Noel Whittaker's  Questions & Answers - page 59 26-1-2010: Question: My wife and I bought a house about 15years ago, which we and our children live in. The house is held in joint names and is paid off. A year ago I bought the house next to ours in my name and took out an interest-only investment loan to finance it. To make it tax-effective I am thinking of negatively gearing it by renting it to my son. ls this tax-effective? Are there better options? How do I minimise, or avoid, capital gains tax on the second property? Answer: To be able to claim the benefits of negative gearing the property needs to be rented at a fair market rent. It need not be a high market rent because you can argue that your son has a slightly reduced rent because there are no agent fees, no vacancies, and no risk of damage. However, it needs to be a rent that is close to the market rent. To minimise CGT you must hold the asset for at least 12 months to become eligible to receive the 50 per cent discount, and also delay sale to a time when you have a low taxable income. Question: My husband and I earn$37,000 and $24,000 a year. We have a 23 year-old son who lives at home and earns $27,000. My husband is 56 and I am 53, we own our own home and cars and have no debt. We have $80,000 in a term deposit and our son has $60,000. About 18 months ago we went to see a        financial adviser who persuaded us to invest in dollar cost averaging with Colonial First State. We started with a lump sum of$10,000 and add $1,000 each month. 0ur son also started an investment with a lump sum of $3,000 and adds $500 each month. Do you think this type of investment is suitable for us given our low income? We think salary sacrifice to super is not tax-efficient given our tax bracket, but we all contribute $1,000 to qualify for the Government co-contribution. We would like to travel to Britain for a six-week holiday in the next year or so - hence the $80,000 in a term deposit, and I expect to decrease my working hours to two days a week. Answer: I agree that salary sacrifice is not appropriate and you are certainly doing the right thing by taking advantage of the super co-contribution. The monthly investment into the managed fund is a very good strategy because share-based assets should give better long-term returns than money in the bank. lt is also more tax-effective because the returns come from a combination of capital gain and franked dividends. Question: We own and live in our home and are looking at moving. If we buy another property and rent it out for six months, and then sell our existing and move into the purchased property, are there any capital gains or other tax implications? Answer: If you buy a second property, and rent it out before you move in, you will be liable for capital gains tax on a pro-rata time basis when you come to sell it. The longer you live in the property the less the CGT will be. For example, if you owned it for 10 years and lived in it for 9 of those ten years it would enjoy a CGT exemption of 90%.  Question: I bought a $404,000 apartment last year. I owe $286,000 on the mortgage and plan to pay $2400 a month off it. I have no other debt. After buying the property I sold 10,000 units from my managed fund to sit in my home loan offset account, making a loss of $14,000. l still have 14,000 units and I am contributing $500 a month to the fund. As interest rates rise l am not sure if I should put the $500 into my home loan, continue investing in the fund, withdraw all of my managed fund and put the money into my home loan, or put the money sitting in the offset account back into the fund. Answer: You are doing well to date and at your current rate should have your house paid off in around 16 years. Keep in mind that you should be trying to maximise your deductible debt and minimise non-deductible debt, so talk to an adviser about cashing in all the managed funds and paying them off your non-deductible home loan - this would reduce the debt to$244,000. You could apply for a home equity loan of $70,000 to invest in managed funds, and the interest on this loan would be around $400 a month tax-deductible. When tax is taken into account you could probably find another $200 a month to pay off your loan. This would have the reduced home loan paid off in 10 years. Question: I turn 66 in a couple of months and hope to retire in the next12 months. I have $60,000 in superannuation and plan to add some savings to bring it to about $100,000. Can I move savings into my super now, in readiness for a small allocated pension, without being penalised for adding a lump sum to my super? Answer: lf you are between 65 and 75 you can contribute to super as long as you pass the work test, which involves working at least 40 hours in 30 consecutive days? You can move your savings to super but you need advice as to whether super is an appropriate vehicle for you. Its main purpose is to save tax but if your total financial assets are no more than $100,000 when you retire, you will not be paying tax. Certainly salary sacrifice your income down to$35,000 a year before you retire, but decide if it is better to remove all your money from super after you retire. -------------------------------------------------------------------------------------------------------------------------------------------------------- 13-2-2010 Question: Can you see any time in the next few years when there may be a property slump? I'm looking at buying my first home in 2011 or 2012 but I'm not going to if there is a boom and houses are over-valued. It seems crazy that there hasn't been a property crash when corrections in the stock market happen more often. Answer: Just remember, there is no such animal as a single property market - there are a large number of markets and they may behave in different ways. Yes, there has not been a crash in the first-home buyer market but the prices of many