You can't use an accounting trick to get a tax deductible loan

About three years ago, I invested $40,000 in managed funds from my own savings. Now I have an approved home-equity loan of $100,000 and also a mortgage of $250,000. I plan to sell the managed funds to reduce my mortgage and will then reinvest in more managed funds using a home-equity loan so I can claim a tax deduction for the interest. Instead of selling the managed funds can I transfer $40,000 from my home-equity to my home loan and claim a tax deduction on interest against the managed funds?

The basic principle is that the purpose of the loan must be to invest in income-producing assets for you to be able to claim the interest as a tax deduction. Merely switching the loan from one account to another is not enough to achieve this. You will need to redeem the managed funds, pay the proceeds off the non-deductible home loan and then make a redraw on the new loan account. Make sure you keep the two loan accounts strictly separate to minimise problems with the tax department.

I am not seeking financial advice, but only seek a clearer picture of what happens when retirement is here and we still have a holiday house and some super/shares. My wife and I are still working part time doing consultancy. We own our home worth $850,000, a holiday home worth $900,000, $500,000 in superannuation and $45,000 in shares. We have heard that it is best to have all our funds in super to get the best tax advantages. What is your general impression of our situation?

You are certainly doing better than most people but a major proportion of your assets is tied up in a holiday home that at some stage will need to be sold unless you intend to retire to it. If you do sell it you will need to factor in capital gains tax, but the amount of that will depend on the cost base of the property and your taxable income in the year the sales contract is signed. The amount that can be contributed to super has now been drastically reduced but provided you are under 65 when the property is sold you could take advantage of the bring-forward rule and contribute $300,000 each in non-concessional contributions to super and $25,000 each as concessional contributions for which you could claim a tax deduction.

Certainly, superannuation would enable you to hold assets in a zero-tax area while you are both drawing a tax-free pension but you need to make sure you optimise the potential of the assets you hold inside super because the rate of return is the major factor that will determine how long your money will last. I also suggest you work as long as you can, provided you are happy doing that, as this will help your money to last longer.

My mother has just been diagnosed with dementia and has gone into aged care. Her unit is worth around $700,000 and she has about $250,000, of which most will go in the form of a bond. We read with interest your recent article on keeping the family home as it is exempt for two years from the assets test but can you clarify if the $162,087 you mentioned is the maximum assessable value of a property for life? Also can family members live in it rent free without any implications?

The home would be exempt from your mother's pension-assessable assets for two years from the date she enters care. After this it would be included, but she would be assessed as a non-homeowner with the benefit of the higher asset threshold. The home is included for the aged care means test up to a maximum value of $162,087 unless a protected person is living there (in which case it is exempt).

I am 60 and no longer working. My taxable income is about $46,000 from super, shares dividend and rental income. I will be selling an investment property soon to pay off my mortgage and expect to have to pay a substantial capital gains tax on the property. I would like to contribute some of the profits to my superannuation account. I understand that the maximum amount I can contribute is $25,000 annually. In your column recently you mentioned the bring-forward provisions, which enable contributions of up to $300,000. Am I eligible for this?

You are eligible to contribute $25,000 of concessional (tax deductible) contributions and $100,000 a year in non-concessional (non deductible) contributions. The latter could be expanded to $300,000 if you use the three-year bring forward rule. Just keep in mind that a non-concessional contribution is not tax deductible so will not reduce the capital gains tax.

Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. Email: asknoel@fairfaxmedia.com.au.

This story You can't use an accounting trick to get a tax deductible loan first appeared on The Sydney Morning Herald.