Do the dead pay capital gains tax?

I am a bit confused about the possibility of claiming a tax deduction for contributions to superannuation since the Government changed the rules from July 1, 2017. If one is paying the maximum of $25,000 per annum into superannuation as pre-tax contributions (employer contribution plus salary sacrifice), what can be claimed as a tax deduction when completing the 2017/18 tax return. Can I claim a tax deduction for after-tax contributions?

It's really quite simple. Provided you qualify under the age limits, you can make total concessional (deductible) contributions up to the limit of $25,000 a year. This includes contributions from all sources, which of course includes your employer. Because your entire $25,000 is coming from pre-tax dollars (employer contributions and salary sacrificed contributions) you cannot claim a tax deduction. That would be double dipping. No deduction is allowed for after-tax contributions.

A reader asks if CGT will apply to her mother's unit. Photo: Jim Rice

A reader asks if CGT will apply to her mother's unit. Photo: Jim Rice

My 96 year old mother-in-law came to live with me in 2013 after a prolonged hospital stay. Her unit has been rented at a low rate to a family friend to assist with costs. Centrelink reduced her pension accordingly to a part pension as they considered her to be a non-home-owner even though she has a home and is only staying with me because of her age and medical status. With the changes to asset tests she has now lost her pension as she has $40,000 more than allowed (money plus unit). This I understand but I am now more concerned that she will have to pay capital gains tax if she sells her unit should she need to move into an aged-care facility if it is more than six years since she has actually lived in her home. I am having difficulty getting advice as to her best options. Should she sell her unit now, or somehow work out what the CGT would be for each year she lives in the future. Does CGT also apply to deceased estates in this situation.

It's not a question of how much income is earned - just that some income is earned. Assuming the property had been fully covered by her main residence exemption up until the time it was first used to produce income, the cost base will be reset to the market value (section 118-192) at the date income was first received. She has six years from that date to cover it with her main residence exemption. After that date the CGT calculation is pro rata, so if she rents it out for eight years two-eights of the capital gain would be subject to tax. She has options.

First option: Use section 118-145 ITAA 1997 to give herself another six years of the exemption by moving back into the unit and living in it as her home again. This would re-establish it as her main residence and give herself another six years when she moves out. If a friend is living there at low rent maybe they could stay and look after her.

Second option: Stop charging the friend any rent at the six-year mark. Section 118-145 sets six years if the property is earning income, but the property can be covered by her main residence exemption for an indefinite period if it is not earning income.

If she does none of the above and lives long enough for the six years to expire the estate will have to pay the CGT if it sells the unit. However, if the unit passes in specie to the beneficiary then, providing they are not a non-resident, no CGT will be payable until they sell.

I am a self-funded retiree and receive regular pension payments from my superannuation fund. The fund charges monthly account keeping fees as well as asset-based fees directly from my super account. As these account keeping fees are an expense incurred in earning and receiving my super income stream, can I claim a tax deduction for them?

They are an expense of your fund - not you. They have been taken into account when the net income of your fund is credited. You cannot claim a separate tax deduction for them.

If Centrelink is not an issue, what are the advantages of framing gifts to offspring as some kind of loan?

The main benefit is that the money has a good chance of being returned to the giver if the recipient suffers financial challenges in the future. These could include a relationship break down or bankruptcy. Preferably the loan should be documented and, if appropriate, secured by a mortgage over assets of the recipient.

Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. His advice is general in nature. Readers should seek their own professional advice before making decisions. Twitter: @noelwhittaker

This story Do the dead pay capital gains tax? first appeared on The Sydney Morning Herald.