Ask Mark Archive

Dear JX

You could borrow against it to buy another property or a diversified portfolio of shares. If you have children and one of you is at home or working part time and the other is likely to have a higher income then you would consider putting the new loan and purchase in the higher income earner’s name although weigh up the capital gains tax consequences when you do. If you are in a similar tax bracket then the new loan and purchase could be in joint names. If you choose property over shares, don’t forget NSW Government Land Tax because with three investment properties at least one of you is bound to be over the threshold.

Best of luck
Mark

Dear DR

Your friend is correct. As the property was not your home for the whole time that you owned it, the main residence exemption will only apply in part. The calculation of the taxable component of any profit you make on the sale is fairly straight forward, just take the profit amount and multiply it by the number of days that the property was not your home and divide it by the total number of days that you owned the property. As you have owned the property for more than 12 months you apply a 50% capital gains tax discount, after applying any capital losses that you have. If the property is jointly held with your spouse, the discounted gain after losses would be split and included in each of your returns as income.

Best of luck
Mark

Dear SA

The answer here varies for each individual depending on their circumstances. 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 usually just take the insurance, even if it’s a bit dear. That’s where you’re at with the interest on your loan. Look at the three and five year fixed rates and ask yourself, can I afford to pay interest at those rates? Then add one, two or three percent to them and do the numbers. If your cash flow is ok in what you see as the worst situation you might stay variable.

Good luck
Mark

Dear L & D

What you have is your home and net investment assets of $900k yielding you 2.1% p.a. or $21k p.a. after interest. That means if you retired and kept the lot you would need to borrow $24k p.a. to fund your living expenses. If you did that for 5 years and interest rates were 8% p.a you would owe an additional $150,000. That’s a number you should weigh up against your assessment of the capital growth in the properties. Your plan does work but you have plenty of options, including putting the proceeds from the sale of the properties into superannuation and starting a pension. Sit down with your accountant before you do anything and work out the capital gains tax on the properties under the different scenarios. Depending on what towns the properties are in they may take some time to sell, so make sure you allow for that in your calculations.The bottom line is your living expenses are modest and you can afford to travel and enjoy time with your grandkids- just work smart to get the best tax outcome.

Best of luck
Mark

Dear AB

Our advisors get asked this one regularly. If you are looking at buying gold now as a long term investment you need to be very careful. After taking into account inflation it is near its all time peak which suggests that there may be a large element of risk in purchasing gold now. It peaked last month at over US$1400 an ounce and many people forget that is was only around US$250 in 2001. In the last bull run in 1980 gold peaked at US $1850 an ounce. The world is looking for capital assets to be put to use and given that gold doesn’t produce income there are other places to look for a return on your money. The counter argument is that no new major gold deposits have been found in recent times and the quality of gold deposits is shrinking making it more costly to get it out of the ground. I would be very cautious about investing in gold.

Best of luck
Mark

Dear AM

Firstly I’d suggest you do a budget and work out exactly what you’ll need to renovate. Make sure you’re not overcapitalising or it may not be worth it in the long run. As you have access to additional funds on your mortgage, an option is to use your redraw facility and access those funds immediately. If your redraw isn’t enough, you can always apply to your lender for a loan increase. While borrowing more will increase your repayments it is usually not a complicated process as your existing lender will have a lot of your details already. They will usually just ask for an update from you to ensure you can afford any increase in your repayments. Speak to your lender or local mortgage broker about the process. Better still, pop in to one of our Yellow Brick Road branches. They can help you understand how much your loan repayments may need to increase to give you the money you need. This will make it easier for you to decide what option is right for you.

Best of luck
Mark

Dear BW

Make sure you take advantage of the small business tax concessions on the sale your business if you haven’t already. Your assets are below the government pension assets test threshold although the deemed earnings on the capital might mean your pension is slightly reduced when you become eligible. It would be worth having a talk to Centrelink now so you clearly understand the eligibility, including the income deeming rules, when the time comes. If you are fit and healthy and can get work I would consider doing some for the next couple of years and investing your money in superannuation. If you are not planning to work then the money is probably fine where it is, as between you and your wife you will pay little or no income tax on the earnings. As they are all the funds you have, you can’t afford to take a risk, so if you go the superannuation option make sure it’s something similar to what you have outside super e.g. a capital guaranteed cash deposit.

Best of luck
Mark

Dear SA

You’re in great shape. You could afford an investment property that you ultimately retire to. That’s a good option for you if you know where you would like to retire but go in with your eyes open. Coastal property tends to be relatively low yielding on a week in week out rental basis and holiday rentals sound great but by the time you pay the agent, gardeners, cleaners, land tax and repairs and have a few vacant periods the returns can be lousy. The alternative would be to add $100,000 to your investment loan and buy some blue chip shares. Meet the interest only payments on the investment loan and pay the dividends off your home loan. Cash flow permitting you could also increase your salary sacrifice to super. If you go the share route, get some specific advice.

Best of luck
Mark

Dear PE

I agree with your investment philosophy. The sooner you start, the better. An investment property is a big step and he may have to live at home for a while but it’s certainly worth considering. He would have to pay some mortgage insurance and his transaction costs but he’s definitely close to having a deposit for a property around the $300,000 mark if his income stacks up.

Best of luck
Mark

Dear AD

I’m sure the bank would love to invest your money. Without a loan they’re not making anything out of your property investment. First get any estimate of the property value. Secondly, calculate what you are earning from the unit after all expenses. Let’s say the unit was worth $300,000 and your net income from it was $10,000 then your return (or yield) is 3.3% p.a.. If you sold the unit and invested the proceeds in a deposit earning around 6% you would be ahead but – now for the catches. The sale will be subject to capital gains tax leaving you with less money to invest. That tax would most likely be lower if you sold after retirement. Secondly you need to take into account whether you think the property will go up in value in the next one two or three years. Capital appreciation might mean you get a better return than 6% p.a. Thirdly, if the property were turned into cash, superannuation might be the best spot for you to invest it and you can’t contribute after age 65 unless you are still working. I’m sorry there is so much to consider but you’ve got a real financial and tax planning exercise on your hands.

Best of luck
Mark

Dear CP

If you’re serious about the property the bike may have to go, but you need to make sure you can afford to purchase a home first. It sounds like credit has been a bit easy to come by for you and before you know it you’re on the high interest consumer loan treadmill. The good news is that you have a good income and credit history. You house is usually the biggest investment you make and as I’ve written before, saving the deposit is often the toughest part, really tough. What you need to do is work out what you can comfortably affords to buy and what a sustainable borrowing level is for you. The next step to scrape together a 10% deposit and be prepared to pay some mortgage insurance. If you sit down with a mortgage expert they will have some financial tools to help you analyse your cash flow. It might be that you are better to rent for a few more years. Superannuation funds can buy houses and they can borrow but they can’t lend to members or own properties that a member or their relatives live in.

Best of luck
Mark

Dear JM

Fixing a loan is entering into a contact with the bank. If you sell early you pay an interest cost which basically represents the difference between that rate you fixed at and the prevailing variable rate for the remainder of the loan term. That can be a very big number if the variable rate is lower than your fixed rate. It’s possible to keep the mortgage and replace the security with your next home purchase.

Best of luck
Mark

Dear JK

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. If you were able to source a loan you fund would be left with very little liquidity and diversification. I would consider buying now outside superannuation. Rather than use the redraw, get a new interest only loan for the investment property and continue to apply any surplus savings and hopefully some rental income to the home loan.

Best of luck
Mark

Dear YC

In this banking climate you can’t get a 100% home loan unless you offer other property security. It sounds like your husband’s investments aren’t property. The only real way of using them to assist you would be to sell down a portion. There are lenders that will provide mortgages over 90% provided you are approved by a mortgage insurer. If you incomes are good and you want to get started you try for one of those loans. Make sure you get a pre approval because once you are outside the 80% loan to valuation ratio it is tougher to get financed.

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 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

Dear JX

You could borrow against it to buy another property or a diversified portfolio of shares. If you have children and one of you is at home or working part time and the other is likely to have a higher income then you would consider putting the new loan and purchase in the higher income earner’s name although weigh up the capital gains tax consequences when you do. If you are in a similar tax bracket then the new loan and purchase could be in joint names. If you choose property over shares, don’t forget NSW Government Land Tax because with three investment properties at least one of you is bound to be over the threshold.

Best of luck
Mark

Dear JM

Death doesn’t crystallise a capital gains tax liability, but a subsequent sale of an inherited asset can. Dates are important. The tax treatment on ultimate sale depends whether or not the deceased acquired them prior to the introduction of capital gains tax in September 1985. Another significant reason to find out the date shares were purchased is the 50% Capital Gains discount for shares subject to capital gains tax and held for greater than twelve months. If you need to find information about when the shares were purchased, you can contact the Share Registry with which each specific share is associated. The two major registries are Computershare and Link Market Services. These share registries generally charge a fee to provide you with information and if the information you need dates back more than 7 years, the cost will increase further. Cost information can be obtained from the relevant registry’s website.

Best of luck
Mark

Dear RC

You have a great combined income and a relatively low mortgage. If you plan to work for the at least the next 10 years, buying an investment property in either of those areas could be a good move. If you plan to stay in the country and keep the property as a pure investment then you can leave repayment of the principal on the investment debt until you have repaid the home mortgage. Keep the loan separate, and pay interest only on the investment loan. If cash flow allows you may also consider salary sacrificing to superannuation.

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 JJ

This is a really tough one in the current lending climate. You could threaten to leave your bank but the danger is that they might call your bluff. The obvious option is to get the house on the market as fast as possible as it is. Weigh up how important those small improvements are against what you might get for it in its current shape. If you really need to do them, or really need funds to get by, your other options are to borrow from a family member or friend for the short term. You could borrow from an accredited private lender on the basis that they will be paid out once you sell the property. This is an expensive option and you need to be really careful. Another option is to use your credit cards to get you through and pay them out as soon as you sell. Unfortunately none of these options are that appealing however you may get yourself really stuck if you don’t take one of them.

Best of luck
Mark

Dear LL

You should get some personalised advice that takes into account your specific circumstances. My comments are general but may give you something to think about. You sound like you have your housing in place and can therefore treat the inheritance objectively, which is great. Property is the most obvious option especially if you are inexperienced with managed funds or shares. What you can afford will depend on your income and job security but with 12 years to retirement you have a long enough time horizon to invest in a growth assets. If buying an investment property, you will be borrowing so make sure you are comfortable with that. The advantage of the property purchase is the ability to get leverage by borrowing – at sensible levels of course. If you invested 100% of the money in a managed fund or shares you would only be able to borrow for more shares using a personal loan or margin lending. These options are not recommended for a first time investor. If you don’t plan to borrow, superannuation is another option for you.

Best of luck
Mark

Dear CC

Your cash flow is definitely tight and must be causing you stress. If your loan was interest only and you were paying around 7% p.a. the interest would be approximately $230 per week. At 8% p.a. it’s approximately $260 per week. The interest on the term deposit is taxable as income so if you were to go with your plan you might consider making your investment by way of superannuation. It could give you a better tax rate and depending on your age you should be able to access it at retirement. If the debt is really worrying you and you don’t blow your investment earnings on rent then you might look to implement your plan. Before you do, just check if you can go interest only for a while on the mortgage. That might help the cash flow. The variables for you are interest rates, future property values and being able to secure a rental property at the right price without having to move too often.

Best of luck
Mark

Dear MC

This is a red hot area for the ATO. 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. Your situation is further complicated by the fact you have another portfolio that you purchased for long term growth.

Given you have two portfolios if you were to attempt to be classified as a share trader, the issue of how you determined which shares are for trading and which shares are for the long term may be difficult to answer. The most likely result is 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 current year. You will however have any future gains reduced by those realised losses.

Best of luck
Mark

Dear LL

The earnings on the superannuation investment are taxed at 15% along with the contributions you are making by way of salary sacrifice. As you are over 50 you can contribute a total of $50,000 p.a. including your employer superannuation guarantee amounts for each of this year and next. You are also eligible to start a transition to retirement pension. I’m happy with you current strategy because at your tax rate, between you and the fund you are saving 15% on the contributions thus building a bigger amount in super to eventually assist in repayment of the mortgage. If you started a transition to retirement pension after age 60 you could recycle some contributions to help reduce the mortgage and benefit from all earnings except contributions being tax free in your fund.

Best of luck
Mark

Dear OG

The additional $300,000 in debt is going to cost you a minimum of $1,750 per month and you are currently putting away between $500 and $1,000. Unfortunately the numbers just don’t work. I suggest you keep chipping away at the mortgage and look at ways to increase your income. Your expenses sound like they are under control but unfortunately your buffer is just not enough to change from an apartment to a unit in the same area. Children’s expenses tend to be a little lower when they are at primary school and perhaps when that time comes you will have some additional room to move. Failing that it’s buy a home in a cheaper suburb or alternatively buy something a little smaller or run down in your area for around the same price as your apartment and put some work into extending or improving it over time.

Best of luck
Mark

Dear PB

Your financial knowledge is good and two of the points you made are often misunderstood; tax on the sale of an inherited home and land tax. The IBD (Term Deposit) will provide you with liquidity and income return ahead of inflation but no capital growth. Including super, you will have over $1.4m in investment assets pre renovation. Depending on when you wish to retire you should be able to continue to grow that asset pool and still meet the kids’ uni costs. Assuming you have $1.2m after the renovation your property represents 1/3 of your investment pool. You could look to invest $400,000 each in the IBD and blue chip shares. That would give you 1/3 in each. If you choose the growth or share option via superannuation, more of the money outside super could be directed to the IBD.

Best of luck
Mark

Dear AA

It depends on your financial position and your attitude to risk. As much as a like to diversify and invest evenly between property shares and cash another of my personal rules is ‘go with what you know’. You know property, you don’t know shares. Unfortunately $200,000 doesn’t get you much property without adding some debt.

Best of luck
Mark

Dear RD

It sounds like you have a good asset and you have plenty of equity in it. Your outgoings sound a little light and I imagine you basically spend what you earn on the mortgage and running the family. That alone is a fair effort. You really have two options; either downsize the home and mortgage or plan out what your shortfall will be if you stay where you are for the next six years and borrow it on a line of credit. Let’s say the shortfall was $10,000 to $15000 pa. Then in six years when your youngest leaves school you could sell the home. At that time the line of credit would be at say $100,000 but you would have achieved your objective and with any luck the house should have appreciated. It is a higher risk strategy and if you are not disciplined or debt worries you would be better to sell the home now.

Best of luck
Mark

Dear LL

Using those numbers unfortunately a refinance won’t help. Current variable rates are around the 7% mark and there won’t be much of a saving for you. I suggest the best you can do is give yourself a deadline to find a job, possibly interstate and if you are not successful the home has to go.

Best of luck
Mark

Dear HH

There is plenty to weigh up when making this decision with the most obvious being the property market, cash flow land tax, and capital gains tax. Capital gains tax is payable at your marginal tax rate and its likely your rate will be higher when you are deriving salary income than after you retire. If you think now is the time to buy the holiday house I would consider minimising the borrowing by contributing the $200,000 from superannuation. You could then sell the investment property on retirement and ,after retiring the debt, contribute any surplus back into super. Remember, to contribute you need to pass a work test if you are 65 or older.

Best of luck
Mark

Dear JG

What you are considering here is making a bequest to a charity. The first thing to do is to choose the charity, and get its correct name and address to ensure there is no ambiguity. The choice is yours and you can choose as many as you like. Then, decide what type of bequest you would like to leave. It could be a specific gift of cash, property or shares, or a percentage or fractional gift which is a bequest expressed as a percentage or fraction of your Estate. It could also be what’s called a residual gift which is the remainder of your Estate once your family members have been provided for. As much as you hate dealing with lawyers, you’re in the driver’s seat in this situation and it would be a shame to mess it up. A lawyer can also explain the mechanics of the will and discuss the options for the Executor etc.

