Check pension rules before building a granny flat

I'm 72, receive a full age pension and have assets of $175,000. My wife is in a nursing home. We own our house and I plan to build a granny flat in the backyard. Would the granny flat be considered an asset and included in the assets test and would it affect my age pension or would it be considered as part of the house and therefore not a separate asset? G.C.

When an age pensioner rents out a granny flat to anyone other than a member of the immediate family, it will be counted by the assets test and its value will be based on a pro-rata percentage of the floor space of the overall property. For example, if the flat covers an area equal to 30 per cent of the total area of the house and flat, then 30 per cent of the value of the property will be counted.

If you have a home in a capital city, this asset value could amount to many tens or even hundreds of thousands of dollars and would obviously affect your pension. Furthermore, the net rent, after expenses, is counted by the income test. And when the property is eventually sold, there will be a capital gains tax liability in proportion to the area rented and the length of time it was rented.

However, if you take in a lodger, and the area being rented is an integral part of your home, for example, a room with an en suite and a shared kitchen and lounge area, it will not be counted by the assets test. Again the net rent would be counted by the income test but you can choose a simpler formula that counts expenses as 30 per cent of the rent. A CGT liability again arises in proportion to area and time.

In your case, I assume you are planning to rent the flat to obtain income. For other readers, a granny flat can be built with other intentions, typically where the parent(s) of an adult child might build a flat above or onto their child's home, to live there rent-free for life. In such a case, the usual "gifting rules" do not apply but there is a "reasonableness rule" or formula that determines how much can be spent before Centrelink determines that the parents are depriving themselves of their assets. Also, the CGT exemption for a main residence continues to apply in such cases.

I have recently inherited a moderate amount in pounds sterling from a deceased estate in England. When I convert this into Australian dollars will I be liable for capital gains tax on any "gains" resulting from the movement in the exchange rate over any particular period of time - perhaps since the date of death of the deceased? I.S.

Australia has no death duties and hence there is no tax payable on an inheritance, even when received from overseas. Any income accrued by the British estate while it was being administered would be taxable in Britain.

If the money was transferred from the deceased estate to you and placed, say, into a British bank account where it earned interest, then that would be assessable in Australia. If any tax was paid on this overseas, you would normally claim an offset for it to reduce Australian tax, subject to limits for large amounts.

Nominally, foreign currency can be a CGT asset, and the tax law known as the taxation of financial arrangements is intended to tax foreign currency transactions, but these mostly relate to business transactions.

I bought 200 Westpac shares in 1982. With DRP and Bonus shares etc, the number of shares reached 743, which I sold in July last year. I am a 75-year-old pensioner who doesn't pay any income tax because my income is below the tax threshold. I do my own tax returns online. In previous years when I sold shares, I was able to negotiate the Tax Office's CGT worksheets quite successfully. Now, after reading your column, I am not sure I will be able to use the CGT worksheet when I do my tax returns next year. As my annual income is quite low, I estimate that if I do have to pay CGT, it won't be much. I do not want to pay an organisation like AIMS-STM a large sum to calculate my CGT if I can avoid it. So I was thinking of writing to the Tax Office to ask if its worksheet will handle my situation, but I am not sure who to write to. My past communications to the Tax Office have gone unanswered. So I am hoping you would be able to direct me to a person/department in the Tax Office and give me their postal address or email address. J.F.

I don't think you need to buy the AIMS-STM software, only find an accountant who either has it or can do the calculations for you at a reasonable price.

These could be quite complex. Your shares bought before September 20, 1985, are free of CGT, as are the 1:5 Bonus shares received on those shares on September 9, 1988.

All shares bought through the dividend reinvestment plan or DRP shares bought after 1985 are subject to CGT, each parcel having a different cost, as are any right issues or share purchase plan you opted to take up. However, you are fortunate in that you have not been using a bonus option plan, which makes things more complicated. From what I see of the Tax Office's CGT worksheet, which can be downloaded from the website, it appears to be only suitable for a single calculation, but if you are prepared to use multiple pages, you could work your way through in a day or two!

Writing to the Tax Office can be a little tricky. The address, word for word, is "Australian Taxation Office, GPO Box 9990, IN YOUR CAPITAL CITY".

Normally, when we see the last four words, we insert Sydney, Melbourne etc, but the Tax Office's instructions are opposite, saying "Do not replace the words 'IN YOUR CAPITAL CITY' with the name of your capital city and its postcode - because of a special agreement we have with Australia Post, they are not needed." Be sure to include your tax file number, name, birth date, address and phone number, plus your signature. It all seems a little excessive.

If, again, you don't get an answer, write to Scott Morrison, PO Box 6022. House of Representatives, Parliament House, Canberra ACT 2600 and ask him to instruct his employees in the Tax Office, who are being paid by our taxes, to respond to your query.

I didn't understand fully the statement "any undepreciated capital expenses over the 12 years of owning the property" in the article "Sell property now or after retirement". Does this mean that if I hadn't claimed the 2.5 per cent depreciation of the building each year (which I haven't claimed) I could claim it for the years of owning the house, say eight years, that is 8 x 2.5 x 350,000? Cost of the building when purchased - $70,000. I realise land can't be depreciated. R.O.

Estimating the cost base for real estate can be quite complex. Where you couldn't claim a deduction for costs because you didn't use the property to produce assessable income at times - for example, if it was vacant land, or your main residence or a holiday home for a period, then you can increase the cost base by adding undeducted expenses such as rates, insurance, land tax, maintenance costs and interest on loans used to buy or improve the property.

If the sale of your rental property includes depreciating assets, a "balancing adjustment event" will happen to those assets. If a balancing adjustment event happens to a depreciating asset that you used at some time other than for income-producing purposes (for example, privately) then a capital gain or capital loss might arise to the extent that you so used the asset.

As I have often mentioned, I am not a tax agent - although officially a "tax (financial) adviser" - and prefer not to venture too deeply into the quagmire that is depreciation. However, the Tax Office offers via its website a booklet titled Guide to Depreciating Assets. Otherwise, I suggest talking to your tax accountant.

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 Check pension rules before building a granny flat first appeared on The Sydney Morning Herald.