I have long believed that if you take charge of the things you can control, you should be well placed to handle the things you can't.
The start of a new financial year is the perfect time to take stock of where you are and think about strategies for the coming 12 months.
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There is no doubt we are living in unusual times, but I have long believed that if you take charge of the things you can control, you should be well placed to handle the things you can't.
Inflation and rising interest rates look like the dominant factors for the coming year, and the Reserve Bank has made it abundantly clear that it will not hesitate to raise interest rates if it feels inflation is not under control. This week's inflation figures told us that inflation is far from being under control, and the tax cuts that start today can only make the situation worse. Markets are now factoring in a 54 per cent chance of rates going up before September.
Obviously, it is far better to prepare for a rate rise in advance than to find yourself in a financial bind when it happens. Therefore, try to maintain home loan repayments of at least $7 a thousand a month - that's $2800 a month on a $400,000 loan. Repayments at this rate will have your loan out of the way in 20 years, if interest rates are 5.5 per cent. If they don't go this high, your loan will be paid off much faster - and you will have given yourself a valuable safety buffer.
Your next pay will be higher than the last one because of the tax cuts which come into effect on July 1. Seize the day! If you don't commit this extra money right away, it will be frittered away.
If you have a housing loan, increase your repayments by the amount of the tax cut. If you are salary sacrificing to superannuation be aware that the maximum deductible contribution has just risen from $27,500 to $30,000, so you can increase your contributions by at least $2500 a year. This, coupled with today's rise in employer superannuation to 11.5 per cent, will boost your retirement nest egg.
If you are over 55, pour as much money as you can into superannuation. Yes, you need to keep cash on hand for emergencies, but there is no point leaving money in bank accounts, where the interest is fully taxable, when you can move it to superannuation, where the income will be taxed at just 15 per cent.
Remember too that a major benefit of placing money in super is that Centrelink does not count it until you reach pensionable age.
For example, if one person was 67 and their partner was 59, moving a large amount of superannuation from the older to the younger person's name could maximise the older partner's age pension benefits.
Inertia is costly, and most of us suffer from it. Take an hour or so to go through all your regular payments, especially for those easily forgotten streaming services, magazine subscriptions and gym memberships, and suspend or cancel any which are not being used.
And don't neglect your estate planning. If you don't yet have a will, get around to it as soon as possible; if you do have a will have a family discussion to see whether it needs to be reviewed. Most people who do have wills never, ever get around reviewing them, and horrendous complications can arise as a result.
Most of my articles are built around this common theme: helping yourself so that you can have a more secure financial future.
It is the actions you take today that will make the difference to your financial security in the long term.
Q&A
Question
We are retired and both get a part aged pension. In 2015 we bought an investment property (in my husband's name for tax purposes). The base cost was $515,000 including acquisition costs and it was bought with a loan of $500,000. We believe the market value is $850,000 but Centrelink have assessed it at $867,000. This means we are now asset tested. We spent $100,000 on renovations so the base cost is now $615,000.
In July 2016 our son and his partner became our tenants. To today's date they have paid $168,000 in rent at $450 a week. We are currently updating our wills and intend to leave the property to our son.
If my husband died in the immediate future there would still be a debt of $440,000 on the property. Will our son be required to pay any capital gains on this property at any stage after inheriting the property?
Answer
I assume Centrelink is aware of the loan against the property because it should be deducted from the property value for assets test purposes as long as it's secured by a mortgage of that property. Death does not trigger CGT, it passes the liability to the beneficiaries who pay CGT only if and when they decide to sell the property. This should not be a problem if your son continues to live in the property - as time passes the CGT should reduce because it is adjusted for time on a pro rata basis.
Question
With the cap on the amount of superannuation that can be transferred from accumulation to pension mode, does this limitation apply to the downsizer contribution for those who are selling the family home and moving into a smaller home? If one is in a position to make the allowed up to $300,000 contribution, is that amount exempt from the $1.9 million cap?
Answer
The downsizer contribution can be made irrespective of your age as long as you are over 55 and irrespective of your present superannuation balance. This is why you need to think strategy when making a downsizer contribution because you can only make it once in your lifetime. For example, if your super balance was $1.6 million and you had money available to make a non-concessional contribution of $300,000 you should make that before the downsizer contribution. If you made the downsizer contribution first you would've reached your $1.9 million limit, and could not make any further non-concessional contributions.