Best of luck
Mark

Dear SD

If I were in your situation, I’d like to own my own home. Depending on the type of property you wish to purchase, the inheritance can make that achievable. The numbers can sometimes work when you rent rather than purchase and use your surplus funds for investment but housing is a basic need and gives you a sense of security. I note that the cash only option in superannuation will give you income but not capital growth and one of the reasons to buy a home is to aim for the asset to appreciate. If you already owned a home, superannuation would be a logical investment. It’s tax effective, particularly as you approach the age where you can access the money in the fund. It’s an investment vehicle rather than an asset class which means it can own property, shares, fixed interest and cash and you aren’t limited to just one option.

Best of luck
Mark

Dear MH

CBD car parking spaces look good on paper because the yield is attractive. There are however plenty of issues to consider. There has been little (if any) rental growth and therefore no real capital appreciation in the past few years. FBT and levies are making it expensive to park in the city and there is an abundance of available spaces in buildings. At least two major parking operators have gone broke recently with toll roads having a major impact. There is plenty of parking available in the centre of Sydney and even more as you move into the western corridor or suburbs. Most buyers of strata spaces do not buy for investment; rather they want to control their own parking availability. Thus it isn't a very liquid market if you need to divest. It’s better to buy in a parking constrained building - something boutique like a barrister’s chambers or prime city residential property where there is limited parking allocation. In short, it possible to get a good rental if you buy the right spot but the devil is in the execution.

Best of luck
Mark

Dear KM

While there are a few jobs that have age limits on them, like airline pilots, there is no overall compulsory retirement age. At age 75 a super fund can no longer accept super contributions unless your employer is obliged to make contributions under an award. To put a transition to retirement strategy in place you need two super accounts; one to receive contributions and one to pay a pension. The super pension is tax free and you (via your employer) effectively get a tax deduction for salary sacrificed super contributions. If you are paying more that 15% as your personal marginal rate of tax there is a saving from the difference between your personal rate of tax and the 15% tax rate the super fund will pay. In your case, the costs and time involved with this strategy may mean it is more beneficial to concentrate on paying off your car loan. With 60 being a key age for superannuation, It’s not a bad time for you to get some personalised advice.

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 NS

There are a couple of variables here. The first is what you need to spend to get a home in your area. And the second is whether how much your husband will earn in the business. If you add the rent you are paying and the amount you are saving it looks like your cash flow will handle a mortgage of around $300,000. I presume that’s not enough to get what you are after. Starting out in small business can be quite daunting and there is plenty to weigh up. You should be realistic about why you’re doing it. People rationalise the fact that they get flexibility and tax benefits in their own business but those things don’t pay the mortgage. The main reason you do it is to make money and to improve your financial position. Small business takes a lot of enthusiasm and given you are both young I suggest taking the business opportunity first with a goal of being in a really good position to buy your home within two years. It’s tempting to get a property now and it’s easier to prove your income whilst on a wage but if you’re confident the business is the way to go then get it moving.

Best of luck
Mark

Dear PL

One reason not to pay down your home mortgage is if you plan to buy another place to live in and rent out your old home. In that situation it’s likely that if you have reduced your old home loan you will need to borrow more to fund the purchase of the new home. You don’t get a tax deduction for the interest on the mortgage on the home you are living in but you do get a deduction for interest on a loan funding a rental property and having the maximum deductibility is desirable. Given there is only $50,000 left on the mortgage you may as well aim to get rid of it. For others in a similar situation but with a larger home mortgage they can achieve a good tax outcome by applying their principle payments to an offset account rather than the home loan itself. That way, if they choose to move but keep the old property and rent it they can withdraw from the offset account to help with the new purchase.

Best of luck
Mark

Dear GJ

The old PSS and CSS funds were great because they were defined benefit and gave you an annuity for life on retirement. In certain circumstances your spouse was entitled to a large portion of the annuity after your death. Unfortunately, new entrants don’t get those arrangements and their fund is similar to any other accumulation fund. The old CSS scheme is referred to amongst older public servants as the “Rolls Royce” fund.

Good luck
Mark

Dear DL

Your existing loan will have break costs – so find out what those are first. There may be a new application fee, and a valuation cost may be incurred – some lenders may have a zero application fee offer - so make sure you ask. Gather together your existing statements (a minimum of 6 months old) including rates notice, identification, proof of income and talk to your Yellow Brick Road wealth manager about completing an application form.

Best of luck
Mark

Dear KB

Given your income and the rent you are paying, I would consider buying a property to live in. You appear to be a good saver and that’s important. Unfortunately you will need a bit more for a deposit but keep working at it. Once you buy a place to live in, if your cash flow becomes too tight you can get someone in to help with the rent or rent it out as an investment property. Although you feel like you are starting again you have a good income and should be able to start getting ahead. That can be extremely satisfying, especially if you’ve been through a tough time.

Best of luck
Mark

Dear GJ

Firstly, set yourself a budget. Knowing exactly how you spend your money is vital, and even though it sounds daunting, setting a budget is actually simple if you know where to find the tools. You can do this online; many lenders have a mortgage calculator that you just plug in the numbers. It will look at your income and your expenses and any other additional living costs you have (like credit cards), and factor those in and compare it to your income. You should also talk with a Wealth Manager who will help you and explore how you look overall financially. If you are already paying off a mortgage, you may be able to look to refinance to get a better rate or even reduce your payments to interest only. If you are looking to get into a home, then you’ll need to include saving a deposit in your budget.

Best of luck
Mark

Dear MF

Residency and tax are issues that a lot of people get confused about. There are various tests to determine whether you are a resident of Australia or a non resident for taxation purposes. The difference between a resident and a non resident is that an Australian resident is taxed on their worldwide income whilst a non resident is only taxed in Australia on their Australian sourced income. If the funds you’ve earned during your time as a non resident were earned overseas and were not from an Australian source then you won’t be taxed in Australia on the funds themselves. You will of course be taxed on the rental income once invested in property.

Best of luck
Mark

Dear GR

It’s hard to answer that without all the facts but I can help with a few general principles. Firstly when you have a home mortgage, investment properties and other borrowings it’s prudent to have the mortgage on your home low and coming down and the borrowings for the investment properties on interest only or as close to it as you can get. That way you are maximising the deductible portion of the interest you pay. You have to factor in what would happen if you lose your job. Income protection insurance can help if it’s as a result of ill health but not if you are made redundant. If you are worried then selling the investment property and paying of the investment loan and whatever you can on the home mortgage could be a good strategy, especially if you borrowing level is about to go up as the new property approaches completion.

Best of luck
Mark

Dear S & JC

Provided you meet a work test you can contribute up to $150,000 as a non concessional after tax contribution to superannuation and up to $50,000 as a concessional or tax deductible contribution. That applies to each of you so technically you could both contribute up to $200, 000 provided you each individually passed a work test. That means being employed and working for 40 hours in a 30 day period in the year. One difficulty is that you may not have enough income to claim the concessional component in which case you might only get $300,000 combined into super. Given you don’t want ban SMSF you will be looking at a retail or industry fund that allows payment of a pension. If you can’t get a job for a short period then you would invest the proceeds of the sale in some combination of property, shares fixed interest and cash either directly or via a managed fund in your own names.

Best of luck
Mark

Dear EG

One of the hardest things to do when you’re starting out is to save a deposit for a home. Many people can afford to pay off a home but accumulating ten or twenty percent for a deposit from after tax dollars is tough and slow. The answer depends on your income and what property values are like in your area but it sounds like you should sell and use the after tax and loan proceeds from the investment property to get you started, especially if you’re not planning to live in Maitland. Don’t forget capital gains tax though.

Best of luck
Mark

Dear D & E

Three years ago I would have been confident you would get the finance from any one of a number of sources and although prudent to get a pre approval it wasn’t absolutely essential. In the current banking climate I strongly recommend you get a pre approval because there is now a significantly higher risk that a bank or financier won’t be prepared to lend you the money. It can be a very costly exercise if you can’t complete the purchase after exchanging contracts. Our branches deal with pre approvals every day. It’s a straightforward process, provided you’ve got your information together.

Best of luck
Mark

Dear MSC

You’re right about those reviews. None have given us anything to suggest that SMSFs are not a great form of investment structure for many, provided you get good advice and understand your responsibilities as a member and trustee. The ATO has good information on its website setting out the things you should consider before setting one up. Here’s a quick summary: Consider your options and seek professional advice. Ensure you have sufficient assets, time and skills to manage your own fund. Follow the super and tax laws and understand the risks. Tailor your trust deed and investment strategy to suit the members of your fund. Be sure you can meet your record keeping and reporting obligations. Make sure you understand your annual auditing obligations. There are strict rules that govern how you can use an SMSF and how you can invest your money. It can be difficult, so at times you might need to consult with professionals and advisers, which can add to the cost of managing your fund. They also advise that you should consider if such costs and other regular fees and charges will affect the benefits you may get from having an SMSF. Get these basics right and you’ll be fine.

Best of luck
Mark

Dear BA

As you are under 65 you are eligible to contribute to superannuation without having to pass a work test. That’s academic as you are working anyway but is often a point of confusion for people. As you are over 55 you are also eligible to commence a Transition to Retirement Pension or TRP. The procedure is that you fund pays you an income stream of something between the minimum of 2% and the maximum of 10% of the value of the fund’s assets at the end of the previous financial year. As you are aged between 55 and 60 ,the pension is taxable to you after an adjustment for the undeducted component and a rebate of 15%. In broad terms if you or your employer had always claimed a deduction for superannuation contributions the pension is taxed at your marginal rate less 15%. If you are in the top tax bracket for example your pension would be taxed at 31.5% instead of 46.5%. Depending on your personal circumstances you may wish to wait until 60 before commencing the pension as it will be tax free. The added advantage of commencing a pension is that the earnings on the assets in the fund used to pay the pension also become tax free once the pension commences. Get some advice on salary sacrificing and pension planning because there are plenty of rules to stay on top of in this area.

Best of luck
Mark

Dear TC

If you have enough savings to get you through to your next position and you still qualify, I would at least make a $1000 contribution to superannuation to get the matching government co-contribution. I would concentrate on reducing the mortgage in the hope that the property appreciates over time. If you still have a mortgage on retirement hopefully you will have plenty of equity in your home and be able to trade down to have a debt free home in retirement. Your home doesn’t count towards the pension assets test. Under the government’s new rules will be eligible for the age pension at 67. That’s because you were born after 1957.

Best of luck
Mark

Dear JH

Your plan has merit but the thing to remember is that there is a maximum pension amount for transition to retirement pensions. They are capped at 10%.The principle of taking some form of lump sum payment and getting rid of the mortgage then applying your savings to super while you are still eligible to contribute is a good one. Just get some specific advice as to what you can and can’t do in relation to pensions and lump sums.

Best of luck
Mark

Dear AM

Firstly I’d suggest you do a budget and work out exactly what you’ll need to renovate. Make sure you’re not overcapitalising or it may not be worth it in the long run. As you have access to additional funds on your mortgage, an option is to use your redraw facility and access those funds immediately. If your redraw isn’t enough, you can always apply to your lender for a loan increase. While borrowing more will increase your repayments it is usually not a complicated process as your existing lender will have a lot of your details already. They will usually just ask for an update from you to ensure you can afford any increase in your repayments. Speak to your lender or local mortgage broker about the process. Better still, pop in to one of our Yellow Brick Road branches. They can help you understand how much your loan repayments may need to increase to give you the money you need. This will make it easier for you to decide what option is right for you.

Best of luck
Mark

Dear JD

There are a number of lenders out there who can offer a product called a low document loan. Generally these loans require an applicant to be self employed for a minimum of two years. Most lenders offer these types of loans, and you’ll probably find that the rates are fairly competitive. Generally with a Low Doc loan you are not required to provide any documentation to substantiate your income (Tax Returns etc, although BAS Statements may be required in certain circumstances). Instead, you "self-declare" your income. Different types of Low Doc loans are available so make sure you talk to your lender and that you have the information you need to make an informed decision.

Best of luck
Mark

Dear JG

I’m always reluctant to sell good assets but it sounds like the properties may need to eventually go if you have a mortgage on your home to pay out. Selling the properties in different financial years to reduce the capital gains tax is good strategy. You seem keen to retire now but you would get a good tax result, and earn more income along the way, if you retired at 60 and sold a property each year after retirement. That way you taxable income pre capital gain would be minimal and as capital gains tax is at your marginal tax rate it would be less. Have a chat to your accountant. Adding the $600,000 to your existing superannuation will get your investment assets into a low tax environment and is a good strategy. Don’t forget the contribution limit of $450,000 every three years on non concessional contributions. If it all happened now, your wife may need to make $150,000 of the contribution. Consider salary sacrifice as well and get some specific advice as there are a few dollars at stake.

Best of luck
Mark

Dear LM

You are right. The ATO in calculating the interest when they are at fault is not as equitable as when you are at fault. Where ATO has delayed payment for more than 60 days, interest is paid at the prescribed rate which is currently 4.16% (1April2010 to 30June2010). On the other hand, if you have an outstanding ATO debt, the general interest charge begins to accrue from the due date until the amount is paid in full. The current general interest charge rate is 11.16%After July, the ATO will commence reviewing all interest on super co-contributions and, if required, pay top up amounts on accounts impacted by processing delays.

Best of luck
Mark

Dear MS

Commercial property usually has a higher yield than residential and the property in your example is yielding around 7% p.a. Banks unfortunately don’t lend at home loan or residential investment rates when commercial property is used as security. The establishment costs are higher and the interest rates can be significantly higher than the average home mortgage. Commercial property can still be a very good investment. The up side is the rental yield and a slight negative is that you need to be experienced to negotiate the property lease as there are a lot more variables than with a house or apartment lease. Examples of issues that a commercial lessor needs to deal with are lease and option terms, fit out costs and make goods. The lease is only as strong as the tenant and strength their guarantees on the rental. The company can help limit your liability but may not be the best structure for taxation. There’s always a trade off so get some specific advice.

Best of luck
Mark

Dear JJ

The capital gain will be taxed at your wife’s marginal rate less a 50% discount, provided the property has been held for greater than twelve months. It’s therefore likely that majority of your wife’s discounted capital gain will be taxed at 31.5%. If her assessable income in the year in which she sells the investment property comprises less than 10% employment income then she could potentially make a concessional (tax deductible) superannuation contribution of up to $50,000. If she were eligible for the super contribution, that rate of tax could be reduced to 15% on the portion that goes into the fund. To explain, your wife would have less income to be taxed in her return and more to be taxed in the hands of the superannuation fund at a tax rate lower than her marginal rate. Be careful on the timing though; capital gains are assessable in the year in which contracts are exchanged. If you exchanged in June but didn’t settle until July, you may not have the funds available to make the contribution. To be tax deductible in an income year, super contributions need to be paid prior to financial year end.

Best of luck
Mark

Dear SH

It’s great that you’ve decided to get on the property ladder. I would suggest though, talking with your lender before you go shopping for your first home. Knowing how much you can borrow is important – and helps potential heartbreak down the track if you can’t afford your dream home right now. Having talked to your lender, there are a few things to consider. The NSW government offers first home owners a grant of $7,000 as well as an additional $3,000 for people building or buying a new home however this additional $3,000 grant expires on 30 June this year. Other costs include stamp duty and mortgage insurance, which are all dependant on the loan amount. Be sure to work through the full costs so you can work out how much you need to save for the deposit. Shop around for a loan which is right for you and make sure that this property purchase is a step towards reaching your overall wealth management goals.

