When an inheritance wipes out the age pension

My wife and I are retired and are in our late 60s, we own our home and we receive about $1800 monthly in part age pensions, plus $500 from a term deposit and about $600 a month from a Colonial First State Wrap account. Our problem is that within the next two years we will receive about $500,000 from an estate that would automatically cancel out our age pensions. My question is if there's anything we could set up to use the $500,000 and still obtain the majority of the pension, as we would need to get about 5 per cent return to equal the current age pension benefits? G.B.

I guesstimate you would have about $560,000 in assets and your inheritance will take you to more than $1 million, well above the current cut-out rate of $830,000 for home-owning couples. Some people advocate buying an insurance bond within a family trust, but I frankly think it's often a waste of time, compounded by additional fees.

Having too much money to receive a welfare payment shouldn't be seen as a problem. Rather, it will be an opportunity to take a holiday or buy a car or, if there are early signs of illness, plan for an eventual aged care facility for one member of a couple, that you otherwise feel you wouldn't have been able to afford.

If your assets run down over time, you can reapply for a partial age pension. Admittedly, if you are currently receiving an allocated pension under the pre-2015 rules, then on reapplying, the super pension fund would be subject to deeming but, in the meantime, you can get an awful lot of enjoyment in life without having to queue up at a Centrelink office.

I have shares in an entity bought before September 20, 1985. Since then, the number of shares has increased through receiving Bonus Option Plan (BOP) issues, bonus issues and taking up rights issues. I paid nothing for the BOP and bonus issues but paid for the rights issues. Every half year we are advised of the number of BOP shares issued and the dividend foregone. My understanding is that the dividend foregone in place of the BOP shares is not assessable income because the shares are issued out of the capital account. But what is the capital gains tax status and cost base of these shares when I sell? Are all BOP shares issued to me after September 19, 1985, regarded as acquired post CGT? If so, what is the cost base? Alternatively, as these BOP shares are issued after September 19, 1985, but are linked to both pre and CGT shares bought, do they have the same pre CGT and post CGT status. If so, do I apportion the BOP shares into pre and post CGT shares? I have kept all records and have entered the data in an Excel spreadsheet. If you know of a good program for CGT calculation, please also advise. M.L.

I'm afraid you're in a nightmare situation and may need an accountant's professional software.

To explain, there have been a number of changes over 32 years in the treatment of bonus shares. Thus bonus shares issued on pre-85 shares until June 30, 1987, are not usually assessable dividends if the bonus shares were paid out of a company's "asset revaluation reserve" or from a "share premium account", for example, if you had 100 pre-85 shares and received 20 bonus shares, you effectively now had 120 pre-85 shares. These are free of CGT when sold but your bonus shares do not carry franking credits.

This changed between July 1987 to June 30, 1998, when only bonus shares issued from a "share premium account" are not assessed as dividends.

Since July 1998, bonus shares are generally not assessed as dividends unless, says the Tax Office's website, you have the choice of being paid a dividend or of being issued shares and you chose to be issued with shares. Bonus shares may also be assessed as dividends if the shares are being substituted for a dividend to give a tax advantage, or the company directs bonus shares to some shareholders and dividends to others to give them a tax benefit.

This is arguably at odds with the bonus plan from, say, Australian Foundation Investment Company, supported by an ATO ruling (CR 2012/10) which states that those who choose bonus shares rather than dividends will not usually have them taxed as dividends but will have them subject to CGT when sold. QBE gives similar advice but ANZ refuses to give any advice on its BOP.

Let's say you navigated these shoals and, 10 years ago, you had accumulated 150 pre-85 shares. Then the company had a 1:15 rights issue at, say, $10 each and so you paid $100 for 10 new shares which are thus post-85 shares.

Let's go on to say that, a year later, you received another 16 bonus shares. Then 15 of these must stem from pre-85 shares and are thus classified as such. Also, you now have 16 post-85 shares, with a collective cost base of $100 above which you calculate your profit when the shares are sold.

As the years go by, with six-monthly BOP shares received, and future rights issues, I can understand your confusion. Its eye-watering stuff! To add a complication, some of your earlier post-85 shares may show a lower tax liability if the indexation method of calculating CGT, rather than the common 50 per cent discount method, is used. The ATO provides a mildly helpful CGT worksheet for this on its website.

So keep your spreadsheet up to date, but don't forget you also need documents to support your Excel entries.

I bought a unit four years ago, lived in it for nine months, then moved out into a smaller rented unit. Last year I bought a house. I will move into this house later this year at the expiry of my current lease and it will be my principal place of residence. I plan to sell the unit to partially pay for the house. Could you clarify if capital gains tax will be applicable on the sale of the unit and, if yes, how is it to be calculated? If I sell the unit after one or two years, will the CGT calculation change? M.L.

After establishing a main residence, you can move out and still claim it as a CGT-free main residence for up to six years (to the day!), providing you claim no other home as a main residence. So the original unit should remain CGT free when you soon sell it, assuming you are not already claiming your new home.

The house you bought last year will be subject to CGT for the period that you have not been able to claim it as a main residence. For example, suppose you own it for one year as an investment property, whether rented to or not, before moving into it, then live in it as a main residence for nine more years before selling it. One tenth of your profit, after all expenses, will be subject to CGT, that is 50 per cent of 1/10th of the net profit will be added to your taxable income that year. The sums can be large, so be sure to use a tax accountant to help you.

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 When an inheritance wipes out the age pension first appeared on The Sydney Morning Herald.