Restore Single Pension to Married Pension. PMP
Pension Maximiser Plan ( PMP) , Positive Homeowner Plan (PHP)
This is part of a series of sessions on Finance for Pensioners and a solution to the Housing and Rental crisis in Australia
One of the biggest problems in retirement happens when one of the partners dies. All in the sudden the surviving partner will be assessed as single but the assets and income have not changed very much. The pension will more than likely be considerably less and the result can be that income will be half that of previous income.
If married income was in excess of $41,000, the single pensioners on the same income will now pay tax and is in the position of paying 73cts in the dollar back to the government.
Let us see what happens to income when the partner dies and how we can rectify some of the problems. Can we use the Pension Maximiser Plan ( Session 6) to restore a single pension to the equivalent of a married pension
Our aim is to restore the single pension to the equivalent of the married pension and also incorporate deemed asset in your or your partner’s superannuation fund
We are using the same strategy as in Session 6 but with some different figures.
In session 6 we used $48,000 as a deposit on a property and borrowed the rest. In this session , if possible, we withdraw the full purchase price from the super . Of course a combination of session 6 and 8 can be used.
There is a problem with withdrawing money from your super and buying an investment property if you are affected under the income test. There is a chance that any rental income will be taxed at 73%.
Most of what follows is a duplication of Session 6 with some different figures and a larger deposit on the purchase of an investment property.
A company develops an affordable housing complex of say 20 town houses. Development costs are $50,000 for the land and $300,000 for the property. The properties are valued @ $400,000 at completion. Houses are constructed.
Under the Positive Homeowner Plan (PHP) first home buyers are approached with the help of Homes Tasmania to sign a 5 year lease and an “option to buy” the property in 5 years time.
The company leases out the property to a first home buyer at 5.2% of valuation.
For instance if the property is valued at $400,000 , the rent would be $400 per week.
Under the Pension Maximiser Plan (PMP) after a suitable period (say one month) the house is sold to a retiree as a going concern (thereby avoiding GST)
A retiree buys the property at 80% of valuation or $320,000. The property is leased back to the developer at 5.2% .($320 per week)
The development company leases in turn to the first home buyer at $400 per week. ( the 5 year agreement with the first home buyer is already in place)
The first home buyer will ultimately also be assessed on the capacity to pay outgoings ( rates, water, insurance). This amounts to approximately 1% of the valuation or $3,000 per year. The tenant does not pay this but must set it aside in a sinking fund, and pay it in 5 years time to the retiree. It shows the bank that you can pay for the outgoings.
“National Seniors” could assist in presenting the investment strategy to retirees. Alternatively, retirees themselves could be secure 5 year tenants with the same option to buy.
House is bought under the PHP by the Tenant in 5 years time at Present Valuation ($400,000) + 3% + Outgoings (rates ,water and insurance over the 5 years.) ( say $480,000). Outgoings would amount to say 1% ( $4000 per year for a $400,000 house) It is better that during the 5 years the retiree pays outgoings as it reduces income for Centrelink. Retiree gets 735% back. If paid by the tenant as a lump sum
after 5 years it can be regarded as Capital Gain. The retiree can pay for the outgoings as he receives $4,000 per year as interest ( rent) on his $64,000 invested.
The retiree now has a Capital Gain of 3%+ 1% Outgoings = 4%
We have seen that the actual return is 3.25 x other income. Therefore total return on funds would be : 4% x 3.25 = 13 % + Rent (7%)
For a pensioner rent will effectively be taxed at 73% and is therefore not very good income. Therefore it would be advantageous to be neutrally geared. No income for Tax or Centrelink. Roughly speaking this would mean a 20% deposit of $64,000 or a loan of $256,000 on a $320,000 property.(80% of valuation $400,000)
The retiree uses own funds of $64,000.
If you have $64,000 in your super you can release that to act as a deposit .However you need a Self Managed Super Funds to do this.
It will be essential that a lender be found that will lend the money. Normally a lender will be reluctant to lend money to a retiree . However, there is very little risk for the lender as the ideal exit strategy is in place. The loan will be fully repaid in 5 years.
The property was valued at $400,000 and the retiree buys it at 80% or $320,000 which is the equivalent of a $80,000 deposit. We are still trying to find a lender that will recognise this deposit in which case the retiree does not need any money at all and can borrow the full $320,000.
The end result is that the retiree will make more than 20 times as much or 2025% more than a bank deposit @ 3%. *
*
- $64,000 in the bank @ 3% per year 5 years $ 9,600 After “tax” 73% = $ 2,592
- Capital Gain 4% over 5 years = $64,000 After Tax 15% = $ 54,400
which is 2025% more ( outgoings are paid from excess in rent).
However this is not where it ends as depreciation allowances can also be taken into account.
(see Appendix D)
The Development Company has the following advantages
- By securing income from the lease over a 5 year period it will be easy to obtain finance to construct the properties
- It is easier to get pre-leases than pre-sales. Arguably the financier would prefer pre-leases
- There is no GST payable if the leases are for 5 years
This strategy is beneficial to the developer and the first home buyer .