Best of luck
Mark

Dear TL

Like in any service industry, there are good and bad operators. Provided the property companies are transparent about their fees and aren’t getting kick backs from developers or suppliers, they can provide a good service. I’ve always thought there is room in the industry for professional buyer’s agents that charge you a fee for finding you a property and negotiating the purchase. They are also referred to as buyer’s advocates. I’d make sure you went with a company that negotiated the property purchase well because there are plenty of real estate agents that can do a good job finding you tenants and managing the property. The tax return for an individual with a rental property is not particularly onerous and your tax agent can easily attend to that. I don’t like the sound of the monthly tax return lodgement. What that means is that they prepare an estimate of your investment income and expenses and lodge a variation with the ATO. Rather than receiving a refund at year end, the ATO advises your employer to deduct less PAYG monthly, based on the variation. What that indicates to me is that the property company is pushing hard on the tax benefits or that you are very reliant on the tax benefit to make the investment work. That can be risky, especially if rules change or you lose a tenant or have an interest rate rise. You really need a buffer for unexpected events.

Best of luck
Mark

Dear JD

Firstly, have the land valued to ensure you know the exactly what your land is worth in today’s market. There are lenders in the market who will consider a construction loan at 95% of the total land value and construction costs. They may be a little more expensive in mortgage insurance but it will get you into your new home sooner. A Yellow Brick Road Wealth Manager can find the right loan for your situation.

Best of luck
Mark

Dear RB

There is some logic to your thinking on the contributions. At your tax rate, as you correctly point out, you are tax neutral. The Government recently announced an additional $500 super contribution for individuals earning less than $37,000 p.a. from 1 July 2012. It will be done by way of a matching contribution of 15% up to a maximum of $500. That will provide you with some additional incentive to contribute. You are missing a couple of additional pieces of the rest of the puzzle though. Firstly if you take a pension from your fund there is no tax at all on earnings or capital growth. Secondly that pension won’t be taxable to you because you are over 60. If the $400,000 was invested outside superannuation and the earnings were added to your current income, it’s likely you would be paying more than 15% - most likely 30% on the earnings compared to zero under the super pension scenario.

Best of luck
Mark

Dear PS

I can see your point. A lot of the age limits in the superannuation regime seem arbitrary. Once you are 65 and not working you are prohibited from making contributions to superannuation, even contributions you don’t wish to claim a tax deduction for. The way to become eligible is to do 40 hours paid work in a 30 day period in the year. I presume the reason the Government has made it difficult to contribute after 65 is that super is perceived to be a tax effective investment and it would rather people make regular contributions over their working lives rather than larger contributions at the end of their careers. Anything that incentivises people to save for their own retirement rather than rely on social security should be encouraged. Some of the superannuation announcements in the budget made it more encouraging to contribute but unfortunately you are stuck with getting a job for a short period, if you can or wish to.

Best of luck
Mark

Dear NC

Salary packaging superannuation would be a good alternative for you. It’s a tax effective way of accumulating assets and you sound like you would be more comfortable with that option than borrowing to purchase investment assets. Given the age difference you might consider making the maximum contributions to your fund rather than your wife’s. The reason for that is that you will reach 55 and 60 ten years earlier. Those are key dates for access to benefits regardless of whether you take a pension or lump sum.

Best of luck
Mark

Dear JZ

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 DK

Most superannuation funds don’t have a capital guarantee. What happens to your capital depends on theinvestment option you select. It sounds like you were invested in a growth option. That means the assets underlying your investment are weighted toward property and shares. Listed property and shares did it tough during the GFC and that’s why your super balance is down. If you had selected a capital stable or conservative option it’s likely that the capital would have been preserved. Three years ago the complaints were the opposite because the share market was racing and people in the conservative option thought they were being left behind. One of the investment options in the fund will be to invest to replicate a fixed interest option so you can get back to a term deposit type investment within super if that’s what you want. Depending on your age and profile it may be better to stay in growth or balanced. On the fee issue, advisers can’t help themselves to your fund. The establishment fee and adviser payment should have been clearly presented to you in the Product Disclosure Statement or Financial Services Guide. If you were given personal advice by an adviser you should also have received a Statement of Advice with fee disclosures.

Best of luck
Mark

Dear CB

One of the hardest things to do when you’re starting out is to save a deposit for a home. Many people can afford to pay off a home but accumulating ten or twenty percent for a deposit from after tax dollars is tough and slow. The answer depends on your income and what property values are like in your area but it sounds like you should sell and use the after tax and loan proceeds from the investment property to get you started, especially if you’re not planning to live in Tamworth.

Best of luck
Mark

Dear CG

Yes he can and yes it is, provided total contributions to his fund don’t exceed $50,000 p.a. . That number drops back to $25,000 plus indexation from 1 July 2012 if he has more than $500,000 in his fund. That’s assuming the budget announcements are passed through Parliament. It only makes sense to reduce his income down to where the 15% tax rate cuts out because all contributions to superannuation are taxed at 15%.

Best of luck
Mark

Dear LP

It sounds like you are making a lot of changes in your life and my advice is to rent the Central Coast property for a year or so to see how you go. If your cash flow can handle it, I think the Central Coast might be a better long term growth proposition than Adelaide given its proximity to Sydney where the population should continue to grow at a strong rate.

Best of luck
Mark

Dear EI

If you haven’t brought forward any non concessional superannuation contributions you can each contribute $450,000 to your SMSF. That’s a good low tax environment to invest your money in. Yes, you can have as many term deposits as you like within your fund. Yes, you can start a transition to retirement pension but the most tax effective time to do that is at age 60. From the information provided it appears you will continue to be Australian Residents but you should get some advice from an accountant to confirm that. Assuming you are still taxed as residents your worldwide income will be taxed here but you will be given a credit for any tax paid in the UK on your UK incomes.

Best of luck
Mark

Dear LC

At least 10% of your income must be from employment, carrying on a business or a combination of both to qualify for the government co-contribution. Your wife’s income consists of rent and dividends and neither of those income streams are classified as business. They fall under the different category of passive income. She has the right to feel a little peeved because, not only does she miss out on the co-contribution, it’s likely she also missed out on the Rudd Government’s $900 stimulus payment last year.

Best of luck
Mark

Dear SF

Regardless of whether you are in accumulation phase or pension phase in your superannuation fund, having your asset allocation in accordance with your risk profile is important. If the switching option is available in the fund you are in it should be able to be done tax free as you are in the tax free pension phase. If you are worried about the downside risk then converting to the cash or capital stable option is certainly worth considering, especially without crystallising a liability for capital gains tax.

Best of luck
Mark

Dear KH

A capital gains tax fee, debt free apartment in Sydney is certainly a good option and if you can earn enough to live and pay the bills you will have security and peace of mind. The alternative is renting and investing your money and it’s a popular theory. Many advisers do models and explain how you could potentially be better off with the rent and invest option but the investments have to perform, you have to be disciplined and you can be kicked out of a rental apartment at the end of a six month lease. I like your plan better. Put the work in and buy well. The Sydney apartment market is really starting to heat up. Driving around the suburbs I’m seeing auction and ‘For Sale’ signs one week and ‘Sold’ signs the next. The blunt force of the Reserve Bank’s successive interest rate rises is having an effect on small business and home owners but property activity is still high in some suburbs, especially around the city fringe.

Best of luck
Mark

Dear CM

The issues to consider here are transaction cost and tax. Selling the investment property will free up $120,000 but may also crystallise a capital gains tax liability. That needs to be taken into account in your calculations. Recycling the loan and buying an investment property will also incur costs including stamp duty on the new purchase. If you were to sell the property I would simply pay down your home mortgage with the after tax surplus. You could then direct the cash you would have used on the larger home loan payments to superannuation contributions, preferably by salary sacrifice. If the shares could be sold without any capital gains tax consequences it would be possible to reduce the mortgage by $80,000. At a later time you might choose to buy shares again. If you drew down on the mortgage to fund the purchase, the interest on the portion of the loan used to fund them would be tax deductible. You currently have an interest in two investment properties so be mindful of land tax.

Best of luck
Mark

Dear AP

It’s tight but I would give Plan A. a go but be realistic about switching to Plan B. if it’s not working. You are getting used to your new financial situation as a single person and the interest only strategy can work, if rates don’t rise too aggressively and your living costs are contained. You need to monitor it really carefully though because the last thing you want is a situation where you are forced to sell the home at a time that doesn’t suit you. Income protection insurance is a must in your situation. The superannuation money is a cash flow backstop as you are getting closer to the age you can start to draw a pension to top up your income. If you find yourself needing to do that you should sell the home.

Best of luck
Mark

Dear MC

It’s good news for all investors. Yellow Brick Road congratulates Chris Bowen and the Rudd government for their intention to ensure that as an investor, you receive information that’s in your best interest – not simply sold a product because the financial planner is being paid a commission for doing so. As an investor, it means you’ll receive unbiased advice and have a clearer understanding of exactly how much you are paying to get that advice.

Best of luck
Mark

Dear LC

If you can’t stay with your parents, renting in shared housing is the best financial outcome for you. Banks and Credit Unions are both good places to save your money. Have a look at some of the higher interest rate internet only accounts. It’s a long road but work on paying off your debt and saving a deposit for a home. You will need an absolute minimum saving of 10% of the home purchase price plus costs. That’s going to take a while on $40,000 p.a. so get that career happening and try to build your income. It looks daunting but everyone has to start somewhere.

Best of luck
Mark

Dear PM

Firstly there is what’s happening inside the fund. The conversion of a superannuation accumulation account to an account based pension in itself does not create tax liability. However, if investments inside the fund are sold before the money is moved into a pension there may be capital gains tax payable inside the fund. Once your super balance is being entirely used to pay a pension there is no longer income tax paid within the account. However, if you are invested in cash there is unlikely to be a capital gain or only a very small one depending on how your fund structures its investment options. Secondly, what happens when you take money out? If you are over preservation age and under 60 and take a lump-sum, the first $150,000 taken from the taxable component of your balance as well as everything from the tax-free component is income tax free. Keep in mind that in most cases you have to be retired to take out alump-sum amount from your super fund. If you take a pension, are over preservation age and under 60, the pension you receive from the taxable portion of your account is assessable for income tax - you do get a 15% income tax offset for this though. The pension taken from the tax-free portion is tax-free. The transition to retirement is not a straight-forward matter. You should speak to a qualified fee-for-service financial adviser to ensure your affairs are appropriately structured.

Best of luck
Mark

Dear GM

Talk to your wealth manager to determine how much you can borrow before you go looking for your dream home. That way you know what range of property to start shopping in. Property purchases up to $750,000 in NSW are currently eligible for a $7,000 lump sum payment from the government (First Home Owners Grant). The NSW government also offers a stamp duty exemption of up to $500,000, with a sliding scale discount kicking in from $500 – $600,000. Your Wealth Manager can apply for the First Home Owners Grant for you. The total amount of how much you can borrow depends on your annual income figure and any existing liabilities or debts you may have.

Best of luck
Mark

Dear JW

Funding the development would be very difficult in this climate – even if you were a professional developer. Your first development is never easy and, although you’ve done well so far, you don’t have any margin for error. I would think about retaining the property you have and keeping the development option open for a later time. If your cash flow allows it and you can get the finance I’d look at the studio option. If it doesn’t, consolidate and pay down the mortgage until it does.

Best of luck
Mark

Dear SF

It’s amazing to think you need to provide that sort of figure for a funeral but it’s actually a realistic number. Lucky it’s only a one off expense! On the investment issues, salary sacrificing to super is a better option for you, especially if you are inexperienced in money matters. The last thing you should be doing is taking on a borrowing. Super is tax effective and you can stop the extra contributions if money is tight. You are also close to the age where you can start to access your superannuation in the form of a pension if you are running short. That’s not preferred but it’s possible.

Best of luck
Mark

Dear KK

The way the tax system works you would be better to sell the old home and have more equity in the new one. People’s definitions of ‘comfortable’ are all different and there are various rules of thumb for savings, depending on your age and living expenses. Having cash flow in retirement representing two thirds of your current after tax income is one guideline that often makes sense. Whether that works for you and how you get there requires some discussion and some financial modelling. I suggest you sit down with a financial planner on the specifics.

Best of luck
Mark

Dear BJ

Find out what the break costs are for the loan with your existing lender. There may be a new application fee, and a valuation cost may be incurred – some lenders may have a zero application fee offer - so make sure you ask. Gather together your existing statements (a minimum of 6 months old) including rates notice, identification, proof of income and talk to your Yellow Brick Road wealth manager about completing an application form.

Best of luck
Mark

Dear LD

Your son fixed an interest rate for certainty and there’s nothing wrong with that at all. Yes, it’s a bit high in today’s market but it could just as easily have worked in his favour if rates had risen more rapidly. The property sounds great and as his job is secure I’d really try and retain it. One of the biggest regrets of people with employer provided housing is that they get to retirement (and that’s early in the Navy) and don’t own a home. In theory he could not have a home and apply his entire salary surplus to savings. That can work but usually doesn’t for two reasons. Firstly there are no tax incentives to do so and secondly most people aren’t disciplined enough to actually save the money. They save it for a while and then buy a new car or go on a holiday.

Best of luck
Mark

Dear CA

The answer will depend on what your living expenses are but at your stage my preference would be buying another investment property in your name, funding it interest only and using the rent from both properties to assist in meeting the interest costs. Any surplus savings can still go against the home loan. You are doing the right thing going with the areas you know. Given your wife’s income, she should consider taking advantage of the Government Superannuation Co Contribution. You are giving the children a private school education and, as nice as it is to fund their University studies when the time comes, the HECS/HELP system is quite a fair way of them funding their own way.

Best of luck
Mark

Dear PD

If you can live on your salary alone, the maximum investment property you could afford would be around $500,000. It’s not too late if you both plan to continue working for another say ten years but my advice would be not to, for several reasons. Firstly you don’t have any debt at present and I suspect you may like your life that way. Secondly committing to working for that extra length of time is difficult and there is some risk – health, redundancy etc. Thirdly, when you retire you will most likely have to sell the property to repay the debt and it may not be the opportune time to do so. Finally, the current superannuation rules are almost tailor made for your situation. I’d consider salary sacrificing from your income and having your wife pay $1,000 after tax into superannuation to have it matched dollar for dollar by the Government.

Best of luck
Mark

Dear GR

That’s a good interest rate and you’ve timed things quite well. The property option is worth considering but it appears a little too soon. You’ve got some equity in the Canberra property which means that you could borrow against it and a new property to help fund the new property purchase. Depending on the value of the property you plan to purchase you will still need a significant cash deposit or have to pay mortgage insurance on the new loan. Buying some more shares from time to time as you learn about them and paying down the mortgage until you get enough equity to buy another property would be my preference.

Best of luck
Mark

Dear PG

For the purpose of the exercise I will assume it’s a first home with no stamp duty payable. Without mortgage insurance a financier should lend you 80% of the property value. That means a $200,000 property with a $160,000 loan. Paying mortgage insurance can get you a ninety percent loan which means a $400,000 property and a loan of $360,000. The example is simplistic but gives you a guide. You need to factor in the cost of the mortgage insurance. Some lenders allow you to include it in the borrowing.

Best of luck
Mark

Dear JJ

Once you’ve terminated with an employer and you don’t have any intention to work for the employer again, if your Super balance is less than $200 you can request it be paid out. Unfortunately you balance is over $200 so it will need to stay in super. There are thousands of small balances sitting in accounts and there’s also a big reserve sitting at the taxation office with Lost Super in it. Have a look online to see if you might have any lost super and look for statements of your super balances that might be under $200. The ATO website has a lost super search function.

