The 'six-year rule' for renting out your former home

My son purchased a one-bedroom unit for $400,000 in October 2009, and obtained the first home buyer grant. He lived in the unit until May 2012, when it was valued at $560,000 by the local real estate agent. The unit was rented until August 2017 when it was sold for $800,000. Am I correct in calculating that the capital gains tax will be 50 per cent of $240,000, that is $120,000? Can he offset this against his accrued capital losses? P.D.

Not quite. If you start using part or all of your main residence to produce income for the first time after August 20, 1996, then, under a special rule, you are taken to have acquired the dwelling at its market value at the time.

Let's say this was $560,000. Your cost base is this plus any capital expenses that have not been depreciated while the property was rented. Let's say he put in a new water heater at a cost of $1000, your cost base is thus $561,000. The capital gain is ($800,000-$561,000=) $239,000. Let's also say your son has capital losses from bad share investments of $9000. These can be used to reduce his capital gain to $230,000, of which 50 per cent or $115,000 is then added to his taxable income that year.

Now I've gone on the assumption that your son has claimed another property since May 2012 as his main residence. If, in fact, he went travelling, he would have had six years in which he can continue to claim the unit as his main residence. Since he sold it in 2017, within that six-year period, he would then not be liable for CGT.

We are ready to retire but would like some advice on the best way to go about it financially. I am 66, with NSW First State Super and still work full time. I earn about $88,000 a year. Between my employer contribution and my salary sacrifice, the amount going into my super before tax is just under the $25,000 limit. My super balance is $510,000. I believe that with my fund I can roll my super into an allocated pension or something similar. I have about six months combined annual and long service leave owing. My wife is 60 and is in the SASS fund. She also works full time and earns around $97,000 a year. Besides her employer contribution, she salary sacrifices 9 per cent, which is her total allowed amount. Her super balance is $614,000. My wife's benefit payment is to be paid out at retirement, so she will have to make arrangements to open an allocated pension or similar fund, on retirement. My wife has about seven months' combined annual and long service leave. We own our house in the country valued at about $450,000, have about $35,000 in savings and will be receiving around $40,000 from a will. We have no debts. We would like to move to the coast when retired, but expect to pay around $670,000 to $730,000 for a house there. If we retire now and have our leave paid out, what amount of tax would we pay? We are probably inclined to use our leave which will take us up to the start of the new financial year and then retire. Because my wife cannot receive any government pension until she is 67, we need to know the best way to make her super last. Can I roll some of my super into her super, or similar, or would I be best to purchase a coastal property from my super and sell our house? Do we sell our house now, put the money into savings, or similar, and have six months to purchase a coastal home and then retire to it? Would I be entitled to a part government pension then? M.M.

The optimum strategy, I suspect, would be to wait until you retire before buying a home up the coast. Life is full of changes of opinions, as well as major unexpected events, and it is best to wait until you are certain as to where you want to live before making such a large purchase.

You don't mention the value of your current home but, if in Sydney, it is likely to be at least equal to the value of any home you wish to buy up the coast, which is important, because I would hate to see you use much or all of your superannuation savings and then find yourself unable to replace it, given the current caps on superannuation contributions.

Being over 65, all your super benefits are "non-preserved" and can be withdrawn at will and hence you can withdraw, say, $300,000. Your wife, being under 65, and having less than $1.4 million in super, can "rollup" three years worth of non-concessional contributions and thus contribute the $300,000 into a new super fund in 2017-18, but then make no other NCCs until July 1, 2020. (SASS being a defined benefit fund won't accept additional contributions beyond its stated limits.) Then, if you wish, she can repeat the exercise while still being under 65.

The advantage of this is that your wife's superannuation is ignored by Centrelink's means test until she reaches age pension age, This would possibly allow you a part age pension until she does, assuming you both retire and don't have a sizeable excess amount left over after the sale of your Sydney and the purchase of a new home. The assets test currently cuts out the pension for combined assets of $830,000 for a couple and the test would count a second home while you still lived in the first.

