We asked Australians around the country to send in their mortgage, money and superannuation questions. Here’s what Aussie finance guru Peter Switzer said in reply.
Q: My Dad has asked me if I want to join his self-managed super fund. I’m currently with Australian Super and it has been doing well. What are my risks going with my Dad?
A: You’re in a tricky situation. I guess if he was a professional fund manager, you wouldn’t be asking the question. Certainly you’re in a good fund that has performed well and not an expensive fund. If your Dad has a lot of money in his fund already, then the percentage cost should be lower than Australian Super. You should tactfully ask your Dad what his costs are and compare that to the money under management. If he says it’s $5,000 and he has $1 million in his fund — that’s a 0.5% cost. Then his costs are less than most professional funds. Next you have to ask him about his fund’s performance. Funds like Australian Super have been doing 8-10% for some time. So, in a perfect world, if your Dad’s fund has done as well or even better, and his costs are lower than most funds, then it could be a good decision to do super with your Dad. However, if he’s not a good amateur fund manager, with lesser returns and higher costs, then maybe you have to find a nice way of saying “Thanks, but no thanks, Dad.” Good luck with that.
Q: I’ve been through a rough time lately and have run up big credit card debts — about $10,000. I’m going into more debt to make my payments and it seems like a terrible merry-go-round but it’s not fun! What would you advise? I’m embarrassed and have kept it to myself but I fear it’s getting out of hand.
A: Well things have to change and you need to talk to someone. I’d suggest your parents, if you think they can financially help you. But if you don’t want to stress them, then you better go to the bank, who thought you were a good risk. If you have a job and the bank can see you have the ability to pay off your debt, albeit at a more economically comfortable rate, then they should come up with a manageable rescue plan. If that doesn’t work, contact the National Debt Helpline on 1800 007 007, which sounds so James Bond, doesn’t it? The free hotline is open from 9:30am to 4.30pm, Monday to Friday. When you call this number you will be automatically transferred to the phone service in your state (opening hours can differ in different states). Calls from mobile phones may incur a fee from the mobile phone carrier. You can also visit the National Debt Helpline website for information and resources that can help if you’re struggling with debt. There’s also a lot of good stuff on the ASIC website. Go to the money smart website here; and do it ASAP!
Q: What’s the latest on where interest rates are heading? I’ve asked you before about fixing my home loan rate as I’ve borrowed a fair bit but you’ve indicated previously that there was no rush to fix. What do you think now? Lisa, Cronulla, NSW.
A: I’ve recently interviewed Bill Evans, the chief economist at Westpac, on my Sky News Business Show called Money Talks. I asked Bill when he thought the Reserve Bank would raise interest rates. His answer shocked me a little. He said, “Late 2019!” So no rises this year and we’d have to wait until next year’s end before rates started to rise. Now Bill could be wrong and our economy could heat up later this year. I think it’s pretty safe to assume that rates will be on hold for 2018. Maybe you could ask me around February or March next year. If the economy improves as I suspect and the Budget’s tax cuts help consumer confidence lift, then maybe the Reserve Bank might move around mid 2019. The best online 3-year fixed rate is 3.74% (advertised) or 4.01% (comparison rate) but offline comparison rates are about 4.66% to 4.8%. By the way, Switzer Home Loans are 4.17% (advertised) and 3.92% (comparison rate), which looks like one of the best in the market! That even surprised me but that’s what I found when I went to the ratecity.com.au website.
Q: I’ve created an online product that has enormous productivity advantages for a number of retail businesses. I need to take it to the next level before I pitch it to possible investors. I was wondering if I could qualify for government assistance. My business turnover is close to $1 million and my profit will be nearly $200,000 but I’ve put a lot of money into developing the related website. What’s your advice? Will, Hornsby, NSW.
