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tax/financial advice please

tax/financial advice please

Old Oct 1st 2008, 1:56 am
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Default tax/financial advice please

My partner & I have been in Oz a year we had a nice bit of equity in our UK house so bought an apartment outright that we let out short term, we rent the house we live in. I'm salaried & my partner is self employed. Our intention was to save the income from the apartment, after tax, as we're not staying in Oz long term. Now we find out that this is probably the worst thing we could have done tax wise, apparently we're very easy targets to extract as much tax as possible. We've been advised to get a mortgage on our property. This kind of defeats the whole objective to why we bought it in the first place. It seems the Oz government encourage people to be in as much debt as possible, which in the current climate could easily go 'tits up!'
I'm just extremely confused by it all.
Help!!!!!
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Old Oct 1st 2008, 2:00 am
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Default Re: tax/financial advice please

Yes, you are correct - the tax system encourages being highly leveraged.

I know people who aren't happy unless they make a loss on their investment properties (income vs interest) simply so they can claim a proportion of that loss back at tax return time!

Personally I think being positively geared is always preferable. I'm not sure how you would be better off having a mortgage as although there would be less income to tax you would be paying 9% interest on the mortgage.
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Old Oct 2nd 2008, 5:35 am
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Default Re: tax/financial advice please

hi sorry to jump in on your thread, but do either of you know anything about pensions as well? I was recently told that we should get our pesions over to oz in the first 6 months, as we will be taxed on them. are there any helpful websites you could recommend to find out if this is right?
thanks
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Old Oct 2nd 2008, 7:33 am
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Default Re: tax/financial advice please

Originally Posted by egghead4 View Post
I was recently told that we should get our pesions over to oz in the first 6 months, as we will be taxed on them. are there any helpful websites you could recommend to find out if this is right?
www.ato.gov.au

After 6 months you'll get taxed on the investment return for that particular tax year (this only applies to money purchase schemes not to final salary schemes).

Your UK pension fund administrators have to send you an annual statement and that gives you the figure for the investment return. If you look at your statement for 2007/08 you probably find there was no investment return (a negative figure). And for 2008/09 it'll probably be the same (share markets not doing too well at the moment). But when you have a positive figure for investment return, you add that amount to your annual income in Oz on your tax return.

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Old Oct 2nd 2008, 7:40 am
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Default Re: tax/financial advice please

Originally Posted by GinaUK View Post
www.ato.gov.au

After 6 months you'll get taxed on the investment return for that particular tax year (this only applies to money purchase schemes not to final salary schemes).

Your UK pension fund administrators have to send you an annual statement and that gives you the figure for the investment return. If you look at your statement for 2007/08 you probably find there was no investment return (a negative figure). And for 2008/09 it'll probably be the same (share markets not doing too well at the moment). But when you have a positive figure for investment return, you add that amount to your annual income in Oz on your tax return.

Gina
If your investment return (on UK pension fund) is negative can you offset that loss against your Australian income if performing a pension transfer?
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Old Oct 3rd 2008, 2:13 am
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Default Re: tax/financial advice please

Originally Posted by bcworld View Post
If your investment return (on UK pension fund) is negative can you offset that loss against your Australian income if performing a pension transfer?
No. You can't offset losses from foreign income against an Australian source of income.

But you can carry forward foreign losses and offset them against foreign income of the same category in future tax years.

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Old Oct 3rd 2008, 5:04 am
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Default Re: tax/financial advice please

Originally Posted by GinaUK View Post
www.ato.gov.au

After 6 months you'll get taxed on the investment return for that particular tax year (this only applies to money purchase schemes not to final salary schemes).

Your UK pension fund administrators have to send you an annual statement and that gives you the figure for the investment return. If you look at your statement for 2007/08 you probably find there was no investment return (a negative figure). And for 2008/09 it'll probably be the same (share markets not doing too well at the moment). But when you have a positive figure for investment return, you add that amount to your annual income in Oz on your tax return.