Best of luck
Mark

Dear KK

I like the sound of your second plan. Make sure you do your costing to ensure you will be able to live in it once it’s no longer rented. Don’t forget that as a rental property it will be subject to land tax if it’s over the threshold. It’s tax deductible against the rental income.

Best of luck
Mark

Dear MH

The short answer is no. You have a relatively high level of debt for your income and I don’t recommend you borrow more to buy another property. Given you haven’t done well in property in the past, if you happen to trade your home down and reduce your debt then superannuation would be a better option for you.

Best of luck
Mark

Dear JS

One option is to salary sacrifice to superannuation and the other is to use the equity in your home to assist you with the purchase of a property, some shares or managed funds. They are the options a financial planner should put in front of you once they get an understanding of your goals, your financial knowledge and your attitude to risk. If they steer you in one particular direction, be sure to ask why. Your husband is in a higher tax bracket than you so any salary sacrifice to superannuation should be done against his income.

Best of luck
Mark

Dear AM

You are on the right track on the investment side, provided the advisor‘s fund recommendation is appropriate. Where your plan needs some help is on the taxation side. You are planning to invest the majority of your cash and just set aside a deposit for a home. That will mean you will ultimately have a managed fund investment, a home and a non deductible mortgage. I recommend you and your advisor work toward a plan where at least a portion of the home mortgage is deductible because it’s been used to acquire the investment.

Best of luck
Mark

Dear VD

That makes financial sense if you are both happy with the investment and plan to keep it in retirement. It does however mean you are moving from being a joint owner to effectively a tenant in your sister’s home and you need to think through any of the potential ramifications of that. Make sure you each have Wills, Powers of Attorney and Guardianship agreements in place. Any surplus cash could be invested in superannuation.

Best of luck
Mark

Dear TZ

Yes, I agree with your strategy. If you have been able to afford the additional mortgage payments you’ve been making, you should be able to fund the shortfall on a negatively geared rental property provided you don’t by a property that is too expensive. There’s no easy way to become debt free but taking an interest only mortgage on the investment property and reducing your home mortgage by your tax refund will help. You don’t want to reduce the investment mortgage until the home mortgage is gone. In the long term you are hoping that the investment property appreciates and generates positive cash flow after interest. That way being debt free is less important, especially as you always have the option of selling the property to pay out the debt.

Best of luck
Mark

Dear KW

Many people talk about paying rent rather than home loan payments and investing the difference. You sound like you are doing it reasonably well. The drop in the share values is not a great concern. If you are happy from a lifestyle point of view to keep renting and don’t pay ‘over the top rent’ I would consider investing some more in the stock market. Despite the shakeout in the past couple of years the old adage of a third a third a third – property, shares and fixed interest can still work. If you don’t want to own direct property you could look at listed property investments or listed companies with property exposure. Achieving your goal of retirement at 45 on that type of income is difficult without any tax advantages. It virtually rules out superannuation because access is restricted until at least ten years later. It will be hard but not impossible. Be careful taking too much risk though. The last thing you want is to lose the lot.

Best of luck
Mark

Dear RW

KD was over 60 and was able to draw a tax free pension. When a fund starts paying a pension the earnings on the capital amount supporting the pension become tax free. That’s the advantage a pension after age 60. Rather than stay in accumulation phase and have the fund pay 15% tax on its earnings it can go into pension phase and pay none. Even if you don’t require the pension you can effectively re contribute it each year, provided you are under 65 and don’t exceed your contribution limits. It’s worth getting some pension planning advice as there can be benefits for you from both a tax and estate planning point of view.

Best of luck
Mark

Dear JM

Before doing that I would look at the investment choices within your allocated pension. Sydney residential property usually yields around 4% p.a. and you should be able to replicate at least that rate of return in a pension fund after costs if it’s a quality fund. You also have the option of rolling out of that fund to another. I’d look at those options first before cashing out as, depending on your age, it’s often harder to get money in to super than it is to take it out. I’m not saying no to the property idea but remember it’s not liquid and if you need to withdraw some extra capital you will need to sell the property or borrow against it. That contrasts with the pension which you can simply increase as there is no maximum amount these days.

Best of luck
Mark

Dear KH

Having negatively geared investment properties in retirement doesn’t make sense so your decision is whether to sell a property or two or take a lump sum from super to repay some debt on retirement or both. There is nothing wrong with having some debt on positively geared property in retirement provided you are comfortable. I recommend you review your situation with a financial planner or accountant as there is a tax and investment planning exercise to be done. You could minimise tax on any investment property sales if you did it after retirement and it might be a case of selling one property one year and one the next. The UK money less what you might spend over there on holiday could come home to reduce your debt. You won’t be happy with the exchange rate now but at a point in time the money is best here if for no other reasons than it returns very little in the UK and can be a hassle to manage.

Best of luck
Mark

Dear JC

The exit fees can range from nothing to a lot and you can get a quote from your existing provider. Be careful of capital gains tax if you are not in pension phase already. Your decision needs to take into account the future performance of the fund and that’s difficult to assess. It would be worth looking at how it has performed in the past few years, relative to others, when making your decision You are at prime retirement planning age I recommend you get some pre-retirement planning advice tailored to your situation and in particular asset allocation and planning for future pensions. It’s possible to have several pension accounts although this is usually not recommended as it makes planning harder. Having one or two accounts is fine.

Best of luck
Mark

Dear VI

With $4,000 you might consider a managed fund with a regular savings plan. Shares can be good but it’s hard to add to them in small chunks. For that reason a managed fund with a savings plan and shares as the underlying investments is an alternative to the cash account. Remember there is no downside risk on the cash account but managed funds, like their underlying investments can fluctuate in value.

Best of luck
Mark

Dear MH

The ASX run introductory courses and that would be a good place to start. Have a look at their website. There are also some extremely expensive courses offered by promoters of various share trading systems. My experience is the people that run many of those courses make much more than those that attend so be wary – if it sounds too good to be true, it usually is. While there are successful share traders, the majority of novices tend to lose money. There is a lot of information on the internet, much of it incomplete or conflicting so be careful there as well. By all means give it go but start small, be disciplined and only trade what you can afford to lose.

Best of luck
Mark

Dear ERW

The rental property interest and expenses will most likely exceed the rental income. That’s how negative gearing works and its often good advice but in your situation it may put a strain on your cash flow, especially if the property is vacant for any time. . If your income was say $20,000 p.a. higher I would consider the property. Borrowing a smaller amount for shares makes more sense but remember, like property, they are a long term asset. You will need to get some specific advice on the purchases but a borrowing of $200,000 for a quality portfolio makes more sense. Depending on what value car you are after my preference would be to borrow rather than sell the existing shares. Firstly, because you will realise a capital gains tax bill and secondly because you presumably bought them for the long term. They have increased in value and pay good dividends so you are on track there. Have the car loan and share loan separate and pay down the car loan. That way you will minimise non deductible interest expense.

Best of luck
Mark

Dear BB

If you look at it purely from a financial point of view, you have two non income producing assets that will ultimately be sold to invest in a new property and superannuation. Selling you wife’s home now and investing the proceeds in super will turn it into an income producing asset but may not suit your living arrangements. From a planning perspective you have the opportunity to bring forward super contributions if you are less than 65, therefore if you chose not to sell her home and contribute to super now, it would be best done before she turns 65. As there is capital gains tax on your home and you are not contributing the proceeds to super, you could wait until you have retired and have less income before you sell yours. That should minimise the CGT bill.

Best of luck
Mark

Dear KD

As you are under 65 you can contribute the whole $200,000 to super provided you haven’t brought forward too many years contributions previously. I would add it to the allocated pension amount as it will then become tax free inside the superannuation fund. As you had planned to invest it in cash outside super and you already have shares, I’d consider taking the cash or fixed interest option inside the fund.

Best of luck
Mark

Dear WR

You’re on the right track; minimise your home mortgage interest and keep the home unit loan at $330,000 interest only. If you plan to do the renovations relatively quickly, pay down $140,000 of the mortgage on the home you are moving into and use the $60,000 for renovations. If you don’t plan to renovate straight away, hopefully the mortgage has a redraw facility and you can pay it down by $200,000 and redraw $60,000 for the renovation later.

Best of luck
Mark

Dear PH

Buying quality assets for long term growth is a good plan and you can look on it as a form of superannuation. Unfortunately you can’t swap mortgages and whether the mortgage interest is tax deductible depends on whether the property is your home or an investment property from which you derive rent. Presumably you will be borrowing 100% of the value of the new property and using both properties as security. That will mean you will have a very large private mortgage and a rental property, being your old home, very lowly geared. A more effective plan would be to buy the property and keep it as an investment.

Best of luck
Mark

Dear SH

If you are committed to changing properties, putting the inheritance against the mortgage is the best way to go. If you plan to keep and rent out the one you are in and buy another to live in, investing the $80,000 in a mortgage offset account is a worthwhile exercise.

Best of luck
Mark

Dear NG

The best course of action is to engage the services of a solicitor and, if you believe your broker was negligent, you can also go to the Banking Ombudsman. If there was a fraud involved by your ex husband it will be it will be hard to prove that you were not involved and you may not get much support. If it gets to court and the court t finds that the lender failed in their duty of care, or the broker realised that your language skills were poor and did not recommend a translator and/or independent legal advice then the courts can deem the contract null and void. If that occurs then you can make a request from the lender to remove the default from your credit file.

Best of luck
Mark

Dear DS

You could bring the money to Australia and repay the loan on your unit. You could invest the remaining cash in a cash management account and use it to fund some of your living expenses while making large salary sacrifice super contributions. The tax on superannuation contributions if 15% so the optimum level of salary to sacrifice is the amount that takes your personal income down to where your marginal tax rate drops to 15%. That’s around $35,000 so you would be sacrificing $27,000 p.a. pre tax.

I am a 24 year old single man which purchased a brand new home 6months ago carrying a loan of $450,000. I have leased that home out now and I am looking for a 2nd investment of around $200,000- 300,000. Would you recommend having both loans in interest only or principal and interest? I have no intention of living in either.

Best of luck
Mark

Dear RM

It’s a matter of comparing the rates and the terms of the loan providers. The big four banks dominate the loan market home although in the mortgage market its increasingly becoming the big two, CBA and Westpac as they are writing the majority of the broker directed home mortgages. St George is a reputable bank and is now owned by Westpac. I suggest you get your mortgage broker to do the work and give you the option that best suits your needs. Make sure whichever loan you go with has a long term as you don’t want to be forced to refinance if you only have a short term loan and the banking climate changes. Unfortunately there is not the competition there used to be.

Best of luck
Mark

Dear KL

It sounds tempting to do the knock down and rebuild but let’s think about it. Firstly you would have to rent while you built. Secondly I’m not convinced you will get what you want or do justice to the location you’re in if you spent $350,000 on the rebuild. My experience is that costs tend to blow out and if you’ve been quoted $350,000 you can almost guarantee it will cost you $500,000. You can’t afford that size mortgage, especially if you eliminate one income while you have more children. You’re doing well to have a virtually debt free home. My gut feeling is you should move and have a lower mortgage. If you’re income was higher or you had a windfall you would consider staying and building. Have a think about whether the property would be more valuable if you sold it with a development approval.

Best of luck
Mark

Dear TW

You could consider using a mortgage offset account for your savings although the rate you are receiving on your high interest account is good and the cost of changing the mortgage to add an offset account is probably not warranted. As you are debt averse to debt channelling your extra savings to fund a negatively geared property is probably not for you. Look at salary sacrificing a little to superannuation or contributing after tax contributions to capture the government co-contribution if one of you is eligible.

Best of luck
Mark

Dear DT

At that level of income and with a debt free home you have plenty of options. Superannuation is the easiest and is tax effective. The maximum you can contribute pre tax at your age is $25,000 p.a. so I would consider doing that and applying any surplus savings to the investment mortgage. If you are confident you will maintain your earnings you can also consider borrowing for more property or shares. For you it’s about accumulating quality assets and mimimising your tax where you can.

Best of luck
Mark

Dear GH

Firstly I would look to see whether your wife qualifies for the government superannuation co-contribution and maximise that. At 55 you can get access to a superannuation pension if you need it so consider contributing say $50,000 of your term deposit to superannuation as a non concessional (after tax) contribution. The fund is a good low tax environment to house your savings. With a relatively short time until retirement, gearing is not the solution so don’t be afraid to your additional savings into super. From there it’s choosing an investment option that gives you some growth without a high level of risk.

Best of luck
Mark

Dear JM

Wow! Glad you didn’t hit me with the long version! I would be wary of pooling your resources with a friend and recommend you try and do your own thing. If your rent is low, you could borrow and buying an investment property with a plan of paying down the mortgage to a level where you can afford to live in it. The alternative is to keep saving until you get a large deposit together and that will take longer. To concentrate on achieving your home goal you might need to suspend the salary sacrifice to superannuation. Keep it on the agenda though.

Best of luck
Mark

Dear IB

Retirement is about income and what you should do is firstly evaluate what rate of return you are getting on the property and whether you can make that money work harder for you elsewhere. Secondly you should consider whether you will be able to live on the post retirement income alone or have to use some of the capital you have tied up in the property. If you were to sell the property you are each able to get large amounts into superannuation by bring forward non concessional contributions. You won’t be able to do that when you are 65 so now a good time to be making the decision. All that said, I hate selling quality assets so hopefully the rental income is sufficient for your needs and the property accumulates in value and you get to keep it. Make sure you take capital gains tax into account when evaluating it.

Best of luck
Mark

Dear BD

You’ve educated yourself well and I like your plan and the fact you are having a go. Don’t forget to have some balance in your life as it would be a shame not to enjoy the next ten years because you are obsessed with the future. Make sure you register for Land Tax and have current wills, powers of attorney and guardianship agreements. On the health side you might look at whether it would be prudent to have some other forms insurance in addition to the income protection. The answer may be ‘no’ but at least weigh up your risks.

Best of luck
Mark

Dear AT

This was one for our accountants. Here’s the answer, which lies clearly in Taxation Determination 2000/16. If you purchase vacant land and build a dwelling on it which is intended to be your primary residence, a full capital gains tax exemption is applicable as long as 2 conditions are met – (a) the period of ownership before occupation does not exceed 4 years; and (b) the dwelling must become your main residence as soon as practicable after work in building the dwelling is completed and must continue to be your main residence for at least 3 months.

Best of luck
Mark

Dear HN

The amount paid by each unit in a strata is calculated on the basis of unit entitlements which are set up by the builder or developer of the property when the strata plan is first registered. It is then the obligation of the strata committee to calculate levies based upon those unit entitlements. Maybe you should first check with your committee and ask them to provide documents showing the registration of the unit entitlements. It may be that there has been a mistake, which can be rectified. If this does not satisfy you, there are procedures set down in the Strata Schemes Management Act, 1996 for raising a dispute and appointing an Adjudicator who has the power to make an order for payment of contributions of a different amount.

Best of luck
Mark

Dear SS

This is a complex financial situation which is best handled with the help of an experienced financial counsellor. The website of the Australian Government Insolvency and Trustee Service has a list of recommended financial counsellors, from which you can choose according to location and convenience. You will find that a counsellor will help you negotiate with your creditors and reschedule your debts to provide breathing space so you can defer payments until your health and revenue issues are resolved. All the best for your partner’s speedy recovery. It’s hard enough dealing with a tough health issue without the addition of financial strain.

