Q & A
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We have compiled some of the many Questions and Answers, Case Studies and Current Issues that Whittaker Macnaught has received over the years. As part of our commitment to providing a sound financial education we encourage you to browse through them. If you have any questions please contact us at info@whittakermacnaught.com.au.
We regularly receive questions from people all over Australia and around the world requesting financial advice. We've compiled some of these requests (removing any identifying information first) and provided our response based on our financial expertise. If you have questions you'd like answers to, please contact us at info@whittakermacnaught.com.au.
Retiring soonQuestion: I shall soon be retiring, at age 62, after 26 years of government service. However, my wife will continue to work a little longer in order to secure an annual $10,000 Commonwealth Public Service pension. I would be entitled to a $410,000 super lump sum. Our house is fully paid up but we still have a mortgage of $100,000 on four low cost investment properties (total market value say $500,000). These properties generate approximately net $20,000 return a year.
We are currently considering committing the balance of my super lump sum to allocated pensions between the two of us in order to secure a $45,000 annual combined income. Are there any better financial options that we can consider to better serve our retirement requirements?
Answer: Your aim should be to minimise tax by both trying to stay in the same marginal tax bracket, and you seem to be on track to do that. Provided you can live on your wife's income it may be best to leave your money in a rollover fund until she stops work. Then you could withdraw part of it, pay the small amount of lump sum tax that would be due, and place that money into superannuation for her as a spouse contribution. She could then start an allocated pension when appropriate.
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P.O.W. CompensationQuestion: In the recent budget there was mention of compensation for defence force personnel who had been incarcerated in Japanese prisoner of war camps. Does this extend to those who suffered in German war camps?
Answer: Prisoners of war who were in Japanese prison camps will receive a one off non taxable payment of $25,000 to compensate them for the suffering they incurred but in an ironic twist the payment will not be made to POWs in German prison camps. According to a government spokesperson the rationale is that the death rate in German camps was three percent, in stark contrast to a 39% death rate in those run by the Japanese.
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Capital Gains Tax StrategiesQuestion: I have both shares and managed funds. I'm an engineer so my salary will continue to grow as I gain experience. For me this means in the next couple of years my salary will rise into the highest tax bracket. The question becomes when is the right time to sell shares so as to pay as little capital gains tax as possible? For me, do I have to wait until I retire to sell my shares so that the government doesn't take most of my money in tax?
Answer: You sound young, so your focus should be on building assets, not going in and out of the market. The benefit of CGT is that you don't pay it till you dispose of the asset and then, when you do sell, any profits are reduced by 50%. I suggest you keep on accumulating assets and worry about CGT when you retire. If you have specific savings goals in the meantime use cash type investments such as term deposits for terms of up to 3 years. For longer terms you could consider insurance bonds, which can be cashed in tax free after 10 years.
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Superannuation policy bonusesQuestion: I was reading a recent article about A.M.P superannuation policies, saying that the bonuses won't be worth much when they mature. I have a Superannuation policy maturing at 65 on which I pay $1,202.00 yearly. There are two bonuses, one guaranteed and the other one is a terminal bonus that goes up and down. Can you please tell me if this policy is good to stay with as I am 38 years old or should I surrender it and can I get any money back since I have been in it since 1991.
Answer: The bonuses depend on the rate of inflation and in any event, these types of policies are like fine wine - they get better with age. Therefore don't be in a hurry to stop paying into it. You will probably find that the money is tied up until you retire so stopping the payments won't give you any immediate cash benefits. However, you should regard it as just one small part of your overall investment portfolio and its performance and future prospects should be reviewed with your adviser at least once a year.
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Property investment as a joint ventureQuestion: Along with three friends I am considering putting in $15,000 each and buying a property to renovate. We would use appx. $20,000 for expenses etc, therefore leaving us with $40,000 deposit. We each earn about $30,000 per annum. We will expect to borrow around $300,000 - $350,000 thousand. As we are all tradesmen we will be looking for a run down property with the possibility to extend. We shall rent out the premises (probably to my fiancée and me) at the going rate, and after a year hopefully borrow more money using the house as collateral and repeat the scenario. Do you think this idea is a wise financial investment and would you recommend it?
Answer: It may work, but I believe that your best joint venture partner is always the bank - all they ever ask is that you pay the interest. Unfortunately in your case it seems you don't have the resources to go it alone and so bringing in partners seems to be an economic necessity. Make sure that you clearly understand what is expected from each partner in this venture to prevent misunderstandings and particularly clarify what will happen if one partner needs to quit. It would also pay to talk to the bank before you start looking so you know what price range you can afford.