As far as the pensioner and developer are concerned it is equally applicable to commercial property.
i.e The developer constructs an office in a business zone and leases it out on a 5 year option to buy to a tenant ( engineer, doctor, podiatrist etc) . After one month the pensioner buys the property from the developer at 80% of valuation with a lease back to the developer at 5.2% of purchase price. The developer guarantees a buy-back of the property in 5 years at purchase price + 4%
If you own your residence we can arrange a loan of $256,000 for you.
The income from rent (5.2%) will equal the interest on the loan (5.2%) so the loan does not cost you anything. .
The capital gain is only paid in 5 years time so what do you do for cashflow now.
The first thing to do is enter into the Home Equity Access Scheme and you can increase your single pension by $572FN . This is in the form of a loan but you can pay it back from your $64,000 capital gain in 5 years time. Your pension as a married couple was $1725.20FN and you now have a pension of $1716FN ( 1.5 x single pension) which will solve your immediate problems. This will also increase your income and together with the rent from your new property will now qualify you for a loan of $256,000
If this all sounds complicated, it is not really. I can set up a strategy for you in 5 minutes.
SUMMARY:
Enter the Home Equity Asset Scheme and your single pension increases to $1,645FN which is very close to your previous married pension of $1,653FN. Loans largely repaid by entering a PMP
With proper planning it will be possible that the death of a partner will not adversely affect the income of the surviving spouse.
Appendix D
This section is not essential but it is useful if a retiree wants to use depreciation allowances to the fullest and maximise returns in super.
We have used the following parameters in an example:
House Purchase Price $400,000
Purchase Price for Pensioners $320,000
Rent $400 per week
Deposit $64,000
Loan $256,000
Construction Cost $300,000 of which $30,000 is Plant and Equipment
The end result is that the retiree will make more than 20 times as much or 2025% more than a bank deposit @ 3%. *
0
- $64,000 @ 3% per year 5 years = $ 9,600 After “tax” 73% = $ 2,592
- Capital Gain 4% over 5 years = $64,000 After Tax 15% = $ 54,400
which is 2099% more ( outgoings are paid from excess in rent).
However this is not where it ends as depreciation allowances can also be taken into account.
Married Pensioners .
It is unlikely that married pensioners will pay tax. They generally do not have to submit a tax return but they can still claim for the cost of running an investment property ( rates, water, insurance, property management etc). ATO and Centrelink will accept 1/3rd of the rent as costs. In our example it means that Centrelink will accept $143 per week ($7,436 per year) as costs. Real costs are approximately 1% of the value of the property or $4,000 per year. Married couples can therefore receive an additional $3,436 per year which is not assessable for Centrelink.
The pensioners can also claim Section 40 depreciation allowances. In our example construction cost of the building was $300,000. Plant and equipment will be approximately 10% or $30,000
For the first 5 years this will average out at 1/5th per year or $6,000 per year. Rental income therefore , for ATO and Centrelink purposes , can be further reduced by $6,000 per year. ( Total $3,436 + $6,000= $9,436). The property is therefore well and truly negatively geared.
Centrelink does not allow negative gearing , but the pensioners can take advantage of this by putting more of their own money into the property ( reducing the loan).Whatever money they put in they will have an effective return of 5.6% . Because it does not affect their pension they do not lose 50cts in the dollar. The effective return is therefore at least double that @ 11.2%.
Single Pensioners
For single pensioners there are larger problems but also larger opportunities.
One of the biggest problems in retirement happens when one of the partners dies. All in the sudden the surviving partner will be assessed as single but the assets and income have not changed very much. The pension will more than likely be considerably less and the result can be that income will be half that of previous income.
If married income was in excess of $41,000, the single pensioners on the same income will now pay tax and is in the position of paying 73cts in the dollar back to the government.
A single pensioner can have additional property rental income of $9,436 per year. This additional income is not assessable for ATO and Centrelink . Where we have seen that capital gain dollars are worth $3.15 of ordinary income, this completely unassessable income is worth $3.70 of ordinary income ( $1 instead of 27cts). This is the equivalent of $34,948 of ordinary income.
On top of this the ATO also takes into account Division 43 building allowances. In our example this would be $6750 per year ( ($300,000-$30,000)/40). Normally tax payable would be 30% so this is an additional normal income of $2025 per year. (see also Session 16)
Therefore any additional income or increased amounts in superannuation will no longer affect the pension
Summary/Example
Retiree invests $64,000 into a $320,000 property ( Loan of $256,000)
If assessed as a single pensioner earning in excess of $37,000:
Capital gain in 5 years $64,000 after tax $ 53,600 = $ 10,720 per year
Rent @ 7% on $64,000 per week less rates ,insurance etc $ 480 ($4,480-$4,000)
Extra income from excess in rent (7%-5.6% x $256,000 $ 3,584
Total $ 14,784
Compare $64,000 in the bank @ 3% after “tax” $ 518.40
Increase in return $ 14,265.60 per year or 2750% better
This is getting close to restoring a single pension to a married pension