Ask Noel

Ask Noel

Sydney Morning Herald
12 November 2008
Noel Whittaker Noel Whittaker is a director of Whittaker Macnaught, a licensed dealer in securities. To ask a question, write to Ask Noel, Money, GOP Box 2571, Qld 4000, or see moneymanager.smh.com.au/sitewide.askanexpert.html.

I started a self-managed super fund this year and have about $300,000 worth of shares in it. I know that a SMSF can't borrow money. Can I personally borrow to buy shares, which I later transfer (as an off-market transfer) to my SMSF? Will I still be able to claim the interest as a personal tax deduction?

You can borrow to buy shares in your own name and the interest on the loan will be tax deductible during the period the shares are owned by you personally. You can transfer all or part of the shares to your SMSF but there will be capital gains tax to pay on any increase in value. It may be worth contributing the dividends to your SMSF as nonconcessional contributions as they are made. This will reduce the amount you have in your own name.

A strategy has been recommended whereby you borrow to buy shares and the dividends are credited to your mortgage. Interest on the loan to buy the shares is allowed to capitalise while you claim a deduction for the interest and also franking credits. The shares are later sold to repay the original loan. Is it legal?

You can borrow to buy income-producing assets such as shares and the interest is tax deductible. The dividends will be taxable. You can use the dividends to pay off your home loan because you have already paid tax on them. But capitalising interest is dangerous. The Tax Office won a court case when it challenged a couple who had tried to do it on a rental property. You can use the dividends in any way you wish but selling the shares may reduce the ability to claim interest on the original loan. I suggest you seek a second opinion.

As super is tax free from a taxed source after age 60 what is the benefit of an allocated pension?

Withdrawals from superannuation are tax free after age 60 but if you leave the money in super, the fund will pay 15 per cent income tax on your behalf. When you start an allocated pension, the fund itself becomes a tax-free fund, which means you are holding your money in a tax-free environment while making tax-free withdrawals.

My husband and I are planning to leave Australia for an indefinite time. We are paying off our home. My mother, who recently sold the family home, is living with us. We have come to an agreement whereby she would give us an interest-free loan to fully pay off our mortgage. In return, we would allow her to stay in our unit rent-free and house-sit for us while we are away. This seems to be a win-win situation. She does not have to pay rent or tax on her savings and we don't have to pay the banks any more interest or pay tax on the rent we would earn from renting the place out. Are there any tax implications for either party?

Your strategy is basically sound because you can be absent from your residence for up to six years without losing the capital-gains-tax exemption provided you don't claim any other property as your principal residence in that time. It is important you return to the house before six years have elapsed - when you do the six-year period restarts. But if you mother is receiving a part age pension, you should take advice from Centrelink because the loan to you will be treated as a deprived asset and will be subject to deeming.

This article is general in nature. Readers should always seek further advice before making financial decisions.

Back to News Index | Back to Home