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Real Estate Investment – not that simple?

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A large number of Australians have a diversified portfolio when they retire consisting of investments, including cash, shares and superannuation and in a substantial number of cases, an investment property.

During a person’s working life the investment property can provide a number of benefits including possible increases in the property’s value, a regular rental income stream and depending on the level of borrowings, a tax benefit via a common strategy called “negative gearing”.
I would like to discuss the treatment of an investment property under the Social Security Act, for the purposes of calculating a person’s age pension entitlement

A person’s age pension entitlement is based firstly on their age, and then on their assets and income.

For the purposes of this article, I will explain the assessment of the investment property under each test separately, starting with the assets test.

The investment property is an asset and the “net” value of the property adds to the total sum of all your assessable assets.

If you have borrowed money to purchase the investment property, and the borrowings have been secured by a mortgage against this property, the value of the investment property is reduced by the borrowings. For example, if the property is worth $500,000 and has an outstanding mortgage of $300,000, the net value of the property for the purposes of the asset test is $200,000.

However, if the borrowing of $300,000 is mortgaged against the age pensioner’s own primary residence – which is an exempt asset – then the value of the investment property is now $500,000 because the $300,000 has not been secured by a mortgage against the assessable asset – the investment property.

Even more confusing is the situation where the borrowings are mortgaged against both the age pensioner’s primary residence and an investment property. In this scenario, the borrowings are apportioned between the two properties based on the value of each. We know the investment property is worth $500,000, but if the pensioner’s residential home is worth $750,000, then only one-third of the $300,000 borrowing – i.e. $100,000 would be assessed as borrowings mortgaged against the investment property, reducing the value of the investment property to $400,000.

Now let us examine the treatment under the income test.

The assessment under the income test is a little easier to understand. The gross weekly rent being received is assessed as income. This income can be reduced by the expenses associated with the management and maintenance of the property. A good guide, if you have not completed a tax return is to maintain a deduction equivalent to one-third of the gross rent. A further deduction, which can be made from the net rent (after expenses) is the interest payable on the borrowings.

Interest paid on borrowings to purchase the investment property is a deduction from the rent, received regardless of which property the mortgage has been secured against. This is providing the purpose of the borrowed funds was to purchase the investment property.

At the beginning of this article I mentioned a tax strategy called “negative gearing”. This strategy allows for any losses incurred by your investment in the property to be used to reduce other taxable income.

This is not the situation under the Social Security Act. Any loss of the rent you are receiving may not be used to reduce the value of other income being assessed to establish your correct age pension entitlement.

Mark Teale | Centrepoint Alliance

Aged Care – Not all accommodation costs are the same!

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Aged care costs are extremely complicated and issues have been raised in relation to a person entering residential aged care and having to pay a Refundable Accommodation Deposit (RAD).

What is the RAD?

A lump sum payment made by residents for accommodation in an aged care home.

Do I have to pay the RAD?

Some people will have their accommodation costs paid in full or in part by the government, while others will need to pay the accommodation price agreed with the age care home. As to whether an individual is eligible for support from the government in meeting their accommodation costs, will depend on their assets and income.

What happens if I am not able to pay the RAD in full?

If you are required to pay the RAD and are not able to pay the full amount, you will need to pay a Daily Accommodation Payment (DAP). This amount is based on the interest payable on the balance of the RAD you have not paid. The current interest rate is 5.76%. To assist with a person’s cash flow to meet the required payment of the aged care fees, a request can be made to deduct the DAP from the RAD which has been paid.

What happens to the RAD when I pass away or move homes?

Indicated by its name ‘Refundable Accommodation Deposit’, the amount that has been paid will be returned to your estate or you if you move or leave the facility. This amount could be reduced if you have requested as per the previous question that a DAP can be deducted from the RAD. It should also be noted that the RAD is underwritten by the government, in other words it is guaranteed.

The RAD is the accommodation cost, which depending on your circumstances, you do have to pay. There are, however, a couple of additional charges that have recently appeared in accommodation contracts. The charges should be closely scrutinised before any agreement is made to pay them or have them deducted from the RAD which has been paid.

These fees can appear as a ‘capital refurbishment fee’ or an ‘asset replacement contribution’ with the explanation that they are levied to cover the cost of repairing, painting and refurbishment of a resident’s room when they leave or pass away.

The Department of Health is very clear that these fees would not be supported by the legislation.

The following is a direct quote from the Department of Health website dated the 2nd of September 2016 and refers to both these types of fees:

“Where the fee does not provide a direct benefit to the individual or the resident cannot take up or make use of the services or where the activities or services subject to the fee are of the normal operation of an aged care home and fall within the scope of specified care and services”.

