Noel Whittaker's  Questions & Answers - page 47 21-12-08: Question: We have an interest only loan on a negatively geared property, a CBD flat worth about $290,000. A year ago we renewed a three-year interest only loan of $240,000. We're concerned that in two years' time, when it's up for renewal again, money will be tight and property values may be down 20 per cent. They may refuse to refinance unless our home is put up as collateral. Our home is currently worth $520,000 and we owe $50,000 on it. We don't want this scenario, so would it be wise to refinance now and try to get a five-year loan if that's possible, even though costs might/could be up to $1,000? Or do we hope for the best in two years' time? Answer: Even though finance might be tight, the - banks still need to lend money to survive and there is no indication that applicants with good credit records will have problems refinancing loans of a reasonable size. It may be worth canvassing the position with your lender, but I doubt you need to worry as you would have a large equity in your home even if property values fall. Question: I earn $57,000-$59,000 a year pre-tax depending on bonuses and my wife is working casually - about 20-25 hours a week. We are renting and looking to buy our first property. We have $40,000 in a savings account earning about 7.1 per cent interest; $10,000 of that will be used for further education next year for my wife. Should we consider taking out one of the Government's new First Home Saver Accounts and commit to not buying a house for the next four years to maximise the Government's contribution? Or should we look at getting into the market towards the beginning of 2010 when my wife finishes her studies? Are we allowed to start a separate account for each of us to be able to double the Government's contribution? Answer: You could have separate accounts, but I am most concerned about the four-year lack of access. You are in the 31.5 per cent bracket and your wife is probably in the 16.5 per cent bracket, so the scheme is not going to be worth a large sum to you. I suggest a better option is to save as hard as you can in your wife's name in one of the online high interest bank accounts. Question: I was considering moving from my pension fund to another which has lower fees. Now I find that my pension fund has a substantial investment in one of the property funds that have suspended redemptions and redemption requests will not be processed for six months. Does this mean that I can't change my pension fund until the units can be redeemed? Answer: Your adviser will be able to confirm the position but based on the information you have provided, it would appear that the money is entirely frozen for the time stated and thus cannot be withdrawn. Just be aware that freezing redemptions is a better strategy than the fund sacrificing the assets at fire-sale prices. Question: Recently our son was transferred with his work. He left his original family home to buy another. He has been told that when he sells the original home he will have to pay some tax and if he doesn't sell within six months, he will be up for full CGT the way the financial climate is at this time. Is he supposed to have a "fire sale" to avoid these taxes? Answer: A person may be absent from their residence for up to six years, without losing the CGT exemption, as long as they do not claim any other property as their residence in that period. This is because a person is not allowed to have two homes that are both CGT exempt. There is no hurry to sell because he need not decide which of the homes he will claim as his principal residence at this early stage and, in any event, if he does decide to claim the second home as his residence, CGT will apply only on any increase in value from the time the first home was vacated. The six months rule you speak of relates only to the period the Tax Office allows for moving from one house to another. Naturally, he will need to take advice from an accountant at some stage but based on the information supplied, I doubt he has much to worry about. Question: I am 68, own my home and had $154,000 in super in June - now $129,000. I have been salary sacrificing 50 per cent of my salary for two years but have now cancelled the salary sacrifice as there won't be much left the way it is going. Please advise as I don't know which way to go. Answer: You must understand that stock markets worldwide have had possibly the worst year on record. You are the only one who can decide whether you should bail out now but there is a consensus that markets are undervalued and that there will be a rise in the short to medium term. I suggest you canvass your concerns with your adviser, but I would recommend you stay in and wait for the upturn when it eventually comes. -------------------------------------------------------------------------------------------------------------------------------------------------------- 15-1-09: Question: Recently, a couple asked your advice about selling a house for $550,000 and then renting for a while before buying back. You urged them to hang on if at all possible, because if they sold, they would lose $50,000 in capital. How did you calculate that figure? Answer: There is a simple rule of thumb, that if you sell a house and buy another, the changeover costs will be approximately 10 per cent of the price of the house you buy. This takes into account selling costs and legal fees of the original home, moving costs, legal stamp duty and borrowing costs for the new home, plus the inevitable bits of money you spend in getting the original one ready for sale. Bear in mind that this is a rough guess. Your solicitor could prepare a detailed estimate for you. Question: My husband and I bought a farm in September and now have a debt of $380,000. We have not altered the repayments despite the interest rate cut. We have about $20,000 from the sale of shares and we would like some advice about what to do with this money. Should we reinvest it and buy more shares or put it in the offset account to reduce interest repayments on the farm? Answer: If the interest on the purchase of the farm is tax deductible, my recommendation would be that you take the opportunity to buy some shares while the market is down. Alternatively, you could pay the money off the mortgage and borrow back for the shares. Question: I am about to sell the family home and will have about $800,000 to live off as a total of my assets. I am turning 50, currently not employed. How would you invest your money for security and income at my age? Answer: Provided you are prepared to lose access to the money until 55 at least, you should talk to an adviser about putting the bulk of it into superannuation. The limit