Our man has the answers

Dear GM

The Melbourne property appears to be tracking ok. You wouldn’t want to be selling now as the market is soft but provided you keep it rented and maintained it will hopefully work for you. Make sure your adviser clearly discloses the fees and commissions they may receive from the investments they recommend. They are obliged to do that. I also suggest you research the property values in the area yourself rather than rely on the adviser’s estimate. On the super borrowing, I prefer the rental to cover the interest and outgoings which usually means around a 50% Loan to Valuation Ratio. You do have a good buffer in the fund to provide liquidity and diversification and your contributions are significant. Don’t get carried away with the tax advantages, focus on the quality and prospects of the property and get a clear understanding of the costs. Compare them to owning another property outside superannuation.

Best of luck
Mark

Dear JC

That’s correct. If you made a capital loss on the property you won’t have a capital gains tax liability and you can make up to $150,000 per year in non concessional (undeducted) contributions to super. As you are still under 65 you can also bring forward two additional years contributions which means your maximum contribution can be $450,000. This is all assuming you haven’t exceeded your contribution caps in this year or the last two. Provided that is the case there is no tax on the contributions. The numbers are large so I suggest some personalised advice.

Best of luck
Mark

Dear SC

As it is not your principal residence, the property is subject to both land tax and capital gains tax. Land tax is payable annually if the property land value exceeds the threshold and it’s your obligation to register. I suggest doing that, regardless of whether it exceeds the threshold. Receiving a nil assessment each year is far better than forgetting to register and being hit with back taxes and penalties. The capital gains tax is only payable when you or the beneficiary of the property in your Will ultimately disposes of it.

Best of luck
Mark

Dear DR

The Taxation Office is very focused on this area as there have been a lot of claims by people trying to do exactly what you’re proposing. To claim a loss made on a share transaction you need to be classified as a share trader. There are a number of conditions you need to satisfy to be classified which include the volume of transactions, your qualifications in the area, how much time you spend trading shares and how systematic you are in approaching the trading. It is difficult to satisfy these tests if you work full time doing something else.

The most likely result is that your share losses will be treated as capital losses and thus can only be offset against capital gains in the current or future years.

The losses carry forward until they are recouped or until you die. So unfortunately unless you can pass those tests it’s likely you won’t get any tax benefits in the year you made the losses. You will however have any future gains reduced by those realised losses. Its worth noting that capital losses made on shares can be offset against capital gains made on property or other assets. So if for example you sold a rental property in say ten years time and made a gain, you would deduct any brought forward realised capital losses from your share portfolio before calculating the capital gains tax liability.

Best of luck
Mark

Dear ZB

It sounds like you are approaching this correctly. You should look k at the threeand fiveyear fixed rates and ask yourself, can I afford to pay interest at those rates? The next thing to do is work out you’re your plan for the property is once the rent guarantee is over. You should be very careful here as in my experience the rent guarantees are often there to prop up the price you paid for the asset. There’s no guarantee you will receive the same rent once it’s over so do you homework on market rents in the area. Fixing an interest rate on a loan is like taking an insurance policy. If you can afford the risk of an event happening then you have to weigh up the cost of the insurance against what the likelihood of the event is. If you can’t afford the event then you’ll usuallyjust take the insurance, even if it’s a little more expensive.

Best of luck
Mark

Dear DR

Borrowing in superannuation for an investment property can be a good option but it doesn’t suit your situation. That’s because the cash in the fund is insufficient to purchase a property without a high loan to valuation ratio. Banks offer SMSF Limited Recourse loans but they are far more comfortable at a loan to value ration of 50% rather than your proposed 75%. In fact it’s unlikely they would lend the money on the figures provided. The second reason the strategy doesn’t suit your fund is that, if you were able to source a loan, you fund would be left with very little liquidity and diversification. The superannuation gearing opportunity is far more suited to a fund with a larger balance and a lower debt ratio thus allowing for diversification. The third point is that if it’s residential property it is likely the fund would make a loss after deducting the interest from the rent. You would potentially need to increase your contributions to fund it. Bottom line – it’s not for your SMSF.

Regards
Mark

Dear AB

Our YBR SMSF specialist says that provided your employment is for 40 hours over a 30 consecutive day period in the year and that occurs prior to the contribution you will be eligible to contribute, but not the full $400,000. Where age 65 is important for you is that the limit in non concessional contributions for you is $150,000 in the year. The ‘bring forward rule’ is only available to a member who is under 65 on 1 July in that financial year. If you qualify with the work hours after next 30 June you would be eligible for another installment of $150,000.

