Contact
1300 732 766

By the time you’re moving into residential care, your retirement plans might have been in place for 20 to 30 years. It’s likely that you had your financial plan pretty well sorted and it had been looking after you comfortably for quite some time.

One of the issues I often see when advising clients and their families about the move into care is that there are often investment assets such as managed fund or share portfolios, but nobody has easy access to the records that are necessary to understand what (if any) tax would be payable if it makes sense to sell some of the investments to fund entry into care.

What is capital gains tax?

Capital gains tax is the tax you pay on the increase in the value of an investment, over what you paid to purchase the investment.

So if you have a share portfolio that’s worth $350,000 – it’s important to know whether that’s a portfolio you originally invested $50,000 into back in the early 90s, or if you invested $300,000 just a few years ago. The portfolio is worth the same amount but the tax you’d pay if selling is substantially different.

The same taxes apply with an investment property, but I find that more often than not somebody can remember at least an approximate price they paid to purchase the property, and aside from some renovations and improvements there aren’t often many other relevant transactions between purchase and sale.

In contrast, a share or managed fund portfolio might have been set to automatically re‑invest your earnings, which means not only do you have the original investment purchase to consider but multiple re‑investments, all at different prices, across the years.

When does capital gains tax become an issue in aged care?

The scenario where this usually becomes relevant is when you’re moving into Residential Aged Care and deciding whether you want to pay a Refundable Accommodation Deposit (RAD) in a lump sum, or to pay it as a daily fee instead as a Daily Accommodation Payment (DAP).

At the moment, the interest rate used to calculate the Daily Accommodation Payment is 5.72% per annum. So it’s often a simple decision to recommend taking money from say a term deposit returning 2.05% per annum, and paying it into the deposit once it matures.

An investment portfolio yielding 4.07% a year can be a bit trickier though. If you could sell the portfolio without paying any capital gains tax then it’s potentially worth selling it to put into a Refundable Accommodation Deposit.

But if the portfolio is worth $200,000 and was purchased for a total of $65,000 over the years, you’d now have a significant capital gain involved. There are discounts that reduce the capital gains tax payable, but it could still easily be $15,000 to $20,000. If you know the tax position you could employ some smart strategies by selling over multiple financial years. If your dates line up well, you could, for example, sell in June 2018, July 2018, and July 2019. That’s 13 months from start to finish but you’ve split your gains over 3 years instead of put them all in 1.

What records do you need to help calculate how much capital gains tax you need to pay?

So how do you prepare the records that you (or your trusted power of attorney) might need when the time comes to move into care?

  • For a managed fund, older accounts may be able to provide you with a transaction history that you can use to put together the various purchases. Newer accounts might even be able to provide you with a simple report that shows exactly the capital gains tax position.
  • For a share portfolio, there should be contract notes for any original purchases showing the number of shares purchased and the purchase price. If you have been participating in Dividend Reinvestment Plans (DRPs), the dividend statement will show this information (these may be with any tax return documents from prior years).
  • For an investment property, the purchase contract will have the original property purchase price, and if any substantial renovations have been undertaken you’ll want a copy of the receipts for this work.

 

General advice only

Any advice in this publication is of a general nature only and has not been tailored to your personal circumstances. Please seek personal advice prior to acting on this information.

Before making a decision to acquire a financial product, you should obtain and read the Product Disclosure Statement (PDS) relating to that product.

The information in this document reflects our understanding of existing legislation, proposed legislation, rulings etc as at the date of issue. In some cases the information has been provided to us by third parties. While it is believed the information is accurate and reliable, this is not guaranteed in any way. 

Opinions constitute our judgement at the time of issue and are subject to change. Neither, the Licensee or any of the National Australia group of companies, nor their employees or directors give any warranty of accuracy, nor accept any responsibility for errors or omissions in this document.

Michael Miller is an Authorised Representative of GWM Adviser Services Limited ABN 96 002 071 749, trading as MLC Advice an Australian Financial Services Licensee, Registered office at 105 –153 Miller St North Sydney NSW 2060 and a member of the National Australia group of companies. 

You may also like

Connect With Me
Michael Miller
Michael Miller is a CERTIFIED FINANCIAL PLANNER™ and Principal of MLC Advice Canberra. He has authored financial planning texts for LexisNexis Australia and regularly provides advice to individuals and their families on how to fund and understand care fees when moving into residential aged care.