THE long awaited Henry Review contained 138 recommendations, most of which have ignored by the Rudd Government. And, as I predicted, there has been no attack on negative gearing.
Cast your mind back to 1985 when Treasurer, Paul Keating, watered down negative gearing by introducing a system that quarantined any net losses from property investment, and required them to be offset only against future profits. It was a disaster - investment in property fell dramatically, rents went sky high,and in October 1987 Keating backed off and reversed his original decision.
Despite the misinformation that is often bandied around, negative gearing doesn’t save much tax. If you bought an investment property for $400,000, and borrowed the entire purchase price, the interest would be about $30,000 and the net rents would be around $16,000. This would give you a cash shortfall of $14,000 which would only save you $5,530 in tax if you earned between $80,000 and $180,000.
Who in their right mind would get themselves into hock for $400,000 just to save $5,530 a year in tax? Sure, I admit that certain properties can give tax breaks due to depreciation allowances but these are often illusory as any tax saved is clawed back when you eventually sell.
The essence of negative gearing is that it speeds up whatever is going to happen – poverty or wealth. Buy a property for $400,000 on $20,000 deposit and you will have doubled your money if the price rises to $440,000, however if it falls in value you could lose your deposit unless you are prepared to wait out the cycle. The problem for property buyers now is not that negative gearing may be abolished, but that they will be lured into buying over priced properties which could devastate their finances if prices fall as interest rates rise
Noel Whittaker is a director of Whittaker Macnaught Pty Ltd. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. His email is email@example.com.
Question: I have inherited a portfolio of shares in mostly blue chip companies - current value around $80,000. I have never owned shares before and want to know how best to manage them. The inheritance has also included $200,000 cash. Can you suggest the best way to manage and grow this money?
Answer: You should form an association with a stockbroker who can help you put together a portfolio that will suit your goals and risk profile. This may involve selling some of the inherited shares and buying others, but check out possible capital gains tax before you make any sales. Remember when you inherit shares you takeover the CGT liability of the deceased and this is not triggered until the shares are sold. You will need to take advice about investing $200,000 but my advice is to take it slowly. If you find you are comfortable with shares you may decide to progressively move part of the $200,000 into more shares.
Question: I am a 58 year old single earning $80,000 per annum (indexed to CPI) with $310,000 in Super (defined benefit contributing $130 per fortnight). I pay rent of $350 per week and otherwise have no debt. I would like the security of owning my own home to a value of $420,000 in today’s value and so far have saved a 25% deposit in a term deposit. I anticipate working until I am 65 year of age.
Would it be recommended to salary sacrifice into my super now and buy a house on retirement or buy the property now?
Answer: Provided you can afford the repayments on the house you wish to buy I suggest you jump in and get it as soon as possible. Yes, it is possible that prices may fall but it is my belief that the rising population will hold house prices up. If you opt for an interest only loan you may well have sufficient spare income to salary sacrifice part of your income to super with the intention of providing a fund paying out part of the loan when you retire. The danger of waiting to buy is that you could be locked out of the market if prices take off.
Question: I will be 64 years old this year, caring for a terminally ill husband, receiving carer’s allowance from Centrelink, and scared that I might not be able to live on the $50,000 I have in Super, if and when anything happened to my husband.
I would like to transfer the money into a Term Deposit account which will add capital instead of leaving the money in Super.
Can you please advise me what to do with my small amount of superannuation.
Answer: The only purpose of holding money in superannuation is to save tax. If your total financial assets are $50,000 you are most unlikely to be paying tax and would save fees by withdrawing the money from super and investing it in an area with which you feel comfortable.
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