A: I would go to this website to see what you have to do to qualify for a Research & Development grant. This is the official story for someone like you: “ [The Government] provides a tax offset for some of a company’s cost of doing eligible research and development (R&D) activities by reducing a company’s income tax liability. Tax offsets of 43.5% or 38.5% are available for costs incurred on eligible activities depending on a company’s annual aggregated turnover. The 43.5% benefit is a refundable offset. So, who can apply? At a minimum, applicants must:
- be an incorporated company.
- be conducting eligible core R&D activities. These are defined in the legislation as being experiments that are guided by hypotheses and conducted for the purpose of generating new knowledge.
- have incurred eligible R&D expenditure or notional deductions of at least $20,000 (unless using a Research Service Provider or a Cooperative Research Centre).
- This is a self-assessment programme. Further key eligibility requirements apply.
You can also hire an expert consultant who to help fill out the paperwork. Their expertise can very valuable as they know what projects can get a tick and those that will find it hard to get across the line.
Q: I’m a 57-year-old builder, who’d like to retire in the next 18 months. How can I take advantage of the small business exemptions to top up my super? My business turnover is roughly $5.5m. Mike, from Cronulla, NSW
A: There are small business concessions for selling a business but the rules are tricky. These are the starting point rules to get the concessions:
- The business must be small. The taxpayer, and connected entities, needs to turn over less than $2 million or the combined assets of the taxpayer and certain related entities need to be less than $6M.
- The asset being sold must have been an active asset. That is, it is a business or was used in a business. A commercial property used by an affiliated business can satisfy this condition, if structured the right way. Shares in a company or units in a trust can satisfy this condition as long as 80% of the underlying assets in the company or trust have been active assets for at least half of their life. This area, in particular, is very complex and it’s easy to get tripped up here. For example, excess cash in the business and loans to the shareholders are not seen as active so, if they account for more than 20% of the assets in the entity, then you may fail this test.
- For a company or Trust, there must be a Significant Individual (SI) – this means that someone must own 20% or more of the entity holding the business for the Small Business Concession to be accessible.
If you jump over these hurdles, this is what you can access:
- 50% Active Asset (AA) Exemption – allows you to claim a 50% discount of the capital gain so you only pay tax on half the capital gain. Please note, if you have already claimed the 50% General Discount for just holding the asset for more than 12 months (this concession is separate to the Small Business Concession and is available to all Australian resident entities except companies), then this AA discount is available on top of this, thus bringing the capital gain down to 25% of the total (it is halved and then halved again!).
- Small Business Retirement Exemption – allows CGT Concessional Stakeholders (the Significant Individual and possibly their spouse) to exempt up to $500k of capital gain each. If you are under 55 when the gain is made, the $500k must go into superannuation. If you are 55 or over, you can decide whether to put the amount into superannuation.
- Small Business 15 Year Exemption – this is available where the CGT asset has been held for a continuous period of 15 years in the same entity. Additionally, when the gain is made, the relevant individual is 55 years of age and the disposal of the asset is connected with the individual’s retirement or their permanent incapacity. If the asset sold is a share in a company or a unit in a trust there must have been a Significant Individual in each year of the ownership period.
- Small Business Rollover Concession – this allows the taxpayer to roll over a capital gain made into a replacement active asset and is acquired in the same name as the person who made the capital gain. This acquisition must be made within two years of the original capital gain otherwise the gain then crystallises into a new capital gain at the expiration of the two years.
Didn’t I say the rules were tricky?! I’d advise you go to a great accountant to make sure you can access what you could be entitled to.
Q: My Mum bought her home years ago before Capital Gains Tax (CGT) and before 1985. We moved out in 2000 into another house – but kept the old one. Rather than leave it empty, we’ve been renting it out for the last 18 years. Now she’s about to retire and was looking to sell the old home, would she be liable for CGT on it? Mary from Kingston, ACT.
A: As the home was bought before 1985, this asset is free from a capital gains tax and even though you have rented it out, this is one of those great situations where the tax rules actually help you. Your Mum can sell her old home and there will be no tax to pay!