Best of luck
Mark

Dear KS

If you are prepared to spend some of the surplus capital you release selling the home and buying a villa, it might be possible for you to own a property and do the things you want in the next five years. Hopefully the new property appreciates ahead of inflation. Unfortunately that’s not guaranteed. As we tend to live longer these days, the reality is that it’s much more likely we will spend capital and income in retirement rather than just income. By buying the villa you also give yourselves the option of going with the rental plan or potentially a reverse mortgage at a later time.

Best of luck
Mark

Dear MG

Indexed lifetime pensions are very hard to beat and as your adviser pointed out you often need to have a lot of money invested to be ahead of the regular long term income stream provided by the pension. I don’t know the specific pension provider or details of the various components but on the surface it looks like the right option. Before committing, get an understanding of what happens to the pension in the event of your death and then in the event of your wife’s death if you predecease her. The difference in the two pension amounts may only be indexation. I suggest you sit down with the provider and get a full explanation.

Regards
Mark

Dear WW

Take out a new loan at the lower rate. It will need to be with the same bank as both loans will be funded by a first mortgage over your home and only one institution can hold the mortgage at any point in time.

Best of luck
Mark

Dear LW

Given your goals, your preferences and your long time horizon, there is nothing wrong with your plan. Property is a long term play and that’s the way you are approaching it. You would fund the new property by borrowing interest only against it and your home. There is another reason for paying down your home mortgage when you have another investment debt and that is that interest on the loan to fund your home is not deductible and interest on a loan to purchase an income producing property is. So, rather than pay down the investment mortgage, with any surplus, pay down the home mortgage. Commercial or industrial investments can be good if you have the knowledge and at the level you are looking you might be able to buy others down the track using the same funding logic. If you are looking in rural NSW be careful with ‘boom and bust’ towns. The closure of a mine or an industry in or near a town that relies almost exclusively on it for employment can make some assets unsaleable.

Best of luck
Mark

Dear CC

You are right; in your situation, maximising tax effective contributions is a better strategy than taking on another investment property; especially since it appears you want some flexibility in the future. Self Managed Superannuation wouldn’t be cost effective for you with a combined balance of $120,000 so you would be best continuing with a retail, corporate or industry fund until your balance is larger. I’m hoping that won’t always be the answer as we’re trying to shake up that industry to make DIY super more cost effective at lower balance levels.

Best of luck
Mark

Dear SW

Decisions involving transfers of major assets and exchange rates are always tough. It seems like the wrong time to convert the Sterling to Australian Dollars but it looked bad six months ago and has only gotten worse since . It’s cheaper to rent than buy and borrow 100%. Your rent is quite reasonable and I’d be reluctant to borrow for the new home as the interest alone would be over $700 per week. I suggest renting for 12 months and reassessing then. If the exchange rate recovers to a point you are happier with in the meantime, bring the money home. You’ve got exposure to property in Australia with the Canberra property so you are not out of the market. You’re not desperate for funds and can afford to take the gamble on the rate. If you’re not prepared to lose more though, you short remit it now.

Best of luck
Mark

Dear HL

Your position is different to CC’s above in that your income and super balances are higher and you have more equity in your investment property. I would consider buying the additional apartment and salary sacrificing to superannuation. With around $230,000, additional salary sacrifice contributions and your desire to manage your own money I would also consider a Self Managed Superannuation Fund. You might then transfer your shares to the fund if it didn’t crystallise a Capital Gains Tax bill.

Good luck
Mark

Dear ST

As you don’t like debt, your options are to invest your after tax dollars in property shares or fixed interest or your pre tax dollars less 15% contributions tax on some or all of the same assets in superannuation. The trade off is you can’t access the super until at least 55. Consider doing a bit of both; sacrificing superannuation from your salary and accumulating share or fixed interest investments in your wife’s name outside super. If you were to bring debt into the equation, consider an investment property. Bear in mind that unlike the debt on your home, interest on a loan to purchase an investment property is income tax deductible. You are obviously good savers and if you went the property option you could try to knock a hole in the mortgage over the next ten years.

Best of luck
Mark

Dear BJ

Your son has effectively loaned you the funds to help you purchase the over 50’s unit. If that’s what the documentation shows, then your son’s advance should be treated as a liability and reduce your net assets accordingly. The pension and earnings in the pension fund are tax free whilst the earnings on the term deposit outside superannuation will form part of your taxable income so leave the pension in place. As you are over 60 you can draw a maximum of 10% of your super if you are taking a transition to retirement pension or if you have retired or satisfied another condition of release, there is no upper limit to the amount you can draw.

Regards
Mark

Dear GL

Take advantage of the higher superannuation limit for people aged over 50 and maximise your concessional super contributions first. People aged over 50 can contribute up to $50,000 p.a. up until 30 June 2012. There’s something very satisfying about having no debt and it doesn’t happen that often in many people’s lives. With that in mind why don’t you make knocking off the debt your next priority? After that you might consider contributing any surplus after tax income to your super fund. With 60 as your retirement age goal I’d steer away from gearing into more property or shares. The choice for any surplus after that will depend on a lot of personal factors like where you want to live in retirement so get some tailored advice.

Best of luck
Mark

Dear JM

Congratulations; it sounds like you could do with a win and you got one. The short answer is stick it in the bank, in either a cash management account or term deposit. Given things are tight you may need access to it but you can do without access to the capital for a while there are some good 12 month term deposit rates around.

Best of luck
Mark

Dear MA

I had a look at the website and you’ve done a good job so I thought I would at least point you in the right direction with your project. Other than the quality of the people in the business and their relationships with each other, the company and the customers, the thing that makes the business run is cash. No matter how big or small the business, from BHP to the home based business its making sure that the bank account is growing. If you focus on that you can work back through issues like accounts payable and receivable, how long stock sits in transit or in the warehouse, when or whether you upgrade equipment etc.etc. Great people and good cash flow make great businesses. Maybe focus on those areas.

Best of luck
Mark

Dear HL

That’s correct, provided its cash as cash is not subject to stamp duty, capital gains tax or gift duty. Other countries have gift duty but we don’t.

Best of luck
Mark

Dear ND

You are doing well to live on $1,400 per month after you mortgage and superannuation contribution. Given what you have ahead of you with potentially a new addition to the family and part time work, I recommend you and your partner really attack the mortgage. It would be an advantage if you had a redraw or offset account so that if your circumstances change in the future or you find you’ve overstretched yourselves with debt reduction you can get access to some extra funds. When the mortgage is lower you can get back into additional superannuation contributions.

Best of luck
Mark

Dear PT

Your mortgage not huge, you are comfortable financially and you are not a long way from being able to access your superannuation if you needed to. I would therefore take advantage of the fact that the salary sacrificed contributions are effectively tax deductible and the superannuation fund only pays 15% on the contributions and contribute the $600 per month into your work super scheme.

Best of luck
Mark

Dear TP

Firstly, keep your chin up; this is a bad time of year to be looking for a job. Business really only gets back to full swing in February and you quite often hear of people that couldn’t find anything in December and January getting a good job in February. I suggest you and your husband sit down and do a budget and also have a look at what you have spent your money on in the past. Credit and store cards are the obvious trap, so start to focus on what you spend on them. By planning ahead you can often make savings, airline tickets are a good example. Dining in rather than dining out, all those little things add up. It sounds like all you a really missing once you’re back to work is a goal and a plan to achieve it. Pick one of those things you mentioned and focus on how to achieve it, for example buying a home. Keep education, investment and holidays etc in the back of your mind but work a plan to achieve the home purchase, if that’s your goal. You’re right, if you throw the home and the other things together, it does look daunting.

Best of luck
Mark

Dear JS

I’m always reluctant to sell good assets but it sounds like the properties may need to eventually go if you have a mortgage on your home to pay out. Selling the properties in different financial years to reduce the capital gains tax is good strategy. You seem keen to retire now but you would get a good tax result, and earn more income along the way, if you retired at 60 and sold a property each year after retirement. That way you taxable income pre capital gain would be minimal and as capital gains tax is at your marginal tax rate it would be less. Have a chat to your accountant. Adding the $600,000 to your existing superannuation all your investment assets into a low tax environment and is a good strategy and as you correctly point out there is an advantage in making the contributions in your name because you’re closer to 60, when it’s possible to receive a tax free pension from your fund. Maximise your salary sacrifice contributions in the meantime and don’t forget the contribution limit of $450,000 every three years on non concessional contributions. If it all happened now, your wife may need to make $150,000 of the contribution. There is enough at stake here for you to get some specific advice from your accountant and a financial adviser.

Best of luck
Mark

Dear AH

Debt consolidation is a good idea, particularly when you are paying the massive interest rates you pay on credit cards. Technically if the interest rates are the same on your credit card and personal loan you won’t be repaying them any quicker if you consolidate them but having one debt and a goal will hopefully enable you to focus on reducing them. Usually personal loans are at a lower rate than credit cards. If you have a home mortgage and were able to draw on it to pay out the loans, you will benefit from a much cheaper interest rate than you are paying. St George or Bankwest are reputable banks but if you are trying to escape the Big Four, remember CBA owns Bankwest and Westpac owns St George.

Best of luck
Mark

Dear RZ

As you are nearing the age of 50 I assume you were born after 1957 and will therefore under the government’s new rules will be eligible for the age pension at 67. Currently a single homeowner is entitled to the maximum aged pension if their assets excluding their home are less than $178,000 and their other income is less than $142 per fortnight. I would keep going with the superannuation co-contribution as it’s a great way to get a good return on relatively small investment. I would concentrate on reducing the mortgage in the hope that the property appreciates over time. If you still have a mortgage on retirement hopefully you will have plenty of equity in your home and be able to trade down to have a debt free home in retirement. Your home doesn’t count towards the pension assets test.

Best of luck
Mark

Dear MF & DP

Renting Sydney and buying a block of land will put you further into debt and with your income coming from a pension it would be virtually impossible to borrow and prudent not to. Your arrangements sound complex to say the least; ‘house partner’ is a new term for me! Selling your home and buying one each without debt seems the logical lowest risk option.

Good luck
Mark

Dear LM

The car loan will most likely be at a higher interest rate so direct any surplus you have to reducing it. Your wife is eligible for the superannuation co contribution so put aside $1,000 p.a. for that. The mortgage is reasonably modest but reducing it gives you more options in the future, like trading your house up. I suggest that once the car loan is gone you would do some salary sacrificed superannuation and some additional mortgage payments i.e. bit of both.

Best of luck
Mark

Dear PB

If you can afford to and can get a tax deduction for the contribution I’d keep it up. Superannuation and asset accumulation is a long term game.

Best of luck
Mark

Dear SP

You will need advice specific to your situation but as a general comment there is still plenty of uncertainty in the finance world and diversified investment option hedges your bets a lot more than the more aggressive “high growth”.

Best of luck
Mark

Dear MA & PG

Retirement on the pension requires discipline with expenditure and you are doing the right thing having a reserve and looking ahead, rather than realising you have a problem once your cash is all gone. The plan is to make sure your regular expenses don’t exceed your pension and keep the unexpected expenses to a minimum. The latter sounds impossible by definition but there are at least some things you can do, like making sure your home and car insurance is up to date, keeping up with regular maintenance, avoiding parking and speeding fines, avoiding store cards etc. etc. You’ve correctly identified the other two options. There are many variables like your health and life expectancy but on the surface of it I’d suggest continuing as you are for a year as your husband has only just retired. If it’s obvious you have a problem then you would look at a reverse mortgage if it looks like a small long term cash drain or the home sale if it looks larger. Another option is to do some part time work if you are able. Sometimes people’s children are happy for their parents their home and build a granny flat. Sometimes they pay their parents not to!

Best of luck
Mark

Dear JF

That equates to 1.2% of the value of the fund. Match that up against the relative performance of the funds and take into account the insurance benefits you get from each fund. The answer might be to bite the bullet or to keep them both going and add to the industry fund going forward.

Best of luck
Mark

Dear MS

Excess cash may be a bit optimistic with the second baby on the way and a $500,000 mortgage. I would be throwing everything you can in that direction. The other thing to factor in is the entire one off costs you have after purchasing a new home. Often you get the big picture under control and a year later wonder where all your cash went. What you often find is it went in furniture, landscaping, painting and all the ‘little’ things you didn’t budget on.

All the best
Mark

Dear PD

What the agent is saying may be correct but speak to some others in the area as well. The more you spend on the property with a view to a short term sale the more risk you have. If you do the numbers on building and selling, make sure you factor in a realistic interest holding cost as it still may take a long time to sell. On the surface of it I’d be tempted to set a realistic price and sell it as is.

Best of luck
Mark

Dear PM

Provided they are good quality stocks, that’s a conservative level of gearing. Diversification is essential and look at all the risks before doing it. I’d also recommend taking advantage of the higher superannuation contribution limits available to people of 50 for the next two year so consider maximising your salary sacrifice to superannuation. If you don’t have a capital gains tax liability you might also look at selling some shares and getting the cash into superannuation as an after tax contribution. That way you will have more of your investment earnings concessionally taxed. If you really need cash at a later stage you can commence a transition to retirement pension at 55. It may be unlikely you would need to but it’s good to know you can.

Best of luck
Mark

Dear TJ

The banks are encouraging savings via online accounts in preference to the traditional passbook accounts and the interest rates are attractive. You could continue to use the account and once you get to say $5000 check the longer term deposit rates and perhaps transfer a lump sum across if the rate is better. Another alternative is to buy shares. As you understand managed funds you may have some knowledge in this area. Given the dollar value it will be difficult to diversify so you will need to choose one or two stocks. Blue chip stocks with dividend reinvestment plans suit this style of investment.

Best of luck
Mark

Dear JN

Paying down the mortgage makes the most sense as the interest rate you’re paying will be higher than the investment rate on the savings account or deposit. In addition, the investment earnings are taxable but the mortgage interest is not tax deductible. Once the mortgage is repaid you could invest the remaining $20,000 for a fixed term.

Best of luck
Mark

Dear SJ

If you leave the funds in the superannuation environment and start drawing a pension, any earnings on the fund will be non taxable. The pension will also be tax free. So, given you are looking at putting your funds in an interest bearing investment anyway it may as well be via superannuation. Remember if you are 65 and not working you can’t contribute to superannuation so, once it comes out, it won’t be able to go back in.

Best of luck
Mark

Dear DL

Maximise the amount you have invested in interest bearing accounts. Centrelink deem you to earn a certain amount of interest on any bank account so there is no advantage in having a non interest bearing account. You would therefore open another fixed term deposit account. The current PAYG tax system is similar to the old provisional system but rather than annual provisional tax instalments you remit tax each quarter on the basis of what you earn from untaxed sources like interest bearing bank accounts. As you don’t have the salary income at the moment, your overall income is much lower than it was and it’s unlikely you will have much or any PAYG tax to pay on your interest.

Best of luck
Mark

Dear JM

Now the mortgage is down to a net $160,000 and even less if you were to sell your shares, it’s a good time to purchase an investment property, buy a share portfolio or invest in managed funds. You will need to look at your loan first. If you simply withdraw the funds from the offset account and put them into an investment, your mortgage will increase but the interest on the loan won’t be tax deductible. If you’re committed to investing and plan to keep living in the home in the medium term, you would be best to pay down the mortgage to the $160, 000 then establish a new loan for investing. There’s a lot to be said for going with what you know and are comfortable with. If you know and like property, then look for an investment property. If you like the concept of share investments, either directly or via managed funds, then consider going that way. As a rough guide you would be looking at a property investment of approximately $500,000 or a share/managed fund investment of around $250,000. The actual amount and the investment mix will depend on your attitude to risk, so get some specific advice when the time comes.

