Abandon a gift in a Will to keep the pension?

Abandon a gift in a Will to keep the pension?

The Financial Planner carefully structures Mary’s affairs. Mary receives a $1 pension and a Concession Card. But then, Mary’s mother dies.

Mum’s Will leaves everything to Mary. The inheritance costs Mary her $1 pension and Concession Card. Mary has money from her superannuation. She does not want the inheritance. Mary desperately renounces the gifts under the Will. Mary’s children get the inheritance instead.

Does Mary keep her Centrelink Benefits?

Sadly, no. Centrelink deems monies abandoned or given away still yours for the next five years.

Two Centrelink deprivation exceptions:

1. $10,000 rule – gifts under $10,000 per year are not means-tested
2. $30,000 rule – gifts under $30,000 over five years are within the gifting-free area. However, a gift cannot exceed $10,000 in any year.

Gifts above $10,000 are ‘deprived assets’. ‘Deprived assets’ are given away but still deemed yours for the next five years. Sure, Mary can abandon the gifts under her Mum’s Will. However, Centrelink deems the gifts still hers for the next five years. After five long years, Centrelink no longer deems the wealth she gave away to be hers.

How can the accountant and financial planner build a Will so that the child continues to get a pension?

Pretend Mary’s mother is still alive. Mary takes her mother to the Accountant and Financial Planner. There are many strategies available to them. For example, the Accountant and Adviser go on our website and build a 3-Generation Testamentary Trust Will. The 3-Generation Testamentary Trust Will names Mary and her children as beneficiaries. The 3-Generation Testamentary Trust is flexible. Each beneficiary can receive a portion or none of the estate.

Mary then successfully retains her $1 pension and all-important Concession Card.

What about companies, Family Trusts and 3-Generation Testamentary Trusts?

1. Private Company

For Pty Ltd your share of the income and assets may be used to calculate your pension. But only if your company meets at 2 or more in the relevant financial year:

1. the consolidated gross operating revenue for the financial year of the company and its subsidiaries is less than $25 million
2. the consolidated gross assets at the end of the financial year of the company and its subsidiaries are less than $12.5 million and the company and its subsidiaries have fewer than 50 employees at the end of the financial year, or
3. the company came into existence at the end of the last financial year

2. Trusts

These rules only apply to ‘private trusts’. These are:

1. family trusts (also known as a Family Discretionary Trust
2. testamentary trusts
3. 3-Generation Testamentary Trusts
4. fixed trusts with fewer than 50 members

They do not include:

1. fixed trusts with more than 50 members
2. Self-managed superannuation funds, or
3. any public trusts, such as listed property trusts or equity trusts

Attribution

If you are ‘attributed’ with any portion of the assets or income of a private company or private trust, those assets and income are treated as yours. This is based on two tests:

1. control (including control via an associate), and
2. source

a) Control test
Who controls the private company or private trust? We all know that the Trustee (especially in a Family Trust) is a puppet. Others control the trust. For example:

1. what can sack and appoint a trustee – for a Family Trust it is the Appointor
2. veto a trustee’s decision, or
3. build a Deed of Variation

The trustee or some other person may also hold some of the above powers. You may control the trust if you can boss the person in power. Can you influence their decisions?

b) Source test
This is where you transfer the assets into the company or trust – and you do not get value in return – but you keep control. In a contract, where you can prove a genuine gift and no further involvement then there is no attribution. (This is after the 5 years have passed.)

Relinquishing control
If you relinquish control of a private trust, or private company or give in a Will, you will be considered to have gifted the assets held by the trust or company. A 5 year deprivation period applies. The deprived amount is based on the market value of the deprived assets and your level of control.

How to relinquish all beneficial interests?

Our friends at Centrelink are not much into tax. So they say silly things like ‘amending the trust deed to remove you and your partner as beneficiaries of the trust or
creating a separate deed to renounce you and your partner’s beneficial interest in the trust’ satisfies relinquishment. However, you can’t amend a Family Trust deed to change a beneficiary. It is a resettlement under the ATO’s view, irrespective of the Commercial Nominees case (High Court, 2001).

3. Three-Generation Testamentary Trusts

Death and Probate Duties were abolished by 1981. However, in 1985 the Federal Government introduced Capital Gains Tax. Capital Gains Tax now earns the Australian Federal Government more money on deceased estates in a single year than in the cumulative history of death duties.

Contrary to what Treasurer Paul Keating told us back in 1985 when he introduced CGT, Capital Gains Tax and Stamp Duty are applying more often to your family home. Even your pre-1985 family home can be subject to Capital Gains Tax.

A 3-Generation Testamentary Trust is the most effective safeguard to put into your Will to dampen the effects of Capital Gains Tax and Stamp Duty.

This is an example of a Will without a

Tom’s Will made the Taxman rich

Tom always wanted to build his retirement home on the canals where he had purchased a block a few years ago. Unfortunately, Tom died before realising his dream to build on the block.

As a dutiful husband, Tom left everything to his much-loved wife Jenny.

Little did Tom know, but Jenny never shared Tom’s vision to live by the canals. However, their 2 children did share Dad’s vision. Jenny decided to give the children the block of land. After all, it was now interfering with her aged pension and pharmaceutical entitlements.

The gift made the children excited. The block had increased in value to $175,000. However, the children were less excited when they got a Stamp Duty bill of over $4,200.

Later, Jenny gets a notice from the Tax Office to pay Capital Gains Tax of $28,000.00 on the “disposal” of the block. (“But I just gave it away!” she lamented)

The nightmare continues when Centrelink advises Jenny that the gift reduces her entitlements because of the Non-Abandonment rule.

