Personal Finance

Newcastle Herald

Thursday March 20, 2008

Noel Whittaker

Q My husband and I are both in our 60s and retired. We have the majority of our money in superannuation with about $50,000 in shares. My query relates to how money left to our four children in our wills can be arranged so that tax is not incurred, or is at least lessened. I am under the impression that they will have to pay 15 per cent tax and on a large amount of money this is a considerable loss.

A The death tax is 15 per cent and is payable only on the taxable component of the superannuation that is paid to a non-dependent person.

A spouse is always a dependant whether working or not. You can reduce the taxable component by making tax-free withdrawals from super, and then re-contributing it as an undeducted contribution provided you are still eligible to do this. The alternative is for the surviving spouse to withdraw the money tax free before they die.

Q We would like some advice regarding our investment unit in a high-growth beach suburb. I have an annual taxable income of $78,000 and my partner earns $15,000 per annum. We have one child and are planning for another one in the near future and are looking at a larger home in a few years' time.

The mortgage on the family home (value $500,000) is $340,000. The investment unit is worth $320,000 and its loan is $160,000. Both loans are interest-only. While we are coping with repayments and living expenses, there is little disposable income remaining after meeting all costs. We are considering selling the unit and putting the money into the family home and commencing principal and interest payments. The other option is to renovate the unit and increase the rental income. Any thoughts would be much appreciated.

A The renovations to the unit will not be tax deductible as they will be regarded as capital expenditure, even though you will be able to claim the interest on any borrowings to do renovations as a tax deduction.

Unfortunately it is most unlikely that the amount you spend on renovations will cause a corresponding increase in rent. Unless you see very good potential in the unit I agree you may be better off to sell it and reduce your housing loan, especially as it is possible that rates will rise again soon.

Q We have $100,000 in managed funds. The performance over the past two years has been good but it has now started to lose because of the downturn in shares. Would it be better to keep the money in the fund or to put it into our mortgage?

A If you cash the funds in now you will be turning a paper loss into a real one. I recommend you hold them for the long term, but an option to consider is to sell them now, pay the proceeds off your mortgage, and then borrow back for more managed funds.

The interest on this loan will be tax deductible so you will have turned some non-deductible debt into deductible debt. Of course you need to take capital gains tax into account when doing the sums.

Send your questions to noelwhit@gil.com.au. Readers should seek their own expert advice before making financial decisions.

© 2008 Newcastle Herald

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