Illustration: Michael Mucci
Q I am 31, have $160,000 in shares and a $170,000 mortgage on a property worth $320,000. I recently moved back into the property after almost six years to keep it listed as my main residence. I recently quit my $70,000-a-year job and plan to take a break of six months before returning to the workforce, moving out of the property and renting it again.
I want to take advantage of my lower income for the current financial year, and sell some stocks which have made decent capital gains, as I am now top heavy in certain sectors.
Do you recommend pumping this money back into equities or should I reduce my mortgage and attempt to pay it off as soon as possible?
A The name of the game is to maximise your deductible debt, and minimise your non-deductible debt. As you have moved back only temporarily and will be renting the property out again, I would prefer to see you keep the loan on an interest-only basis, while accumulating any spare cash in an offset account.
Paying money off a deductible mortgage will give you an after-tax return of 4 per cent at most, but a good share portfolio should do far better than that over the long term. The market is very strong now. You are the only person who can decide when to start buying.
Q I am getting ready to start my own business. If I do it by myself should I act as a sole trader, or if I go into it with my partner do I set it up as a partnership? Would it be better to set up a company or trust? I understand it is more expensive to set up a company than a sole trader or partnership, although if I get into financial difficulty a company may be less vulnerable. Could you explain how a trust works when running a business?
A I much prefer a company or a trust, because this gives you the dual benefits of asset protection and flexibility in respect to allocation of business profits. You would not have this in a partnership, and should keep in mind that all partners are joint and severally liable for any partnership debts. A trust with a family company as trustee would give you maximum flexibility at a reasonable cost. Make sure you involve your accountant at every step of the way as your structure really depends on the size, working capital and future potential of the business. If your business has the potential to grow quickly and have large working capital requirements a company with a trust owning the shares may be the better option. Again seek advice from your accountant.
Q I've read articles recently about people borrowing the maximum to purchase investment properties and placing these assets into self-managed super funds. I thought Treasury superannuation guidelines stipulated that only unencumbered assets can be placed into self-managed super funds. Can you advise if this is true or false.
A Monica Rule, author of the Self Managed Super Handbook points out that the superannuation fund does actually borrow the money. The ''limited recourse borrowing arrangement'' (LRBA) that came into law on July 7, 2010 allows SMSFs to borrow to purchase assets. It is actually the SMSF that borrows under the LRBA. But the asset is held by the Holding Trust for the duration of the borrowing period. The trustee of the Holding Trust acts as the legal owner to the asset while the SMSF acts as the beneficial asset owner.
Q I am 58 and my wife is 48. If she continues to work once I retire, Centrelink takes this into account when assessing my pension. If she earns $45,000, my pension would be around $140 a fortnight. As I have paid taxes all my life should I not be entitled to a full pension when I retire? Is there any way of getting the full pension even though my wife will still be working, or should she move to part-time work?
A I don't buy the argument that people who have paid taxes all their life should be entitled to the full pension. Think about it - the current full pension for a 65-year-old couple is almost $32,000 a year indexed. An annuity that would pay the equivalent of this sum indexed for life would cost at least $600,000 - that is far more than the average Australian would ever pay in tax. The only way to qualify for the full pension is to run your assets down to a level where you would qualify under both the asset and the income test. I think this may be extremely risky given the state of Australia's finances, and in view of the fact that it will be 17 years before your wife will qualify for a pension.
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@example.com.