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Archives for December 2018

A Strategy to Counter Labor’s Franking Credit Policy?

No doubt you are aware of the Labor Party policy that if elected at the next federal election they will no longer permit unused franking credits to be refunded to taxpayers and self-managed super funds (SMSF’s) in pension phase.  You may also be aware an exemption has been provided to Age Pension recipients.

The planning for retirement for many SMSF’s was done so on the premise that excess franking credits would be received to supplement investment earnings the fund’s assets generated.  This effectively would result in the return on equities paying fully franked dividends to be increased by 30% or the amount of company tax that was paid on that profit the company has decided to distribute to you.

Many of our client’s portfolios hold shares in CBA (Commonwealth Bank) which has a current yield of 5.95%.  The dividends CBA pays are 100% franked which means the true yield to a taxpayer entitled to receive a refund of those franking credit becomes 8.5% (5.95% / 70% * 100%).  A rather compelling reason to hold CBA in this low-interest rate environment some might argue…but that’s for another time…

Let’s assume you have a 2 member SMSF that is in full pension phase and you are not eligible for the Age Pension.  Let’s also assume the SMSF’s portfolio receives $30,000 of fully franked dividend income which once grossed up for franking results in a total dollar return of $42,857.  An additional amount of $12,857 or 30% of the total return has been received due to the refunding of the franking credits.  Under Labor’s policy, the $12,857 will be lost!!

One interesting change in the SMSF landscape happens on 1 July 2019.  From that date, the membership rules of an SMSF change in that the number of members permitted will increase from 4 to 6.  What does this have to do with my SMSF losing my franking credits I hear you say? Well, a lot!!

A strategy worth considering is increasing the number of members in your fund to include those in accumulation phase because the earnings attributable to their member accounts will be taxed at the rate of 15%.  The advantage of this strategy is; rather than lose an entitlement to receive those franking credits altogether, they can be offset against the tax raised against the income attributable to the members in accumulation phase.

For example:
Fully franked dividend income $30,000
Franking credits $12,857
Other income $15,000
Taxable income $57,857
Proportion of members in pension phase 60%
Proportion of members in accumulation phase 40%
Tax rate applicable to a super fund 15%
Gross tax $3,471.42
Less: franking credits that can be used -$3,471.42
Net tax $0.00

A further advantage of adding members in accumulation mode into the SMSF is their taxable contributions are not pro-rated.  This means the contributions tax of 15% levied on those concessional/taxable contributions can be also be soaked up by franking credits to mitigate the net tax position.As you can see for the hypothetical example above, by including members into the SMSF who are in accumulation mode, part of the franking credits can be used to reduce any potential tax liability to nil.  Whilst this is not as advantageous as receiving a full refund of those excess franking credits there is a minor advantage gained in reducing the amount of tax the SMSF pays overall.

As the great Kerry Packer said at the House of Representatives Select Committee on Print Media way back in November 1991:

“I pay whatever tax I am required to pay under the law, not a penny more, not a penny less…if anybody in this country doesn’t minimise their tax they want their heads read because as a government I can tell you you’re not spending it that well that we should be donating extra.”

Please note this article only provides general advice, it has not taken your personal or financial circumstances into consideration. If you would like more tailored financial advice, please contact us today. One of our advisers would be delighted to speak with you.

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Failed Investments

“$16m Goldsky fund ‘Ponzi Scheme’ ensnares high-profile sports stars” – this was the headline of the weekend Courier Mail.

What it is about us that makes us risk our hard-earned cash when someone sells us a good story?

There have been any number of so-called Ponzi schemes uncovered over the years and we haven’t seen the last of them.  A Ponzi scheme is a type of fraud that pays profits to its investors from funds invested by newer investors. The ‘success’ of a Ponzi scheme relies on a continued flow of funds into the scheme and little in the way of withdrawal requests. There is often no underlying investment made in spite of the reporting that is provided to investors.

These schemes are usually operated by people who excel at sales, people with the gift of the gab and a great personality, who are able to convince people to invest with them and then convince the investors that the investment is performing outstandingly well – until it crashes. Someone eventually twigs that things aren’t as they should be, with the result that a lot of people lose a lot of money.

Why would anyone invest in one of these things, or at least invest in something that could be less than what it purports to be?

We are suckers for the ‘get rich quick’ type of line that these operators will use and that level of greed will make us – for greed is what it is, will make us take the risk.

A simple portfolio of good quality ASX-listed shares that will appreciate over time and produce a sustainable income just doesn’t cut it when compared to the promises made by our dodgy operators.