Gina
I'm not 100% sure about this but you may be mixing up a couple of things (FIF and 1936 Tax Act) here.

Some pensions count as FIFs (Group and Personal pensions do, COMP and Final Salary don't). If you keep these in the UK and you exceed the FIF $50k limit then the gains in the year may be subject to tax.

The 6 month rule comes from the 1936 tax act and says that if you transfer later than 6 months then you are potentially taxed on the gain since you arrived. I've not seen any rule saying that certain pensions are exempt (but maybe I just haven't found the rule).

Note to OP. Don't worry too much about the 6 month rule. You only get taxed 15% on the GAIN not the whole amount and you can deduct the transfer fees to reduce the gain.
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Old Oct 3rd 2008, 8:50 am
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Default Re: tax/financial advice please

Originally Posted by MartinLuther View Post
I've not seen any rule saying that certain pensions are exempt (but maybe I just haven't found the rule).
I didn't say any pension funds are exempt. What I said was that the rule does not apply to final salary schemes.

That's because there is no individual fund for each employee as there is with a money purchase scheme. With a final salary scheme there is therefore never an investment gain or an investment loss for the individual.

Instead, a final salary scheme is a promise by the employer to pay the employee a certain amount of pension on retirement. A popular form is the promise to pay a pension of 1/60th of the employee's final salary for every year of service. If someone joined such a scheme at age 25 and left at age 35, they'd be entitled to a pension of 10/60th of their final salary (and the scheme rules will say how "final salary" is defined. It could be something like the average salary over the last three tax years minus bonuses and overtime).

The Civil Service and the NHS still run final salary schemes. Apart from that though there are now very few people under the age of 40 who are members of a final salary scheme. Since the early 1990s they've become incredibly expensive to run for employers and for that reason most company pension schemes these days are a money purchase scheme (by-the-way, a COMP is only one type of money purchase scheme, but there are other types as well).

Australia does not have any final salary schemes. All "super" funds are money purchase schemes.

I hope this helps you to understand why the rule of paying tax on one's UK pension fund invetment return after 6 months in Australia does not apply to final salary schemes.

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Old Oct 3rd 2008, 10:13 pm
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Default Re: tax/financial advice please

Originally Posted by GinaUK View Post
I didn't say any pension funds are exempt. What I said was that the rule does not apply to final salary schemes.

That's because there is no individual fund for each employee as there is with a money purchase scheme. With a final salary scheme there is therefore never an investment gain or an investment loss for the individual.

Instead, a final salary scheme is a promise by the employer to pay the employee a certain amount of pension on retirement. A popular form is the promise to pay a pension of 1/60th of the employee's final salary for every year of service. If someone joined such a scheme at age 25 and left at age 35, they'd be entitled to a pension of 10/60th of their final salary (and the scheme rules will say how "final salary" is defined. It could be something like the average salary over the last three tax years minus bonuses and overtime).

The Civil Service and the NHS still run final salary schemes. Apart from that though there are now very few people under the age of 40 who are members of a final salary scheme. Since the early 1990s they've become incredibly expensive to run for employers and for that reason most company pension schemes these days are a money purchase scheme (by-the-way, a COMP is only one type of money purchase scheme, but there are other types as well).

Australia does not have any final salary schemes. All "super" funds are money purchase schemes.

I hope this helps you to understand why the rule of paying tax on one's UK pension fund invetment return after 6 months in Australia does not apply to final salary schemes.

Gina
I didn't say that you said certain pension funds were exempt..... oh we could carry that one on for ever!

In the UK I ended up with 4 different MP pensions (of 3 different types) of which only 1 was a COMP. When I started work Final Salary schemes were already becoming unavailable for the reasons you stated. I lived and worked through the demise of the final salary scheme

Anyhoo: I can see what you're getting at now and can see that you've not mixed up FIF and 1936 (unlike some other posters I've seen on here).