Painting, repairing and refurbishment of a resident’s room would fall within the category of normal operation. These services should be factored into the facilities scheduled maintenance program. The resident is certainly not going to benefit from the refurbishment after they have passed away. I do not believe the charges for these services falls within the category of fees outlined in the Aged Care Act 1997, Quality of Care Principles 2014 and the User Rights Principles 2014 which are required to be paid by the resident.

So, if you believe you are paying a capital refurbishment fee or an asset replacement contribution or one of these fees is being deducted from the RAD that you have paid, I would certainly ask the question of the aged care facility as to whether the fee can be charged under the guidelines issued by the Department of Health.

 

Source:  Mark Teale | Centrepoint Alliance

Have a question about retirement? You’re in good company!

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When I speak with people who have either retired, or are planning to retire in the near future, there are some similar themes that emerge when it comes to the financial side of things.

There appears to be five key questions that regularly come up in the conversation.

Will we have enough money to enjoy our retirement?

Many people have an idea about what they would like their retirement to look like – where they would like to live, how they will spend their days, the type of car they would like to drive, and the places they would like to visit.

However not many people have considered just how much their ideal lifestyle will cost.

Sure, the government will pay the age pension, however that does not allow you to have a particularly ‘flamboyant’ lifestyle.

The maximum age pension for a single person is just $22,804 p.a., and for a couple it is $34,382 combined. To put this into context, the poverty line for a single person in Australia is $426 per week (pw), or $22,152 a year.

The latest figures in the Retirement Standard published by the Association of Superannuation Funds of Australia show that a modest retirement lifestyle costs a single person $23,767 per annum (pa), while the cost for a couple is $34,216. By contrast, a single person wishing to enjoy a comfortable retirement lifestyle will spend just on $43,000 – when a couple will be shelling out close to $60,000.

Will I ever be able to retire?

For those wishing to maintain more than a basic retirement lifestyle, some form of continued participation in the workforce after ‘normal’ retirement age is a decision some will be willing to consider in order to fulfil their retirement dreams.

However, undertaking work that generates an income in retirement doesn’t necessarily mean working the 9-to-5 grind from Monday to Friday. Work may be part-time, casual or seasonal. For some it may even mean self-employment – taking a hobby or a skill and turning it into a small business.

Retirement becomes a trade-off. If we have dreams of a certain lifestyle but don’t have the means to support it, it will either be a case of trading down our lifestyle – nobody wants to do that – or find a way to afford it.

In addition to providing a source of income – ongoing workplace participation provides a social outlet (and also helps to keep individuals mentally in check!).

What about the increasing costs of health care as we age?

It is a fact that as we age; we become more reliant on the health care system, and that all costs money.

For those who are eligible for a part or full age pension (approximately 2.5 million Australians) the Pensioner Concession Card provides access to a range of services including bulk-billed doctor’s visits, access to hearing services, reduced cost of pharmaceutical items, and a range of other concessions.

Even if you don’t qualify to receive an age pension, self-funded retirees of age pension age may be eligible to receive a Commonwealth Seniors Health Card which can also provide concessions for health care and pharmaceutical items.

We need to understand what benefits we are entitled to. Sadly, many Australians are missing out on accessing benefits and services that are freely available simply because they are unaware of their entitlements.

What if I run out of money?

This is a very real concern for many people as we don’t know just how long we are going to live, and that makes planning very difficult.

With life expectancy in Australia steadily increasing, retirement is likely to span 25 to 30 years for many. With the money we do have it must last a very long time.

Recent research has found that many Australians are actually under spending in retirement so as to ensure the money lasts.

Managing the retirement budget requires some careful planning. Some very good advice is available to assist in that process.

Even if you were to run out of money, the age pension is there to provide a safety net. Most Australians will be entitled to receive the age pension at some point during their retirement.

The government rightly expects people to use their own financial resources first, before drawing on the public purse. As a result, and as a consequence of an ageing population, we can expect to see government policy being tightened more to restrict the age pension, and other government welfare payments to those truly in need.

And that might include raising the age of entitlement at which we can begin receiving the age pension.

Will I be able to leave a legacy?

Being able to leave a legacy to children and grandchildren is something that many people earnestly aspire to. But, at what cost?

There are many stories of people living in poverty simply so they preserve their modest savings to pass on to the next generation who, are often living a far more luxurious lifestyle than their parents ever imagined.

While being able to leave something for the next generation is a noble ideal, I am sure that a significantly large proportion of potential beneficiaries would prefer to see their parents enjoy their retirement years.

Leaving a legacy would be wonderful ideal, but would your kids want you living on baked beans for the rest of your life? There has to be some balance.

Enjoying a comfortable lifestyle, and being able to afford it, is a very fine balancing act.

There is no simple answer, but perhaps the lesson is to start planning as early as possible, understand what entitlements are available, and seek the appropriate advice.

 

Source:  Peter Kelly – Centrepoint Alliance