Two major factors in this decision will be the amount of capital-gains tax you would have to pay if you sold it, and the potential of the property.
If you decide to keep it and wish to continue to use leverage, you could always borrow for another property or for a share portfolio, using the equity in the investment property as deposit, and the surplus income to help you with the payments.
I have been thinking about ways I might help a young relative to enter the property market. I have observed that savings interest rates have plummeted, while borrowing rates have eased more slightly. In my scenario, I would invite my relative to offer me a 3 per cent fixed-interest rate for a 10-year term deposit of, say, $100,000, with interest paid monthly or even annually and the capital fully refunded at the end. That would be a win for them (borrowing below market rates, without fees), but also a win for me (better interest). It might cost $500 to have a water-tight agreement drawn up, but surely this scenario could be repeated in many situations. If a lot of people started doing it, it may even force the banks to increase their deposit rates.
It’s not as simple as you may think. For starters, home-loan rates can be obtained at possibly less than 3 per cent now – and the trend is downward. Therefore, you would not be doing your relative much of a favour by lending money at 3 per cent interest.
Furthermore, the interest would be taxable income for you, but non-deductible for your friend, as it would be for a private purpose. On top of that, when your friend went to apply for a loan, the repayments to you would need to be taken into account, which could result in a situation where it could disqualify your relative from eligibility for a bank loan.
I have been told that donations to approved charities can be used to offset Capital Gains Tax (CGT). To completely offset the tax, does the donation have to be equal to the full capital gain (say $500,000), or only to the extent of the 50 per cent tax liability ($250,000)?
After application of the 50 per cent CGT discount, a $500,000 capital gain becomes $250,000 in taxable income. This amount is added to your tax return, where any donations you have made are deducted against it. So yes, if you made a $250,000 donation, the capital gain of $500,000 would not attract any tax liability.
It is really a matter of what you could do with the proceeds – the most you could pay in capital gains tax would be $117,500, which would still leave you with $382,000 in your pocket.
The numbers would be different if you had no other taxable income in the year of sale, so make sure you liaise with your accountant.
I am 68 and working part time. My pension depends on my income, which I report fortnightly. I have minimal assets. Can I switch to the asset test Age Pension?
When you are being assessed for the age pension, Centrelink will assess you under both the income and assets test. The test which gives you the least pension will be the one used.
You are not allowed to choose the one that would be most advantageous to you.
I am 52 years old, single and with no dependents. I owe $75,000 on my mortgage for a semi-detached unit I bought for $610,000 in 2012. It is now probably worth $780,000. I have a superannuation balance of just over $1 million. I hope to retire in 2031, aged 63-64. I have no other investments, having swung share investments across to my home deposit at property purchase time. I salary sacrifice 10 per cent of my teaching income into superannuation, which brings the total concessional contributions, including the compulsory Super Guarantee, to $22,000 a year. I’m confused about the $1.6 million cap. What happens when I reach it? Can I keep contributing concessional super contributions to it? What will happen to any excess balance?
Once your super balance reaches $1.6 million you can no longer make non-concessional contributions, but you can continue to make concessional contributions up to a total of $25,000 a year from all sources.
While you are in accumulation mode, there are reduced tax concessions because the whole of your fund, irrespective of the balance, is paying tax at 15 per cent per annum. However, once you retire and start a pension, $1.6 million of your fund can be held in the tax-free pension mode, and the balance in the same tax environment as if it were in accumulation.
Noel Whittaker, AM, is the author of Making Money Made Simple and numerous other books on personal finance.