Best of luck
Mark

Dear AL

Your borrowing capacity would be based on the value of your home rather than your cash flow. You have plenty of equity in the house but it would be difficult to support a negatively geared investment property on your income. I would consider increasing the salary sacrifice to superannuation and also paying the odd lump sum of the variable mortgage. The boys will eventually move and help solve your overcrowding. Having them as tenants in a rental property can create problems. What if they can’t pay? What if their friends move in and don’t look after the place? Could you really evict your son? Super is a better option for you.

Best of luck
Mark

Dear PF

Presumably your employer will contribute 9% of your earnings to a fund of some sort and you should be able to sacrifice to that fund. Between you and your husband, whoever is in the highest tax bracket would be the best one to salary sacrifice. On your husband’s rollover, to work out which fund to keep, have a look at the performance of the two funds and compare the other benefits like life insurance etc.

Best of luck
Mark

Dear DD

You need to do something with your surplus cash or you may blow it on those fast cars. Why don’t you start attacking the home mortgage and sacrifice some more to superannuation? That’s a good combined income you have and putting the money into super will help reduce your tax as well have give you options on retirement.

Best of luck
Mark

Dear MG

Go for it. You’re in a good position and adding some more real estate to your asset base is a good thing, provided it doesn’t leave you short of cash flow. If it’s a holiday home, get some advice on the tax deductibility of the expenses if you’re using it. You can download the Tax Ruling from the ATO website. If it is a holiday home you may need to sell the other investment property to avoid cutting in to you pension capital. There are limits on what you can giveaway to your daughter for age pension purposes but other than that there is no limit to what you can gift her and no gift duty in NSW.

Best of luck
Mark

Dear BM

Those old State Super Pensions are good and if you are in good health the usual advice is to keep it rather than commute it to a lump sum. Without eating into the capital you would need to generate around 9% p.a. on the lump sum to replace the pension. That’s almost twice the return you get on a low risk investment like a term deposit or government bond. You would also need to do your own investing if you took the lump sum and that may not be your area. The indexed pension for life looks attractive. I’d concentrate on living as long as you can to get your money’s worth.

Best of luck
Mark

Dear SL

Many people are writing to say they aren’t contributing to superannuation because they lost value last year. That’s not a good reason to give up on it completely. One feature of assets like superannuation or listed share investments is that they are “marked to market” or revalued regularly. Any decline can make some investors worried. This contrasts with real property. You never really know exactly what the property is worth until it’s sold. People tend not to get as concerned about fluctuations in a property’s perceived value. You’ve worked hard and have a debt free home and $75,000 in super. That’s a fine achievement. Gearing into more property is not the right option for you but resuming the salary sacrifice makes sense. At your tax rate the extra contributions will save you 15% in tax and get your money into a concessionally taxed environment. Compounding savings of over $20,000 per annum over five or ten years within super is an attractive option despite the less than average performance recently.

Best of luck
Mark

Dear M & P

It’s the 8% p.a. unsecured note that sounds risky to me. Given long term deposit rates are significantly lower than this I would be wary about the investment, especially if it’s not a note issued by a highly rated listed company. It would be devastating to lose a chunk of your capital at your age for the sake of a 2% extra return. I’d be reluctant to put any more of your capital into growth assets and would really do your homework on the notes before making a further investment.

Best of luck
Mark

Dear GS

Unfortunately the interest on the $150,000 loan will not be deductible against the rental income from your previous home. The reason is that the purpose of the $150,000 borrowing was to purchase unit one. It will become your home, so that loan is effectively a home loan and the interest is not deductible. Transferring the security on the loan won’t change the situation as it’s the loan purpose, not the collateral that determines the deductibility of the interest.

Best of luck
Mark

Dear JP

The capital gain after deducting any capital losses brought forward or realised during the year will be added to this year’s taxable income and taxed at your marginal rate. If you have any assets that haven’t performed and you sold them and realised a loss, that loss would reduce the capital gains tax payable. You never set out to make a loss but if you have one, it’s better to realise it in a year you are paying tax than a later year.

Best of luck
Mark

Dear KH

Your sons will need to meet a condition of release to access their superannuation benefits as a lump sum. Excluding permanent incapacity, between ages 55 and 60 the condition is retirement. At 60 and over it’s either retirement or a change of employment. They’re both eligible to take transition to retirement pensions of up to 10% of the accumulated benefits per annum but that may not give them the deposit they need.

Best of luck
Mark

Dear SO

Putting the funds in to superannuation is a good idea. You may be able to get some of the funds in by way of salary sacrifice. That would involve retaining a portion of the cash to meet your living while you are forgoing salary. This would be especially beneficial if you are in a tax rate higher than 15%. Regardless, the super plan is a good one for you. As you are over 55 you will be able to start drawing a pension if you run short of cash. Obviously the aim is to maximise your superannuation savings and not draw on the funds unless you have to but it’s good to have the back stop. There are two important things to know about your rental plan. Firstly, the rental income will be taxable and the rent you are paying won’t be tax deductible. Secondly if the land value of your home exceeds $368,000 and it’s not your principal residence at 31 December you will be subject to land tax. It’s deductible against the rental income.

Best of luck
Mark

Dear BN

Sounds like a competitive household with two pretty good cars! The answer here is to do both. The superannuation rules encourage salary sacrificed contributions over time so consider each of you doing some of that. By borrowing to buy an investment property or share portfolio you will be aiming to acquire an asset that’s going to grow in value over time. With market yields on the property or shares the investment will cost you up to about 3% p.a. after tax (This varies widely. Get some specific advice when you locate specific assets). You have a good cash flow and with the right property or share investments, a tax refund as a bonus and some good capital growth you would hope to grow your wealth significantly over time. Don’t over commit and be aware of the risks rather than just focus on the rewards. Remember it’s a long term play just like superannuation.

Best of luck
Mark

Dear CG

You’re obviously ambitious and have correctly identified the issues you need to consider. You will have a capital gains liability so factoring in a worst case result of 23.25% of the net gain that could be as high as $28,000. That’s $28,000 less you will have available to invest in future. It’s tempting to take the profit and access the cash for your businesses but have a think about your situation. If your businesses do well and you want to expand it will be virtually impossible to get a bank loan against the cash flow of your businesses without property security. They are interested in security in the form bricks and mortar. They do lend to businesses but its tough work getting finance and it’s expensive.  I would consider raising the $20,000 by drawing on your variable facility and working on your plan B of buying another property in time.

Best of luck
Mark

Dear FW

Measuring your assets from the peak of the boom can be a bit depressing. If the majority of the funds had been invested say five years ago for example then it’s possible the value of your assets may still be ahead of your original investment. I would review the investments this way and see how they look. Capital gains tax will be payable on the difference ultimately sell them and that needs to be factored in to the house calculation. As to the choice, that will depend on a number of factors including where you want to live, your family income, and what size mortgage you can afford. A deposit of $200,000 is a very good start and as it appears that owning your own home is important to you I would look some examples of properties you might like to buy and work out some numbers. On the investments, get some specific advice about when or if you should sell individual assets.

Best of luck
Mark

Dear SF

If you were to sell the property and realise a capital loss, that loss can be offset against a capital gain but not against your business income. If not recouped, the capital loss carries forward and can be applied against a capital gain made in the future. If you eventually sold the business and made a gain and the loss hadn’t been recouped, it could be applied to reduce that gain.

You obviously bought the property with a long term view and have seen interest rates rise then fall in the time you’ve had it. Your situation is relatively tight but if you’re confident in the rental and your business income you might consider fixing a rate for say three years and reconsidering you position then. At least you will have some certainty on your outgoings and have some insurance against rates going to an unaffordable point.

If your position is really worrying you and you’re not confident about your future cash flow you would consider selling but fixing a rate might potentially ease your concerns.

Best of luck
Mark

Dear MW

I hope the bank is not just trying to sell you an investment loan. Borrowing to buy property inside or outside an SMSF can make a lot of sense for people with high disposable incomes in the middle of their working careers. You are closer to retirement. When you get there it’s going to be all about income. The big question is how will the debt be serviced and ultimately repaid? Hopefully they’re not suggesting a speculative property purchase with a sale at retirement. At Yellow Brick Road our rule of thumb for the minimum amount to start an SMSF is $250,000. That amount tends to be where the costs represent a realistic percentage of the fund’s assets. You would be commencing yours with $150,000 and a debt. The administration costs as a percentage of the net funds invested will be quite high.

Super is a very good spot for your money and at your ages you have options for withdrawal if you need the funds. An alternative strategy without the debt would be to put the $100,000 into super as tax effectively as possible over the next couple of years. The maximum contribution you can each get a tax deduction for is $50,000 per annum so have a talk to your accountant or planner about the timing. If your incomes aren’t that high then a portion of it might go into super as an after tax contribution. From there you might consider a balanced option rather than the aggressive strategy you’ve been given.

Best of luck
Mark

Dear RLW

I assume the shares were investments you had in listed companies rather than shares in your own small business company so you won’t benefit from the small business concessions. There may however be an option to use a superannuation contribution to reduce your capital gains tax liability.

If your income from salary and wages represents less than 10% of your total income (including the capital gain), you are eligible to make tax deductible superannuation contributions. If you satisfy this condition, you will need to review your contributions for the year to date, and if they are less than $100,000, you can make additional contributions to your superannuation fund.

On the capital gains tax, remember that if you held the asset for more than 12 months, you will only pay tax on half the gain. So, if your profit was say $20,000, you would only pay tax on $10,000. Continuing with this example, if you were eligible to contribute to super, as I outlined above, you could then pay $10,000 into your superannuation fund which would effectively wipe out the capital gain in your name.

If you do have more than 10% of your assessable income for the year represented by a salary or wage, unfortunately you won’t get a deduction for personal contributions to super. Your best option in that case would have been to salary sacrifice some of your salary to super but given it’s the end of the financial year you will have missed that opportunity.

Best of luck
Mark

Dear BS

Under the Superannuation (Industry) Supervision Act, it is permissible to pay Income Protection Insurance premiums from your super fund. The taxation laws also permit the fund to claim the premium as a tax deduction. The rules surrounding the tax deductibility were relaxed in 2007 as prior to that, the fund could only claim 2 years of premiums as tax deductible.

It is worth noting that Income Protection insurance is also tax deductible in your personal income tax return where you are no doubt paying more than the 15% tax that your superannuation fund pays. Although it may seem appealing to pay the premium from your superannuation fund, you might be better off paying it personally and claiming the tax deduction.

Best of luck
Mark

Dear HS

Accessing superannuation all comes down to satisfying a condition of release. The most common condition of release is reaching preservation age. Preservation ages are different depending on the year you were born – which is why you have been getting mixed signals from the different people you ask. The preservation ages are:

Your date of birth is between 1 July 1963 and 30 June 1964 and therefore your preservation age is 59. Under the current legislation you would be able to commence a transition to retirement pension at age 55, but you must continue to work to satisfy this provision. Sorry to be the bearer of bad news, but look on the bright side, you have another 14 years in which to grow your superannuation and you can rest easy knowing that you can retire very comfortably when the time comes.

Best of luck

Best of luck
Mark

Dear CCZ

I don’t know where you have been getting your advice but you’ve got a serious problem here. Members are specifically prohibited from borrowing from their self managed superannuation funds. Not even having a loan agreement in place and paying interest solves the problem. The borrowing is simply not allowed and breaches the SIS rules that govern superannuation. You should report the breach to the auditor of the fund and he or she is required to report it to the ATO. The funds need to be repaid, and unfortunately that may mean the sale of the property. As it is a residential property, the fund is prohibited from purchasing the property from you and SMSF can purchase residential property but not from a member. At Yellow Brick Road, we occasionally have people that have been badly advised in the past, come to us to resolve issues for them. Our experience in dealing with the ATO is that if a breach of the SIS act is reported and is the result of a trustees’ lack of knowledge and a remedy is put in place to rectify the situation so the fund is not out of pocket they may be satisfied. It’s crucial that you understand your responsibilities as trustee. Given an SMSF is required to have two trustees, your wife or partner also needs to be aware of their responsibilities.

Best of luck
Mark

Dear BP

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. Your situation is further complicated by the fact you have another portfolio that you purchased for long term growth.

Given you have two portfolios if you were to attempt to be classified as a share trader, the issue of how you determined which shares are for trading and which shares are for the long term may be difficult to answer. The most likely result is 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 current year. You will however have any future gains reduced by those realised losses.

Best of luck
Mark

Dear BP,

Firstly, superannuation funds are prohibited from lending funds to members so the only way your super fund could fund the purchase of a property would be to use its cash, or a combination of cash and a bank borrowing via an instalment warrant style structure. Our view at Yellow Brick Road is that this is realistic option for medium to high income earners with adequate diversification in their SMSF. We’ve given a lot of advice in this area in the past 18 months.

In terms of structure for the property purchase your options are to buy it in your own name via, your superannuation or within a family trust or company.

As you are a long way from retirement, with your existing asset level and current salary I don’t recommend the superannuation option. There are capital gains tax disadvantages of owning growth assets in companies. Having a negatively geared property in a family trust could leave you with losses accumulating in the trust and no reduction in your personal tax liability.

So unless you need asset protection, the best option is to purchase the property in your own name. You can use your existing apartment and the new property as security for the purchase and depending on the level equity you have in your existing property you may be able to retain your other investments. This option gives you the flexibility to move into the property at a later stage.

Get good advice but from the broad outline you have given, buying the property personally makes the most sense. Capital gains tax, land tax and stamp duty all need to be considered when you are thinking about how bust to structure an asset purchase.

Best of luck
Mark

Dear NM

The current superannuation rules allow you to contribute to superannuation whilst drawing a tax free superannuation pension, the precondition for the super contribution at your age is that you pass a work test. You would because of you are working and receiving a significant salary.

Superannuation contributions are taxed at 15% in the fund so it makes sense to reduce your taxable income to the level where the 15 cent tax rate cuts in. That is currently $30,000. So salary sacrificing enough income to bring you down to this level is a good strategy.

Given you are over 65 you can access the super funds at any time. You may need to be quick as in recent weeks there has been speculation that the government may change the rules to prevent salary sacrificing whilst you are receiving a pension.

Best of luck
Mark

Dear AI,

Generating 8-10% on your investment without taking some level of risk is difficult in the current environment. You therefore need to determine how much risk you are prepared to take to generate income on your investment. Regardless of what you ultimately invest in, superannuation would be the most tax effective place to have your funds.

Given you are working full time and are over 50 you can currently contribute up to $100,000 to super and claim a deduction for it. You can also contribute $150,000 in after tax dollars to superannuation each year that you pass the work test. This could very well change on Tuesday night so if you wish to get your money into super quickly it might be prudent to get your wife to contribute the $400,000 to super. Before you make a hasty decision based upon Budget speculation it would be wise to set out your long-term objectives and make an informed decision about the likely costs and savings of your alternative decisions.

As your wife is less than 65 provided she has worked 40 hours in a 30 day period in the current year, she could make $150,000 after tax contribution and bring to forward up to another 2 years at this level. Therefore her maximum non concessional (or undedicated) contribution is $450,000 which is more than the funds you have to contribute.

Once the money is in the superannuation environment its earnings are taxed at 15% and once your wife commences the pension there will be no further income tax in the fund. Given that she is over 60 the pension will be tax free to her. It’s s still possible to make contributions whilst drawing a pension but it’s still a case of watch this space.

Best of luck
Mark

Dear RS

I presume you will be buying the property to live in and will cease renting. The debt on the Melbourne property is 63% of its value and assuming your income is sufficient and the Sydney property is affordable, the bank should lend you up to 80% of its value without mortgage insurance. That equates to $29,000 you will have to put towards the property in Sydney. The bank is incorrect about the tax advantage on increasing the investment loan to assist with the Sydney purchase. From a taxation perspective it is the purpose of the borrowing that determines whether interest on a borrowing is deductible. In your situation you would be borrowing $29,000 against the Melbourne property to assist with the purchase of a private residence therefore it’s a not deductible. If you borrowed the $29,000 to buy shares or to do improvements to the Melbourne property interest on the loan would be deductible because it’s for an income producing purpose but that is not the case.

