

    Profile photo of Richard TaylorRichard Taylor
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    Redspida

    It is unfortunate that we seem this sort of thing happening every day of the week. Hard working Tax payers who will not qualify for a pension due to a variety of circumstances.

    The Tax treatment and social security treatment of the disposal of assets is considered differently as is to complex to explian on the forum here.

    Social Security benefits are assessed on both a Assets Test and Income Test although as a Homeowner Couple the Family home is considered an exempt Asset (there are exceptions especially on larger land holdings) and therefore would not effect them currently.

    The question is how do they subdivide the property dispose of the assets and still qualify.

    From what you have said if they sell off the property and invest the money then the Deeming rules will apply and they will miss out on both counts of income and assets. If they subdivide and then hand over a parcel of land to their children they will be caught in the Deprivation (Gifting) rules.

    One consideration is to look a variety of non asset tested income streams.

    Given the number of years to go to retirement i would strongly suggest that your parents sit down with a Financial Planner and work through their options.

    Let us now how they go.

    Richard Taylor
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    Profile photo of redspidaredspida
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    Transferring the property now will incur stamp duty. It may be a way for them to get the pension, but at $420 per fortnight is it worth the hassle and expense – Capital Gains Tax as well.

    Hi Terryw,
    is stamp duty payable even for transfers to family members without any money involved, just change of name on the title?
    I thought capital gains tax is not applicable for a prime residency.

    Profile photo of shake-the-diseaseshake-the-disease
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    Originally posted by redspida:

    Transferring the property now will incur stamp duty. It may be a way for them to get the pension, but at $420 per fortnight is it worth the hassle and expense – Capital Gains Tax as well.

    Hi Terryw,
    is stamp duty payable even for transfers to family members without any money involved, just change of name on the title?
    I thought capital gains tax is not applicable for a prime residency.

    Stamp is always payable when the name on the title changes. Capital gains tax isn’t payable though if it’s a PPOR.

    Profile photo of DerekDerek
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    @derek
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    Stamp is always payable when the name on the title changes. Capital gains tax isn’t payable though if it’s a PPOR.

    In this case there may be – from the depths of my memory there is a size limit on land. From memory land larger than 2 acres could incur CGT. An accountant please?

    The rider to this is also the purchase date of the property. Anything purchased prior to september 1985 is CGT exempt.

    Derek
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    Profile photo of CDCD
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    I agree, they can do much better than the pension. How about a no doc mortgage on the property, increasing the amount each year. On a fully owned $1m property, growing in value at a very conservative 5% they can borrow $50k in the first year to live off, tax free. The property is then worth 1m + 5% = 1,050,000 so they still have their 1m equity. In the second year, they borrow say $55,000; 50 to live off and 5 to pay the interest on the loan. Now the property is worth about 1,105,000 so they still have $1m equity. And so on.

    Given that it’s likely to increase at much more than 5% they should still end up with more than they started with, and have a much much better lifestyle than if they were on the pension. When they pass on, you can either sell or take on the loan. Good luck. [rambo2]

    Profile photo of TerrywTerryw
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    Originally posted by redspida:

    Transferring the property now will incur stamp duty. It may be a way for them to get the pension, but at $420 per fortnight is it worth the hassle and expense – Capital Gains Tax as well.

    Hi Terryw,
    is stamp duty payable even for transfers to family members without any money involved, just change of name on the title?
    I thought capital gains tax is not applicable for a prime residency.

    hi Redspida

    You will have to pay stamp duty on the transfer at market rates even if no money is exchanged. And there is usually no CGT on the main residence, but Derek is correct about this being limited to properties of a certain size – which I beleive is only 5 acres. I think this is about 2.5Ha, so they may be up for some CGT. Better check this with an accountant.

    Terryw
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    Profile photo of DazzlingDazzling
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    I’m not an accountant (thank the Lord for that !!), but the legislation specifically states 2 hectares are CGT exempt for your PPOR.

    1 hectare = 10,000 sqm
    1 hectare = 2.471 acres

    Therefore the ATO will exempt 4.942 acres. Your parents other 5.058 acres will attract CGT if you go down the sell option, unless it was purchased prior to 1985, in which case it will be CGT free. Of course, if it enjoys that privileged position – why sell it and then bring it into the CGT nasty zone ?? Makes no sense.