Q: I’ve been told that if you’re not in a high tax bracket, then negative gearing won’t work for you. Is that right? Joanne, Collaroy, NSW.
A: Negative gearing can be a great way to reduce a big tax bill. Why? Well, the loss on an investment property or even on stocks, for which you’ve borrowed to buy, is deducted from your other income. This takes you down into a lower tax bracket. It creates a nice tax refund for many people who decide to buy a property to rent out to a tenant. That said, if you’re in a lower tax bracket, you can still reduce your overall tax bill using negative gearing. It can still help your cash flow, especially if you ask your paymaster to adjust your fortnightly tax slug. For example, you know that you might lose $10,000 for the year being a landlord because the costs are greater than the rent. If the overall benefit is small compared to someone in a high tax bracket, if you pocket a nice capital gain from holding the property for a few years and negative gearing helped you do it, then it would be a useful strategy.
Q: I’ve gone guarantor for my son for a loan for his business but he and his wife are now splitting and I worry that their business could be badly affected. What would you suggest I do? Should I go to the bank to see if it can help? Wally, Bendigo, VIC
A: Before going to the bank, which could make matters worse, I’d have a good talk to your son and daughter-in-law to gauge what they think about how the business would go if they split. If they look like they’re set to cause problems for the operation and your guarantee of the loan, you have to talk to their accountant to see what he/she thinks is the future of the business. If they don’t have one or you don’t rate the one they’ve got, ask another accountant to go into the business to make an assessment. If the prognosis isn’t good, you need to have a serious, tough chat to your son about how he can’t let the business jeopardize your assets, which could be claimed by the bank if the business goes belly up. If he thinks he won’t be able to cope without his wife, then the business should be sold or get an assistant in plus get your accountant involved to ensure the business survives. Maybe taking lower wages and profits or other better business practices might mean the business gets through the emotional problems and you don’t have to lose out because you are the guarantor. Good luck with it all. For anyone reading this my advice is to be careful about going guarantor, for anyone, even your children.
Q: If I buy artwork inside a self-managed super fund (SMSF), can I hang it on a wall in my house? Arthur, Balmain, NSW.
A: The simple answer is no. You can’t hang artwork on the wall in your house. However you can hang it on the wall in a business that pays you a rental or lease fee to do so. That would mean your super fund could receive both an income for the years you hold it and any capital gain, if you’ve chosen a good artist and a good piece of art.
When you retire and paying the best tax rate of all — zero tax — you could withdraw the artwork as a lump sum withdrawal, with no capital gains tax to pay. You could also buy it from your super fund to get cash into your fund and you wouldn’t be limited by the caps on contributions. Before making an artistic decision for your super fund, I’d get some advice. It’s worth it!
Q: I’ve been told that as a business owner I’m entitled to claim for expenses when I take a client or potential client out for a coffee or a sandwich. Is this right? I thought tax-deductible lunches were a thing of the past. Jason, Middle Park, Melbourne.
A: Small outlays for such things as coffee and a sandwich involving a client, or even a work meeting with staff, can be claimable as a tax deduction but I’d recommend you keep info about the get together in a diary. Lunches are affected by fringe benefit tax rules and are treated differently because of the relative difference in the outlays. It would be a good idea to talk to an accountant about the legitimate expenses you can claim as a tax deduction.
Q: I was given a guarantee from a stockbroker to sell my holding of stocks but their share price has gone to virtually zero and I’ve lost my entire outlay! What can I do? Alex, Armadale, VIC.
A: It’s crazy for a broker to give a guarantee and if it’s in writing and they haven’t taken the actions promised in the undertaking, I’d contact the Australian Stock Exchange and tell them about your problem. If they don’t show any interest in taking action on your behalf, you could contact ASIC (the Australian Securities and Investments Commission) because the broker should have a licence that is supervised by ASIC.