However I am surprised that the ATO effectively allows someone to accumulate pension tax-free overseas* with the possibility that they transfer it near the end for tax-free distribution.

*Assuming that the cash-in value would be different from arrival to transfer.
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Old Oct 4th 2008, 4:39 am
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Default Re: tax/financial advice please

Originally Posted by MartinLuther View Post
However I am surprised that the ATO effectively allows someone to accumulate pension tax-free overseas.
The keyword here is "accumulate". With a final salary scheme you don't accumulate anything. Your entitlement stays the same: 1/60th (or whatever) for each year of service. As you don't accumulate, there is nothing to tax you on at that point.

But with a money purchase scheme the individual has his/her own investment fund. And the value of that can go up or down. (Which gives the ATO something to tax you on.)

(By-the-way, only someone very financially unaware would take a transfer value from a final salary scheme shortly before reaching retirement age. At that point - shortly before retirement age - the pension from a final salary scheme would be substantially more than the pension achieved from the transfer value!)

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Old Oct 5th 2008, 10:13 am
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Default Re: tax/financial advice please

Originally Posted by MartinLuther View Post
I didn't say that you said certain pension funds were exempt..... oh we could carry that one on for ever!

In the UK I ended up with 4 different MP pensions (of 3 different types) of which only 1 was a COMP. When I started work Final Salary schemes were already becoming unavailable for the reasons you stated. I lived and worked through the demise of the final salary scheme

Anyhoo: I can see what you're getting at now and can see that you've not mixed up FIF and 1936 (unlike some other posters I've seen on here).

However I am surprised that the ATO effectively allows someone to accumulate pension tax-free overseas* with the possibility that they transfer it near the end for tax-free distribution.

*Assuming that the cash-in value would be different from arrival to transfer.
A quick technical note.

The legislation relating to the assessment of transfers of funds into Australian superannuation from overseas pension funds is now in the 1997 Act, at section 295-200:
http://law.ato.gov.au/atolaw/print.h...99991231235959

Also:
http://law.ato.gov.au/atolaw/print.h...99991231235959

Note also that - I recall - transfers from the UK must not be distributed to a beneficiary within 5 complete tax years of departure from the UK under the QROPS provisions.

Best regards.
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Old Oct 5th 2008, 11:11 am
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Default Re: tax/financial advice please

Originally Posted by pks View Post
My partner & I have been in Oz a year we had a nice bit of equity in our UK house so bought an apartment outright that we let out short term, we rent the house we live in. I'm salaried & my partner is self employed. Our intention was to save the income from the apartment, after tax, as we're not staying in Oz long term. Now we find out that this is probably the worst thing we could have done tax wise, apparently we're very easy targets to extract as much tax as possible. We've been advised to get a mortgage on our property. This kind of defeats the whole objective to why we bought it in the first place. It seems the Oz government encourage people to be in as much debt as possible, which in the current climate could easily go 'tits up!'
I'm just extremely confused by it all.
Help!!!!!
To quote Galbraith again."In financial matters the majority are wrong 100% of the time".

Making money and paying tax on it is the best thing you can do.Losing money and claiming a tax deduction is the worst thing you can do. To put it simply say you leave after ome year.You make 10K in rent and pay 3K to the tax man.Having a mortgage you have a 10K deduction> The tax man gives you 3K back.Never uderestimate how many people cannot work out that 7K is more thAn 3K if the sentence has the words tax deduction tax deduction in it.

The OZ govt does not encourage people to be in as much debt as possible.The OZ govt is not responsible for the madness of crowds. Making money and paying tax on it is a wonderful thing. Losing money and claiming a tax deduction will send you bankrupt.The crowd thinking and repeating the same thing is just madness.Making money is better than losing money,it doesn't matter how many people think and repeat the opposite to that.There will never be a cure for the madness of crowds.

To make it more explicit which business would you buy,one that is making money ,or one that is losing money
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