From the Sun-Herald's Personal Investment column comes the following Questions and Answers:-
Q I own my home, assets of around $465,000 plus $85,000 in super (I am presently paying 6pc into SASS and $100 per week salary sacrifice into AMP super).
I am almost 48 years old, single, on a salary of $78,000 pa. I would like to retire as soon as I could after 50 years of age on $30-40K pa. I do not have an expensive lifestyle but love to travel overseas every two years or so (backpacking). What do you think? What would you do in my place?
R G,
A A man who retires at 50 has a life expectancy of around 29 years and a woman about 33 years. If you want to net, say $30,000pa from a super fund, you will need to withdraw around $32,500 (assuming it is all taxable). If you plan to index this to 3pc pa inflation, over 30 years, you will be drawing about $78,500pa in the 30th year.
To finance this, assuming you plan to stop work completely, you will need around $675,000 in super (assuming the fund earns 6pc pa after tax), less if you are spending your own capital since it won't be taxable income.
You have almost enough to cover your costs and may have enough by the time you turn 50.
I always argue that money is there to make you happy. If, all things considered, backpacking around the world would make you happier than your NSW Government job, then you really must follow your heart.
Q I have recently taken out a mortgage loan for a home unit that I bought in the middle of this year. I have a professional package with a major bank that allows me to offset my savings against my loan, thereby reducing the amount of interest I have to pay.
I have $149,000 remaining on my loan and $62,000 in the offset account.
I would like to know whether I would be better putting more money directly into the offset facility or if I would be better off by simply paying off more of my mortgage with my surplus cash savings.
R M,
A The answer really depends on your plans for the unit.
Mathematically, there is no difference to paying off a loan or placing the money into a mortgage offset account providing the latter offsets the loan on a dollar for dollar basis.
In other words, each dollar in the mortgage offset account offsets a dollar in the loan account so that, if your mortgage rate is 6.7pc, then you are effectively earning 6.7pc after tax on your money. (There have been mortgage offset accounts which offer a lower offset rate.)
The advantage of placing money into the account, instead of paying off the loan, is the ease with which you can redraw the money if you need it. By comparison, redrawing from a standard home loan usually requires discussions with your bank or mortgage provider.
For example, if you are living in your home unit, then the loan interest is not tax deductible. If you later decide to rent this unit out and move out to another residence, and wish to maximise the tax deductions on your old home unit, presumably now to be rented out, then it is relatively easy to transfer the money in the mortgage offset account.
If you are uncertain, aim at building up your mortgage offset account to $149,000 and then weigh up your options. With an offset account equal to your loan, you get all the advantages of a bank borrower i.e. free cheque accounts etc, while not paying any interest, just check to make sure you are not paying loan fees.
Q I was extremely interested in the reply recently given by you about UK pensions, and I am wondering if you could also assist me.
I have lived in Australia for the last seven years, and receive a monthly widow's pension from my late husband's company in South Africa, to which he and his company contributed for 24 years, in order to receive a pension at his retirement. ALL contributions were made from Zambia (Northern Rhodesia as it was then) and South Africa.
I also receive a National Insurance Scheme (NIS) retirement pension from the UK, to which contributions were also made regularly by my husband when we lived in England as well as South Africa.
I am English and my husband was also. When I emigrated to Australia in 1993 after his death, I naturally had to look after my financial affairs and submitted details of my two pensions to local accountants.
Each time I stated "self-funded South African widow's pension and UK widow's pension" and at no time has anyone mentioned that UK NIS pensioners in Australia are allowed by the Federal Government to have eight per cent of their NIS pension deducted from their taxable income relating to the UPP.
Would there be a similar deduction in respect of the 24 years' contributions to the South African pension, all made from overseas? The UK pension amounts to approximately $5,000pa under present exchange rates. Can I claim back the eight per cent deduction for the last seven years and possibly on the South African pension which is +- $18,000 per annum after deduction of South African income tax, this tax being taken into consideration when assessing Australian income tax on investments etc.
Now that there is a Double Taxation Agreement between South Africa and Australia, does this mean I need only pay income tax in one or other country? Once again I cannot get any clearance on this point.
V H,
A Your UK NIS pension is taxed in Australia but a non-taxable Undeducted Purchase Price of 8pc of the annual pension is allowed for most NIS pensions. (You could claim more but you have to prove your claim. See Taxation Ruling TR 93/13)
Remember that an Undeducted Purchase Price is generally the amount of money contributed towards the pension without claiming a tax deduction and it is returned, taxfree, spread over your life expectancy at the time your husband started the pension.
If you have not claimed this in the past seven years, you can put in for an amendment to your claim up to four years from the date of assessment, which means that you should be able to amend your Australian tax returns for either three or four financial years, depending on the dates your assessments were payable.
Australia and the Republic of South Africa (RSA) have signed a Double Taxation Agreement that will operate in Australia from July 1, 2001. Before the agreement, your pension will have been taxed in RSA and would also have been subject to taxation in Australia, but with a credit for the RSA tax paid.
Under the agreement, your pension will not be taxed in RSA but in Australia alone although this does not apply to government service pensions and certain annuities.
RSA should have ceased taxing your pension from January 1, 2000. If not, write to the SA Revenue Service explaining that you are an Australian resident and that your pension is now only taxable in Australia.
As I understand it, your South African pension is a private company pension that does not have any standard Undeducted Purchase Price accorded to it by the ATO. As such, you would need to prove how much was contributed by your husband without claiming a deduction, and you would need to establish the life expectancies of you and your husband at the time he began his pension.
I presume this information could be obtained from the Human Resources Dept of the company that he used to work for, or from the fund that is paying his pension.
Once you get the information, write to the ATO branch shown on your tax assessment.
Q My wife, who is in her mid-80's owns a two-bedroom unit which is rented, and was purchased about 20 years ago, long before CGT was introduced. She intends to provide in her will for our daughter to inherit the unit but the question is whether CGT would be payable by our daughter when she becomes the new owner and intends to live in it or should she decide to sell the unit and reinvest the proceeds. As an alternative, would it minimise the effect of the CGT if my wife sold the property before her death and invested the proceeds in a fixed deposit or monthly income fund on a fairly short term basis, which can then be transferred to our daughter when her mother dies.
J R,
A No, I don't think you should sell the property for tax reasons. Since it is a Pre-1985 asset, it has the benefit of being free from Capital Gains Tax on sale.
Only after the owner passes on does the property become a Post-1985 asset in the hands of your daughter, with the cost price being the value as at the date of death. However, there is still no tax payable at that time if it is sold within six months.
Also, if your daughter decides to then live in the unit, it will remain free of CGT on the grounds that it is then her principal residence.
I would hope that your wife is making plans for her 100th birthday. Don't sell unless the building is falling down.