Finally, if these official bodies don’t offer you the assistance you want, then you should contact a lawyer. If the written undertaking of the broker hasn’t been kept, then you have a right to sue the butt off the broker for your losses.
Q: I’ve been inspired to take a good hard look at my super following the news about the Productivity Commission and the fact many super funds are duds. I also have about three super funds and I’d like to bring them all together. How do I start to fix up my super? Laura, Avalon, NSW.
A: To find your lost super, just follow these steps:
- Create a myGov account at www.my.gov.au, then link the ATO to your account.
- If you already have a my.Gov account, just log in and click on the ATO section.
- Go to the ‘Super’ tab. In this section, you can see details of all your super accounts, including any you’ve forgotten.
Once you know where you super accounts are, you should compare your super fund against the best in show.
Go to superratings.com.au or chantwest.com.au and they’ll show you the best super funds in terms of performance. Once you get say the best five, find out their fees. Then you’re in a good position to judge your fund. Make sure that if you’re in a conservative option fund that you compare yours with other conservative funds.
If you selected a conservative fund, your returns will be low compared to a balanced or growth option super fund. Once you have worked out what fund you want to switch to, then the new fund will help you consolidate all your super into your preferred one fund.
Q: How much money do I need in my super fund to set up a self-managed super fund (SMSF)? I’m 32 and my wife is 31. Together we have about $250,000 in our combined super funds. And will our boss pay our super into any SMSF we create? Lenny. Castle Hill. NSW.
A: This is at the low end of the starting amount. If you could run your SMSF for $2,500 a year (this would mean you’d need a software program and you’d have to do most of the work with limited help from an accountant and auditor), your cost for running your SMSF would be about 1%, which is what a lot of industry and retail funds might charge.
Then you have to get returns of about 7%-8% to match the average fund but you’d be underperforming the best funds. Work out the cost by talking to accountants and looking at the SMSF software out there. Some actually do tax returns but you still would have to provide a lot of info and do a bit of work. If you like doing that stuff, you could make it work but I prefer someone to have $500,000 in super before going into an SMSF. If your costs were say $4,000, the cost would only be 0.8%, which would be cheaper than a lot of super funds.
Q: I’ve heard that I can make a super contribution to my wife’s fund. She’s currently not working. How does it work? Robby. Camberwell. Victoria.
A: Yes you can, if you’re eligible. If your wife (or de-facto partner) earns $37,000 or less, you could make a $3,000 contribution to their super fund and you’d get a $540 tax offset. And as of 1 July 2017, the spouse income threshold increased. So you could claim the maximum tax offset of $540 if you contribute to the eligible super fund of your spouse, whether your spouse’s income is $37,000 or less. The tax offset allowed decreases as the income approaches $40,000, then cuts out.
If your spouse was on an income of $37,000 (under the $40,000 mark by $3,000), you work out the tax offset by multiplying by 18%. So 18% of $3,000 is $540. If your spouse were on $38,000 ($2,000 short of the $40,000 limit), the tax offset would be $2,000 times 18%, which is $360. For more details go to the ATO website.
Q: I’ve recently had a decent pay rise and have been pushed into a higher tax bracket. I’m wondering if there’s anything legal I can do to reduce my overall tax bill. Jamie, Brighton, VIC.
A: An easy one is to maximise your contributions to super but it does mean you won’t see the money until you retire. You can make concessional contributions up to $25,000 but this includes what your boss throws into super. So if your employer puts $9,500 into your super fund, you could salary sacrifice or make an additional contribution up to $15,400. If that money was to be taxed at 45%, it would now be taxed only at 15% for super (unless you earn $250,000 or more and then you’d pay 30% tax on contributions). Given your new tax status, I would visit an accountant or tax agent to discuss your options for legally reducing your tax. Car leasing, buying an investment property or even borrowing to buy shares could be options. By the way, the tax advice cost would be tax deductible!
