Each week, financial adviser and international best-selling author Noel Whittaker answers your questions.
I have spoken to an accountant who says super is the best way to minimise tax and prepare for retirement, however, it seems that the laws are going to change. What else do you recommend that would give me the ability to make deductions and put money into super?
The government has announced some changes to super but it is unlikely they will be legislated before the election in September, and if the Coalition wins government the changes might not happen. There is no doubt the rules regarding super will keep changing but the older you are, the less likely they are to affect you. Therefore your age should be a major factor in your decision to use it or not. No other investment vehicle gives you the ability to make contributions from pre-tax dollars and to hold money in an environment where income tax is just 15 per cent. If you are young, a better strategy might be to borrow for investment. Your adviser should be able to tell you about the advantages and disadvantages of the available options.
I have recently retired and my husband and I have applied for the age pension. My husband is 73 and I am 69. We are selling our investment property and would like your advice on the best thing to do with the profit to minimise changes to our pension. Should we invest in super or a fixed-term deposit?
As you are older than 65, you are not eligible to contribute to superannuation unless you can pass the work test, which involves working 40 hours in 30 consecutive days in the financial year you make the contribution. This is usually not a very difficult goal to achieve. The benefit of being able to contribute to super would be that you might be able to make a tax deduction of up to $25,000 each, which could reduce any capital gains tax payable on the sale of the property. The attractiveness of super versus a term deposit will depend on your overall assets, tax position, what you believe your life expectancy will be and your attitude to risk. As you are making an application for the pension later than the qualifying age, be sure to explore the Pension Bonus Scheme as you might have some due entitlements.
My mother has $100,000 in savings. She wishes to put it into my home loan offset account for a year as she is working part-time and has to pay tax on any interest earned. Would this have any tax implications on us? Do we need to notify the ATO?
It would have no tax implications for your mother, as people are free to make interest-free loans to other people if they wish. It would be a different matter if she is receiving Centrelink benefits because it would then be treated as a deprived asset. There is no need to notify the ATO.
I have two rental properties and am considering selling the older one, which is 21 years old — I've had it for nine years. I am concerned if I sell it the profit or capital gains tax will be added to the child support I pay as income. Do you know if this is correct? I purchased the property for $226,000 and now it is worth about $300,000.
Your income for child-support purposes includes taxable income. If you sold a property and made a taxable capital gain, the amount of that gain, less adjustments such as the 50 per cent discount, would be added to your taxable income and would increase that income for child-support purposes. Just keep in mind it might not be a huge amount when buying and selling expenses, plus the discount, are deducted.
Beware pitfalls of investing for a newborn
I want to purchase shares in an ASX index fund to be held in trust for my newborn daughter. The intent is that over time I will buy additional units, and the dividends would be reinvested to purchase additional units in the fund. I understand that as the trustee I need to provide my tax file number to the index fund provider. Does this mean the dividends would count towards my personal income and be taxed at my marginal tax rate of 45 per cent? If so, how can I establish the trust to purchase the index fund units for my daughter, while maximising capital growth through dividend tax minimisation?
If you are holding the investment as a trustee, you will be taxed as trustee at the same punitive rate that applies to people under 18. This means once income exceeds $416 a year, the tax will be at the highest marginal rate. A better option would be to place the money in an investment bond whose main asset is the index. Because the bond fund pays tax at 30 per cent on your behalf, there would be no further tax to pay each year. A large benefit is that the bond can be transferred to your daughter at any stage capital gains tax-free.