A sensible thing to do would be to convert the investment loan to be interest only and to make sure it’s quite clearly separated from the housing loan. That way you can make principal reductions on the non-deductible housing loan whilst leaving the investment loan as it is. Given your debt level will be rising you may look at fixing a rate, especially on the portion of the loan you won’t be able to repay in the next few years.

Best of luck
Mark

Dear RK

Unfortunately, the answer here is yes, capital gains tax is payable. You may have confused the situation with the rollover relief available to qualifying small businesses.

There is no taxation rollover relief for selling an investment property and buying another. You will pay Capital Gains Tax on any gain made on the original investment and be left with the after tax proceeds to purchase the new property. There is some good news though; if you have held the property for more than 12 months only 50% of the actual gain will be taxable.

There is roll over relief for selling active assets used in qualifying small businesses when a replacement asset is purchased however an investment property falls outside the scope of the small business rules.

Have a good look at your income the cash flows on the two properties. With the lower interest rates perhaps you may able to afford to retain both properties. Give that some thought but keep a careful eye on your cash flow.

Best of luck
Mark

Dear ZC

Don’t be embarrassed, this area is not easy and some advisers love complicating it. The Hawke Government introduced the concept of dividend imputation in 1987. The Howard Government expanded the system in 1996. Prior to the introduction of dividend imputation, there was effectively double taxation on dividends paid by companies. A company would earn profits and pay tax then pay a dividend out of its after tax dollars to a share holder. The shareholder would pay tax on the net income and wouldn’t be granted any credit for the tax paid by the company.

The introduction of dividend imputation brought logic to the situation. Now, when a company pays tax on its profits pays a dividend to its shareholders, the shareholder receives the net dividend and an imputed tax credit (franking credit) for the income tax already paid by the company.

Australian resident shareholders receiving dividends directly or through a managed fund or family trust include in their tax return both the dividend and the franking credit as income. The franking credit is also treated as tax paid like PAYG tax paid on a salary.

The current company tax rate is 30% and if the company pays the shareholders a fully franked dividend the dividend comes with a 30% tax credit. A Tax payer with a marginal rate of 30% affectively receives the dividend.

The current company tax rate is 30% and if the company pays the shareholders a fully franked dividend the dividend comes with a 30% tax credit. A Tax payer with a marginal rate of 30% effectively receives the dividend without any additional tax to pay. Taxpayers on higher rates of tax have to pay the difference between the tax already paid at 30% and their marginal rate.

If your marginal tax rate is less than 30%, the franking credits can be used to reduce your other tax liabilities and where there is an excess you can receive a refund of franking credits.

If your investments are via a self-managed superannuation fund, franking credits are particularly appealing because the tax rate in superannuation funds is 15%. People in pension phase in superannuation funds pay no tax, so it’s possible for a fund to receive a refund of all its franking credits in the year, hence, increasing the return on their investments.

Dividend imputation is great for retirees and investors like you. It effectively provides an extra return on your investment. Many investors are happy with the current system and would prefer it not to change.

Best of luck
Mark

Dear TG

73 and still working! That’s impressive. The rules in this area have changed so many times in recent years; it’s hard for taxpayers to keep up with them.

The test for making contributions is an age based test not a retirement test so people under 65 can contribute to super regardless of whether they are working or not.

You can continue making superannuation contributions after age 65, provided you pass a work test. After 65 you can continue contributing to super, even if you previously retired, as long as you work at least 40 hours in a period of not more than 30 consecutive days in the particular financial year. This applies until age 75.

Because you are over 65 you can access the superannuation benefits at any time.

Best of luck
Mark

Dear TD

In times of volatility and uncertainty gold becomes popular as a store of wealth. When interest rates are low and if inflation starts to grow, investors have historically looked to gold as a safe harbour for their wealth.

With some of the worlds biggest banks in danger of collapse without government support, and some governments printing money, it's little wonder gold is back on the radar. Although it peaked at just over US $1,000 per ounce it has now come back down to US $880 per ounce. 

Much of the gold ever mined still exists, so changes in sentiment are certainly a factor in the price. The current uncertainty is driving that sentiment. 

Gold doesn't produce income and costs money to store professionally, so it doesn't suit investors reliant on regular income.

Provided inflation stays under control, it's hard to argue that people should invest in gold for safety when Australian bank deposits are guaranteed.

Best of luck
Mark

Dear HF

Because you didn’t build a house on the Penrith block, it doesn’t qualify for any exemptions allowed for private residences, so there will be some capital gains tax payable.  However, it is not as bad as you think. 

Before you calculate the profit on the block, you need to calculate the cost base, and that consists of the original purchase price plus all costs incidental to the purchase, such as stamp duty and legal fee.  Then you add to this all costs that you have incurred in connection with the continuing ownership of the property including annual rates, interest on the mortgage, repairs, etc. 

The difference between the net sale proceeds after agent’s costs etc and your cost base becomes your nominal capital gain, which is then reduced by a discount of 50% to get to the taxable capital gain.   

All investors holding long term assets should keep good records to support their cost base calculation.

Best of luck
Mark

Dear GF

I read Malcolm Farr’s article on Wednesday and I hope his prediction doesn’t come true.

The ATO brought in measures a few years ago to apply a commerciality test to business losses being claimed against other income. Those measures caused a ruckus when they were introduced but nevertheless provide sensible guidance on what constitutes a legitimate loss from business. I don’t see any reason to tighten this area any further.

Apparently the Government’s research showed there are 11,000 higher income tax payers claiming primary production losses against their other income. I found this surprising and presume the number is distorted by people that have invested in tax driven Agricultural Schemes. I agree with you, why should a loss made from a legitimate farming enterprise be any different to a loss made on a rental property or a geared share portfolio.

I would be disappointed if any new measures affected people that are legitimately producing farming and grazing income as many rural people rely on revenue from other sources and there are also many owners of farms that reside in the city and employ people to work their properties.

With unemployment rising, the last thing we need is to destabilise any area that actually produces something.

Best of luck
Mark

Dear AB

That’s an interesting question we’re often asked.

The changes to the SIS legislation that allowed Self Managed Superannuation Funds (SMSF’s) to effectively borrow were introduced when the Federal Coalition Government was in power. The current Government has been monitoring the product providers and generally staying aware of what’s happening in this area.

It doesn’t appear that the SMSF industry has been turned on its head by the changes and given there aren’t massive revenue implications for the ATO, the rules should hopefully remain as they are. What I like about the existing situation is that SMSFs are now in a much better position to purchase property. Without borrowing it’s difficult for a small to medium sized fund to purchase a property, but since the changes that area has been opened up to them. Property suits people with a long investment horizon and should certainly be considered in SMSFs with members in their 30s & 40s.

I like people to invest in what they understand, and with the rules as they are, trustees can realistically consider investing in property using some gearing.

Best of luck
Mark

Dear VH

The principle of super is to accumulate funds for retirement but in this situation I can sympathise as retirement is a long way off for a teenager.

To take money out of super fund you need to satisfy a condition of release e.g. being 55 and retiring, or 60 and changing jobs or reaching age 65. There are however other conditions of release like finding lost super in a fund with a balance of less than $200 or where a member terminated gainful employment with the employer and their super balance is less than $200.

If your kids fit in to the latter category for at least some of their balances they could take a lump sum. The benefit is tax free and therefore there is no requirement for the super fund to deduct tax or issue them with a payment summary. They should can contact the fund directly and quote their member number etc. . Given the employer should have remitted super of 9% for them, if they earned more than about $2,200 in wages they will probably have balances in excess of $200.

An option if their balances are over $200 is to consolidate them into one and to provide that fund’s details each time they start a new position. They can get serious about super when they get out into the workforce.

Best of luck
Mark

Dear HF

I’m certainly not against equity investments with capital protection provided the fee structure is transparent and you understand the product. They have a mixed reputation in the market place, largely due to those two elements not being there for some investments and overuse at year end by aggressive tax planners. Since the decline in stock market there are plenty wishing they had capped their downside.

Capital protection put simply is buying an insurance policy against the value of your shares going down. The usual way to protect the value of a share is to purchase a put option. A put option is the right to sell the stock at a specified price at a specified point in time. Professional traders make a living out of buying and selling options and until the early 1990s it was a difficult area for retail investors to get involved in.  Macquarie bank paved the way by packaging up loans for shares where the investor was charged an interest rate that included the cost of the borrowing and the put option. When borrowing costs were about 8% the overall rate charged, including the put option was around 12 to 15%, depending on the underlying basket of shares. The investor paid that and received the dividends and franking credits.  The ATO eventually capped the amount of the interest/option payment that was deductible.

There are now plenty of providers and as always some are terrible and some are excellent and there are a lot in between. You need to break it down into its components and work out how much insurance you need by way of an option. You can insure virtually anything at a price. If you are a long term buy and hold investor without any gearing perhaps the cost of protection is not warranted but if you are reliant on maintaining capital value in the short term you might choose to buy some protection.  Get good advice and if you don’t understand it, don’t do it.

Best of luck
Mark

Dear EK

Banking transactions such as this are deregulated in Australia, so there are no restrictions or tax implications on the receipt of a loan from overseas.  Some foreign countries place restrictions on payments to other countries, but European countries do not impose any restrictions, so there should be no problem with your parents sending the funds. 

You will most likely be queried by Austrac on the transfer so make sure it’s well documented. There are various methods the banks use for transfers, each of which has a different scale of bank charges, so it is worthwhile checking with the remitting bank and choosing the most cost-effective method.

Many conflicts in families are caused by misunderstood financial arrangements, so it is important that all the terms and conditions of the loan are agreed and documented, including the initial interest rate and whether it will increase or decrease as bank rates change, when interest payments are due, terms for repayment of principal, requirements on the death or divorce of a lender or borrower, whether the loan is repayable if the property is sold, etc.

Payments of interest by Australian borrowers to non-bank foreign lenders are subject to withholding tax at 10% of the interest accrued or paid.  It will be necessary for you to register with the ATO as a payer and make the payments so you’ll have to gross up the payment for the withholding tax. Take that into account when deciding if the rate is competitive.

If the loan is used for purchase of a private residence, there are no tax implications for you relating to either the interest or principal.  However, if the property becomes a rental property, the gross amount of interest paid (including withholding tax paid) will be deductible against the rental income.

Best of luck
Mark

Dear CF

With mortgage rates at record lows and credit card rates still very expensive, now is a great time to consolidate debt. I’m not aware of your outgoings but if you have been making ends meet with your existing debt payments then with the recent big reduction in variable mortgage rates it is conceivable your repayments on the combined mortgage may not be much higher than you are used to.

It is possible to take the loan over thirty years so look at the difference in payments of the 25 and 30 year loan terms and compare that against your cash flow. The more flexible the new mortgage the better. There’s no harm in being ahead of the banks repayment schedule but it’s useful to be able to redraw if you get stuck.

Given you will have to produce details of your living costs etc for the bank, why don’t you take that bit of extra time to do a personal budget to make sure you won’t have to consolidate again.

The downside of increasing your mortgage to cover those other loans is you are using up equity in your home to pay out unsecured debts. But given your surplus after mortgage payments is not huge it’s not time for you to borrow to invest so you may not need the extra equity. 

If you pay your HECS off in a lump sum the Government will give you a discount but remember the HECS only goes up by inflation each year so it not necessarily a priority to pay it off. You may wish to, just for the peace of mind. Floor coverings and paint should add value to the house and regardless will make it more liveable so that sounds like a sensible option.

Best of luck
Mark

Dear DG

If you‘ve got a high paying job in London I’ll bet you’re not an investment banker.

There are a number of things to consider. I will cover off briefly, but I recommend you seek comprehensive advise as there are a lot of issues.

Firstly on your home. If you have always lived in your home it is not currently subject to Capital Gains Tax (CGT).You can elect for your home to continue to be treated as your main residence for Australian taxation purposes for a period of up to six years from when you move out. This is regardless of whether you rent it out or not. Presumably you will be back within six years and if you then make it your home again, and then happen to have another overseas posting, the six year period restarts. Incidentally, the concession is even available to a person who chooses to move out of their home, rent it out and live elsewhere. You can however only have one main residence at a time.

Any rental income that you receive is assessable income in your Australian tax return. Any expenses relating to your property including interest on your loan, rates, repairs etc will be deductible.

Currently the interest on your share investment loan is deductible against your dividend income. If you intend to stay overseas for a long period of time you may be deemed to be non resident  The rules here are strict and residency depends on a number of factors.  As a result of the Double Tax Treaty we have with the UK, the franked dividend earnings for a non resident are exempt income and  unfranked dividends are subject to withholding tax of 15%. The interest on the loan for the share portfolio will no longer  be deductible whilst you are non resident.

 It may be possible to “mark your share portfolio to market” when you leave. This means you work out your capital gain as at your date of departure and pay tax on that amount and not pay any capital further tax on the growth whilst you are non resident. Depending on when you purchased your portfolio and what price you paid, you may find it is favourable to do this as the capital gain may be minimal or possibly zero.

If you qualify as a non resident you will only need to report your Australian sourced income in your Australian Tax Return. You will no longer have a tax free threshold or be liable for the Medicare Levy. You should advise your bank and the share registries that you are no longer a resident so that they can deduct the required withholding tax from your interest and dividend payments (where applicable).

As I mentioned,  there is a lot to it. It’s best not to assume anything without proper advice because there is a lot of misinformation about residency. It’s not straightforward, come and see us.

Best of luck
Mark

Dear JS

The bonds are not available yet. At this point the Government’s $43 billion broad band infrastructure project is only a proposal and is yet to undergo a full feasibility analysis. It will then have to get through Parliament. I doubt we’ll hear much about the details it until the end of the year. The Government is looking for corporate participation and will take up the remainder of the project itself. The PM announced last week that a portion of the investment will be debt funded and that will be done by issuing infrastructure bonds to the public. If these are like the bonds that have been issued in the past they will represent a defensive fixed income type, low risk investment with a relatively long term to maturity, probably a minimum of 10 years. They should be popular with investors and superannuation funds and life insurance companies may also buy them.   

After the sale of Telstra the government repaid a lot of its debt and in recent years Australian Government Bonds have not been as readily available as they were back in the 1990s. Depending on how much of the project the Government is left with, there should be no shortage of bonds available for the public.

The bottom line is that if you want a long term, low risk, fixed interest investment, then you can put Australian Government Bonds alongside Term Deposit and other low risk fixed interest investments and do a comparison. The big advantage in the past was the Australian Government guarantee. It will be interesting to see how the pricing compares with Australian  bank term deposits given that since the Global Financial Crisis they are also Government guaranteed. The Government may have given itself a competitor with its 100% guarantee to the banks.

Best of luck
Mark

Dear KM

Remember last week, I’m always wary of any investments that purport to provide a guaranteed return. With any guarantee, check out how strong the provider is; in this case the guarantee is on the rental whereas last week it was guaranteed business income but the principle is still the same.

Even though the home builder may be reputable, our experience with Yellow Brick Road clients offered this type of investment, is that the amount the company guarantees for rent is built into the price. In fact we’ve had people come to us who have purchased properties in the early part of the decade with a three year rental guarantee only to find at the end of three years that there had never been a tenant living in the property. What does that tell you? Obviously a sales tactic to justify price. The fact that these people then had to find tenants at the end of three years in a less buoyant rental market and that their bank had revalued the property downwards is a good reason to be sceptical about this type of investment.

