Noel Whittaker's  Questions & Answers - page 51 21-4-09: Question: My son is in Year 12 and my daughter is in first year at university. Both have part-time jobs. Would you recommend they contribute into their superannuation funds to attract the government co-contribution? Answer: Despite the virtual certainty of changes, I believe it is a great strategy for young people to contribute $1000 a year to super to become eligible for the co-contribution. If they contributed $1000 a year, and that contribution is matched with a co-contribution of $1500, they would have $20,000 in super after six years. This would be in addition to the employer's compulsory 9 per cent and of itself would give them extra $1.07 million in super in another 40 years' time. Question: I will soon turn 59, and would like to retire before I turn 60. I've been in a defined benefit superannuation plan since March 1982, so most of the funds are post-1983. If I do retire before 60, am I able to draw the indexed tax-free post component ($145,000), transfer the remainder to a complying super- annuation fund until I turn 60, and then withdraw it tax free? Answer: Yes, what you propose is fine. Whether you stay in the low-tax superannuation system or to invest outside the system will depend on family income and other financial assets. Question: I have read about an arrangement where a person on a pension can sell an investment property after they have retired and invest the profit in superannuation and subsequently reduce their Capital Gains Tax liability to just 15 per cent. I have since heard that this only applies to limited categories of investment properties and may not apply to a residential house which has been rented and used for taxation negative-gearing. Is this correct? Answer: Your question contains both correct and incorrect statements. A person who is eligible to contribute to super and who does not have an employer paying superannuation for them may make a contribution to super within the age-based limits and claim a tax deduction for the concessional part of the contribution. As capital gains tax depends on total taxable income, it may be possible to reduce a capital gain from any source by adopting this strategy. For example, if you sold a property that triggered a taxable gain of $100,000 after the application of the 50 per cent discount you could contribute all or part of the proceeds of sale into super and claim up to $100,000 of them as a tax deduction. This $100,000 tax deduction would eliminate $100,000 capital gain but you would be liable for 15 per cent entry tax on the $100,000 contributed. Question: At the time of my retirement at the end of 2005 my financial adviser recommended I rollover the balance of my super account to another fund manager which he suggested would be better. But my new fund has halved in value since the end of 2007 whereas had I stayed with the original fund it would have declined by 22 per cent in the same period. Should I stick it out with the fund I'm in, or rollover the remaining balance to my original fund? Answer: It is important to ensure you compare like with like. For example, a fund with a high proportion of bonds would have done much better in the past year than one mainly exposed to local and overseas shares. However, when the upturn eventually comes, the fund with the higher exposure to shares will do better. This is why it's important, in consultation with your adviser, to choose an asset mix that is appropriate for your goals and risk profile and select a fund that matches your requirements. --------------------------------------------------------------------------------------------------------------------------------------------------------- 9-5-09: Question: I am 54 and married with two young children. I'm starting to think about the best use of my salary as I approach retirement. I earn $160,000 pa and have a mortgage of $300,000. My wife is 42 and works part time earning $25,000 pa. I salary sacrifice $15,000 into my super. My super fund has about $200,000. Should I be putting more into super and just pay interest only on the mortgage, or concentrate on reducing the mortgage as quick as I can? Answer: In your tax bracket money salary sacrificed to super loses 15 per cent whereas money taken in hand loses 41.5 per cent. Therefore if you salary sacrificed $80,000 into super you would lose $12,000 and have $68,000 working for you, that same $80,000 in your pay packet would lose $33,200 in tax and leave you with just $46,800. This is a difference of $21,200 a year after tax. Salary sacrifice is the best way to go but as soon as you reach 55 you should talk to your adviser about starting a transition to retirement pension. Question: My wife and I are living in a property we bought in October 2008. We are thinking about buying another property to live in and rent out our current house. When we eventually sell our current house, which will probably be in a year or two, will we have to pay capital gains tax? We expect to sell it for a lot more than what we paid as we have done extensive renovations. Answer: You will only be liable for CGT on any increase in value from the date you moved out. Therefore the extensive renovations you have done will form part of the base cost and will not be taxed. Make sure you get a written valuation when you move out. Question: I'm a single 30-year-old woman renting in the city. I have saved $30,000 in cash, and have a rapidly falling share portfolio of about $15,000. I feel I should be doing more with my money, as it's just sitting in an online savings account not doing much. I don't feel confident buying a property. Can you advise me of the best options to make my money work for me? Answer: The only options you have are cash, shares and property and as you do not have enough to buy a property you are limited to choosing between the first two. You should not be buying shares unless you have at least a five-year timeframe in mind but if you are prepared to take a long-term view I believe the market is offering great buying opportunities right now. Question: I am 40 years old and have three superannuation accounts (total value now about $60,000). I had been intending to roll over the dormant accounts into my active account, however with the financial crisis I am now unsure. Should I roll them over now, or wait until the recovery? Would there be penalties involved in rolling over my superannuation into one account which would amount to further losses? Answer: Superannuation is not an asset like property or shares, but merely a vehicle that lets you hold assets in a low-tax area. Roll them all into one super fund now to save annual fees and in consultation with your adviser choose a mix that is appropriate for your long-term goals. You always buy and sell in the same market so you should not be disadvantaged if you move from one share-based fund to another unless there are long delays involved in the process. Question: I recently read advice to a person, No invest in share-based insurance funds as the preferred option for long-term investments for children. What are these? Answer: An insurance bond is a tax-paid investment like super but the main difference between insurance bonds and superannuation funds is that the former pays tax at 30 per cent, there is no lack of access and there is no limit on contributions. Super funds pay tax at 15 per cent and you lose access until you reach your preservation age. A major benefit of them is that the earnings accrue in the form of bonuses which are not taxable until the bond is cashed in. However, if you hold the bonds for 10 years or more your earnings are tax-free. Question: We contribute to our super fund's default balanced option. We do not need access to this money for 10 to 15 years. Advice has been that while there may be high short-term volatility, this option will probably achieve higher returns over the longer term, compared with a cash option. Do you think this advice still holds? Answer: The balanced fund option will almost certainly include local and overseas shares which should give a much better return over 10-15 years than you would receive if you stayed in the cash option. Just make sure you have an overall mix of assets inside and outside super that suits your goals and your risk profile. Question: I heard that if I rented my principal residence while shopping for a new home, rental received is tax-free for two years provided I sell the home within two years. During this period I will be renting a place to live. Is this really the case? Answer: Once you rent out the home rent will be taxable but you will be able to claim outgoings such as interest, rates and maintenance. You can be absent from your home for up to six years without losing the CGT exemption provided you don't claim any other residence as your property in that time. Question: What is the difference between the All Ordinaries Index and the ASX200? Answer: The All Ordinaries Index covers all the shares listed on the Australian Stock Exchange whereas the ASX200 covers the largest 200 companies by market capitalisation. Because the top 200 are so dominant there is not a huge difference in the performance of the indices. Question: We are employed by my father in our family business. He wants to give us $100,000 to help us build our house. Do we have to pay gift tax? Answer: There is no gift duty to be paid by anyone but you need to be clear that it is a gift and not a distribution of profits or a dividend. If the payment fell into one of these two categories there would be tax to pay. Question: I am thinking of doing a second-storey extension to my home, is now a good time? Answer: Provided you are not over-capitalising your property this should be a great time because many tradespeople are looking for work and prices have dropped. --------------------------------------------------------------------------------------------------------------------------------------------------------- Back to: HOME    Back to: Finance     Back to: Whittaker (50)    Forward to: Whittaker (52)