Remember the old fable about the tortoise and the hare? This is equally true of investing. Here at The Investment Collective, we subscribe to the theory that a properly constructed portfolio of shares, fixed interest and International managed funds will achieve your objectives over time – safely. This type of portfolio will also give you transparency so that you know what you own, you know what you are invested in and you know the type of income that it will generate for you.

Why would anyone think that the ‘get rich quick brigade’ have a better idea?

Call The Investment Collective if you would like further information on how to invest safely and transparently.

Please note this article provides general advice, it has not taken your personal or financial circumstances into consideration. If you would like more tailored financial advice, please contact us today.

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Will I Run Out Of Money?

What if I run out of money?

“I read in the paper on the weekend that more and more retirees are actually running out of money. I am really worried that this will happen to me.”

There are many factors involved in answering the implied question. We know that:

  • Life expectancy for our population is rising every year – we are living longer.
  • Centrelink thresholds have changed and therefore excluded many retirees from receiving a benefit payment.
  • Interest rates are at all-time lows.

We know the stockmarket is volatile and we are only 10 years on from the Global Financial Crisis (GFC) that had a major impact on wealth. We are still nervous about putting our money into this environment because of the risk of losing it.

So instead of that, we are putting our money into the bank.  Did you know that the average term deposit rate since 2004 (all terms, all institutions: source RBA) is 3.45%?

Looking at an average Balanced portfolio of investments, the annual compounded return since inception in 2004 has been 6.62%.  This period includes the GFC-affected years.

This means that if you had invested $50,000 into a Balanced portfolio of investments, reinvested dividends and other earnings, and did not take anything out of it apart from portfolio management fees, you would now be sitting on about $126,000.

If you had taken the same amount and invested it in a Term Deposit at the same time, drawing nothing and not paying any management fees on it, you would now have just under $81,000.

Tell me which of those clients is going to run out of money first if they began drawing a payment from it?

We forget that one of the greatest risks we can take is that our money is simply not earning enough to allow it to support the lifestyle we desire. They have replaced what they see as investment risk with risk of another kind – the risk of running out of money.

There is no question in my mind that we should be properly investing our money in a portfolio that best suits our risk tolerance, rather than sitting it in a term deposit, if we wish to mitigate the risk of running out of money.

 

Please note that this article provides general advice and has not taken your personal or financial circumstances into consideration. If you would like more tailored advice, please contact us today.

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5 Steps To Budget For A Debt Free Christmas

Christmas is fast approaching. It will not be long until Santa is saddling up his reindeer and heading to town.

The festive season gives us all a chance to reflect on the year that was, spend valuable time with our loved ones and allow us to re-charge the batteries before doing it all again!  It is also a time that is associated with spending money and a lot of it!

Here are five quick and easy steps to help you put in place your Christmas budget and make this year a debt free Christmas.

1.   Make a list of everyone to whom you would like to give a gift to

This will provide you with focus.

2.   Figure out how much you can afford to spend

This calculation is relatively simple. How much money can you save between now and December 25th? How much of this are you willing to dedicate towards gifts? This figure must be an amount you save in cold hard cash and not the dreaded credit card.

If the number is low, that is okay. Remember, Christmas is not about financially crippling yourself just so you can feel good about giving someone an expensive gift.

3.   Prioritise

Refer back to your list you made in Step 1.

Now you are going to make it a shorter list. Life is about prioritisation.

Separate your list into three groups – paid gift, made gift and no gift.

Since you now know how much you can afford (Step 2), this will give you a better idea of how many people can be on the paid gift list. Knowing your time available, you can limit your made gift list. The others – no gift.

4.   Allocate accordingly and complete

Paid gift – next to each name on your paid gift list subscribes a monetary amount. Be sure that total does not exceed that number you came up with in Step 2. If you had planned to spend $100 on your partner, stick to it. Do not decide at the last minute that you would really like to get them that iPad they wanted, or those new diamond earrings. Stick to the plan!

Made gift – if you are arty and creative make something. Customized cards or Christmas tree decorations are simple yet effective ideas. If you are good in the kitchen, why not bake something? Christmas puddings, gingerbread and other treats are a good idea for close friends, neighbours and work colleagues.

No gift – sometimes the simple things in life mean the most to some. A personalised handwritten card, email or simply just picking up the phone and having a conversation with a family member or friend are great ways or sharing the festive spirit as well as being cost-effective.

5.   Make it work

Do not spend more than you budgeted. You have a plan now stick to it! Discipline is key. Remember you can have a giving spirit without having a negative bank balance.

Don’t forget the reason for the season.

The above is provided as general advice only. It does not take into your personal circumstances or financial goals. If you would like to discuss further the opportunities involved with budgeting and having a financial plan, call to book an appointment with one of our talented financial advisers today!

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