Money | Reflecting on the year that was to plan for the year ahead

What if we could have predicted what happened in 2020. Photo: Shutterstock.
What if we could have predicted what happened in 2020. Photo: Shutterstock.

Welcome to another year - a time to reflect on the year that has passed, and consider the strategies you need to put in place to make the best of the year ahead.

But first let's play a game of make-believe; let's pretend it's January 1, 2020. You are at a beach resort, and notice a psychic advertising her wares. Just for fun, you hand over $50 and ask what kind of year 2020 is going to be.

She looks up from her crystal ball with a worried look and says: "It's not going to be good. I foresee a pandemic that will kill millions of people around the globe. This will cause rampant unemployment as people are forced to stay quarantined at home.

Furthermore, international air travel will be banned, and cities will be deserted as commuters are required to work from home. Many people will be unable to pay their mortgages, and the interest on these loans will build up as banks give them repayment holidays, but no waiver of interest."

You are astounded, because at this stage markets are strong and the year ahead is looking good. You ask the obvious question: "What will stock markets and property markets do if your prediction is true?"

She responds, "Sorry - I don't predict race winners or shares. If I could do that, I wouldn't be telling fortunes for a miserable $50. That's something you will need to work out for yourself."

Off you go to your advisers to tell them about the predictions and brainstorm where markets will go if the psychic is right. The consensus is that both stock and property prices will plunge, or at least stay flat, as the news gets gloomier by the day. The lack of demand for goods and services will play havoc with business profits, and many will go out of business, never to return.

It's hard to fault the reasoning, but come back to the present moment. Things didn't quite work out like that.

Certainly stock markets plunged in March, but most of them have been performing strongly since then. And despite gloomy predictions about what would happen in the markets if Donald Trump lost the presidential election, in reality, stocks have shrugged off the Biden win and continued to climb.

In Australia, property prices have remained strong, even surging in resort areas such as Noosa and the Gold Coast, as people discover it's more fun to stay near home than to face the rigours of overseas travel.

Older baby boomers are cashed up, thanks to refunds of the money they intended to spend on overseas travel and cruises, and they have used that windfall to update the Benz, the Beemer or the Lexus.

So what can we expect in 2021? It's a fairly safe bet that interest rates will stay down, and investors will continue to buy quality property and shares in an unrelenting quest for yield.

Almost certainly, an effective COVID-19 vaccine will become available, and if this can be combined with a quick and effective test for travellers, it's reasonable to assume that life may start to return to a degree of normality.

However, the pandemic has changed some ways we think. I expect business travel to remain weak, as business people have discovered that a Zoom conference is almost as effective as travelling - plus much cheaper and less tiring. Working from home will increase, and there will be a lack of demand for inner city office property.

The most important thing is to think of life as a long journey, with inevitable bumps along the way, and do everything you can to make the best of your own personal situation.

Here's to a healthy and happy 2021.

Noel answers your money questions

Question

I am 59, semi-retired, and my wife is 50, working full time. We own an investment property as joint tenants and are about to buy another with a mortgage of $600,000.

My wife's income is much greater than mine. Can we change ownership of our first property to tenants in common, split 90/10 with my wife as principal owner?

Could this be done by gifting (and if so what would the tax implications be), or does it have to count as a sale with CGT payable? Would this be worth doing for tax purposes? What are the pros and cons of buying the new property with my wife as sole or principal owner?

We intend keeping both properties to generate retirement income, barring unforeseen financial circumstances.

Answer

Any transfer of part ownership of the investment property to your wife will trigger capital gains tax, as the transfer will be deemed to have taken place at current market value. Your accountant will be able to do the sums for you, but I suggest the costs may outweigh the benefits.

Buying an investment property in these days of low interest rates is not going to save much tax if any - the loan rate should be no more than 3 per cent per annum and I would hope the property would also be returning at least 3 per cent per annum. Therefore, it should be positively geared from the outset. An important thing to consider is how long you will keep the property.

The problem you will face when you wish to sell the property as, unlike shares, you cannot sell in part, therefore when the transaction happens you will face CGT on the whole sale. Therefore, your focus should be on what the taxable income of the owner might be when you dispose of the property. You may well decide that a 50-50 ownership is better if you think you will both be retired when the time comes to sell.

Question

What is the CGT position where a person with a life interest in a residence remains for more than two years and the property is not sold within the two year period?

Answer

Julia Hartman of Bantacs says that there is an extension of Section 118-195 to cover this situation. The catch here is that there is not a two-year interval or reset of the cost base when the life tenant dies.

Accordingly, there will be a CGT event even though a high portion of that gain will be exempt due to the life tenant's presence. The base cost starts with the market value at the date of the deceased's death assuming at that time it was their or their spouse's main residence. This cost base can be increased by all the costs of holding the house, even insurance, lawn mowing, cleaning etc.

Question 

My wife entered aged care two and a half years ago and the daily accommodation fee interest rate at entry was was 5.77 per cent.

At this time I could only afford to pay half the room price. On querying the aged care home on why I was still paying the full rate and not the current rate they stated that the 4.10 per cent was only for new clients entering into aged care now. I find this hard to fathom as surely we should all pay the same rate that is current at this time. The home told me they have had a lot of clients asking about this difference.

Answer

Unfortunately, the government is firm on the rules, and you are stuck with the interest rate from the date your wife entered care, unless she moves to another room or another facility. Take advice if you are contemplating a move because it may have an adverse implications for your overall costs. While the rate you are paying is higher than the current rate it is much lower than previous rates that have applied - some have been in excess of 11 per cent per annum.

  • Noel Whittaker is the author of Retirement Made Simple and numerous other books on personal finance. noel@noelwhittaker.com.au