Welcome to Firstlinks Edition 436 with weekend update

Graham,

As a GEN-Y financial advisor , I completely agree with your statements. The family home should count as part of the asset test. The age pension and welfare system is there as a safety net. It’s not an entitlement.

I can see a bunch of red faced, self entitled and very wealthy retirees sitting in their multi million dollar homes opposing this. All assets, regardless of what vehicle they are invested in are still assets!!

From a tax and welfare perspective - I don’t think the country can afford not to start having the conversation about the wealth effectively trapped in family homes.

The family home is can be consider irrelevant by providing a universal old age pension & making it un-means tested! However, all income are tallied and taxed. Older folk could downsize or ceed money to others without fear. Old age pensions must be seen for what they are, a citizens right!

"family home should count as part of the asset test":
Then pay implied rent assistance to home owner.

"The age pension and welfare system is there as a safety net. It’s not an entitlement.":
It is an entitlement to all who manage to fetch up at Age Pension age with less than SweetSpot assessable assets.

James, I guess your clients must be other Gen-Y'rs or you would not have referred to retirees as "a bunch of red-faced. self entitled and very wealthy retirees sitting in their multi million dollar homes opposing this" as otherwise, you have committed professional suicide. I think that your Professional Association would take a dim view of such a public comment on a well-respected site made by someone who clearly states he is a financial adviser and who is supposed to uphold its' professional ethics which clearly have passed you by. It is such behaviour that brings your profession into disrepute and why many retirees choose to manage their affairs and often better than you can when they alone understand what is facing them as they age as you clearly do not and also choose to be rude, rather than be blind-sided by someone like you who feels it is appropriate to make such a comment publicly. Despite your anonymity on this site you should apologise to all retirees who read this website.

Well said Lyn! Also generalisations as to the disposition of retirees is facile and to be blunt, ignorantly disrespectful. Many retirees are not that wealthy and don't live in multi million dollar homes!

Thank you 'James of Dec 6' , you seem to be the James of a later comment 5/12 who has alternative view to "my" James of 5/12 whom I tasked re professional ethics. That James seems to have gone to ground as no apology offered. That James has no idea of ongoing costs re retirement flat and/or/both nursing home places plus management fees for unknown number of years, sometimes both are required for same retiree and/or partner to quad-dip into ever - diminishing capital from home sale as I have found for relative as Power of Attorney. Their multi-million dollar home sale is long gone on aforegoing costs after only 5yrs. and but for other investments, how else would their future costs be paid? It is very scary and problem I hope not to ever face. There's plenty of talk re home value as an asset re pension but there is not enough talk about selling home to fund end of life care & what those costs are.

Two points.
1. "Council will increase the Site Valuation" - at least in NSW it is not Council that increases valuations. Council receives values from NSW Valuer General and uses those value to assess rates.

2. "she bought her house for $100,000 over 50 years ago" While not addressing the merits or otherwise of the argument, in the words of Owen from The Vicar of Dibley, "Bugger me". My parents paid 5,000 pounds, $10,000 for a 5 year old home in Lidcombe NSW in 1961. How big was the $100,000 house, how large property area and not too sure that Vaucluse topped that amount in the mid 60's.

Perhaps you have experienced residual memories of the old and hated "Death Duties" where estates were taxed and families worked hard to hide assets from the Govt assessors. Many current retirees would have these memories from their youth and the hatred of the tax lives on, evidenced by the recall of death duties in recent discussion of changes to Franking Credits laws.
It seems that for many, growing your family wealth through the house you live in is different to doing so with property you don't live in or other investments you use to grow your wealth. Is that difference the memories residing in the family home? Are those memories worth more than our health and well-being when the family home is no longer fit for purpose as we age? Is our suffering worth it just so we can pass the family home to our descendents who, more likely than not, will sell it without consideration for the memories or the suffering of the parents who simply wanted to live in the house they called home and which they sweated and laboured to keep and maintain, even when it became unfit for purpose..?