for non-concessional contributions for you will be $450,000. The normal limit is $150,000 but a person of your age can contribute three years at once, but having done this it will be three years before you can make further contributions. You need not fear a market downturn because you can choose a cash option within super. There will be no 15 per cent contributions tax because you will not be claiming any money as a tax deduction. Once the three years have passed you can contribute more money to superannuation and then start an income stream from it once you reach 55. In the meantime, you can live on a combination of interest and capital draw-downs. Question: My current super fund is way down. Should I change and accept the loss in the change or wait? Answer: Remember, a superannuation fund is nothing more than a vehicle in which you can hold a range of assets such as cash, property and shares. If your fund is down you will need to discuss the reasons why with your adviser and also ask how the funds you have are performing when compared with similar ones. You will most likely find they have fallen in line with the sharemarket in general and therefore I believe the best long-term decision is to stick with the ones you have and wait for the recovery when it eventually comes. Be aware it is possible that there may be further falls before the market recovers. Question: I am a self-funded widowed retiree of 80 who 46 years ago inherited a rocky farm paddock, valuation unknown. I fenced the property and paid rates without earning any income from the property. I recently sold the property for $90,000. Is CGT now payable on this? How do I find its 1962 valuation, with everyone involved (ie executors) being long deceased? Surely after 46 years with no income on it I will be spared a heavy tax? Answer: Provided the property was acquired before September 1985, which appears to be the case here, it will be exempt from capital gains tax. Question: My husband and I both salary sacrifice some of our pay into superannuation. Last year we contributed about $10,000 each over the financial year and our statement in June 2008 showed a negative return. I went from $119,726 at Jan 2008 to $115,170 in June 2008. This means all the money I contributed has been lost. I am in a balanced fund and understand I can change this if I want to. I understand the market crisis at the moment but I want to know if there is any benefit in continuing to salary sacrifice into super if it is just going to get lost. We are currently contributing $300 each fortnight to try to reduce our taxable income. Also can you suggest a better plan that will ensure we do not lose so much in our super? Answer: I believe it is much better to be contributing to super now when the market is down instead of waiting until the recovery happens and the same assets will cost much more. The only other option is to place your salary sacrificed contributions into the cash area of your super but this will doom them to years of low returns. Question: The economy of Australia is much stronger than the one in the US but our Australian dollars keep on falling against US dollars. Would you be able to tell me why? Answer: There is a big demand for US dollars from hedge funds who are busily turning their assets into cash and at the same time there are many Japanese who borrowed in yen at low rates to invest in Australian assets who are now cashing in those assets and converting the Australian dollar proceeds to yen. The first scenario is creating an exceptional demand for US dollars and the second one is creating downward pressure on the Australian dollar. Question: My wife and I bought a block of land last July 2007 and have just started building an investment property on the block. When are we able to claim the interest that we have paid on the loan for the block -this financial year or once the property is built and income is generated? My understanding was that as long as the intention was to build within four years and produce income from the investment you could claim any holding costs as a deduction including rates etc. Answer: You are correct that the interest and rates during the construction stage are claimable if you intend to use the property as a rental. The expenses are deductible in the year they are incurred, i.e. 2007/08, you do not have to wait until income is produced. Question: My wife and I have recently moved from a unit we own to a house we have purchased. We are presently renting out the unit as my intention was to use the equity in the unit which we had almost fully paid off and upgrade to a larger property. Am I doing the right thing in terms of still having quite a large loan on the house we are in, which is not tax deductible. Our house is valued at $425K with a loan of $270,000, which costs roughly $600 per week in repayments. Our unit is valued at $335K with a loan of $140,000. Income is $300 per week in rent after expenses and weekly loan repayments of approximately $300. I have a casual salary of $1,000 gross per week, so things are tight as my wife has given up work to look after our one-year-old. Answer: You could maximise your tax benefits by ensuring the loan on the unit was on an interest only basis, this would also help your cash position as you may be $50 a week or more better off. Alternatively, if you believe the unit has reached its full potential it may be better to sell it and use the proceeds to reduce your non-deductible debt. You could always borrow back for other investment in the future. Question: I am purchasing a home with the help from parents and need to borrow $290K. I would really appreciate your opinion on what type of loan I should have and whether to use variable interest rates or fixed interest rates. I am a first home buyer and this is all new to me and a little confusing. Can you please give me some advice? Answer: There are a wide range of loans available and they range from the cheaper no frills loans to more expensive ones with a load of extras that you may or may not need. Make a list of the features you are looking for and make sure you think about an offset account facility, a redraw facility, the ability to make extra payments without penalty and portability so you can transfer your loan from one property to another without penalty. You will have to make up your own mind about whether to choose a variable or fixed rate but as we are in a climate of falling interest rates I wouldn't be in a hurry to fix my rate yet. -------------------------------------------------------------------------------------------------------------------------------------------------------- Back to: HOME     Back to: Finance       Back to: Whittaker (46)     Forward to: Whittaker (48)