Q: Is it possible to have a self-managed super fund with two investment strategies to reflect the different people in the fund? When my parents were younger, we all had a high appetite for risk so we had the same investment strategy. However, as they are close to retirement, they want to be more cautious but my brother and I still want to be very pro-growth with our investment strategy.
A: There’s no reason why an SMSF can’t have more than one investment strategy. It’s really wise for fund members to realise that their different risk profiles mean that they should develop investment strategies that should be documented.
The number one point of a super fund is to create a nest egg for the fund members. That’s why we talk about the sole purpose test when looking at how super monies are used. I’d recommend that the fund members meet and link the respective investment goals of the members to strategies that will have a good chance of making them happen. By the way, once an agreement is reached on the strategies, it could be recognised in an email to the members. This would serve as the required documentation.
Q: Could you explain to me how I can access government free money for my wife’s super fund? I’ve heard about it but don’t understand it. Lawrence, Blacktown, NSW.
A: What you’re talking about is the Federal Government’s co-contribution to super. It works this way: if your wife or someone like you puts $1000 into super — this is called a non-concessional contribution. The government will sling an extra $500 into your wife’s super fund. However, it’s not for everyone’s partners because there are conditions. If your wife earns $36,813 or less, then the government will kick in half of what is put into your wife’s super fund but the maximum is $500. So if you put $1000 in, she gets $500 from the Treasurer! If she earns more than $36,813, the amount the Government puts in reduces. If she earns more than $36,813, the co-contribution entitlement reduces by 3.33 cents for every dollar you earn over $36,813, until it cuts out at $51,813. It’s still worth doing, until her income starts approaching the $50,000 mark.
Q: I need a personal loan for a business venture I want to develop but I don’t think the bank will back me. What are the best personal loans out there? I’ve seen a number of ads on TV from new lenders. Are they OK?
A: A mob I’ve never heard of called Harmoney have a 6.99% fixed rate loan, which has a comparison rate of 7.69% (that’s the rate you’ll really be paying when you through in all the fees and charges). These rates are pretty good for personal loans.
Be careful of advertised rates because one new lender has an 8.42% fixed rate but when you add in fees, the comparison rate goes to, wait for it, 10.79%!
There are lots of personal loans around 10% and many higher. If you have a good credit history, you should have a good chance to get the money from the cheaper lenders in the market.
Interestingly, Latitude loans are, according to the interest rate comparison websites, 13.99% fixed but the comparison rate is a whopping 15.19%! I guess Alec Baldwin doesn’t come cheap!
Q: My financial planner put me into a super fund with a leading investment company but what I am annoyed about is that with the cash component they only pay 0.28% interest!!! They say it’s policy etc . But by the time you deduct fees, charges l end up paying them! It’s not a lot of money in the end but the principle burrs me up.
I have been with the company since 1990. But I have only recently noticed this low interest. I would call it a rip off or hidden fee. I have contacted Australian Super and they pay over 1%. ING gives me 1.15% on call. So I am looking at options. Any ideas ? Will, Ashfield, NSW.
A: My first piece of advice is to get more involved with your money, mate, as you’ve ignored this low rate of interest for 18 years! You should also look at the fees you’re being charged for your super fund and then compare it to the likes of Australian Super. And while you’re there, look at the average performance of your fund compared to the best of breed, of which Australian Super has been. If the combined return difference, which should include the cost of being in the fund, means that you lose 2% each year over a lifetime of working, you could have a super fund that is hundreds of thousands of dollars less than it should be. The bigger this difference compared to the best super funds, which are often amongst the lowest charging funds, the greater will be your loss.