All this seems very unfair to Jenny. They had paid taxes throughout their life. Jenny gave the block away yet Capital Gains Tax, Stamp Duty and Centrelink all became problems.

But there is a way that Tom and Jenny could have fought back…

Tom could have put 3-Generation Testamentary Trusts into his Will. Tom’s Will then leaves everything to his wife, children and extended family. Tom also makes his wife Trustee of the 3-Generation Testamentary Trust. Jenny controls the assets but does not own the assets for tax purposes.

Does that mean that Tom’s estate goes to Tom’s mother-in-law and Uncle Harry? Do the children have control over what Jenny does with her husband’s estate?

No to both questions.

Jenny has full control of who gets what from the estate. With a Testamentary Trust, Jenny can give everything to herself or give some things to the children, grandchildren or any of the extended family as she so wishes. With her accountant’s help, Jenny can take advantage of the lower income tax rates paid by some members of her family. Now that is flexibility.

Flexibility: 3-Generation Testamentary Trust?

In the above case, Jenny could have merely distributed the block to her children through Tom’s Will. Even if the transfer took place years after Tom’s death, the transfer is direct from Tom to his children. Therefore:

1. No stamp duty is payable because Jenny did not own the land – she merely controlled the land in the Testamentary Trust.
2. There is no “disposal” of the land. Therefore, Jenny does not have a Capital Gains Tax bill – CGT Generation Skipping.
3. Alternatively, the asset could have been kept out of Jenny’s hands to protect her Centrelink entitlements.

Do children benefit from the 3‑Generation Testamentary Trust?

The Tax Man penalises your children and grandchildren under 18 years of age who receive unearned income over $416 per year. Above this amount, children pay tax at 66% and then the highest marginal tax rate.

This is not the case with a 3-Generation Testamentary Trust. A Testamentary Trust operates through your Will only at your death. A Testamentary Trust offers the benefits of tax-effective income splitting without attracting the penalty tax. Minors deriving income under a Testamentary Trust get the benefit of the same tax-free threshold as adults.

Rich enough for a 3-Generation Trust?

Of all the people who paid Capital Gains Tax last financial year, 80% earned income of less than $80,000. Capital Gains Tax is a tax on the middle class.

The only people who don’t need a 3-G Testamentary Trust in their Wills are people who feel guilty for not paying enough tax during their lives. Even if your only major asset is your family home, you can gain tax advantages from a Testamentary Trust.

Estate Planning is not for the rich. It is for people who don’t like paying taxes.

Pay CGT on my family home?

When the press was alerted to them the ATO withdrew its two booklets:

• Capital Gains Tax and the Assets of a Deceased Estate; and
• Capital Gains Tax and the Family Home.

For updated copies of these books ring the ATO on 13 2861.

Unfortunately, the books don’t tell you how to reduce Capital Gains Tax on your home or your deceased estate; they just give you advice on how the Government collects its money when you die.

Paul Keating told me in 1985 that my home was exempt from Capital Gains Tax

A lot has happened since then. Within one generation, every asset in Australia falls within the CGT regime. Even the family home is not automatically exempt.

You can own property with another person either as Joint Tenants or Tenants in Common. When a joint tenant dies, his or her interest goes automatically to the survivor(s) – not via the Will.

In the past, it was popular for married couples to buy assets, such as family and investment homes, together as Joint Tenants. Capital Gains Tax legislation does not recognise Joint Tenancy in its calculation of Capital Gains Tax. Generally, holding assets as Joint Tenants is now considered dangerous.

By owning property as Tenants in Common and including a 3-Generation Testamentary Trust in your Will, you can provide your accountant with the flexibility to significantly reduce any Capital Gains Tax that may be payable on your home.

A  3-Generation Testamentary Trust allows a beneficiary to set up many or no testamentary Trusts. If a 3-Generation Testamentary Trust is activated as a result of your spouse dying, you are attributed with the assets and income of the trust only if:

• you directly control the trust, or
• an ‘associate’ has control and you are a potential beneficiary

Therefore, if you don’t want the assets to be taken into account for Centrelink put in your Accountant or Financial Planner as the Appointor of the 3-Generation Testamentary Trust.

Can a pensioner escape from a Family Trust?

Often, a Centrelink beneficiary can be removed from a Family Trust. This is different to a pensioner rejecting an actual gift or right.

Centrelink benefits are worthless compared to my children divorcing and going bankrupt

Q: Professor Davies, I do not like your article. Sure, I give all my assets to my children to get Centrelink, But, what if my greedy children divorce and go bankrupt? Everything I gave them is then lost. This is all to get some miserable government pension and the pathetic Concession card.

A: Well I happen to agree with you.

My personal view is that clients fixate on getting a pension or benefit from the government. They say, ‘It is my right after paying taxes all my life to get something back from the government’.

I would not personally hand over millions of dollars of assets 6 years before I intend to retire. Forget about the Capital Gains tax and the stamp duty, what if you run out of money yourself? Rather, after my wife and I die, through our 3-Generation Testamentary Trust Mirror Wills our children get our wealth with:

• no capital gains tax
• no stamp duty
• protected by a Divorce Protection Trust
• protected by a Bankruptcy Trust

That is worth a lot more to me than the short-term gain of a pension.

But, this is my personal view. As a Professor in tax law, I have no skill in financial planning. Rather, such questions are the province of the financial planner and the accountant. The adviser, accountant and client come to me with what they want. They then build those documents on our website.

Written by Adjunct Professor, Dr Brett Davies (Partner) and Madeleine Baxter (Solicitor) at Legal Consolidated Barristers & Solicitors