Best of luck
Mark

Dear SB

You are unfortunately in that middle category where you’re short of income to fund your daughter’s costs but are deemed too ‘wealthy’ to qualify for the government support. Using those rough loan numbers, the investment property mortgage sounds like it would be around $100,000 to $120,000. If it’s worth $220,000 and you could borrow up to 70% against it then you could access new funds of $30,000 to $50,000. This could be drawn and used to top up your daughters living expenses for the term of the course. I’d be reluctant to buy another property just for this purpose because your income would be stretched funding it. You also don’t know where your daughter will ultimately settle. The alternative to the borrowing is for your daughter to work for another year to get access to the independent support. That will probably seem like an eternity for her I know but you can only do what you can and financial pressure can bite.

Best of luck
Mark

Dear PJ

Yes, our Yellow Brick Road SMSF specialist confirmed that once you reach 65, regardless of your employment status you satisfy a condition of release and are no longer limited to the maximum 10% pension limitation. Your options at 65 are to continue with the current income stream, commute (cease) it and purchase another, commute it and take a lump sum (to pay down your mortgage) or commute it and go back into accumulation. To achieve what you are after you would commute, take the lump sum and start a new pension on the reduced balance.

Best of luck
Mark

Dear LT

It might be worth your husband making a spouse contribution for you as it’s tax effective up to $3000 provided your income is low enough. Another option worth considering is doing some work in the family business to enable you to qualify for the government superannuation co-contribution. That’s where the government matches the first $1000 of a personal contribution you make whilst employed or self employed. Have a look at the rules but it sounds like you will be well below the shade out threshold. You are already with BT and I note their BT Super for Life Product is promoted as a low fee offering and has fee comparison on the website.

Best of luck
Mark

Dear MP

The tax treatment of the fund will depend on the nature of it, inheritance, accident victim compensation etc but as a general principle the trustee is responsible for tax on the earnings along the way and it’s unlikely tax would be payable upon your daughter turning 18. She should definitely invest the money safely until it is determined how it will be spent. A Term Deposit from an ADI (Approved Deposit taking Institution) is still government guaranteed and that’s where I would invest it for the short term. Be very careful chasing higher rates elsewhere. The people that invested in Westpoint did that and many lives were ruined as a result.

Best of luck
Mark

Dear DB

It’s good to hear you’re on track financially. There’s no set time to purchase a stock and prices tend to fluctuate based on the release of information about the company’s plans and results. It’s worth noting that a stock tends to increase in price up until they go ‘ex’ dividend. .That’s the time when purchasing the stock does not entitle the purchaser to the recently declared dividend. I’m definitely not a fan of trading stocks unless you do it for a living. The banks are obviously very profitable and pay good dividends but a good portfolio is diversified across sectors. As to Telstra, that’s a tough one. Its dividend has always been good but the stock price is still near its low. You would include it in a diversified portfolio on that basis but the market has waited a long time for it to perform. Best get some personalised advice.

Best of luck
Mark

Dear JZ

When deciding to borrow, it is not simply the access to funding that must be considered; serviceability of the debt (your ability to make the repayments) is also a crucial factor. Repayments on your $25,000 loan (if taken out at 7%p.a. paying principal and interest, over 5 years- secured by your home) would cost you approximately $495 per month. To borrow this money, you would need to be comfortable with this level of repayment commitment before making your financial decision. Bear in mind, that you will also need to encumber your home to attain this finance, so you will be required to hand over the deeds to your home. Assuming you are comfortable with this arrangement, you will also need to consider the impact of this on your Centrelink entitlements. Are you being paid based on the assets or the income test at present? You will also need to consider the asset that you are purchasing with your funds- if this is an assessable asset for Centrelink? If so, a recalculation of your entitlements will be required. It would be best to speak with a financial adviser who will be able to guide you in the right direction.

Best of luck
Mark

Dear AC

The important thing to remember about superannuation is that it is not an investment in itself; it is a tax efficient structure inside which you make investments. So whether your husband had invested inside super or outside super, depending upon the assets that he invested in, he could still have lost money. Whether you invest in shares, property, cash or international investments, they all rise and fall over time which is why it is prudent to get professional financial advice to best assess where you should invest (inside and outside super) based upon your risk profile. Super is not ‘secure’ in the sense of being protected from rising and falling markets, but it is still the most tax effective structure in which to save for your retirement.

