Noel Whittaker's  Questions & Answers - page 53 28-06-09: Question: Could you please clarify the position regarding withdrawals from super when eligibility for the Commonwealth Seniors Health Card is being assessed? Answer: The Government had announced that gross pension income and lump-sum withdrawals from super or allocated pension accounts were to be treated as income for CSHC eligibility purposes from July 1. This was revoked in the recent Federal Budget and will no longer occur. Question: My husband and I are both 40 and we have three children. We have a mortgage of $340,000. Our house is valued at $850,000. We earn a combined income of $85,000 a year and are able to make double the repayments at the current low rate of 4.99 per cent. Is it in our interest to pay as much off our mortgage as soon as we can, or should we use the equity to buy an investment property? We have no other accumulated debt (except the three children!). Answer: We appear to be near the bottom of the interest-rate cycle so at this stage I would focus on reducing the debt as fast as possible. Once you reach a situation where you can pay $12 per thousand a month (eg: $3600 a month on a $300,000 loan) you could consider borrowing for investment. When you do, think about borrowing for shares, because you have a large equity in your home which would enable you to borrow using a home equity loan which would free you from the possibility of margin calls. Question: How do I set up a testamentary - or family trust for my children? Whom should I approach for more information? Answer: Testamentary trusts and family trusts are very different structures. A family trust can be set up at any time and its main purposes are to hold assets in another entity for asset protection and to save tax by giving you the ability to split your income among other family members who may be on lower taxable incomes than you are. Take advice before you establish one because they are of little use for tax purposes until you have children who are at least 18. A testamentary trust is normally included in a will and does not come into being until the will maker dies. A solicitor who specialises in estate planning is the appropriate person to guide you with a testamentary trust. Question: I am inquiring about tax deductibility on the payout of economic costs in relation to fixed-interest loans on investment properties. I have been told by the bank how much it will cost to convert some existing high-rate, fixed-interest loans (on investment properties) to variable loans at the current low rate. After doing the sums it looks promising to go ahead and pay out the bank. It makes much better sense if I am able to claim a deduction (based on the highest income-tax bracket) against the payout figure. The bank says this is not allowed, whereas my accountant says that this is possible and can be claimed in total this financial year. Who is correct? Answer: Your accountant is correct. It is always dangerous when banks start giving advice. Question: Can I borrow against my share portfolio to buy an investment property, rather than selling an asset I want to keep and creating a CGT problem? Answer: It would be better to buy against your home, if you have substantial equity, as you can borrow much more against the security of real estate than you can against shares. However, if you have a large parcel of blue chip shares and a good relationship with your bank, and have a good income, you should still be able to use the equity in the shares to buy the property. Question: My parents, aged over 60, worked overseas and are now retired in Australia. They own a home and are living off their personal savings as they do not have superannuation. Are there any strategies to maximise the returns on their savings? They are Australian citizens. Answer: If your parents are less than 65 they are eligible to contribute to super even though they are retired. Doing this would enable them to minimise tax but there would be no point in moving money to superannuation if they are earning less than $35,000 each now, the point at which the 15 per cent band stops. Super funds pay tax on income at 15 per cent from the first dollar earned. The only way to boost the returns on their savings is to seek higher earning assets. My preference is for quality shares but they should seek advice before investing in this area. Question: I refer to the statement from a recent article "clients starting pensions in June of a financial year have the ability to defer their pension to the end of the following financial year. This in effect allows up to 13 months of tax free earnings to accrue in the pension environment without the need to draw down on capital." Does this apply to funds which have quarterly benefit payments only? That would mean that the first payment would occur on September 1, 2010, if the money was invested in June 2009. Would that contradict the government rule of minimum payment in any 12 months pension period? Answer: My statement would apply only to account-based pensions that have the ability to elect to receive payments on an annual basis. For example, if the account-based pension was started on June 1, 2009, there is no requirement to take a pension payment in the 2008/09 financial year (30 days). The next annual payment could be delayed until June 30, 2010 (2009/10 financial year, or a maximum of 13 months). If a fund had quarterly payments as its only payment method and was started in June 2009, no pension payment would need to be taken for the quarter ending June 30, 2009 (2008/09 financial year) but the first payment would be paid for the quarter ended September 30, 2009, and quarterly thereafter. Question: My wife will be 55 years old in June. She plans to retire then and wonders how much of her superannuation she can withdraw tax free. Answer: Once she reaches 55, and signs a statement that she is permanently retired, she can withdraw up to $145,000 of the taxable component of her super tax free. If she has a nontaxable portion she can also withdraw a portion of that tax free as well. Having retired, she can have a change of heart in the future and return to work without penalty. Make sure you take advice before you withdraw a large sum from