One last issue you have to be mindful of: the relative and overall performance of your super fund. If, say, your cash rate of return is low compared to others, it might be because your fund has been designed for an older person, who’ll be drawing cash out of super. Younger people who aren’t in the drawdown phase might get a higher rate because the investment bank knows that the money is there until the client retires. I don’t know how old you are but it can be an important issue. And finally, if the cash percentage return is low but you have a low amount of money in it, while the shares component of the fund has a lot of money and it has given you high returns, then it might be worth sticking with the fund. That said, a comparison of your fund against others can be a rewarding experience.
Q: I’m noting a number of experts’ recommendations that the Chinese company Tencent is a buying opportunity as the Chinese market has fallen a lot with all this trade war talk. Can you please explain how a private investor can invest directly in Tencent? Alice, Middle Park, VIC.
A: For those out of the loop, Tencent (according to Investopedia) is “an investment holding conglomerate with many, many subsidiaries. They include social networks, payment systems, media, entertainment, smartphones, e-commerce, property, advertising, artificial intelligence and more. One of their businesses is WeChat and “think of WeChat like Facebookmeets WhatsApp, meets Venmo and CandyCrush, Tinder, and Amazon. Still, there’re even more functions, including booking medical appointments and finding out how densely crowded a location is.”
The number of people on WeChat is now over a billion!
Online stockbrokers, such as Nabtrade or CommSec, will let you buy shares in a company such as Tencent. They do this for you via the Hong Kong stock exchange. It shows how much easier it is to invest in overseas companies nowadays. If you haven’t got an online account, open one up. Many full service stock brokers would do it for you but all they’d do is use an online broker on your behalf.
Q: I’ve been out of the workforce having a bub and I’ve been told I can put more into super to make up the years when I was not putting money into my fund. Is this true and how do I do it? Lesley-Ann, Glenelg, SA.
A. What you’re talking about is ‘Unused concessional contributions’. This has just started to operate, which means any unused amount can be carried forward on a rolling five-year basis but can only be used if your super balance is less than $500,000.
For example, if you or your employer only make concessional contributions of, say, $17,000 in 2018-19, this means another $8,000 from the $25,000 concessional cap could be contributed. Then in 2019-20, you or your employer could, if you choose, make concessional contributions up to $32,000.
This measure was meant to help women temporarily off work to top up their super savings once they re-enter the workforce. But any Aussie employee who was out of the workforce can access this scheme. However, in your case, the scheme will work for someone like you who is off work this year. It’s a great idea but it’s too late for you unfortunately.
Q: I’m interested in the First Home Super Saver Scheme, so can you explain how it works? Rob, Albury, NSW.
A: The FHSSS allows you to put up to $15,000 a year of extra super into your super fund up to a total of $30,000, which you then can draw out to use as a deposit for a home. A couple could access up to $60,000 for a home but it can be less. It can only be done once and if you’ve owned properties in Australia before, you’ll be ruled out of this scheme. The contributions can come from salary sacrifice money from your wage, which means they would be concessional contributions. Also you could put money outside of your wage, which is called a non-concessional contribution. The idea is that money that once was put into a bank term deposit at low rates of interest can be channelled into your super fund, which may have a better rate of return. By the way, you can put money into your super fund under this FHSSS before you are 18 but you can’t access the money until you are 18 plus. The only problem with this quick deposit creation system is that if you change your mind and decide not to buy a house, then these extra savings are in your super fund until you retire!
Q: I want to dip my toe into the stock market for the first time. I’m 22 years of age and have saved up $10,000 and want to try and do better than the 3% I might get with a term deposit. What would you recommend? – Alice, Bronte, NSW.
A: You could buy five stocks putting $2000 into each. I don’t like all my eggs going in one basket, and it’s better to be diversified. You might buy one miner, one retailer, one bank, one tech-like company and a health sector company. You might buy the companies you deal with such as Woolworths, JB Hi-Fi, NAB, Telstra and Flight Centre. These are not my tips but they are businesses many of us deal with.
