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When a takeover effort becomes taxing

The acquisition of AXA by AMP has a series of ramifications for shareholders dealing with the ATO, writes George Cochrane.

The acquisition of AXA by AMP has a series of ramifications for shareholders dealing with the ATO, writes George Cochrane.

ABOUT 12 months ago, AXA shares appeared to be selling at a reasonable price. Having access to an equity access loan through our bank, I bought $1000 in shares. Since the recent acquisition of AXA by AMP, I received a return, plus shares. I understand that the interest on the loan is tax-deductible but, having sold the original shares, will that still be the case? If so, should I use the profit to take the loan back to zero balance this financial year? D.H.

Some background for readers: the AMP takeover on March 30 resulted in AXA shareholders receiving 0.73 of an AMP share plus $2.5464 cash for each AXA share. AXA also paid a final unfranked dividend of 9.25?. Since the value of an AMP share was determined at $5.32, they received $3.8836 in AMP shares (0.73 of $5.32) plus $2.5464 cash for each AXA share.

Accordingly, your deduction for interest on your loan depends on what you are doing with the cash received as part of the takeover. If you are using it to create assessable income, such as putting it into an interest-bearing account, then the interest on that portion of the loan is deductible. If you have put it back into your loan account, thus creating no assessable income, it is not.

Also remember that the disposal of your AXA shares is a capital gains tax event that, apparently, resulted in a capital gain for you. Assuming you choose "scrip-for-scrip rollover", no CGT is payable until you sell your AMP shares. The cost base of new AMP shares is now set by the cost base of your original AXA shares.

To apply the 50 per cent CGT discount when you sell your new AMP shares, the combined period that you owned the original AXA shares and the new AMP shares must be at least 12 months.

To buy or not to buy

MY PARTNER and I, both aged 51, are contemplating buying a house to live in the first time for both of us. We have no dependants and pay $390 a week in rent. We have been renting our house for 12 years.

I earn $86,000 a year and my partner $90,000. My partner recently inherited $75,000, which we're contemplating using as a deposit for a house. Any mortgage we undertake would mean spending all my wage on repayments, leaving only my partner's wage for living expenses. We plan to work until 65. Would we be financially better off to stay renting where we are and either buy a small rental property or put the $75,000 into superannuation, a term deposit or some other investment? S.B.

Given you are paying a relatively low rent, house prices are weak and, in terms of average rental yield, are still considered expensive, I wouldn't suggest buying a home now. That said, I do believe that a principal goal in life is to aim for a paid-off home by retirement.

The economic slowdown in the eastern states is partly due to fears about the US and European debt crises and their effects on the rest of the world. I can't see Australian house prices rising strongly until those fears are resolved and Australians feel more relaxed about borrowing large amounts of money. So, take your time, shop around for a year or more and keep an eye on prices in an area you might like to live.

In the meantime, save as much as you can. Since neither of you has owned a home before, you are each eligible to open a First Home Savers Account into which you can place $5500 for 2010-11 and receive a 17 per cent, or $935, government co-contribution. The income is taxed at 15 per cent, which means a tax saving since you are each in the 39 per cent tax bracket. You need to contribute for four years before withdrawing the money to put into a home or home mortgage, although you can buy a home before then. For full details, see however, the website has not been updated to include the option of transferring to a home mortgage if you buy a home within the four years.

Too late to claim tax relief

CAN I deduct tax losses from shares I bought in 1970 and 1980, when some companies went broke and I lost the values? I.F.

Sorry, non-primary production losses incurred before the 1989-90 income year are extinguished and can no longer be used. I should also point out that the Tax Office makes it quite clear that people who do carry forward losses from previous years must offset them at the earliest opportunity. You cannot choose to hold on to losses to offset them against future income if they can be offset against the current year's income, which sharpens the answer given to reader A.W. a few weeks ago about his capital losses.

If you have a question for George Cochrane, send it to Personal Investment, PO Box 3001, Tamarama, NSW 2026. Helplines: Banking Ombudsman, 1300 780 808 pensions, 13 23 00.

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