Buying from Father in law, pension problems and solutions

Hi, first time here as i am new to this whole property purchasing business but have been forced into it now unfortunately, but have some complex issues to deal with in terms of my father in laws pension.

Story is he purchased the house for my wife 17 years ago under the assumption she would pay back the mortgage and he would not be responsible as a landlord for repairs etc. We have lived in the house for the last 17 years and put a lot of our own money into renovations etc, including borrowing more money on the house via my father in law to do renos. He did not consider at the time when he retires this year it will affect his pension as it is an asset for the asset test. Nor did we.

So he has freaked out and now told us we have to buy the house off him thinking this would save him and was happy to sell for remaining mortgage of $84k plus fees.

Of course, centrelink have now told him, nope... thats gifting and you will still be assessed on the 340k value.. so still loses same amount of pension.

My question is, could there be a tricky way around this by me paying him the money for mortgage, plus extra to cover the 24 k he will lose in his pension over the 5 years, but then he gifts us that back as a gift of 6k per year over 5 years that we then use to pay him some money each month to cover his lost pension.

Sorry if this sounds way too simple i am very naive when it comes to these things- just spit balling some ways around paying back that lost money to him but him somehow giving at least a portion back without affect to his pension.

Thanks in advance for any suggestions- and yes i know "Go see an accountant", we are in the process of doing this, i just wanted as many opinions as possible.

Shane

 

You will likely need advice that cross centrelink and tax. We tend to see this under our aged care banner but its same issue. Tax planning for a pension is same.

You may need to first address this with a lawyer. One who knows stamp duties in the relevant state. There may be concessions under apparent purchaser rules to revert ownership if it can be proven that the original purchase was by her father as an apparent purchaser. But in loads of cases you just wont be able to prove it. Its why people are always suggesting structuring advice BEFORE you buy. It avoids this concern. And I m going to guess nothing agreed is in writing.

The other problem is that the ownership probably wont meet the main residence CGT concessions since the legal owner hasnt continually lived there. So Dad will also have a tax problem.

 

As far as tax goes, he has been told by an accountant he will make a capital Loss on the sale. if i am gifting him money back under the 30k over 5 years is it not also tax free?

 

Seems unlikely a place hasnt increased in value in 16 years.

 

Yes i thought that also, but the accountant assured him due to the loss he has made over the years there will be no CGT to pay. The situation is a bit more complex than what i had explained, however my wife and i have not been paying enough to cover all the rates etc each year so he has made a loss each year. Again i dont know much about these things, i have to trust what the accountant says.

 

I am just advising a client on something similar.
It may be possible to argue the dad was trustee for the daughter. This will mean a transfer could be exempt from duty and CGT and won't effect the pension.

Seek legal advice.

 

I was just reading something similar, i will seek advice on this angle, thanks very much all for the input. Of course not having this in writing in the first place will make it difficult but we can get access to bank statements etc.

 

This is incorrect unless the property has dropped in value. there is no legal basis to the last sentance either. You are conflating the centrelink gifting rules which are a separate issue to the tax side.

 

And the non-arms length value based on the market value substitution rule ??

I have seen tax advice where someone said - No CGT because the property cost $200K and is being sold now for $400K but since there is a $200K loan its only the $200K that is the amount used for CGT.

 

Obviously this is a complex situation i am not equipped to deal with, nor is my father in law. We had hoped to avoid the cost of legal advice, however its evident it may save us in the long run financially and emotionally. I assume i am looking for someone who is well versed in family property transfer and centrelink issues- any recommendations in Adelaide?

 

Hi

Any money paid would have all been declared on his income tax returns and any excess of expenses over rent claimed as a tax deduction.
Marg

 

Tip - Search for a Adelaide based stamp duties lawyer. If they can convince the state OSR of a property held on trust it could be good value. Ironically tax law may respect that same position and Centrelink are mosre likley to accept the arrangement being unwound. THEN based on those outcomes look at aged care (I know its not) advice as those advisers have the centrelink skills

 

Not necessarily. He hasnt been receiving income as rent. If he had well thats a whole different tax problem and destroys the issue of property held on trust

 

Yeah i would go the stamp duty advice first. If successful then apply for a private ruling from the ATO. Centrelink would then likely accept this as evidence of the trust relationship

 

Yes that private ruling is a key element

 

Well thinking on it i would have to say though i dont think even this is an option, as i am sure he would have claimed the income from us as rent on his tax return, as it is a requirement to declare it is it not?

 

That wouldn't matter for stamp duty. But it could be evidence that it was not held on trust.

 

Thing is I actually don't mind the stamp duty, I have factored that and all other fees into the loan. What I need to figure out is how to pay him the 24 k he will lose in his pension over 5 years without that itself affecting his pension. I thought he could perhaps gift is that back over the 5 years.. Still going to be visiting a lawyer, just not sure a stamp duty lawyer is the correct choice. Ugh so confusing. All this because he did my wife a favor 17 years ago by buying her a house without documentation saying its hers.