How to avoid the tax trap

MY HUSBAND and I are about to receive an inheritance of approximately $85,000. We are wondering how best to invest this money. My husband is 55 and will retire in five years with a defined benefit pension. I am 58 and will retire in two years with approximately $200,000 in superannuation, assuming 20 per cent salary sacrifice. My super is invested - 30 per cent in cash and 70 per cent in Australian shares. We have another $50,000 in shares and equity funds and $20,000 in the bank. We both earn $75,000 a year, own our home and our only debt is $50,000 to the Imputation Fund. Last year my financial adviser discouraged me from changing to a transition to retirement pension. Should I add the inheritance to my super, put it into a fixed term deposit or purchase some blue-chip Australian shares while the prices are as low as they are? J.O.

It doesn't sound as though you have a pressing need for further cash so you might give higher priority to saving on tax. Your adviser might have been thinking that your super is currently a little low to begin a transition to retirement pension or TRAP, so you might consider placing your inheritance into your super fund, possibly adding some of your cash, and then bouncing the idea off him or her again.

If you can live off less than you are earning, you might be able to salary sacrifice more. Since you are in the 30 per cent tax bracket, and salary-sacrificed income is taxed at 15 per cent, there is a useful tax saving in doing so.

Rollover best option

I'M 58 years old and am leaving my current employer to take up a position in another company. I intend to work for another five to seven years. I have approximately $500,000 in my super account. I have to leave the current super account so should I roll it over into another super account or would it be better placed in a fixed deposit account for a couple of years given the current performance of super funds? J.B.

Superannuation is no more than a tax saving it is not an investment class like shares or cash. In fact, you can put your money in exactly the same investments, both in and out of the super system.

Most super funds have a balanced fund that is their default option, the one into which your contributions are placed if you give no alternative instruction.

Balanced funds generally have 50 per cent to 70 per cent in shares and property and have thus taken a beating in the past year but that would also have happened if you had invested in a non-balanced super fund.

So I would definitely suggest keeping your money within the superannuation system by rolling it over into another, well-managed, fund. If you are concerned about losing any more value from your savings should share and property markets fall further, you can simply place the money into a cash option, instead of a balanced option, within your new super fund.

However, it is possible that the sharemarket is near its low for this recession since share prices can bottom before a recession has, statistically, even begun. So if you do use a cash option, be prepared to switch back when advised to do so and thus catch future rises.

Top-up for new house

I AM fortunate to live in a home owned by a family trust for which my father is in control and I do not pay rent. I am in a new relationship and my partner and I want to move into a larger home together with our blended family (two children each). How can we manage ownership to protect my father's portion of the investment? I hope to have approximately $600,000 after the sale of the home and would like to add approximately $350,000 of mine and my partner's money via cash and a mortgage. My father says this would be troublesome as the title would have multiple owners and he prefers to have only the trust own the home. He also wants to protect my future against any possible divorce or separation where my wife/partner may make claim to the home the trust has purchased. Is it possible to have the trust own a share of the title and my partner and I own our portion of approximately 35 per cent? Is dual ownership between me, my partner and the trust detrimental to the protection the trust currently provides? Alternatively, is it possible for me to take a mortgage for a home, even though the title would be solely in the trust name as I appear as a beneficiary of the trust? J.J.

By having your father's trust own the property, then yes, it does protect his money in the event that you get divorced but it also deprives you and your partner of the tax benefits (i.e. no CGT) of owning your own home. This is something that your partner may, or may not, baulk at.

I doubt that a bank would lend you the money personally, while leaving ownership of the house in the name of the trust, since the bank would have no security.

It is no more troublesome to have three parties owning a property than it is to have two. But if your father wishes to top-up your net proceeds, allowing you to buy a larger house, then encourage him. You and your partner can then invest your own money elsewhere, and earn an income from it.

If you have a question for George Cochrane, send it to Personal Investment, PO Box 3001, Tamarama, NSW, 2026. Helplines: bank ombudsman 1300 780 808 pensions 132 800.