Background

Michael and Amanda Jamieson are new clients who come to seek your professional advice.  The Jamieson’s have 2 children, Jenny and Matthew, both of whom are financially independent.  Jenny is married to Adam and does not work as she is presently raising their 4 children.  Matthew is an executive with a large Bank and he and his wife Belinda have no children at this time. Michael and Amanda provide you with the following information about their assets. Neither Michael nor Amanda has any liabilities:

Michael retired from work 2 months ago as he required a major heart operation but was earning $100,000 per annum prior. He has since recovered and his prognosis for a full recovery is excellent. Amanda does not work but spends 6 hours a week as a volunteer for Community Aid Abroad.  The Jamieson’s have been living off a payout which included both sick leave entitlements and long service leave entitlements whilst Michael has been recuperating.  At this point in time Michael has left his superannuation with his employer’s super fund. He is considering drawing an account based pension later in the year.

You have agreed to address some of their queries which arose at your recent interview with them. Michael and Amanda would like to access a part Age Pension if possible and want to know whether they would be eligible.  You have advised them to speak with someone from Centrelink, but they want to know some information before they attend any interview with Centrelink.

Required: 

1)      Michael is concerned that you have incorrectly assessed his age pension eligibility with respect to calculating the incomes test, because you included deemed income for his bank account, which is not an interest bearing account. Explain to Michael how deeming works?

2)      What total amount of income will Centrelink “deem” Michael and Amanda to be earning for the purpose of assessing their pension entitlement ? (Ignore the superannuation). Show your workings.

3)      Michael and Amanda have a will in place but they believe it needs to be reviewed in light of their changed circumstances. They have told you that they are planning to leave the home to their daughter, Jenny, and the shares, the managed fund and the investment property to their son, Matthew. They feel this is an equal distribution of assets as both have an approximately equal value of $220,000.

Explain to Michael and Amanda why capital gains tax will likely result in this being an unequal distribution of assets.

4)      Michael and Amanda have heard that income splitting is a useful tax effective strategy. As such, they have decided that they will transfer the shares to Amanda’s name. They are planning to do this next week (June 10^th) when Michael goes to the city for his next medical check-up.

How do you advise Michael to wait a few weeks before transferring the shares to Amanda, and what reasons would you give for the delay?

5)      Michael has heard that investments in shares are appropriate for long term investment. He is concerned that now that he is retired, it might be more appropriate to sell his shares and place the funds in the bank account.

Advise Michael on the appropriateness of investing in shares versus 100% cash. Is it a matter of either or?  How would you explain balancing the need for consistent income with the need to maintain that income in light of the rising cost of liv

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