How does capital gains tax work for a separated couple?

Can you please clarify the capital gains tax aspects of the following situation? My wife and I separated in 2012. She lives in one of our two properties, I in the other. Both titles are as joint tenants. One property, purchased in 2001, was operated as a bed and breakfast until 2008. The other was purchased in 1999 as the marital home. We are both nearing 80, so need to consider the implications of selling one property when one of us dies. The survivor could live in either. Any thoughts you have on this would be appreciated. P.O.

Being the marital home, the 1999 property will be fully exempt from CGT until 2012 when one of you moved out. If we assume that it is you who continue to live into it, then your 50 per cent remains exempt.

If your wife now claims the other property as her main residence, then her share of the original home became subject to CGT since 2012. She should try to obtain the market value of the home at that time. Market value is used to establish a cost base when you lose your entitlement to an exemption for the main residence. However, if her 50 per cent share can be passed to you as part of a court order or a financial agreement under the Family Law Act, it can be rolled over into one name without any CGT liability. I understand that married couples need to apply to the Family Court for a property adjustment within 12 months of a divorce becoming final, but I'm not a lawyer.

The 2001 property was fully liable for CGT until 2012 when one of you, let's assume your wife, moved in. Since it became her main residence, her 50 per cent share became CGT exempt. When a property is first rented and then you move in, the capital gain must be apportioned by time of ownership.

Again, if full title is moved to her as part of a court-ordered settlement, then the period from 2012 on should become CGT exempt, but there will still be a CGT liability created while the property was used as an investment. In each case, I am assuming no capital losses.

You and your wife can choose to talk to a lawyer or you approach the Family Court directly and even jointly file for divorce online. Google "Family Court How Do I apply for a divorce".

My wife and I are both 50 with one child (13). My annual salary is $120,000 gross plus fully maintained car and salary continuance insurance and my wife is self-employed earning approximately $3000 a year. We have a mortgage on our home of $150,000 at 4.55 per cent with $210,000 in our offset account and monthly repayments of $1800. Current value of the property is about $550,000. We have $35,000 in bank savings. My super is currently $200,000, with regular after-tax annual contributions, and my wife's is $40,000. She is not considering full-time employment at the moment. We are considering a few options in the near future: retain the current property as an investment and upgrade to a bigger home, or increase wife's super with after-tax contributions, or invest funds now in a savings account in shares through a high-growth managed fund, or set up a savings plan for the child's tertiary education. I understand that some of our objectives may not be appropriate from the tax benefit perspective but we simply do not understand the full tax impact and how to manage our plan. I hope that you may be able to suggest changes or how to prioritise our strategy, as we hope to have at least another 10 years before considering any retirement plan. V.J.

I suggest you have a short-term objective, which is to enlarge your living space, and two important long-term objectives, which are to retire debt free and have enough money in super to support your lifestyle in retirement.

If more space is a necessity, your choices would be to either sell and upsize, or knock down and rebuild your home, or put on a second storey to your existing home. Living in a capital city, you are unlikely to be able to buy a larger, second home and have it paid off by retirement, even if you work to 65 or 70.

The last option would probably be the least cost and you might be able to cover it using your savings, including the money in the offset account.

Looking at the remaining $150,000 mortgage, it should easily be payable over 10 years as your $1800 monthly repayments would even cover an average interest rate of 7.7 per cent.

Then, to build up your super from the current $240,000 to a minimum of, say, $1 million, over 10 years, would require you to make the maximum deductible contribution in your name, starting at $25,000 this year, plus a $3000 spouse contribution into your wife's super fund (allowing you to reduce your tax with a $540 tax offset) plus a further $17,000 non-concessional contributions. That third contribution will probably be impossible but if you can make the first two contributions, your combined super will add up to around $750,000-$800,000 in 10 years, assuming a 5 per cent return on funds. So you will probably decide to work through to age 65 or even later. By then, the age pension age will be 70.

I am 68 and during the year ended 30 June 2017, I received a gross annual pension of $68,590 and my transfer balance credit has been calculated at $1,097,440. In addition to my pension I worked for 40 hours to satisfy the work test and for this work I received a gross amount of $885. As I satisfied the work test I made a contribution of $33,000 to my accumulation account prior to 30 June 2017. After completing my income tax return, but before lodgement, I notified the fund that I would be claiming a tax deduction in the amount of $30,500 and this has now been processed by the fund. I have two pension accounts with AustralianSuper and at 30 June, the sum of these was $466,714. I also have an accumulation account that had a balance of $39,529 at 30 June. The three pension accounts come to $1,565,154 and as such I have assumed that I fall within the $1.6 million maximum, however I am now unsure. My questions are as follows: 1. Am I correct in assuming that I fall under the $1.6 million limit or do I need to include the amount of $39,529 that I had in the accumulation account? 2. If I need to include the funds held in the accumulation account then the total becomes $1,604,683 and what are the ramifications of exceeding the limit? 3. What are the implications going forward of the $885 I received for doing my 40 hours work during the 2017 income tax year? 4. If I satisfy the work test for the year ended 30 June 2018, will I be able to make a $25,000 contribution to my accumulation account and claim it as a tax deduction? I have been having sleepless nights worrying about my situation and even though I have phoned AustralianSuper for advice they were not able to answer my questions. B.L.