Another way is to put the $10,000 into an exchange traded fund or ETF. There are two to think about for a starter, which will give you the top 200 companies in Australia on the stock market. The codes are IOZ or STM, and you can simply buy units in these funds, just like buying shares. And when you come home at night and see on the nightly news that the stock market was up 2% for the day, then you know are 2% wealthier minus a small fee. Last year these ETFs were up about 13% and those that held them didn’t have to do any picking and they had plenty of diversification.
Q: I keep hearing about salary sacrifice and how it helps build up your super, but could you explain how it works? – Pedro, Carlton, VIC.
A: Basically you make an arrangement with your employer/paymaster who takes part of your salary to be put into super instead of having it paid to you. Because it goes into super and you can’t get at it until you retire, the money is taxed at 15% instead of the higher rates of 19%, 32.5%, 37% or 45%. This can be a big tax-saver, especially if you’re on higher rates of tax. You can’t put in any more than $25,000 out of your salary into super and the employer’s 9.5% contribution forms a part of the $25,000.
Q: I’ve noticed that my super fund has performed terribly with only a 4.5% return for the year, while I heard others were doing close to 10%. What should I do? Karen, Cronulla, NSW.
A: Check what option you have chosen on your fund. If you selected a conservative strategy, then 4.5% is OK as term deposit rates are less than 3%. However, if you have a balanced or growth option, then your return is terrible. Go to websites — superratings or chantwest — and they will give you the better performing super funds. Don’t just rely on last year’s returns — the three, five and 10-year returns are the best for gauging the consistency of a fund.
Q: I went to a bank financial adviser who wanted to charge me $3,500 for his advice. I have about $400,000 in my super fund and pay a lot of tax. That’s why I wanted some advice, but the cost seemed pretty high. What do you think?
A: Many advisers will charge 1% on the funds to be looked after so $3,500 isn’t too high. Also a planner by law has to put about 12-14 hours into a plan and there is a lot of responsibility, if he or she screws up. If the advice given was good, then the $3,500 is not expensive and I do think others could have charged $5,000, so I suggest you think through how good the proposed plan is or get a second opinion. Remember, some part of the service attached to the plan could be tax deductible, so you should ask about that. Also, any ongoing service in future years will definitely be tax deductible. Finally, if the financial adviser is only recommending products from his bank, ask if he has looked at the ‘best of breed’ products when he selected his investment products and insurance policies. The more questions you ask, the better position you will be in to make a judgment call on the planner and their proposed plan.
Q: I’ve been told by a super consultant that I can transfer my residential property into my self managed superfund. I believe this to be incorrect as from all that I have read over the years. Larry, Hurstville, NSW.
A: Your super consultant is wrong. If you own a rental property and want to put it into your self-managed super fund, you can’t. However it is possible to do this with a commercial property you’ve been working out of. So your super fund could actually pay you for the property and the ownership would transfer from you to your super fund. With self-managed super funds there are a lot of restrictive rules to prevent you from personally benefiting from the super fund. There is called a sole purpose test. Every decision made has to be for the benefit of the super fund and its trustees. It means you couldn’t buy a rental property inside the fund and then let it out to your son or daughter. There has to be an arm’s length relationship and the rents set should reflect that it has been done with the trustees in mind.
Q: When do I know a stock I’ve bought has become too expensive and should be sold? Beverley, Beaumaris, Vic.
A: This isn’t easy to give a rule of thumb for, as a stock such as CSL looked expensive at $100 and is now $200! Certainly, this company has continued to raise its profits and this has justified its share price rise. But it has defied rules for investing, such as the price earnings ratio. This looks at the share price and compares it to the company’s earnings per share. If a company was currently trading at a multiple (P/E) of 20, the interpretation is that an investor is willing to pay $20 for $1 of current earnings. Now that’s a 5% return ($1 divided by $20 = 5%) and when a stock gets to a P/E of 20, it’s often a reason to wonder if it is starting to get expensive. This was especially so when term deposit interest rates were 5%, so someone could sell a more risky share returning 5% when they could get a safe 5% in a term deposit. However, some companies like CSL are so good that smart investors still buy the stock with a P/E of 44! I guess if picking stocks was as simple as following a simple rule of thumb, then we’d all be making money the easy way out of the stock market.
