IT IS a sad fact that politicians don't always do things because they are right. It often comes down to expediency, what will gain them the most votes, and sometimes when public opinion forces them to.
The unfair treatment of age pensioners who take out loans using their home as security is a clear example.
If pensioners were hoping the Rudd Government would correct this problem they will be disappointed. A spokesman for the Government has said that due to the exemption given to the family home they will not look at changing the rules relating to loans secured over the home, even when the loan has nothing to do with its purchase.
The Opposition did not respond to a request for their stance on the situation.
The complexities surrounding the income and assets test used by Centrelink are not limited to loans taken out using a home as security. In some cases, the interest paid on a loan is counted, in others it is not.
Q I own a geared share portfolio and have been told by Centrelink that for the asset test, the net asset value is taken into account, while for the income test the gross asset value is used, with no reduction for the loan. Is this advice from Centrelink correct?
A Because of the way the legislation is written, loans taken out for investments are treated differently depending on what investment is purchased and what is used for security.
Where a person's home is used as security for a loan, the value of the loan does not decrease the pensioner's net assets, and the interest paid does not decrease the income earned.
When another form of security is used for a loan, the net asset value for the assets test is decreased by the loan. Under the income test, the interest paid may not be taken into account, depending on the type of investment.
There are two types of assets under Centrelink rules. There are financial assets, such as bank deposits, loans and shares, which are deemed to earn an income. Then there are other assets, such as a rental property, that have their adjusted taxable income used for the income test.
For the non-deemed assets, interest on loans used to buy them is deducted to arrive at the net income.
Some deductions that can be used to calculate the net taxable income are added back by Centrelink. These include depreciation, the special building write-off and borrowing costs.
For financial assets, the deemed rate of income is applied to their gross value without it being decreased by any loans taken out to buy them. Under the deeming rules, investments are deemed to earn an income whether they actually earn it or not.
This means interest paid on a loan is ignored for the income test but the value of the loan is counted for the income test.
For example, if a pensioner used $20,000 of their own money to buy shares, and borrowed a further $20,000 to invest in shares using their total share portfolio as security, the value counted under the assets test would be $20,000. Under the income test a deeming rate of 2 per cent or 3 per cent is applied to the $40,000.
If the pensioner had used their own home as security to borrow the $20,000 to invest in shares, that loan is ignored under the assets test. This would mean they would have $40,000 counted as an asset, as well as having the $40,000 counted for deeming under the income test.
Questions can be emailed to max@taxbiz.com.au
Self Managed Superannuation Funds, A Survival Guide, by Max Newnham, is available in bookstores.
