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.
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.
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.
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?
General advice only
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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.