expensive beach homes have dropped by 30 per cent or more. The important thing when buying property is to look for a bargain and buy in an area where there is strong demand. Question: We have two properties - one is our main house and the other is a rental. We want to move into the rental. To minimise capital gains tax, do we sell the main and move to rental, or do we move to the rental and rent out the main? Answer: If you sell your home after you move out, it should be free of capital gains tax, but if you rent it out you will be liable for CGT on any increase in value from the date it was rented. When you move into the rental, it will become your principal place of residence and when You sell it, CGT will be apportioned on a time basis. Therefore, the longer you occupy that property, the less your CGT will be. Question: Why don't savers get any attention from the media? When interest rates go down, savers get less interest, feel poorer and spend less. Perhaps if the interest rates went up, savers would earn more interest, feel richer, spend more and stimulate the economy. Does the Reselve Bank or the Government care about savers, or should we all give up saving cash and invest in shares and property? Answer: The media thrives on bad news and there are more headlines in rising interest rates and mortgage foreclosures than there are in rising interest rates and wealthier investors. By all means spread your investments but make sure you keep an appropriate proportion of your money in cash so you have liquidity when you need it. Question: People over 50 are usually advised to contribute as much as possible to super via salary sacrifice. My husband is 50 (earning $80k) and I am 40 (earning $100k) and we both salary sacrifice around $5000 each to super. Once he retires, I expect that my salary will be enough to support us both until I retire. Given this, is it a better strategy to increase my before-tax contributions to maximise the tax benefits and leave his or even reduce it? Answer: You should always try to maximise your super contributions because such contributions lose just 15 per cent, whereas money taken in hand loses at least 31.5 per cent in your husband's case and 39.5 per cent in yours. Your ability to salary sacrifice is severely restricted because you are under 50 - your employer should be paying about $9000a year, which leaves you with just the $16.000 of additional contributions that can be made before you reach your $25,OOO a year limit. Your husband can contribute a maximum of$50,000 a year, but there is no point in contributing to a level where his gross taxable income is less than $35,000, the point where the 15 Per cent tax scale cuts out. Question: I have been made redundant and will need to move interstate. I owe $400,000 on my house and am 18 months into a five-year fixed term loan at 8.9 per cent. Am I better off to sell now, or to try to rent it out as well as paying rent interstate? If I rent my house for $400 a week I will have a mortgage shortfall of about $600 a week. On my new wage I will just be able to afford this but don't know which way to go. If I sell I will have to pay break fees and will no doubt walk away with debt. Answer: Bear in mind that the interest will be tax-deductible, even though the rents are assessable, so the Government will be paying at least a third of it. If you are strapped for cash, you can sign a form requesting your employer to reduce your PAYG tax to take account of your rental property tax deductions. Hang on to it if you can because you will lose lots of capital if you have to sell it, pay break costs and eventually buy again. Question: My wife and I, with two young boys, rent a home in Brisbane and are about to receive the proceeds of a property in Perth that has been rented since we moved two years ago. We have recently been joined in Brisbane by my pensioner parents, both in their 70s. I am 49 and my super is $170,000. My plan is to buy a unit in Brisbane for about $250,000 of which I will borrow about70 per cent, and rent it to my parents who should receive rental assistance from the Government. With property likely to increase in value, my mortgage exposure lessening, and considering the negative gearing aspect of the property investment, does this sound like a wise strategy? Answer: If you intend to buy your own home, which appears likely, you should be trying to minimise any borrowings for it and at the same time be maximising the amount that you will borrow for investment. A better option might be to borrow the full purchase price of the unit to be occupied by the parents, using a home equity loan against your own residence as the deposit. Bear in mind, though, your parents will need to be paying a fair market rent - it need not be high, recognising that there will be no property agents' fees, vacancies or damage, but it needs to be a rent you can justify to the Tax Office. Question: We have an investment property in the city that has a market value of $720,000. We bought the property three years ago for $500,000. For the first two years we lived in it and now we have it rented out. We are renting and have bought land and plan to start building soon. If we sell our city property now and use the equity in it for our new home or another investment property, do we need to pay any tax on the profit? Answer: Make sure that you talk to your accountant before signing any contracts, but based on the information you have given you should be within the six-year capital gains tax exemption period, provided you lived in the house before you rented it out and have not claimed any other property as your principal residence since. --------------------------------------------------------------------------------------------------------------------------------------------------------- Back to: HOME     Back to: Finance      Back to: Whittaker (58)   Forward to: Whittaker (60)