I am 39 and have a gross salary of $63,000 a year. I have $30,000 in Australian shares and $37,000 in US shares through CommSec. I also have $1500 in cash. I have an investment property with a principal and interest loan of $180,000 owing. After reading your book, I think it should have been "interest only". I am single with no dependants. I'm currently renting, which costs $20,000 a year, but is very close to work. A friend is helping me to defray the cost of this rent. Would I be better to buy an apartment further away and incur travel and petrol costs or remain a renter and keep my investment property?
It is usually cheaper to rent than to buy but it's a fact of life that the majority of tenants fail to invest the money they save by choosing to rent. However, if you have your heart set on owning another property, you could always buy one that suits your fancy, live in it for a few months and then rent it out and obtain the negative-gearing benefits. It seems to me that you are better off continuing to build up your shares because you already have the bulk of your assets in the residential property basket.
I am 62 and earn $55,000 a year. I have a small defined benefit super account of $90,000. I have about $200,000 in savings, which is invested, and I'm required to pay provisional tax on the interest it earns. A friend suggested I should contribute the cash to a super fund up to the maximum allowed (he mentioned $150,000), which would avoid the provisional tax liability. Then on retirement (between now and 65) I could withdraw it back tax-free to live on. Does this sound right?
Yes, if you contribute this money to a super fund now it can be cashed in at age 65. However, if you declare retirement before 65, it would be accessible immediately.
As you are over 60, super withdrawals from your "taxed" super schemes will not be subject to tax. If your defined benefits fund is an unfunded one, you will still be subject to tax on withdrawals from that fund, after you reach 60.
When share prices are down and dividends are reinvested, does that mean you get more shares because they are cheaper? Or does it mean that when the market is down, the dividends are not as great, so there is no advantage?
In the long term, the All Ordinaries Index has averaged a yield of about 4 per cent a year but you need to look at each scenario on its merits. For example, many shares, such as bank shares, maintain their dividends, so when the price drops, you are getting a high yield and also more shares at the same price. Remember, the best time to buy is when everybody else is gloomy.
I am 71 and still working full time. I love my career but dread the day I retire. However, I realise that one day I will have to stop, or slow down and plan for a transition into retirement. I have $200,000 in super, plus $200,000 in blue-chip shares that I have owned since 2001. I am considering selling the shares to put into my super fund but what are the tax implications in doing so while I am still working? I am still salary packaging into super and into my mortgage which is a reverse mortgage of $30,000 that I am currently paying off as a normal mortgage. I obtained this facility in preparation for retirement in case of emergencies or simply to enjoy life in my later years. To be honest, I feel it is much easier to keep working!
The simplest solution may be to salary sacrifice as much into super as you can, which will reduce your taxable income, and then make up any shortfall in living expenses by selling shares if necessary. Once you "retire", the combination of franked dividends from the shares and the senior Australian tax offset should mean that you won't have much tax to pay if any.
Advice is general readers should seek their own professional advice.
Contact noel.whittaker@whittaker macnaught.com.au. Follow him on Twitter: @noelwhittaker. Questions to: Ask Noel, Money, GPO Box 2571, Qld, 4000, or see moneymanager.com
.au/ask-an-expert.
I recently sold a property I first lived in for five years then rented out for the past 15 years. I have purchased another house and will let it out for three months before moving in to it to live. Can you give me some ideas on capital gains tax and if the purchase price of the new property will be exempt.
You will first need to work out the cost base, which includes all purchase costs and any capital improvements along the way. This sum deducted from the net proceeds will be the assessable capital gain. As you have held the property for a total of 20 years, you will pay CGT on 15/20ths of that gain after allowing for the 50 per cent discount that applies for assets held for more than a year. Your accountant will be able to do the calculations for you. If the period between purchase and moving in is just three months, I would be wary about letting out the property. It will lose its full CGT exemption because CGT will be calculated on a pro-rata basis, as happened in the property you just sold. A better option may be to move in as soon as practicable and not rent it at all, so as to maintain the full exemption.
Frequently Asked Questions about this Article…
Rent vs buy: should I buy an apartment further away and face travel costs or stay renting close to work and keep my investment property?
The column notes that renting is often cheaper than buying, but many tenants fail to invest the money they save. Because you already hold most of your assets in residential property, the author suggests continuing to build your share portfolio for diversification. If you really want to own another property, one option is to buy a place you like, live in it briefly and then rent it out to capture negative-gearing benefits.
Is an interest-only loan better than a principal-and-interest loan for an investment property?
The writer reflects that, for an investment property, interest-only might have been preferable because it typically lowers short-term repayments and can enhance negative-gearing benefits when the property is rented. Whether interest-only is right for you depends on your goals, cash flow and overall asset mix.
Should I focus on building share investments if I already own residential property?
Yes — the article recommends continuing to build up shares when your portfolio already has the bulk of its assets in residential property. Increasing shareholdings can improve diversification and reduce concentration risk in a single asset class.
How does reinvesting dividends work when share prices are down — do I get more shares or are dividends less valuable?
Over the long term the All Ordinaries has averaged about a 4% yield a year. If a company maintains its dividend (for example, many banks do), a price drop raises the effective dividend yield and dividend reinvestment will buy you more shares at lower prices. In short, reinvesting when the market is down can increase your share count — and historically buying when others are gloomy can be advantageous.
Can I contribute savings to super now to avoid provisional tax on interest and access the money later?
According to the advice given, contributing cash to a super fund can reduce your provisional-tax exposure on interest earned outside super. Money contributed now can generally be cashed in at age 65; if you declare retirement before 65 it may be accessible earlier. Always check limits and seek professional advice for your situation.
Are super withdrawals tax-free once I'm over 60 or 65?
The column explains that if you are over 60, withdrawals from ‘‘taxed’’ super schemes are typically not subject to tax. However, withdrawals from an unfunded defined-benefit scheme may still be taxed after age 60, so the tax treatment depends on the type of super arrangement you have.
I'm still working in my 70s — should I salary sacrifice into super and/or sell shares to fund retirement?
The simplest approach suggested is to salary-sacrifice as much as you can into super to reduce taxable income, and then sell shares if you need extra cash to cover living costs. Once you retire, a combination of franked dividends and senior tax offsets should reduce your tax liability in retirement.
If I lived in a house, rented it out, then bought another and let it out for a few months before moving in, how does capital gains tax (CGT) apply?
You must work out the cost base (purchase costs plus capital improvements) and subtract that from net proceeds to get the assessable capital gain. If you owned the property for 20 years and it was your main residence for 5 of those years, CGT may apply to 15/20ths of the gain after the 50% discount for assets held more than a year. Letting a newly purchased home out, even for just three months, can jeopardise the full main-residence CGT exemption because CGT is calculated on a pro‑rata basis — moving in as soon as practicable and not renting it may help preserve the full exemption.
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