What is suggested here is not a death duty. A death duty is a tax on all wealth not just housing. What is suggested here is a “claw-back” from the estate of some or all of the age pension paid during a person’s lifetime, precisely because the family home is exempt from the pension assets test and therefore recipients get a higher pension than they would otherwise.
This payment by the next generation would be easy to avoid. Either downsize and release capital or borrow against the equity in the house. Either way you replace the age pension with your own income stream. If there was no pension received, there would be no “claw-back”. But it would mean that if you had the means, you would not rely on the welfare payment of the age pension.

If this was the accepted way dealing with the age pension for wealthy people in expensive houses, we wouldn’t need an assets test. Anyone who was prepared to sign over the title deeds to their family home to the government, could claim the age pension, safe in the knowledge that it would all be repaid out of the estate.
But I suspect that with the knowledge that it did all have to be repaid, retirees might find ways of avoiding making a claim on the age pension. As it is now, there is an incentive to over-invest in the family home and claim the age pension because it is a non-assessable asset.
Graham’s proposal would reduce costs and change incentives in one go.

Hi Graham,
You do the country a great service in tackling this serious problem. Thanks.
What about making all residential property purchased after a certain date ( say 1/1/23), be subject to asset test calculation?
Other housing problems like CGT discount, owner unoccupied AirBNBs, etc could also be phased out over the long term, without causing pain to current owners of property.

Firstly congratulations on your publication which as an investor I find very valuable.
I’ve been a follower of Don Stammer in The Australian for many years…he’s always wise, insightful and practical in my view.
I look forward to reading him in FirstLinks.
Again thank you for the excellent work you and your team are producing

Graham, Allow me to quote you yo you: "Thousands of age pensioners who never aspired to become ‘royals’ are now wealthy beyond their wildest dreams. Many toiled hard in working class jobs without extra money for luxuries and their superannuation balances are modest. Now in retirement, they qualify for full age pensions which for a couple is about $38,000 a year with supplements. They did one brilliant thing that set them up for life and retirement. They bought a house 30 or 40 years ago. There was no ‘postcode envy’, as Lorde calls it, of wanting to buy in Sydney’s eastern suburbs or north shore. They bought where they could afford, in inner west industrial suburbs of Leichhardt, Marrickville, Camperdown, Redfern and Alexandria, and their equivalents in other cities."

So, why are you now wanting to introduce "postcode envy" as a justification for an asset grab? Is it because you have guilty-feelings and socialist tendencies that need to be assuaged? As for sacred cow: "an idea, custom, or institution held to be above criticism " Hardly! A house represents so much more than a mere accretion of wealth! It allows ALL the security, protection and worthwhile material realisation of a person's dreams and ambitions that our "culture" has fostered and developed and encouraged to build the amazing country and living standards we enjoy today ! What you appear to be endorsing most home-owning Australians will never go along with that.

You protest that a clawback of age pension payments from the value of someone’s house upon their death would be a ‘socialist asset grab’. But let’s look at things from the standpoint of the retiree who has accumulated the same wealth in assets other than the family home. They have to fund their own retirement, while the home-owner gets to ‘stick their snout in the pension trough’ and ‘bludge off taxpayers’.

It’s a basic principle of fairness that people with the same assets and income should pay the same taxes and receive the same welfare payments.

In Australia, that principle doesn’t apply — with knobs on. Someone who holds their wealth in a house gets far more generous access to the Age Pension than someone who has accumulated the same wealth in assets other than their residence.

"Someone who holds their wealth in a house gets far more generous access to the Age Pension than someone who has accumulated the same wealth in assets other than their residence.":

Conversely, someone who holds their wealth outside their home has their Age Pension amputated.

The bit I don't get is why no-one points out that, in the example you give, the $1m cash could be invested to generate an income equal or greater to the pension they would lose. I understand it is complex and that the other benefits lost (cheaper pharmaceuticals, rates etc) might leave them a little worse off, depending on the rate of return on the invested funds. But surely given the income generating power of this money a win-win policy could be developed, which allowed people to downsize without being worse off, and reduced the welfare burden on government - possibly including a 'future fund' type agency that could manage that money on behalf of people who did not feel comfortable managing it themselves.

