Online at http://www.financialcareservices.com.au/newsletters/vol-2-ed-1
Newsletter Volume 2 Edition 1
Sent February 2012
The holiday house – an asset at Centrelink
Long ago when their children were small Bob and Bertha bought a block of land near a beach. Initially the family camped on the site then a basic holiday house was built. The beach house has been well maintained and its remains structurally sound. Bertha insisted that the kitchen and bathroom be totally refurbished when Bob retired and planned to spend more time at the beach.
Now retired Bob and Bertha divide their time between their suburban home and their beach house. Bob mows the lawns at both while Bertha keeps the inside fresh and clean. Their grandchildren adore staying at the beach.
Whilst Bob and Bertha had grumbled about the municipal rates for the beach house they had not noticed that the ‘Site Value’ and thus the ‘Capital Improved Value’ had increased substantially over the last decade. Once the beach house is included at its ‘Capital Improved Value’, the total value of their Assets at Centrelink exceeds $1 million and is considerably more than the cut-off for the Age Pension.
Bob and Bertha had looked forward to starting the Age Pension when Bob retired at age 65. They were expecting to receive a good proportion of the full Age Pension but maybe not the maximum rate because Bob had some superannuation and they had some savings in the bank.
Surprise. Centrelink said, ‘No Age Pension for Bob and Bertha. The Assets Test excludes you.’
Stunned that the Centrelink Asset Assessment included the beach house at its Capital Improved Value, Bob and Bertha need to reconsider their housing options fast.
Option 1 Gift the holiday house to their children now.
Bob and Bertha had bequeathed the holiday house to their 4 adult children in equal shares so gifting it earlier would not upset their estate planning. But their children have homes, mortgages and children of their own to finance and do not have the cash for the stamp duty on the transfer of the beach property and the ongoing municipal rates and running costs for the beach house.
Centrelink rules would treat the value of the ‘gift’ of the beach property less $10,000, as an Asset of Bob and Bertha for a period of 5 years from the date of transfer of the property. Thus no Age Pension for the next 5 years if the beach house were gifted.
Option 2 Sell the beach house.
Bob and Bertha wanted to keep the beach property for themselves and their grandchildren. Their children could not easily afford the stamp duty plus running costs for the beach house so they are unlikely to be able to buy it at market rates.
If the beach property were sold Centrelink would count the market price less selling costs, as an Asset of Bob and Bertha. If the sale were to an unrelated party then Bob and Bertha would receive the sale proceeds in cash on the settlement and then have financial assets to generate an income for retirement.
If the sale price were reduced to a level that Bob and Bertha’s children could finance then Centrelink could count the ‘price reduction’ part as a gift. Bob and Bertha could receive enough from their children to finance their retirement living expenses. Maybe Bob and Bertha could be eligible for some Age Pension in five years time after the gifting period has expired and they have used up some financial assets.
Option 3 Beach house becomes the principal residence.
Bob and Bertha could go and live in the beach house as their main home. The beach property is then their Principal Residence for Centrelink purposes and the suburban home could be sold to provide financial assets for generating an income.
Bob and Bertha admit that they are tired of caring for 2 properties and are now relaxed about selling the family home in suburbia. Some significant upgrades are undertaken at the beach house to provide a self contained ‘granny flat’ section for Bob and Bertha away from the visiting hoards.
After switching homes and paying for the renovations, Bob and Bertha approach Centrelink again. Their Assets and ‘deemed income’ are now below the Centrelink cut-offs for the Age Pension and Bob and Bertha are now eligible for small Age Pensions and the Pensioner Concession Card.
Bob and Bertha enjoy their sea change but miss having their own place near their city based family and friends. For the next winter, they purchase a small suburban apartment with a body corporate to handle all external maintenance. Centrelink means testing includes the Capital Improved Value of the apartment as an Asset.
In summary, any retirement planning regarding holiday houses and/or town pads should be considered well before age 60 years. Planning could require open discussion between generations regarding potential ownership and operating costs of family holiday houses.
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Christine Hopper
Fellow of Institute of Actuaries of Australia
Director and Authorised Representative
Financial Care Services
Telephone 03 9808 0338
www.financialcareservices.com.au