Hold your horses and rein in the mortgage

Illustration: Michael MucciQ I’m 31 with a $215,000 mortgage on a home that’s three years old. I’m overdue in starting a wealth-creation program but I want to make a move now – I don’t want to still be working at 70! With a wage of $90,000, what are your thoughts on purchasing an investment property versus paying my mortgage off as quickly as possible?

A You’ve got plenty of time on your side. My recommendation is that you keep paying the mortgage until you reach a stage where your payments are $12 a month for every $1000 borrowed – that would be $2580 a month on a $215,000 mortgage. This will ensure it will be paid off in less than 10 years, provided rates stay under 9 per cent. Once you have the mortgage under control, you can take advice about borrowing to invest in growth assets.

Q You recently answered a question from a man aged 65 in which you inferred there could be an exit tax payable on his superannuation. Could you please clarify?

A Withdrawals are tax-free for most people once they reach age 60 but there is another class of super funds called unfunded funds – the members of these are public servants. There can be an exit tax on these funds because no 15 per cent contributions tax was paid initially.

Q My husband and I are age pensioners, 82 and 75, respectively, and live in the city. In 1976 we bought land in the country and built a house for retirement, which was completed in 1994. The value of the property has since grown significantly.

We are thinking of selling due to financial commitments, and understand there is a difference with capital gains tax on property bought before 1985. We would appreciate your advice on how that could affect us if we sell, or after our demise if our children sold the property.

A This is a little complex and you should be taking advice from your accountant. The land will be a pre-CGT asset and the house will be a post-CGT asset, so you will need to have calculations done to work out how much capital gains tax will be payable. If the bulk of the gain is in the land, the CGT may be small. If you leave the property to your children in your will, and they sell it within two years of you dying, there will be no CGT at all.

Q I am retired and have all my assets in an allocated pension balanced portfolio. The returns for 2012 were 14 per cent, and less than 3 per cent for 2011, but I can find nothing to compare these returns with. Is there independent accurate information available on allocated pensions?

A It is very dangerous to compare returns without getting specific advice because a fund that gives you a low return may have lower volatility and so be classed as lower risk. You need to sit down with your adviser and agree on a portfolio that suits your risk profile and then have an annual interview to make sure that portfolio is performing well in respect of its own benchmarks.

Q I’m trying to grasp the dividends paid by fully franked shares in an SMSF. I understand if they are fully franked and your super fund is taxed at 15 per cent until you reach 60, the fund doesn’t pay tax on the dividends as they are taxed at the higher company tax rate. Does this mean at the end of the financial year you can be refunded the difference between what your SMSF was taxed and what the fully franked shares were taxed?

A When you receive a franked dividend, the amount of that dividend plus any accompanying imputation credits is added together, grossed up, and tax is payable on the total. Then, the imputation credit is deducted from the tax payable. For example, if your fund received a $700 dividend with franking credits of $300, the grossed-up amount would be $1000, on which tax would be $150 because your fund would be paying 15 per cent tax on its income. When you deduct the $300 imputation credits, you find yourself in the fortunate position of having a bonus of $150 tax-free, making franked dividends an attractive investment for self-managed super funds.

Q I am moving to retirement living. How does Centrelink treat leaseholds and franking credits in calculating total assets and income?

A Most retirement village contracts these days are 99-year leasehold or licence arrangements. From a Centrelink perspective, the amount you pay to enter a retirement village is an entry contribution, and is used to determine whether you are considered a home owner as well as your eligibility for rent assistance. If the amount you pay is less than $139,500, you are considered to be a non-home owner and the value of the retirement village unit is included in your assets. If the amount you pay is above this threshold, you are a home owner and the amount you pay is exempt. While a deferred management fee (exit fee) is often charged when you leave the retirement village, this is not used to reduce your assessable assets while you live there.

Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. His advice is general in nature. Readers should seek their own professional advice before making decisions. Email: [email protected]杭州夜网m.You can follow Noel on Twitter – @NoelWhittaker

The original release of this article first appeared on the website of Hangzhou Night Net.

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