Hi Jeremy, if the age pension and entitlements for a couple are worth say $40,000 a year, achieving 4% risk-free after tax on $1m by investing is not easy, and the first time the market falls by 20% making the $1 million worth $800,000, the couple will probably sell all their investments and blame each other for losing $200,000.

Graham, Glad you brought up that reply to Jeremy as there are other sides to the coin, one size does not fit all & I don't trust rule-makers to get this right. I purposefully downsized 16yrs before retirement to smaller home, 2 beds as still a minor at home re school/Uni, one level, wheelchair accessible if required (twice already) garden planned not leave leaves on driveway or grass to cut & hoped to be self-funded, invested difference, some not recover after GFC, other world occurrences & lower return but at the time thought could wholly self-fund as it had granny flat which made up for being child of unsuperannuated era (until 1991/92) so saw as "my super" which it still is amongst the rest & part-pension of approx 35% so despite well-laid plans to ensure full self-funding it fell short. Nothing has a value until one sells something but I calculated possible worth, Capital Gains Tax re granny flat approx $290,000 if I die today which exceeds part-pension even if were to live until 85 & the CGT will be even more if so, via passage of time. I have no issue with CGT or any tax as long as it's uniform but have issue with how rules are likely to be made re home being an asset for C/link purposes as the rules may not take such things into account & even if it did it would very complex I don't trust the Govt to get it right. There will be other retirees who make ends meet by letting a room and declare it, thus CGT on home if sold, ATO data match re airbnb etc, many don't realise that but it will come out in the wash at the end. I may have enough to go into comparable-to-home retirement village if that time comes & hopefully enough to pay management fees which are not life-time capped as are Nursing home fees so none of us knows how much we may need of proceeds of a home sale before we die, no matter what its' now- perceived worth is. A relative had N.Home fees $102,000 p.a. until lifetime cap was reached, $59,000 p.a. thereafter plus physio costs, taxi costs to specialist appointments etc, $550,000 buy-in fee & one could add lost opportunity cost on that, plus $1.4 M retirement flat ( with diminishing value re %age to management annually up to sale of same) for able partner and $12,000p.a. management fees so that's roughly $2.6M so far, much more than home sale in Brisbane, that's Brisbane care prices, Sydney?? no doubt I will find out soon. I hope younger readers will be careful what they wish for and be grateful if they have child-care age children for the huge subsidies to child care that my generation did not have and use their working years to achieve buying a home, times not that different it's just that the difficulties change & plans need to change to match. I daresay Generation Y-ers may have no idea how much is required to "downsize" to a retirement village and/or/both a nursing home in one's latter years so they'd better get their skates on as I can attest to the costs as P of A for one of the partners above. As previously said, 2 sides to the coin and the coin only shines brighter on one side to the young when the young have yet to face old- age problems. I made this very clear to my children who are not sitting around waiting for me to die but getting on with learning how to accumulate in their own right & hopefully because I taught them.

I wonder how capable somebody who has had no investments in their lives is of investing $1m?

It does concern me as I get older and possibly less capable.

Being financially independent though is a pleasure in itself.

Exactly!
Graham's suggestion would be throwing many elderly people "under the bus" and possibly into the hands of unscrupulous financial charlatans. How do you protect them from this? What if they have no financial IQ? Let the Government manage it? You've got to be joking on this last point. Successive governments have shown they simply can't be trusted!!!

"$1m cash could be invested to generate an income equal or greater to the pension they would lose":

Increasing Age Pension Assessable Assets from $405,000 to $1,000,000 results in:
. inflation protected Age Pension payments reducing from $38,000 / y to $0 / y.