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Fund SelectionQuestion: Like so many other people at this time, I now have the opportunity to choose different portfolios of investment within my superannuation scheme. I currently have a policy through a master trust, which gives me a choice of 19 or so different portfolios, including several outside funds managers, and I can divide my assets among these as I see fit. My adviser has recommended that I put the majority of my funds into 'balanced' options, which is sound advice. He has also provided me with a history of their performances over one, five and ten years. My question to you is, how does one decide on which fund to use, or does it really make much difference?
Answer: It depends on your age, and your attitude to 'risk' which, in financial planning jargon, means the value of your investments bouncing around. Over the long haul, 'growth' investments such as shares will give higher returns than 'secure' investments such as cash. A balanced fund contains both growth and cash investments and is probably suitable for older investors. If you are younger you are probably better to opt for the managed growth segment. Here the manager is moving funds between different areas to try to capture the best performing markets both here and overseas.
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Budget changes to prepaid interestQuestion: The budget mentioned that the 13 month prepayment rule was to be changed to reduce it to 12 months. Will this affect investors who wish to prepay 12 months interest on their invested loans.
Answer: The purpose of the change from 13 months to 12 months was to be consistent with the new simplified tax system for small business. Investors are still able to prepay 12 months interest in advance.
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Self-employed SuperannuationQuestion: I am sixty and self-employed. I've read that adding to superannuation is a tax-effective savings strategy. I added $15,000 to my super fund last year but the return so far has been a 'pathetic' 4%!
I have been informed that if I intend to claim the $15,000 as a tax deduction, I must inform the fund manager, who will then deduct 15% contributions tax of $2,250. This will leave me a balance of about $12,750. Was there something wrong with what I had read about adding value to one's super? If I'd put the $15,000 into a term deposit at 5%, and paid tax on the interest, it seems that I would have been $3,000 better off.
Answer: You need to think it through. For example, if you were in the 42% tax bracket the choice is to pay tax of $6300 from your $15,000, leaving $8700 to be 'invested' in your bank account or else to pay 15% contributions tax of $2250 leaving $12,750 in your superannuation fund. By using superannuation you have a lot of after tax dollars working for you. Furthermore the earnings on your bank interest will be taxed at your top marginal rate, whereas the money in your superannuation fund will be taxed at only 15%.
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Structuring investments for retirementQuestion: I am retiring in the next two years and wonder how we should structure our investments taking into account ease of management, risk management, tax and inflation effects. By mid 2002 I will be 61 and my wife 59. We will have approximately $800,000 of investment capital for retirement. We own our own home and have put aside other capital to set up our retirement. We have no debt. I feel that we would need about $35,000 gross income, perhaps split evenly to meet our retirement needs. I must say however this figure is only an estimate.
Super has not featured greatly in my investment strategy due to the relative low performance of the funds we have invested in. I am self-employed, and my wife has permanent part time employment.
I intend to sell our investment houses. They are a trouble to manage and the rental returns have been poor over the past 3 years.
Answer: Your comments about superannuation show that you do not appreciate that a superannuation fund is merely a vehicle that enables you to hold funds in a low tax area. If the fund returns are poor is it the fault of the underlying assets in the fund not superannuation itself. At your age you have little to fear from rule changes so my primary focus would be to ensure that you both have maximum superannuation with the aim of starting an allocated pension when you retire. In view of what you have done so far you should talk to your adviser about starting a self-managed fund and transferring assets to it. Naturally, you must be mindful of CGT as you will be disposing of assets when you transfer them to your fund.
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Sale of a small businessQuestion: I will shortly receive the proceeds from the sale of my small business: largely representing 'goodwill'. Under the new rules it can be paid tax free into my super fund but I am already very close to my lump sum RBL. If I put it into the super fund but later am in excess of lump sum RBL but won't take a complying annuity for health reasons, can I take the excess as a normal allocated pension?
Answer: The allocated pension RBL is the lump sum RBL, not the pension RBL, so there is no joy for you there. However, if you are married and your wife is in good health you may still do well by taking half the money as a complying annuity - this would make you eligible for the pension RBL. Also, if you die before you withdraw the money from superannuation, the pension RBL is used too. Therefore your estate could enjoy the benefits tax free.
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