    On a general comment on the initial post, I believe your parents made a fuzzy target in their primary aim when they purchased the prop and had no chance of hitting it. It appears from the info you have provided, their next target of re-arranging their affairs to qualify for the pension is also ill founded.

    My parents were in a similar position to yours are now 5 years ago, with the same ill founded goal of getting the pension regardless…it was amazing what they were prepared to sacrifice to get it.. We sat down and got them on the right track. It took a while to change a mindset that was entrenched in the 50’s. They now realise their thinking was completely flipped up the wrong way.

    The pension and all of the paperwork BS you need to constantly submit to the DSS is a nightmare to be avoided at all costs if at all possible. It appears from your parents equity in their PPOR this is entirely possible. Try exploring other way more productive opportunities than submitting your finances to the DSS….that health care card the pensioners laud so highly is only worth about 6K….instead, why not try shooting for the stars and settle for something far greater than the pension.

    Profile photo of DerekDerek
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    @derek
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    Hi Derek,
    my parents want to stick with the property, no matter what.
    They are very family oriented.
    You mentioned leverage, what options are available without getting rid of the land?

    Hi Redspida,

    Leveraging off property is very easy.

    Banks will typically lend up to 80% (without mortgage insurance and depending upon zoning issues – if any) on residential property.

    Assuming a debt free property the banks (assuming no zoning issues) could lend up to $800K on this property.

    These funds could then be used in conjunction with other borrowings to further leverage the $800K or for an outright purchase of an asset class that they are comfortable (and educated about).

    Derek
    [email protected]
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    Skype – derekjones2113

    Profile photo of redspidaredspida
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    Ok, we have established that stamp duty is payable if a title changes owners and CGT applies for land exceeding the allowable CGT-free 2ha’s with the PPoR on it.

    Now let’s say another family member would be added to the title as a part (50%) owner of the land. Do stamp duty and/or CGT apply in such a case? Logically half the stamp duty would be payable, right? What’s the story with CGT? Since my parents would not make any financial gain out of adding a family member to the title no CGT would be payable, right? And as Richard mentioned, would the Gifting Rules play a role in such a situation?

    Profile photo of TerrywTerryw
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    If you add someone to the title, it is the same as selling. Stamp duty will be payable on the percentage sold, and CGT would apply. Even if no money changes hands, the ATO would require you to pay CGT as if the property had been sold at market rates. Same with stamp duty.

    Terryw
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    Profile photo of redwingredwing
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    Originally posted by Terryw:

    If you add someone to the title, it is the same as selling. Stamp duty will be payable on the percentage sold, and CGT would apply. Even if no money changes hands, the ATO would require you to pay CGT as if the property had been sold at market rates. Same with stamp duty.

    They dont make it easy do they..[blink]

    I would also be thinking a reverse Mortgage or looking to leverage the Property, maybe establish a Trust and look at some JV’s with family who would stand to inheret anyway..

    It seems the goal is to try and access the value without losing the asset…

    However, what if they sold the asset (move into a retirement village, or acquire another slightly cheaper property under the correct structure-leaving additional funds for thier personal investment/use for the next few years) then looked at thier options with the end goal in mind..if the land was to go to the kids would it have to be sold and split anyway..?

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    Profile photo of MerrianneMerrianne
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    i have seen this problem a couple of times lately in my work as an insurance agent. where clients have sold good quality property which could give them a very good income to be eligible for the pension. this property surely could be used to buy positively geared property to provide an income far superior to the pension What is the fixation with the pension or is it the kind of advice that people are receiving. why go on the pension and be controlled by the govt of the day and a very small income when you already have assets in place that over the retiring years which is on average 20 years will return a far superior income for the retires and their family.

    Merrianne

    Profile photo of ducksterduckster
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    Look into the pension effects of them becoming a primary producer .
    With 4 acres they could put some cows on the land and may become deemed primary producers which might help their problem.
    Check this possible angle out out with an accountant.

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