To receive equivalent income requires a real risk free rate of return of:
. $38,000 / ($1,000,000 - $405,000) = 6.4% / y

The only place where such a rate of return is found in today's market is in converting Age Pension Assessable to capital efficient home improvements (~6% tax free capital gains) and claiming the Age Pension (8% return on investment tax free).

Due to Means Tests.

I believe the discussion is flawed because price is confused with value. The value of a house is that you have a (preferably fully paid) roof over your head, recommended by most financial advisers as a first goal to achieve. And it means that even in tough times, you’re likely to get by.

It is an depreciating asset because to remain liveable requires constant upkeep. The Tax Man recognises this by allowing that as deduction(s), albeit for investment properties only.

If my neighbour sells his/a house for double or triple the price he paid for it, how does that benefit me? Not one bit, on the contrary, Council will increase the Site Valuation: a double whammy when the next mostly annual increase comes through; and I will pay more for living in the same house.

The saying “A rising tide lifts all boats” applies of all properties which seniors will find out when they need to downsize.

When then is a house really an asset? Like any investment: when you have more than your own.

Harty, liked your comment as I was taught at 16 by my family whilst discussing a piece of jewellery that nothing ( not even a house) has a value unless you place it on a market for sale, at 16 it took a while to catch on but I did and that is why I think you are right that the discussion is flawed. Noone, not even a Govt., can estimate at any one point in time what anything is worth which is how flawed this thinking is.

"family home be included in the age pension assets test, subject to a threshold":
Then the chase is on to un-improve housing to below the threshold.

"lose all your pension":
The chase is on to improve housing to reduce assessable assets to below the SweetSpot.

"gifting rules":
Start a day earlier than the 5 year before 67 rule, and dig deeper.

"And so this large house ...":
is hostage to welfare mentality government policy.

Government induced problems solvable by abolishing the Age Pension Means Tests.

which should be released for a next generation family will be held by the elderly couple who will struggle up and down the stairs, slip on the leaves covering their long driveway and ponder their empty rooms. That's two families living in inappropriate accommodation because no politician will touch this sacred cow."

Graham, have you heard the expression "you catch more bees with honey than vinegar"?
Those audience questions were ripe for the picking.
The first question was an opportunity to discuss a modified assessment of the home toward the asset test similar to the way the Aged Care means test works re the home. Then the discussion becomes a choice between the love of the home v the love of the entitlement to the full pension.
As for the second one extracting the $1m by downsizing, even a meagre return of 5%pa would achieve a healthy $50,000 (less about $7k in tax) in annual income which is around double the single age pension.
You have the understanding and the opportunity to keep this conversation going. Waiting on politicians is not how this debate is going to be had.

Thanks, Kym. I'm not saying anyone needs to leave the 'love of their home'. Simply that subject to thresholds, their age pension payments are charged against their estate. It's the next generation that pays.
Also, anyone who lives on capital of $1m in older ages will have capital protection as a priority, and achieving 5% is difficult without taking equity risk. So if they invest in term deposits at 1%, income is only $10,000.
Regarding keeping the conversation going, I think our readers expect me to move on at a certain point, when all is said and done on a policy unlikely in the near term.

Graham,

You said:
"And so this large house which should be released for a next generation family will be held by the elderly couple who will struggle up and down the stairs, slip on the leaves covering their long driveway and ponder their empty rooms. That's two families living in inappropriate accommodation because no politician will touch this sacred cow."

I'd posit that it is more likely three or more families in inappropriate accommodation.
If this is an older house on a 600 m2 or larger block, it will be bought by a developer who will knock it down and build two town houses. If this is a corner block then the developer will build three or four town houses. Or they may build eight dwellings on two levels, if they get a permit to do so - another area for NIMBYs to block change.

With the current disincentives to downsize this change will be postponed until the last member of the couple dies and the inheritors sell the house. 20, 30 or more years.

I suppose time is on the side of Treasury, because if there are few beneficiaries, the harsh asset test will knock them out of the Centrelink pension within a few years, after the proceeds of the estate are distributed.