Q: I was thinking about starting a self-managed super fund (SMSF) to buy a property to eventually live off the rent in 29 years when I retire. I hate the stock market and my super fund has performed terribly and it’s expensive as well. I wonder if you think this is a good idea? My partner and I have about $450,000 in our combined super. Jason, Sandringham, VIC.
A: The dollars you have are sufficient to start a self-managed super fund but you have to be careful with a few things, which I’m happy to list. First, it’s harder to get property loans for SMSFs, so make sure you can get access to money. Second, you are going to need to buy a property that has a history and the likelihood of at least returning 7% per annum, which a lot of properties have difficulty doing. This would be made up of the rental return and the capital gain. The stock market index returns about 10% per annum over a decade, which means the bad years are more than countered by good years. And if you put some of your money in term deposits and other safe cash-oriented investments, your overall return would be about 7%. Third, you will have tenants and maybe real estate agents to deal with as well as repairs. Possibly you should look at the top 10 super funds on websites such as Super Ratings and Chant West to see if you would be better off in a top fund. I like property but I also like shares. I advise my clients to be diversified, which means they can have property, shares, term deposits, bond funds and cash. That’s the investment mix I’d have in an SMSF if I was advising someone.
Q: I’m travelling overseas for a conference in London and I’m wondering if I can claim the cost of the trip as a tax deduction. The conference goes for three days and we will stay for the rest of the week because it’s a long way to go for just three days. Louise, Ascot, QLD.
A: I’d get advice from an accountant, but I think the advice would be that the flights back and forth could be tax deductible, if the conference is directly linked to income upon which you pay tax. For example, you are a travel agent and it’s a travel agent’s education conference. The nights around the conference and living expenses should be tax deductible, while the other days when you are holidaying would not be. With tax deductions, you have to play fair. Costs that are related to you earning income upon which you pay tax are legitimate tax deductions. The ATO website can also be good for improving your understanding of what tax deductions are fair game.
Q: Can you explain what happens to my super when I die? Can I nominate who gets it, and do they pay tax on it? I am a little confused because if it goes to my wife, I understand that she doesn’t pay any tax, but if it goes to my daughter, she does pay tax. Patrick, Pymble, NSW.
A: Yes, you can nominate who you want your super to go to. You need to contact your super fund and tell them you want to nominate who will be the beneficiaries of your super. If you don’t do this, the trustee of the fund will decide and, though they usually follow common sense guidelines, you might have a different idea. On the subject of your daughter paying tax on any super you leave her, if she is not a dependant and is an adult, she is likely to have to pay tax of around 17% on the super proceeds you leave her. You are right that your wife will not have to pay tax. I guess some people leave all their super to their wife and then in their will they instruct that some part of the estate, which could include cash or shares in super, be left to a daughter or son. Maybe you should get some advice.
Q: I’m buying my first home — an apartment — and I’m stretching myself a little. Should I fix my home loan for five years? What if I wanted to sell the property before the five years are up? Jenny, Oyster Bay, NSW.
A: If you know you’re going to stay in the house and you can get a good fixed rate for five years that will become easier to pay off as your wage rises, then this could be a sensible option. Being stretched on a new home with interest rates so low does leave you exposed to rising rates. I’d go to a mortgage broker or trawl the interest rate/loan comparison websites to get the best rate for a five-year fixed loan. Remember, you will have to pay something if you break a loan before the end of the term, but if rates are higher when you decide to retire the loan early, the cost should not be huge. Ask your lender for an explanation of the likely cost if you had to get out of the loan early.
Peter Switzer is the founder of the Switzer Report, a newsletter and website for self-managed super funds.