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Pension & Family home

Discussion in 'Real Estate' started by Gonzo, 22nd Mar, 2006.

  1. Gonzo

    Gonzo Well-Known Member

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    Singapore
    I've been thinking of how I can help my elderly parents without causing them, or me, too much financial penalty.

    Brief scenario is that they are now on the pension. Their investments didn't add up to much thanks to some dodgy Bank "Financial Advisor" who convinced them to throw all their savings into a property development fund back in 1990. They pretty much lost it all.

    They have a fully paid for PPOR which would be worth about $600-$700k but it's too big for the two of them. Being very conservative types, and also very family oriented, they are deadset against the idea of selling the family home.

    I was wondering what the tax implications on me and them would be if I bought a townhouse/unit close to where they are living now as an investment property. If my parents were to move in there and we rented out their family home, would they be seen as having extra income through the rent of their asset ? Could I claim the tax benefits of interest etc if the rental income I am receiving is from a different property to that I bought ?

    I'm guessing that this wouldn't be seen as kosher in the eyes of the ATO & DSS but who knows...
     
  2. MrDarcy

    MrDarcy Well-Known Member

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    I'm invloved with monitoring my Mother into retirement, but am otherwise as confused as the rest of world with CentreLink stuff.

    First problem I see is that that their house would no longer be their residence and therefore included in Assets tests, and in the rent in the income test. Their goes their CentreLink pension up in smoke.
     
  3. Nigel Ward

    Nigel Ward Team InvestEd

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    Hi Gonzo

    At the risk of sounding like a broken record, advice from a financial adviser who's right across all the complex rules about pensions is critical.

    But some general observations:

    1. With a fully paid off ppor worth let's say $600k your parents should be able to comfortably live on drawn down equity for many years to come.

    2. Whilst they may feel they've worked hard all their lives and paid taxes and are thus ENTITLED to the pension, if an income significantly higher than the pension could be structured without having to sell the family home would they be prepared to let go of the full pension if needed?

    I don't mean any disrespect to your parents (or anyone elses) but I really do not understand an attitude that means clinging desperately to the pension if it is possible to create a higher income from a little optimisation of one's assets even at the expense of losing the pension...surely if you're better off financially from an income perspective that's better??? (accepting of course that say rental income is less certain than the pension)

    3. Purely from a tax perspective (ignoring the pensions entitlement issue) provided they are paying you an arms' length commercial rent then there's no objection to you buying a property, and claiming all the deductions. You must ensure though that they REALLY do pay you that rent and you declare it as income etc in the usual way, that the usual tenancy agreement is signed etc etc...

    4. If your parents were to rent out their home then (again purely from a tax perspective) they would need to declare that rent as income and would be entitled to deductions for property related expenses such as repairs, rates and land tax (if applicable)...

    Hope that helps, but please note my "broken record comment" above.

    All the best.
    N

    ps. have you read the living on equity articles??? V. relevant for your parents.
     
  4. Gonzo

    Gonzo Well-Known Member

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    Thanks Nigel,

    I hear what you are saying and don't disagree. What I am facing is my parents are old school Italian and have worked all their lives to avoid debt at all cost. they just can't understand how having debt is good. Then compound that with the inbred necessity to leave something for the kids, even though we can do without, and you can see that the mental state of mind is not one conducive to living on equity.

    As for the pension, well again it's the principle of it. They were very hardworking and never thought too much about tax minimisation. Just paid what the ATO said they had too without using any vehicles to help them reduce their tax. Now they see it as what's owed to them by the government. Is it the right way to think ? It is in their minds.

    I guess there is no easy solution to keep their minds at ease whilst maximising their equity unless I work hard to make them see what is possible. Unfortunately it's a bit hard to do while I'm living overseas.

    Thanks again for your reply.
     
  5. Jacque

    Jacque Team InvestEd

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    And herein lies the crux of the problem. Unfortunately, many people of this generation (and I empathize with you, Gonzo, as some of my relatives think exactly the same way as your parents here) view the pension as something that is owed to them by the govt for paying all their taxes their whole lives. Though this expectation is seriously flawed, it's difficult to make them see things any other way. What they forget is that WE are the govt. In the end, it's up to all of us to secure our future by putting away and investing NOW and not leaving it up to everyone else to fund our retirement. And the full pension is nothing to crow home about- it's there to be utilized as a bare minimum to exist, and nothing more really. I know I certainly don't want to be relying on it for my retirement.
    Guess that's why the govt introduced compulsory super all those yrs ago ;) Our reliance on the pension in later yrs will cease to become an expectation or a right, but rather viewed as a last resort for those who simply cannot afford to live any other way.
    Changing the mindset of your parents isn't going to be easy, as long as they feel they have a claim on the pension. It really is amazing the lengths some people will go to to retain access to this paltry amount, when the reality is, with a bit of refinancing and advice from a good independent financial planner and accountant, they could be so much better off!
    But, instead so many of them struggle on, and leave a huge debt free asset to their families instead. Madness! You only get one life, so I say forget the kids and concentrate on living yours to the fullest :)
    Good luck with it all Gonzo and let us know how you get on...
     
  6. Alan

    Alan Well-Known Member

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    My 'mindset' is CLEARLY that not ony don't I want the pension, but if I ever got in a position that I qualified I would be EXTREMELY disappointed with myself!

    I know what you mean, it's a different mindset, but to be fair, it's also different times. If I was born a few decades earlier I may well have had a slightly different attitude.

    Unfortunately in the past, for a male to get an aged pension may have meant they would only be on it for 5 or 6 years as after that they would be dead! And if you'd been through a couple of World Wars, fought for your country etc. this doesn't sound like too much to ask to me.

    Times are now different and if I can manage to live a lot longer than 'normal retirement' age then I think I should be making a big if not total contribution to my own future.