Best of luck
Mark

Dear JE

The 1.6% sounds like what we call a Management fee. These fees are deducted from your superannuation balance and are charged to administer your portfolio. Management fees vary greatly depending on the investment option you are currently in. Typically the more defensive options (e.g. cash, fixed interest etc.) attract a lower annual fee than your typical “growth” style of investment (e.g. listed property or shares). You should investigate the investment option/s that you currently hold within your superannuation fund and seek advice to determine the suitability, given your very short investment time frame & pending retirement. Industry superannuation funds and funds with wholesale investments available in their menu will typically charge lower management fees than standard retail superannuation funds, so they may be worth investigating. Given that you will soon be commencing a retirement income stream, now is the ideal time for you to seek the professional assistance of a financial adviser, who will be able to assess your appetite for risk and ensure that your hard earned retirement savings are invested in line with your “risk profile” (your comfort level with exposure to riskier growth assets).

Best of luck
Mark

Dear LM

Your current rental income of equates to a 5.2%p.a. return. This is quite acceptable from an investment property. The figure of $650 per week on rent will depend on your desired rental location and your size requirements. This figure could be reduced in certain areas, which should be investigated further before making any decisions. The decision whether to buy a home comes back to your personal and financial goals and objectives. The options outlined above are all viable, however depending on your risk profile (your appetite for exposure to risk through growth investments) you could purchase a new home and leverage your equity for further wealth creation via geared investments. Your cash flow may be a hurdle, based on your current income level, so it would be best to speak with a financial adviser who will be able to guide you in the right direction.

Best of luck
Mark

Dear DR

You’re looking good and things are well on track. Just a few quick pointers from our tax and financial planning experts. The component of your pension that went in without you or your employer claiming a tax deduction will be tax free on the way out. The small portion that was claimed as a deduction comes out as a pension with a 15% tax rebate. You might consider sacrificing some of the $30k salary to super to get your tax rate down to 15%. Your investment strategy appears fine for your stage of life. Your wife won’t be able to access her super if she retires that early. It would be worth her making maximum salary sacrificed contributions in the interim, even if it means increasing your pension to help with living expenses. As she has less than $500k in super, under the proposed legislation she will be able to continue to contribute up $50k p.a. tax effectively once she turns 50. Have a think about an SMSF.

Best of luck
Mark

Dear DB

The availability of credit is a trap but the emphasis is on us to have discipline. That said credit card rates are ridiculously high and were so right through the GFC as well. As it’s starting to affect you I’d give serious consideration to selling the shares and paying down the debt and get a second job if you need to. Your health is important. What you should pay is what you can afford. If you stick with their minimum payment it will take forever. Think about what you could sell that you don’t need and things like your tax refund that might help break the back of it.

Best of luck
Mark

Dear AE

Property development is hard enough for professionals and it’s especially risky and time consuming for novices. The other negative is the risk involved. What you would be doing is borrowing to effectively buy three townhouses, without the cost of the land. You would need to pay rent until you could live in one and then hope to get the others away quickly to get the bank loan repaid. Many developments can look good on paper but then not stack up after you take the holding costs, especially interest, into account. What you might consider as an alternative is making a Development Application for the site. This should make your property much more valuable to a prospective purchaser. That would give you the funds to buy a town house for yourself and hopefully also leave some money to invest elsewhere. Alternatively, you may look to do a joint venture with a reputable developer who has the experience and contacts to make the development profitable. Be careful though, it’s a tough game.

Best of luck
Mark

Dear DS

Another one for our YBR tax experts. There is no rule against a sale to an associated entity provided that any taxes are calculated and paid on the basis of the market value of the transaction. At the time of subdivision one of the blocks loses its primary residence CGT exemption, and it will be necessary to determine the cost base of this block. Taxation Determination 97/3 gives guidance on this calculation. If you then sell that block within 12 months and the market value is more than the cost base, CGT will be payable at the full rate on the gain. A 50% discount would apply only if the sale occurred more than 12 months after creation of that block.

Best of luck
Mark

Dear BJ

I’m assuming you turn 50 this financial year, otherwise your maximum superannuation is capped at $25,000 p.a.. I would consider maximizing your salary sacrifice contribution this year and next while the $50,000 maximum is still available. Ten years is just long enough to make the property work for you and there are still tax advantages in negative gearing. Consider the superannuation this year and next while you are doing your homework on the property.