I wouldn't be in any hurry to retire. You are together bringing in a healthy $137,000 after tax each year. If you are currently spending most of this on living expenses, you won't have enough to maintain your standard of living beyond a decade or so, given your total super benefits of around $1.1 million, unless your downsizing leaves you with a significant amount in cash.

I'm clearly confused of the amount I might expect to receive as a part age pension. I successfully beat cancer some years ago, then after a further cancer scare, my doctors have said that stress might be my demise, so I'm currently on long leave before retiring in 2018. I separated a few years ago, which like all couples, cost us both emotionally and financially having to start over again. I'm 63, in a government defined benefit superannuation fund that has no pension plan. I will therefore need to put it into a retirement account once tax on the untaxed portion has been paid. When I become entitled to a part age pension at age 66, I expect to have about $315,000 left in the retirement account. I also have a Commonwealth Superannuation Scheme pension paying about $20,000 a year. At 66, I expect my annual expenditure to be about $52,000 and so will need to draw down on the $315,000 each year and together with my CSS pension and a part age pension. I cannot work out how deeming rates will apply, e.g. will this only relate to the $315,000 investment or will it also apply to the $20,000 CSS pension, or is that taxed differently? I would like to work out approximately how long the $315,000 might last and the answer to that is very much dependant on the value of the part age pension I might be entitled. G.M.

Your defined benefit CSS pension is a hybrid that contains a portion which is taxed. This is the employer untaxed element that is paid out of general revenue which, as a rough rule of thumb, is likely to form half or more of your pension and would be added to your assessable income each financial year. The rest would be untaxed.

As your new allocated pension would stem from a "taxed fund", it would be tax free in your hands and since you would receive the standard tax-free $18,200 general concession, it is unlikely that you would pay income tax once you are fully retired.

If in fact you find yourself paying some tax as a result of income you may not have mentioned above, then you can reduce it with a tax offset equal to 10 per cent of the taxable portion of your CSS pension. You cannot reclaim any unused tax offset as you can, for example, claim an unused franking credit from a share investment.

If your total assets consist of $315,000, this would be deemed to earn some $9485 a year at current deeming rates. Centrelink's income test would count this plus your CSS pension and the combined income of $29,485 would produce a pension of around $10,700 at current pension rates. This would be reduced if you have any other savings.

Thus, if you draw the minimum 5 per cent from your allocated pension, or $15,750, then to top your income up to $52,000 you would need to draw an extra ($52,000-$20,000-$15,750-$10,700=) $5550 a year from your super pension which would thus last you around 15 to 20 years, depending on its earning rates.

An article about the safety of money in offset accounts run by home lenders who are not authorised deposit-taking institutions made me stop and think. Can you shed any light on the security or otherwise of money in such offset accounts? Under what circumstances could money in these accounts be at risk? What about the loan as well? What is the relative risk between bank lenders and institutions that are not authorised deposit taking institutions (like R.C.

Without having done a major study of non-authorised deposit-taking institutions (non-ADIs) and lenders, I am generally more in favour of borrowing from ADIs, which are governed by the Australian Prudential Regulation Authority (or APRA), and whose depositors are protected under the government's bank deposit guarantee on the first $250,000.

That said, last October the government introduced a Bill into Parliament - the Treasury Laws Amendment (Banking Measures No 1) Bill 2017 - that aims to provide APRA with the power to oversee the provision of finance by non-ADI lenders. At the time of writing this has not gone beyond its second reading in the House.

In the meantime, I would ask a lawyer to carefully read any contract you are considering and also ask "what if" questions, such as what happens to your loan, and offset account, if the lender sells out to someone else, or goes into administration or is liquidated.

If you have a question for George Cochrane, send it to Personal Investment, PO Box 3001, Tamarama, NSW, 2026. Help lines: Financial Ombudsman, 1800 367 287; pensions, 13 23 00.

This story The 'six-year rule' for renting out your former home first appeared on The Sydney Morning Herald.