Do your research and tread very warily.

Best of luck
Mark

Dear JR

A Will deals with what happens to your assets after you die. An Enduring Power of Attorney (EPA) is a document that appoints someone, usually a spouse to deal with a person’s affairs on their behalf, even in the event of them losing their mental function. They are very important because if you have appointed a EPA and you do lose your mental function, then your spouse doesn’t have any authority to deal with your assets on your behalf – the public trustee needs to be involved. It’s a similar situation to when a person dies in testate, except it happens while they are alive and can be traumatic and even disastrous for the spouse.

Firstly I recommend you appoint one or more of your children as your EPA acting either individually or together and that you have your husband’s mental capacity assessed to determine whether he is still competent enough to appoint you as his EPA. Hopefully, if he is not too ill, you may still be able to be appointed.

The other big issue you have is the issue of guardianship for your husband. The EPA deals with the financial issues, but a Guardianship Agreement deals with the non-financial issues such as choice in health and medical treatment, nursing home etc. Without a Guardianship Agreement there is a possibility that a representative of the state could be appointed as guardian or you have to prove to the state that you can perform that role. That’s the last thing you need at such a time.

I’m sorry that all sounds a bit grim, but with an aging population, it is something we all need to deal with. Your situation is difficult enough without having to wade through red tape.

Best of luck
Mark

Dear TL

It sounds like you have your living arrangements well under control. That’s always a priority as it’s difficult to contemplate investing if you’re not well set up at home. You are therefore treating the inheritance objectively, which is great.

With 12 years to retirement you have a long enough time horizon to invest in the likes of property or shares. The under $500,000 market you are looking to invest in is the rising tide in property and it’s always good to invest into a rising tide. Doing your homework can minimise the risk of unexpected repairs. If buying in a strata apartment block, be sure to check out the level of the sinking fund to make sure a major event like a roof replacement doesn’t leave you dipping too far into your pocket. You can insure against tenants defaulting on rent or causing malicious damage. Many landlords are unaware of it and our insurance team is doing its best to educate our clients about it. You can fix an interest rate to give you some certainty for 3 or 5 years.   Depending on the property you purchase you might consider setting aside say $30,000 to purchase a basket of blue chip shares to also give you an interest in that area. The advantage of the property purchase is the ability to get leverage by borrowing – at sensible levels of course. The inheritance alone is not enough to purchase a property so borrowing is necessary if you head in that direction. If you invested 100% of the money in a managed fund or shares you would only be able to borrow for more shares using a personal loan or margin lending. These options are not recommended for a first time investor in the middle of the Global Financial Crisis! There’s no problem continuing to rent if it’s cost effective but why not accumulate assets as well.

Best of luck
Mark

Dear DW

You are lucky to have a daughter who listens to you at the age of 20, especially on investment decisions. She has done very well to purchase a property at that age and the first thing I suggest she does is get comfortable with owning it. Meeting loan commitments and juggling a budget is often harder in practice than on paper but good on her for taking the first step.

Our preference has always been to buy and hold investment property. Our wealthier clients have done exactly that. The tried and proven method is to use the equity you build up in a property from a combination of debt reduction and capital appreciation to assist with the security for the purchase of the next property. In time the hope is the rent from multiple properties meets the interest commitments and the properties go up in value.

On a salary of $46,000 your daughter will have approximately $37,500 to meet the shortfall of rental after interests and costs and to meet her living expenses.  The losses from negative gearing are deductible against her salary income so a tax refund will also help the cash flow. The last thing she should do is rely on the refund to help her make ends meet. It should be treated as a bonus that helps her get more equity in the property.

The salary is a critical piece and it becomes very important that it continues to roll in to pay the bills. Income protection insurance can protect you her against a health event causing her to be unable to work. It’s also tax deductible. There is no harm in working hard at work to raise her salary and this will give her more options.

So, in summary your daughter should keep her head, get used to the new arrangements but keep pushing forward. Her plan may be ambitious but with some discipline and guidance she could achieve it.  Be sure to tell her to live a bit as well, after all she is a 20 year old!

Best of luck
Mark

Dear ST

The business arrangement sounds interesting. I was especially interested in the fact that the business income is guaranteed. If it generates $2,000 week on a purchase price of $400,000 it’s returning 26% p.a. That’s an excellent return but the big questions are:
How saleable is the business if you wanted to get out? And
How much time do you have to put into the business to earn that income?
If you and your husband were working full time in the business to generate that income you are not actually returning 26% on investment you are buying yourself a job. So many people do that and think they are getting ahead. They go in to debt to buy themselves a job. They can end up exhausted with more grey hairs than they started with and a business that’s hard to sell. Maybe that’s not the case here but be careful.
Withdrawing the equity in your home to purchase the business is borrowing and exposing yourself to risk – tread carefully and do your due diligence – engage an accountant to advise you and be wary of business brokers.
If the business doesn’t stack up, you could potentially afford to buy the new home and rent out the old one but don’t forget the issues I raised last week - that the old home would be potentially subject to land tax and that the rental income less expenses would be taxable to you whilst the interest you paid on the new $400,000 mortgage would not be deductible.
Another option would be to sell your home and buy the new home thus minimising the home loan. You could then potentially borrow against the equity in the new home to purchase an investment property or share portfolio.

Best of luck
Mark

Dear KC

Passing the Sole Purpose test is absolutely fundamental to ensuring your SMSF is legitimate and compliant.

It is set out in Section 62 of the Superannuation Industry (Supervision) Act 1993 (the SIS Act) and  requires that a regulated superannuation fund operates for the sole purpose of providing benefits for members on their retirement, or for a member’s dependants in the case of a member’s death before retirement.

A residential investment property can meet this criteria and properties purchased wisely have certainly been great long term investment assets. If the fund has sufficient cash to purchase the property outright then the trustees can make the purchase on its behalf. They should of course consider the fund’s future cash requirements when making the decision to buy because property is not a liquid asset.

The investment can be owned directly by the fund. You have correctly identified that the property cannot be purchased from a member or associate. It also needs to be rented a third party, i.e. a member or their associate cannot derive any benefit from the property.  Make sure it intends to keep it as an investment property. There’s no problem with the trustees appointing a third party estate agent / property manager to manage the property.

The trustees will need to register the property for land tax, although in NSW land tax is not payable until the value exceeds a threshold, currently $368,000. If it is a strata property, it is unlikely it would exceed the threshold.  Just a tip – register anyway as it’s the owner’s responsibility and the last thing you want is the OSR issuing unexpected back assessments if it happens to exceed the threshold down the track.

On the borrowing issue, Section 67 of the SIS Act was amended in September 2007 to allow borrowings in certain circumstances. The ATO then issued TA 2008-5 which clarified its position on the issue.  The rules allow borrowing but are very specific about how the purchase should be funded. It’s essential there is no recourse to the SMSF in the event of a default on the loan and that the asset is held in a bare trust for the fund with a “Security Trustee”.  Some of the banks are starting to package loans that are compliant with these rules. St George Bank has one that we reviewed recently.

Best of luck
Mark

Dear KH

 A bank will usually lend up to 80% of the value of a residential property without mortgage insurance. As it appears you need more than 80%, the best option would be to use your existing properties and the new property as security for the new loan. That means all your borrowings will need to be with the same lender.

You are positively geared which means your rental income exceeds your deductible interest expense, and this will continue to be the case even after the new purchase because Section 8-1 of the ITAA 1997 allows you to deduct the interest on your investment loans because it is incurred in gaining or producing your assessable income.
The new loan home will not be deductible as it is being used to fund the purchase of your private residence. So even though your overall interest exceeds your rental property income, your tax position is unchanged i.e. your rental properties are still positively geared.

 If your financier is flexible enough, I recommend converting the investment loans to interest only and making the new housing loan a principal and interest loan. That way you can keep the deductible interest maximised, whilst reducing the non deductible home loan. Look out though, because it is important that the investment loan and the home loan are separate loans i.e. not all part of the one facility, even though using the same security. A split loan facility is an option, provided you don’t capitalise interest.

Best of luck
Mark

Dear DS

I’m glad you like the column. Thanks for the P.S. It really spiced up this week’s mailbag.

Despite giving me a laugh and lots of winks from the team in the YBR office, your question’s a good one.  It’s good you’ve done plenty of research. There’s certainly been nothing wrong with Warren Buffet’s approach. It’s just the extremes people have taken gearing to in the past 15 years that have brought things to their current level.

 Once this mess shakes out some normality will return, although I can see gearing being much better thought out and pitched at more conservative levels than it’s been in the last 15 years.  

If your hypothesis is to reduce indebtedness rather than gearing in to quality assets then I don’t necessarily agree with it. Yes it’s a great time to pay off debt because interest rates are low and the tax benefits of negative gearing have been reduced by tax cuts but don’t go into your shell.

There are some quality assets out there that have really been marked down. Use the same old rules; look at the returns and the costs of ownership and balance them up. Obviously get some personalised advice but if your cash flow can afford it and your work income is relatively secure then don’t write off gearing as an option. While you thinking about it, stick your surplus cash in an offset account.

Best of luck
Mark

Dear SS

I liked your question because your situation appears to be part of a worrying trend we’ve seen in the past year.  Balancing various parts of your life is tough and critically important.

I suggest breaking things into components and dealing  with them one at a time.

If you’re a partner in your husband’s business, or a director of his company you have certain statutory obligations that need to be met e.g. lodgement of a tax return, payment of the an ASIC filing fee etc.  If that’s the case you have the right and definitely the obligation to get on top of those things and can deal directly with your husband’s accountant.

If you are not a partner or office holder in the business then all you can do is continue to try to get your husband to do it.  

Lodgement of a 2008 Income Tax Return is a prerequisite for one of the Governments stimulus payments so that might be an incentive for him to get things moving. Maybe give the accountant a call, and push them along. Possibly suggest a book keeper gets involved in your husband’s business. Failing that, send him in to us and we’ll talk some sense into him. It might be a worthwhile investment.

One issue you need to give serious consideration to now you’ve separated is asset ownership and that leads on to risk management and estate planning. Given the disorganisation, I doubt you have wills or enduring powers of attorney, so if something happened to your husband, you might be left in a very bad situation and it could be you and the public trustee dealing with the financial mess.

Questions like “Is the home owned as tenants in common or as joint tenants” are very important if your lives start to go in different directions or if one of you dies, are the assets going to end up in the right spot? You’ve made a contribution to the home from the inheritance from your mother – could that all be at risk if your husband’s business is wound up?

It really does sound like your husband needs to either get it sorted or sell the business and get a job. We see 2009 being a year where many businesses like your husband’s will be found out and you’ve really got to try to stay ahead of it.

I’m putting together a few booklets and one in particular is about managing in tough times. If you would like to send me your address, I will send you a copy as soon as it comes off the press.

I hope these thought starters get something moving and maybe one of them will prompt some action.

Best of luck
Mark

Dear CD

I can understand your concern. Interest rates gone from a 10 year high to what’s looking increasingly like a record low since you fixed that rate. I presume the reason you took the fixed rate was to give yourself some certainty – you certainly did that!  How long interest rates remain at these low levels is uncertain.  It’s just that it hurts when rates are coming down. If rates had gone to 12%, you would be in a great position.

The way exit fees work on fixed mortgages is that a calculation is done to quantity the amount of interest you have remaining to pay on the term of the fixed rate loan, and deducting the amount of interest payable for the same term at the rate the bank is currently lending at.

This figure is then discounted to its present value and that amount and possibly an administration fee, becomes the exit fee. The $80,000 is therefore probably correct. Even though you may have had a good offer for the house, this fee may change your decision to sell.

Some, but not all banks, will allow you to retain the loan with substituted security. So if you were selling your home to purchase another home it may be possible to have the existing Bankwest facility transfer to the new property.

 If there is time delay between settlement for the old property and the purchase of a replacement it may also be possible to secure the loan against a cash deposit.

When the numbers are smaller it can be advantageous to refinance and add the exit fee on to the new mortgage, however, $80,000 is a large amount.

If you are selling the property and do not intend to make another purchase, unfortunately you will most likely be stuck with the fee. If you are making another purchase you may be able to keep the existing loan and let it run its course.

Given the numbers, it would definitely be worth you getting specific advice. Communication is the best option. Get some specific advice then talk to the bank.

Best of luck
Mark

Dear EM

You and your husband have savings, a good income and are ahead on your mortgage, so you get three ticks! The fact that you are actually doing some forward planning on your finances is also  to be commended. The tendency of too many people is to worry about these cash flow issues when they happen, rather than confronting them now – well done!

Concessional rates of tax are available for bona fide redundancy payments and the maximum your husband should pay on the lump sum component is 31.5%. There is a tax free component  calculated using years of service, so given his 16 years, a significant portion of the payment will also be tax free.

Ok, so you may receive a concessionally taxed lump sum in the future, now what?

Superannuation should be considered, but given you are young, you have a mortgage, you want to travel, and it might take some time for your husband to re-establish himself on return to the work force, I recommend applying the net payment to the mortgage. If you already have either an offset account or a redraw facility on your mortgage, you can access funds when you need them.

Until the redundancy happens, throw everything you can at the mortgage. The lower the mortgage is when you go without income, the more options you will have when you plan to travel.

You might consider fixing a rate on the portion of the mortgage you won’t be able to repay in the next 12 months, thus eliminating another variable.

Keep your $20,000 in savings as an emergency fund, and consider funding your travel by drawing the mortgage up over time. Budgeting is essential. Know where your limits are, because one of the traps can be the loans are easier to draw down than they are to repay.

Another form of saving is for your husband to accumulate his annual and long service leave over the next 12 months, and to take it as a cash payment as part of his termination pay. Whilst there is no real tax saving for him, it does provide you with more cash at a time when you may need it.

This strategy works whether the redundancy comes or not. If it doesn’t eventuate, you might just take some long service leave, do a shorter trip and start redrawing the mortgage to purchase quality long term investments.

As much as property and shares can be great investments, they are for the long term.

Given your time horizon, I definitely don’t recommend investing in these long term growth assets until the family income is back up again. The worst thing you could do is invest in long term assets and have to sell them in the short term at a time that doesn’t suit or generates a loss.

Best of luck
Mark

Dear JR

The Government is allowing a one off tax deduction of 30% for assets acquired for the principal purpose of carrying on a business, between 13 December 2008 and 30 June 2009. To be eligible, the asset must be installed and ready for use prior to 30 June 2010. The allowance reduces to 10% if the asset is ready for use between 1 July 2010 and 31 December 2010.

It  does extend beyond 30 June 2009 and only applies to new assets. It is also reduced to 10% for assets acquired between 1 July 2009 and 31 December 2009, and installed and ready for use prior to 31 December 2010. 

All businesses are eligible; small businesses (turnover <$2m) have an asset value threshold (minimum cost) of $1,000 and for all other businesses the threshold is $10,000. There are some exclusions but it applies to most depreciable items.

The draft legislation does not exclude assets that are only used partially for business. So long as the asset is principally used for business (more than 50% of the time)you will have access to the full allowance – there is no apportionment.

The other great thing about this allowance is that it doesn’t affect your cost base for depreciation purposes. For example, if you purchase an asset for $50,000 (net of GST), you will receive a tax deduction for $15,000 (being 30% of the cost) and you will still be able to depreciate the asset using a cost base of $50,000.

As long as the forklift and the car are purchased prior to 30 June 2009, are new and are installed and ready for use prior to 30 June 2010, you will be able to claim 30% of their cost (net of GST) as a deduction in your business tax return. The luxury care limit still applies for the vehicle so although you could spend more than that limit, the 30% allowance is capped.

Best of luck
Mark