Share In The Growth And Profit With Blue Chips

Sun Herald

Sunday December 3, 2006

George Cochrane

Read the paper, watch the TV business news and get into the swing of things, George Cochrane writes.

I AM a 55-year-old woman earning $50,000 a year. I have $48,000 in super, own my home and support my two adult children (19 and 22) who are full-time students. As part of a property settlement I have received $150,000 in super spread over seven different funds and approximately $150,000 in shares. I have rolled over the super into one fund. What should I do with the shares? I am told they are blue chip but I have no knowledge of the sharemarket. If I sell them I am up for capital gains tax. Would I be best to have everything in super? I expect to work full-time until I am 60, and then work part-time before retiring at 65. L.A.

I like shares and I love blue chips, a title which refers to big healthy companies such as BHP, Commonwealth Bank, Woolworths and the like. By owning them, you share in the growth of some of Australia's largest companies and, as they make profits, they pay you franked dividends (which means that you get a tax credit for the 30 per cent tax they have already paid so you pay no more tax). Hopefully, their profits and their dividends will grow over time.

Use them to learn about the stockmarket, which is a key to growing one's wealth. Read the business section of the newspaper, watch the TV business news and, after a couple of years, you'll be in the swing of things. You could make it a family matter by telling your children that they will inherit the shares (it's the best way to avoid capital gains tax).

Mean trick of taxable income

I RECEIVE a State Super pension, get about $2000 bank interest a year and am over 60. I understand that from July 1, 2007, I will not pay tax on my pension amount. Will I be have to pay the Medicare levy? I understand the levy is based on my taxable income and as I will not be taxed on my pension income, will my future levy be nil? I happen to save some of my pension and then get interest on the amount saved. At what rate will I be taxed? P.B.

The Medicare levy is calculated on one's taxable income. Previous governments played a mean trick by using the concept of taxable income that is assessed at a zero rate of tax. So, although you pay no tax on such income, the amount still counts as assessable income.

For example, if one withdraws some post-1983 component as a lump sum from a super fund, it is untaxed in practice, but the Australian Taxation Office deems it to be taxable income, taxed at a zero rate.

Thus a lump sum withdrawal in 2006-07 can affect one's claims for such items as the Medicare levy exemption, government superannuation co-contribution, senior Australians' tax offset, low income tax earners offset, superannuation spouse offset, family tax benefits and the Commonwealth seniors' health card.

Super benefits paid after June 2007 will not count as assessable and thus will not count towards your Medicare levy.

For those people qualifying for the senior Australians' tax offset, the Medicare levy's low-income thresholds for the 2005-06 year are currently $21,968 for singles and $31,729 for families with no children. A reduced levy is assessed until a higher threshold is reached at $23,749 and $34,301 respectively. The figures for 2006-07 are not yet released.

Different thresholds apply to other individuals ($16,284) and pensioners below age pension age ($19,583 for singles, $27,478 for families with no children, up to $42,616 for families with six children).

Head for the shoe box

MY very elderly mother has been investing in shares for years, accumulating but never selling. While she has maintained records of dividends for annual income tax purposes, she has never understood the importance of recording details of purchases, dividend re-investments, and so on, to satisfy capital gains tax rules. She is unclear what brokers she has used - there have been several. Can you suggest how this problem may be tackled? F.G.

Link Market Services, formerly called ASX Perpetual Share registrars, tell me their computer records go back eight years and beyond that you need to write to them (Locked Bag A14, Sydney South, NSW 1235) and request a search through the archives. However, they charge a fee of $38 for searching through the first year for each stock and then $30 per year thereafter, capped at $250. That could get quite expensive for a large portfolio. Your best bet is to go through your mother's shoe boxes, hoping she hasn't thrown any papers out. Brokers are usually quite meticulous in sending out the paperwork.

Reconsider your plans

I OWN a house and am keen to sell. I'd expect about $200,000 which I will invest, probably in a bank with the highest interest. I am unemployed and receive Newstart. How much can I invest without affecting my Centrelink payment. My plans are to move to the coast and rent a property using the interest earned from the proceeds of the house sale. G.G.

You should be wary about pursuing this course of action. For a single non home owner, the Newstart allowance cuts off completely for total assets above $278,500. Also, the Centrelink income test will act to reduce your allowance in that, over a full financial year, it will deem your $200,000 in the bank to be earning income of $355 a fortnight at current rates. Assuming no other income, the Newstart allowance begins to reduce by 50 cents for every dollar earned above $62 per fortnight up to $250 per fortnight and then by 60 cents in the dollar for income above that. Thus a deemed fortnightly income of $355 will reduce your Newstart allowance by $157 per fortnight which, for a single person, would take it down from $421 to $264 per fortnight.

Another aspect is that the income you receive as interest paid on your money is taxed while the rent you pay does not carry a tax deduction.

If you have a question for George Cochrane, send it to Personal Investment, PO Box 3001, Tamarama, 2026. Helplines: tax 132 861, bank ombudsman 1300 780 808, pensions 132 300.

© 2006 Sun Herald

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