superannuation. --------------------------------------------------------------------------------------------------------------------------------------------------------- 18-7-09 Question: I am a retired teacher aged 61 and receive a state government pension. I do some casual work and this financial year I will have earned about $7,000. We have sold an investment property and my share of the capital gain is about $90,000. I would like to make a tax-deductible contribution to my superannuation accumulation fund provided I pass the 10 per cent of assessable income rule. The problem is that I can't find a precise definition of "assessable income" on the tax office website for application of the 10 per cent rule. I have some additional income from dividends and from rent. For this income, in order to calculate my assessable income, do I use the gross amount (i.e. before interest and other expenses) or the net amount? Answer: Your accountant will be able to calculate the figures for you, but bear in mind that the capital gain itself forms part of the total taxable income, so if your income from personal exertion is just $7,000 you should qualify easily. Just make sure you take advice before making the contribution. Question: I own a property, and am looking to buy another. At the moment I am living in a rental property paid for by my employer, while my existing property is my principal place of residence for CGT exemption purposes. I may need to rent out the new property I am looking to buy, however it is intended to be my principal place of residence in two to three years' time. What are the CGT implications of renting this property immediately after buying? Answer: If you rent out the new property immediately it will be classified as an investment property from day one and so may not be eligible for stamp duty concessions when you buy it. If you eventually move into it, and then sell it, you will be liable for CGT on a pro-rata basis based on the time it was rented out. For example, if you owned a property for 10 years, and rented it out for two, you would be liable for CGT on just 2/10ths of any profit. Bear in mind you would be eligible for the 50 per cent discount too so CGT should be minimal. Question: At the moment we live in a house owned by my father as his investment property and we pay rent to him for the house. We are looking at options for us to take ownership of the house from him as it is going to be our long-term family home. What tax would we be subject to if my father was to leave us the house in his will, or give us the house? Is there a way to have a legal arrangement where we pay the house off to him in instalments, say through our rent and it becomes ours? Answer: If your father is receiving a part aged pension a good strategy may be for him to give it to you now. It will continue to be assessed by Centrelink, as it is now, but after five years it will no longer be assessed. Death does not trigger capital gains tax, it merely passes the liability on to the beneficiaries so, if the property was left to you in his will there would be no capital gains tax payable by anyone until you decided to dispose of the property. This would be reduced considerably if you lived in it for a long period. Another option is for him to sell you the house using an interest free loan but this would trigger CGT and would also be ineffective for Centrelink purposes. Question: I am 27 years old and recently bought an investment property. I am happy for the existing tenant to remain renting but am considering raising the rent by $50 to help with my mortgage repayments. I have noticed real estate agents charge a lot to manage the property and I was thinking of doing it myself. Is this wise? Answer: You have raised a number of important issues. First, you cannot just raise the rent to cover your mortgage repayments unless the new rental amount is at market value, or you may find your good tenant leaves very quickly. In addition, in most states you cannot increase rent within a fixed-term lease, and usually two months notice to increase rent must be given, even if you are doing so at the end of a lease. Check with a local agent regarding market rent and be sure that you set your rent within those limits. Secondly, the cost to engage a property manager is low in relation to the return. If we said that the average cost is 8 per cent, this is just $16 on a $200 a week rent return. As this is a tax deductible cost, this amount is reduced to $11.20. To manage a property you must research and select a suitable tenant, collect rent, answer queries, arrange tradesmen when needed and oversee the tenant to ensure they are looking after the property. Even if this all took only an hour (and usually it can take more than that), $11.20 is a pretty poor wage for an hour of your time. Leave this job to the experts, who also have a better capacity than you to do background checks on a tenant and know how to manage the process in the event things do not run smoothly. Question: Would you recommend restructuring our conventional home loan through one of the major banks to one where two lines of credit are set up with borrowings against our house in which we have some equity? The advice given suggests we would borrow against our equity to buy shares, and the dividends would then go back to pay off the home loan quicker than the conventional method. Our LVR would be 75 per cent on a $600,000 house with current equity of $200K. We have three school-aged children and I am on a salary over $150K. We are conservative investors and are not sure if this is a medium to high-risk strategy. We welcome your thoughts. Answer: I have no problem with a strategy of borrowing against your home to buy shares and I do agree that line of credit loans would work well in this situation. I also agree with the idea of borrowing for shares and using the dividends to reduce your nondeductible housing loan. Just make sure you do not get overcommitted and remember you should not be buying shares unless you have a five to 10-year time frame in mind. --------------------------------------------------------------------------------------------------------------------------------------------------------- Back to: HOME      Back to: Finance     Back to: Whittaker (52)      Forward to: Whittaker (54)