Using Centrelink's 'granny flat' rules to house ageing parents
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Using Centrelink's 'granny flat' rules to house ageing parents

I have a house that is currently rented out and we plan to move there in two years. Neither of my parents have superannuation and we have invited them to live with us. They will be selling their home, which would give them about $350,000 profit. They hope to give us $200,000 to be used to renovate or rebuild so they can be accommodated. They are aware of the rules of gifting and their aim is to contribute without affecting their pensions. They are aged 66 and 75. T.M.

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Credit:Michael Mucci

You might find Centrelink’s “granny flat rules” helpful as they allow pensioners to contribute more than the usual gifting limits of $10,000 a year and up to $30,000 over a five-year period.

In a nutshell, those gifting rules do not apply if a person, or a couple, transfer the title of their home to someone else, or buy a property in another person’s name, or pay to build a flat or addition onto another person’s property and, in return, receive a life interest or a life tenancy in that property, which will be the donor’s principal residence. The rules are not concerned with age or family relationship.

However, when extra amounts over the cost of transfer or construction are transferred, Centrelink applies a “reasonableness test”, which permits the maximum amount that can be transferred, covering both the transfer cost plus the additional amount.

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This “reasonable value” is found by multiplying the maximum annual couples’ pension (currently $35,573.30 until indexed up in September 2019), even if a single person is involved, multiplied by a conversion factor (which you can Google).

For example, if you moved into your parents’ house, and they transferred the title of their house (which means you would pay stamp duty) in exchange for a life interest in the house, with no additional assets, no amount is treated as a gift. Note however, that the deprivation rules might apply if they leave within five years and the reason they left could have been anticipated.

But if they contribute $350,000 to build a self-contained flat on your home and pay, say, another $100,000 cash on top in exchange for a life tenancy in the unit, then the “reasonableness test” is triggered. If we assume the youngest parent’s next birthday is 67, the conversion factor is 19.8, which results in a reasonable value of ($35,573.20 x 19.8 =) $704,349. In this case the reasonable value is not exceeded.

Your parents, as pensioners, might pay for more than one life interest (if you have siblings) and, if the total amount paid is no more than the reasonableness test amount, no amount is treated as a gift.

It gets more complex when deciding whether a person (or a couple) in a granny flat is a homeowner or not, for the purposes of the assets test. If the price paid (the “entry contribution”) is greater than the difference between the age pension’s homeowners’ and non-homeowners’ assets test thresholds (currently $207,000 and known as the “extra allowable amount”) then the granny flat residents are homeowners, otherwise they are treated as non-homeowners.

Tell your parents to make an appointment with Financial Investment Service to discuss how they cane best use the granny flat rules.

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I am an avid reader of your column. You recently suggested only one method for calculating tax liability when selling a property: the proportional method. I own a unit in downtown Sydney, purchased and immediately rented in 2000 until 2009 when I downsized and it has been my “principal residence” since then. My tax agent advised me I could choose between (a) the above proportional method, or (b) to get a formal valuation e.g. from a local real estate agent, as at the time I stopped renting my unit. I used (b) and this was easy as there are 160 units or so in my block. This valuation could then be used to determine the capital gains tax liability when I eventually sell, or my estate sells. Could you please confirm both options are acceptable? B.T.

The rules vary depending on whether you first earn income from a property and then move in, or whether you first establish a main residence that is exempt from capital gains tax, and then start to earn money from it e.g. from renting some or all of it.

If the property is first rented and then you move in, the capital gain must be apportioned.

If the situation were reversed and you earn income from a main residence after August 20, 1996, by renting some or all of it, then you must use market value to determine your cost base. You don't have a choice.

For older homeowners who started renting out a post-1985 main residence i.e. one that is subject to CGT, before 1996, you can only use the apportion method.

I am seeking advice in relation to a life insurance policy I bought in 2012. My niece, the sole beneficiary, will get the benefit payment after I die. Two questions: 1. Will said beneficiary have to pay any tax on the benefit payments after I die? 2. If for some reason, the insurance company/underwriter changes hands, would they honour the life insurance policy i.e. the contract that I originally signed in 2012? A.C.

No, your niece should not have to pay any tax as the life insurance company has been paying 30 per cent tax on its income each year, assuming the policy was bought in your name and not through a super fund. Consequently, a death benefit is untaxed.

The assets supporting your life policy are held by a “statutory fund” within the life company. Such funds were first set up under Australia’s first Commonwealth Life Insurance Act in 1945. There was only one subsequent breach and this was the fraud committed against the policy holders of Occidental Life and Regal Insurance when these companies were sold to a shelf company in 1990 and their assets then stripped. Policy holders were compensated by a special levy raised under a special Act, the Life Insurance Policy Holders' Protection Levies Collection Act 1991.

The law was then updated with the Life Insurance Act of 1995, which introduced more stringent regulation. Under this Act, a company may not wind up a statutory fund as long as any liabilities exist, or transfer a fund without approval from the Australian Prudential Regulation Authority (APRA). Alternatively, APRA may direct the company to assign those liabilities to one or more other registered life insurance companies.

I assume the life policy you bought was a “whole of life” policy that pays out should you fall off your perch, or possibly if you suffer a terminal illness, and you either paid a one-off sum, or have paid a series of regular payments since. If, in fact, you bought a “term life” policy, and made no further payments, such a policy is a little like house or car insurance and has to be renewed each year, or it lapses.

If you have a question for George Cochrane, send it to Personal Investment, PO Box 3001, Tamarama, NSW, 2026. Help lines: Financial Ombudsman, 1800 367 287; pensions, 13 23 00. All letters answered.