Could you help out with advice on the following scenarios and how it would impact on my pension?
Our panel of experts answers property investment questions from API readers. For more Q&As, see this month’s API magazine.
Concerned about pension
Q In 1993 I lost my business, home, investment project and my family; which left me living in the back of my van by a creek and eventually onto a disability support pension. In 2000 I was blessed to purchase an old cottage on a large block. Since then I have painstakingly rebuilt and extended it to create two by two-bedroom apartment/units (designed for strata if required). Total outlay was approximately $160,000 as an owner builder. The current value is approximately $200,000 each. I’m a 60-year-old ex-architectural designer and aiming for a quiet life on a small acreage somewhere. Could you help out with advice on the following scenarios and how it would impact on my pension:
Rent both apartments/units (my preference due to equity and income)
- Sell both units
- strata title units
- transfer property ownership to trusted daughter (for $1, refer January API, page 37).
A If you rent out both apartments, you will receive income. As you most probably have no debt on them, the net income, even after you have written off real and on paper losses, will be assessed as income to you and, if outside of the threshold, will reduce the amount of pension you receive by 40 cents for every $1. You can earn $138 per fortnight to get a full pension, and $1558 per fortnight to maintain a part pension. In addition, the value of the properties may affect your pension under the assets test. If you don’t own your own home, the value cannot exceed $296,250 to retain a full pension, or $675,000 to retain a part pension. You must satisfy both of these tests.
If you sell them, you’ll receive around $395,000 after costs. If you invested this in anything other than property, the deeming rate would apply. The first $41,000 is deemed to earn three per cent and the remainder four per cent, regardless of what they actually do earn. This would mean a total income of $15,390, or $591 per fortnight . Thus your pension would be reduced by $236. You would be okay under the assets test as long as you don’t own your own home.
Strata titling them would still have the same effect as above, except that you would have to pay the costs which can run to around $15,000. I couldn’t see this increasing their rental capacity, and from a sale point of view it may make it more saleable but possibly not more valuable. Strata titling would, of course, mean you could keep one to live in and sell one, and then the above tests would apply to whatever you achieved on the sale.
You could transfer the property, depending on the state you live in (some states don’t have this provision and will charge your daughter purchase stamp duty on the full value), but then she would achieve the benefits, not you. If she was to give you any proceeds, you would have to declare this as income anyway, and the above test for income would apply. Margaret Lomas
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Meet the panel
Margaret Lomas, founder, Destiny Financial Solutions, www.destiny.net.au