Best of luck
Mark

Dear JN

It’s tempting and you could almost do it but I don’t think you are quite there yet. Your investment assets are approximately $900,000. Assuming a pre tax return of 6% that’s $54,000 p.a. As the majority of your assets are in superannuation you will pay very little tax when you commence a pension and none if you did it after age 60. Your after tax income at the moment is likely to be between $70,000 and 75,000 so that’s what you will be giving up by retiring. Maybe you can live on $54,000 p.a. but the problem is that you still need your capital to keep pace with inflation because $900,000 in ten years time will likely be worth a lot less than it is now. Depending on the value of your home and whether you want to stay there in retirement I’d consider working for another couple of years but be smart with your super contributions. You should take advantage of the government co contribution while it’s still around and your wife could salary sacrifice say $23,000 p.a. to get her tax rate down to 15%. If you need cash to get by, you can use some of the money you have outside superannuation. As always, get some specific advice that takes account of your actual rather than hypothetical living costs.

Best of luck
Mark

Dear EB

You’re doing well, but you’re not there yet. It’s really tough getting that deposit together but stick with it because, now the credit cards and car loan are gone, you might be able to step up the savings plan. There’s no hard and fast rule on how much you need to save and what size loan to get. It tends to vary from person to person depending on their earnings and living expenses. If you can put together a 10% deposit and the transaction costs of the home purchase you will be in the ball park. As to where to get advice, that’s easy; pop in to one of our branches and have a chat to the branch owner about what you might need to focus on. You will be surprised how, when he or she outlines the loan types available, that the choices aren’t as confusing as you thought. In relation to salary sacrifice, as much as it’s great to save for your future and salary sacrificing is a tax effective way to do that, I’d stick with saving for the home at this point.

Best of luck
Mark

Dear TC

You are creating two assets from one original asset. One asset will retain exemption from CGT as your primary residence, the other asset won’t. At the time of subdivision it will be necessary to attribute a CGT cost base to each block. Our YBR tax expert said to have a look at Taxation Determination TD/73. That’s where the ATO sets out its policy to accept any approach that is appropriate in the circumstances of the particular case, e.g., on an area basis or relative market basis. There will also be GST considerations. The dwelling which you build for sale will be subject to payment of GST on the sale consideration, with a credit allowed for GST paid on development costs. It may be wise to seek professional advice on the GST implications are they are complex.

Best of luck
Mark

Dear MC

Firstly, superannuation won’t be an option because your mother is retired and over 65. That’s not an issue for her, given the sum involved. You need a low risk plan and your suggestion is a good one. The majority of your mothers funds should be in cash investments and you should get a reasonable rate for the $80,000 on term deposit. Compare the 3, 6 and 12 month rates with the banks and weigh the term up with you view on interest rates over the next year. Stick with quality Banks and Credit Unions. Remember, rate is not everything. Tragically, people in your mother’s position chased extra earnings with things like Westpoint and lost the lot a few years ago.

Best of luck
Mark

Dear SF

What you ultimately do will depend on your combined cash flow requirements. If you need the superannuation to meet the family budget and can access it, then I would. If you can do without it then I’d leave it to accumulate. I presume your advisers suggested selling the shares and contributing the proceeds to superannuation and taking a superannuation pension. You need to get a handle on the capital gains tax before making that move. If it is payable I wouldn’t do it.

Best of luck
Mark

Dear CD

In many cases the cash flow from the investment is improved by a refund of income tax. Unlike many countries taxation systems in Australia you are allowed to claim losses made on investing in rental properties against your other income. If your other income has been taxed like foe example a salary then it’s possible to receive a refund of the tax you have effectively overpaid i.e. if your taxable income is lower than the amount of income you were taxed on during the year. It’s known as negative gearing. This arrangement is of absolutely no benefit unless the value of the property increases over time. You never invest to save tax, you invest to make money. If an investor is too reliant on the tax benefits of an investment to make ends meet and the taxation law changes they can be in left having to sell the asset, possibly at a time when a lot of similar assets are being sold. Negative gearing can be a sensible option to help grow wealth but be careful not to over extend yourself and get plenty of advice, preferably not at dinner parties.

Best of luck
Mark

Dear LT

There is likely be capital gains tax if you’ve owned the shares for a long time but acquired them post 1985. Let’s assume they were sold and you’ve held them for more than a year and they cost you half their current value. Your gain would be $96,500 and 50% of that would be included in your tax returns. Tax would be payable at your marginal rate (say 31.5%). That would leave a hypothetical tax bill of approximately $15,000. That’s 7.7% of the value of the asset which is close enough to one year’s interest on the mortgage. Based on those numbers you could sell the shares, pay down the mortgage and instead of paying interest on your mortgage, sacrifice a similar amount to superannuation. That’s all hypothetical but it’s the way to go about reaching a decision. The other point is that with only one stock you are not diversified. That often tends to be overlooked because BHP has been such a strong stock for so long.

