A Time To Lose Interest
Sun Herald
Sunday July 23, 2000
WE ARE in our early forties and suffered a business loss of about $50,000 which we can claim against. Soon we will have about $70,000 to invest after a recent death in my family. We earn $50,000 altogether and have no super to speak of. Our mortgage is $130,000 and we have a car loan of $15,000. If we didn't have the capital loss I would probably pay off most of the house with a deposit for negative gearing but this is an advantage for us so to speak, and it puts a different light on things.
ID, Port Macquarie
YOU DON'T explain whether your business losses are in your personal name or in the name of a company or trust through which you previously ran the business.
I assume you are aware of the continuity of business tests covering company losses, ie, the same majority ownership has continued, or alternatively, the ``same business" test. That is, the same business, but different owners.
If your capital losses can be used to offset future capital gains, remember that they cannot be used to offset income earned. (This is one of the more unfair rules of the tax laws in that the Government taxes 50 per cent of gains as income but will not allow past losses to offset income.)
Assuming it will take some years before any $70,000 investment grows sufficiently large to show a $50,000 capital gain and thus fully utilise your capital losses, you can earn an awful lot of taxable income before you ever get around to using up your losses.
You can also spend a lot in interest over those years. For example, if you pay the interest on a $50,000 loan over 10 years, it can chew up $35,000 at a 7pc interest rate, or $40,000 at an 8pc interest rate. I suspect you would do best to focus on minimising your interest payments rather than on possible future capital gains, ie, eat the bird in hand and don't worry about a recipe for those in the bush!
Why not put the money towards the car loan first, since you are probably paying a rate of 10-12pc, and the rest towards the mortgage. Then, if you are in a position to make deductible contributions into super, or to use salary sacrifice, contribute the pre-tax amount of what would otherwise have gone into paying off that debt, into a super fund.
If you cannot make deductible contributions, throw the full amount of current debt repayments into the remaining $75,000 mortgage and pay it off as quickly as possible. Then divert these payments into super to provide for your old age.
© 2000 Sun Herald
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