The old-age pension is taxable. But here’s why many retirees don’t pay taxes

Question 1: Do people receiving the Centrelink Old Age Pension have to pay taxes?

The old-age pension is taxable.

But if this is your only source of taxable income, you end up paying no income tax, as older pensioners are also eligible for the Senior Australian Pension Tax Offset (SAPTO).

Combined with other offsets, this gives single retirees an effective tax-free threshold of nearly $33,900.

When you consider that retirement income payments are paid tax-free from age 60 (unless they come from an untaxed source, which would be unusual), then that’s very generous.

Only when older Australians have significant other taxable income, for example dividends, equity interest, managed funds or other non-super investments, or rent from an investment property, tax becomes payable.

Issue 2: We own our home and an investment property worth $500,000. There is a vacant block next to our house for sale at $600,000. Could we buy it, improve our lifestyle because no one could build on it, and combine it into one title, integrate it into our residence?

We would need to sell the property for $600,000. This would reduce our non-residential assets so that we would qualify for a pension. Would Centrelink have a problem with that?

It will depend on the exact circumstances. For example, it will depend on whether the council will allow you to combine the two properties into one title.

Generally, if land is held in two titles, it can be considered to be held in one title when:

• The house is situated on the two blocks of land, or
• The alienation of one of the blocks of land without the other will seriously impair the residential function of the house, or
• Both blocks taken together are protected under Commonwealth, State or Territory law, due to their natural, holistic or indigenous heritage.

I would like to seek clarification from the Financial Information Service before continuing.

Question 3: I retire at 60. How much tax will I have to pay on a lump sum payment?

Generally, no tax is due when funds are withdrawn from the super, either through a lump sum or through a regular income stream once you reach age 60.

The only exemption to this is for people who are in “non-taxed” super-schemes or in constitutionally protected funds.

Before taking a lump sum payment, you should consider whether it is appropriate to keep at least some of your super funds to start a steady stream of income, as these funds may need to last you the rest of your life.

Question 4: My husband’s elderly parents have four adult children as beneficiaries in their will. Everyone agreed that only one adult really needs the product. Do they need to change their will because they think informing both executors (one being my husband and the other being the new beneficiary) is sufficient?

I’m sure they need to update their wills to show this change. What would happen if they didn’t update, and what would be the consequences if my husband continued to pay his brother his share?

Currently, “everyone agrees”, but there is a risk that this is not always the case.

It’s amazing how often people have different memories of unwritten agreements, and people also change their minds when circumstances change. These problems are even more common when large sums of money are involved.

If an executor fails to carry out the instructions in the will, a beneficiary or other interested person can ask the probate court to have the executor removed. In addition, the executor may be held personally liable for failing to perform his duties or for performing them improperly.

It will be much easier and cleaner, and minimize the risk of litigation, if the will has been updated now to reflect what has been agreed.

Question 5: I am married with no dependent children. My husband and I are retired. I have an investment property that I’m selling, which I’ve owned since about 1984. It’s fully paid for and in my name only.

I’m not against paying CGT, but if the profit from the sale can be put to better use, I’d be happy to see that happen. Can I contribute to the retirement pension of my (two) children? I intend to do this anyway, but a tax efficient method would be preferable. Likewise, can I contribute to my spouse’s pension?

Capital Gains Tax (CGT) did not begin in Australia until September 20, 1985, and investments such as shares and property purchased before that date are grandfathered, i.e. that is to say that they are not subject to the CGT at the time of the transfer. Any capital gain is realized tax-free.

However, if you have made capital improvements or additions to the property, such as a major renovation, the improvements themselves may be subject to CGT.

The ATO has some guidance on how this works and how to calculate CGT on upgrades only.

You can make non-concessional (after-tax) super contributions to your husband’s and children’s super if you wish. Normal contribution rules would apply.

Craig Sankey is a Certified Financial Advisor and Head of Technical Services and Advisory Enablement at Industry Fund Services

Disclaimer: The answers provided are of a general nature and although inspired by the questions asked, they have been prepared without taking into account all of your objectives, your financial situation or your needs.

Before relying on any information, please ensure that you consider the relevance of the information to your objectives, financial situation or needs. To the extent permitted by law, no liability for errors or omissions is accepted by IFS and its representatives.

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