Best of luck
Mark

Dear KQ

The bank planner would have provided you with a Statement of Advice when you made the initial investment. That should have taken into account your income requirements and your attitude to risk. Unfortunately the timing wasn’t the best and the capital has been eroded. Your situation is not uncommon and it’s now time to revisit the plan and see if it’s still working for you. The $30,000 p.a. you are taking in pension is not what your capital is earning, it’s just the pension amount. It can be changed as your needs change, provided the set minimum is withdrawn each year. It sounds like your structure is right and it’s now a choice about the underlying investment. If you went in with a long term view and are diversified, and deriving good income returns then switching to cash might be a bad plan. Sit down with the adviser and have he or she explain your options in a way that you understand.

Best of luck
Mark

Dear JG

Hopefully you have some superannuation from your employment and as you are aged over 55 you may be able to access a transition to retirement pension. If that’s not the case then a line of credit against the home is not worth considering because it would cost too much to establish for the amount involved. That leaves the obvious alternative, drawing down on the cash and delaying the car purchase. Credit card is another alternative but paying more than 15% interest makes little sense while you have the deposit earning 5 or 6%.

Best of luck
Mark

Dear KG

You're lucky that the Port Macquarie property is safe from the floods. I lot of coastal property isn't and there will be some enormous wrangles with insurance companies in the next few months. With interest rates and investment earnings where they are at present, if you are old enough to access $200,000 from your superannuation tax free then I would give serious consideration to doing that rather than borrowing. That way if you went back to work for a year or two you could sacrifice to superannuation and save some tax. Hopefully the Port Macquarie property won't take too long to sell. I don't recommend purchasing in Sydney until you have the cash in the bank.

Best of luck
Mark

Dear LV

Australian residents are taxed on their worldwide income so from an Australian tax perspective the property is no different to a domestic rental property.  The rental income is assessable and interest and expenses are deductible. The country you buy in may deduct tax from the income and you should be entitled for a credit for that tax against any payable here – depending on our arrangements with the other country. Owning property overseas can be difficult. You have exchange rate risk and other complications like inheritance tax and local laws to get familiar with. Do plenty of research and get some advice before proceeding.

Best of luck
Mark

Dear JD

Despite the fact that you paid your stamp duty on purchase to the Office of State Revenue, which happens to be the same body that collects NSW Land Tax, it is your obligation to register. I suggest you download an initial land tax form from their website and complete it and lodge it. If you're not rateable you will receive a nil assessment. Land tax is payable on land values over $376,000 on properties that are not your principal residence, regardless of whether you derive income from it or not.

Best of luck
Mark

Dear BD

Congratulations. Setting up an investment for your daughter with the money you have received as gifts for her is a good idea, provided your mortgage and other commitments are under control.. You could invest in any of the investments you mentioned. With a regular lump sum addition each year the investments can grow. A cash management is probably easiest until the funds accumulate and then you could consider shares or bonds. When setting up any of the accounts you should ensure the account notes either yourself, your partner or is in joint names as trustee/s for your daughter. (i.e. Husband and Wife's Name ATF 'daughter first and last name'). Any income will be included in your (the trustee's) tax returns.

Best of luck
Mark

Dear KS

Preapproval is when a lender approves funds prior to you choosing a property, which indicates how much you can actually spend. At that point, the lender should be clear with you about what conditions apply to your loan. When you've found your new property your lender needs to submit any outstanding conditions and a copy of the contract of sale to get final approval. What's important in this process is communication. A Yellow Brick Road Wealth Manager will not simply 'process' your loan, they'll take the journey with you, ensuring you understand fully any conditions or details about your loan. Finding the right wealth manager is as important as finding the right loan.

Best of luck
Mark

Dear GJ

That will depend on your living costs. Let's break it down; You earn $75,400 p.a. net of tax. If your living expenses are $45,000 you will have approximately $30,000 that could be applied to savings or a mortgage. At 8% (higher than current fixed and variable rates) and a 25 year loan term your loan repayments would close to $30,000 p.a. That number goes to $350,000 if you choose a 30 year loan term. Once you've done your budget hop on to our Yellow Brick Road website and run the numbers through our Loan Repayment Calculator.

Good luck
Mark