The $1.6 million transfer balance cap or TBC only refers to super funds "in the retirement phase" as it is now quaintly put. It sounds as though your $68,590 annual pension is a defined benefit fund and that, multiplied by 16, gives a debit to your transfer balance account of $1,097,440.

As you say, your two allocated pension accounts with AustralianSuper take the total that counts towards your TBC to $1,565,154, which is within your $1.6 million cap and therefore you have nothing to worry about. You could, in fact, create another pension holding $34,840 from your accumulation account if you wish, but you cannot add more than that without running into problems with the ATO.

You can continue to make concessional, i.e. deductible, contributions each financial year that you meet the work test, such as the maximum $25,000 contribution in 2017-18 and the amount you earn is irrelevant. If you are paying more than 15 per cent tax on income from your work and defined benefit pension, then leave the accumulation account in existence, just don't convert it into an allocated pension. Rather, take out lump sums as you need to spend it.

There is another account of which you need to take note and that is your "total superannuation balance" or TSB. Simply put, this is the sum of all your retirement phase pensions and accumulation accounts, (the latter includes transition to retirement pensions, now taxed since last July). Since your TSB is now over $1.6 million, a number of restrictions come into play, not all of which affect you. Those that do may include:

1.You cannot make any further non-concessional contributions or NCCs (which also means that you can no longer claim the government co-contribution of up to $500 for an NCC of up to $1000 nor, if you were under 65, could you use the "three year bring forward option").

2. You will not be able to use the "unused concessional contributions cap carry-forward option that comes into force from next July. In fact, to be able to carry forward, and use in a later year, up to five years of your unused concessional contributions cap, from July 1, 2019, your TSB must be under $500,000 as at June 30 of the previous financial year.

Those restrictions that do not, or are unlikely to, apply to you include:

1. If your spouse's TSB is greater than $1.6 million at the end of June 30 of the previous financial year, or if he or she has exceeded their $100,000 NCC cap in the financial year, then you are no longer able to claim a tax offset for a spouse contribution.

2. If you were the trustee of an SMSF or small APRA fund, you could not use the segregated assets method for determining the taxfree income.

3. For a person who wants to use the "three year bring forward rule" for non-concessional contribution in 2017-18 and later years, then:

(a) you will only be able to bring forward the full $300,000 NCC over 3 years if your TSB at June 30 is less than $1.4 million (a figure that will be indexed up in future years); and

(b) if your benefits total between $1.4 million and $1.5 million, the maximum bring forward amount will be $200,000 over two years, and

(c ) If your balance lies between $1.5 million and $1.6 million, your NCC cap will be $100,000 alone.

We have recently sold a home unit, an investment property. We now have some $300,000 to invest and would like to know the best option for maximising a return? Our financial assets include combined allocated pensions totalling $622,000, a super fund of some $16,000, and some $20,000 in term deposits. We currently draw a combined pension from our allocated pensions totalling $31,460. We own our home and have two cars and a caravan. We previously received a small Centrelink aged pension of $3564 combined which was not insignificant and formed part of our budget. This was withdrawn when the government moved the goalposts last year. We need the interest on this investment of $300,000 to form part of our budget, as we did previously; the rental income netted us about $7600 annually. Can you advise the best way to invest this $300,000? We have checked out term deposits but the return is not enough to generate sufficient income. What other secure alternatives are there? What do you think of annuities for such an investment? What are the rules re adding capital to superannuation? This might be a possibility for one of us as one partner is still working, be it only one day, casually, a week. Are there any other alternatives which do not involve risking the capital investment? R.H.

If your working partner can manage 40 hours in 30 days (it might require working two days in one of the four weeks), then he or she can make a $100,000 non-concessional contribution into a super fund each financial year.

Term annuities, notably from Challenger, can offer somewhat higher rates than bank term deposits. If you want a guaranteed capital return and also want frequent access to some capital, my preferred strategy is to invest one third of the money ($100,000) into each of three annuities, at first for 1, 2 and 3 years, Then, when one matures, roll it over into a three-year term so that, after two years, you have trio of term annuities, each with a three-year term, one of which matures every year. Last time I checked, Challenger was offering 2.52, 3.11 and 3.27 per cent respectively, which would initially give you some $8895 in the first year and thus more than you were getting from rent. Lifetime annuities exist, but lock you into historically low rates.

If you are able to cope with investment fluctuations, my preference would be to place the money into a selection of, say, five or six "multi-sector" i.e. balanced and diversified funds in, say, the Colonial First State Investment fund which allows you to stipulate what monthly payment you need, e.g. $650, thus receiving a mix of capital and interest in some months. Other funds exist, of course, such as wrap accounts, while the current fad is for listed platforms such as Hub24 or Netwealth although, in many cases, they require an adviser to be attached to the account.

Such multi-sector accounts have earned between 5 and 8 per cent compound a year over the past three years, far exceeding term deposit or annuity rates.

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 How does capital gains tax work for a separated couple? first appeared on The Sydney Morning Herald.