Our man has the answers

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 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