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Posts by The Investment Collective

Westpac Bank Controversy (WBC)

AUSTRAC has recently begun civil proceedings against Westpac Bank (WBC) in relation to the alleged contraventions of its AML/CTF obligations. In particular, AUSTRAC has accused Westpac of $23 million breaches, including a small number of transactions that appear to be linked to child exploitation in the Philippines.

Although difficult to estimate, it is expected, WBC will receive a large fine well in excess of what CBA was given earlier his year.

Since the announcement on 20th November, Westpac’s share price has fallen approximately 7.5%.

Despite the immediate issues facing the company, it is still a good cash generating business and there may be future opportunities that warrant further investigation and as the old saying in financial services circles goes, ‘don’t try and catch a falling knife – let it hit the floor and then pick it up.’

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

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Strategies to equalise super

In most relationships it’s common for couples to have different super balances, especially where one partner has taken time out of work to rear children or for whatever reason, has not been engaged in full-time employment.  For employees, the amount of employer sponsored contributions made for us is also influenced by salary level, which generally increases the longer we’re in the workforce.

Changes to super since 1 July 2017 have put this issue under the spotlight and provided a real incentive to plan appropriately.  It only seems like yesterday the $1.6M cap on the amount of super that could be held in the tax-free pension phase came to life but it’s been in force for almost two and a half years.  Time flies when having a ‘super’ amount of fun…terrible attempt at humour…

‘Equalising’ the super balances between couples can help to avoid the need to hold amounts in excess of the $1.6 million transfer balance cap in an accumulation account, where profits are taxed at 15%, or worse, be held outside the tax-friendly super environment which could expose profits to the larger marginal individual rates of tax.

Another change to the super rules that are now available to individuals with a super balance less than $500,000, is the ability to carry forward unused concessional contributions i.e. before tax contributions, and make a ‘catch-up’ contribution in the future. This rule provides a real opportunity to maximise retirement savings and gain a personal tax deduction, especially once the nest becomes empty, the mortgage paid and surplus cash accrues.

Couples can also consider contribution splitting, which allows one member to rollover up to 85% of their concessional contributions made in the prior year to their spouse.

Another strategy available is where a member’s income from personal exertion is below $37,000.  Their spouse may receive a tax offset of up to $540 if they make a spouse contribution of up to $3,000.

A strategy we employ at The Investment Collective that is specifically appropriate for couples who have reached 60, is the recontribution strategy.  This involves withdrawing super from one member’s account and then recontributing some or all of the withdrawal into the other member’s account.  This is really beneficial where one member’s balance is above the $1.6M transfer balance cap.  The strategy can also mitigate the impact of death benefits tax when the remaining balance of super passes through to a deceased estate on the death of the surviving partner.

Equalising super balances between couples can bring tax benefits, assist with estate planning and boost the retirement nest egg.  Come in and have chat with us…you never know where it will lead…

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

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‘Death Duties’ in Australia

There are currently NO ‘death duties’ in Australia, all Australian states having abolished them back in 1979.

However, there are taxes that may be payable as a consequence of death. In other words ‘if it walks like a duck, and sounds like a duck…it’s a duck, isn’t it’?

There are several of these but the one I want to focus on today is the potential tax that’s embedded in your superannuation benefits. It’s embedded in a way that you might not even see unless you know what you’re looking for.

To see ‘this duck’ you need to first understand that your super benefits are categorised as either ‘taxable benefits’ or ‘tax-free benefits.’

The first is ‘taxable benefits.’ These include benefits arising from salary sacrifice contributions, personally deductible contributions or employer contributions (i.e. the 9.5% super guarantee). Essentially, any benefits arising from contributions on which someone’s received a concession (read ‘tax deduction’). Whether there’s any tax actually due on these benefits depends on who receives them. If at the death of the super account holder the taxable benefit is paid to a spouse or dependent child, for example, no tax is payable. The logic being that the benefit is actually helping someone who was directly dependent on the deceased; this being one of the purposes of superannuation. If on the other hand, the taxable benefit is paid to an adult child who is not financially dependent on the deceased, tax of up to 16.5 % (or more) may be applied. The logic being that superannuation was never designed to benefit individuals who were not financially dependent on the decease and, as such, the Government wants to ‘claw back’ some of the concessions (read ‘tax deduction’) that were received by the deceased.

Keep in mind that for someone who is already accessing their super via a pension (e.g. someone over the age of 65), the distinction between ‘taxable’ and ‘tax-free’ benefits is irrelevant. Any and all amounts paid to them, while they are alive, are tax-free in their hands.

However, it’s when this person dies that the ‘taxable’ benefits could turn into a ‘death duty’ (as noted above, depending on who receives it.)

For example, earlier this year I met a lovely gentleman in his early 70’s who was on his death bed. He had no partner and only one adult son who was not financially dependent on him. He possibly only had a few days, perhaps weeks to live and wanted to know if there was anything he should do while he was still alive to reduce tax payable by his son (his sole heir). As it happens, he had about $200,000 in his super account balance consisting entirely of taxable benefits.

My advice to him was to immediately contact his super fund and arrange for the full redemption of his super paid into his personal bank account. As noted above, any and all payments received from super in respect of a person over age 65 are tax-free ‘in their hands’, in other words, while they are alive. This simple action saved his son about $33,000 in ‘death duties.’

Keep in mind that this can be a tricky area, and there’s a bit more to what I’ve described above, so it’s important to seek out the right advice.

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

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Protecting your Super – changes and impacts

Whilst many Australians hold only one super account, there are many who hold multiple. Across the board the balances in these super accounts are often smaller and/or the account is no longer receiving contributions. The member is sometimes unaware that they have insurance cover within their super.

The Federal Government introduced the Protecting Your Super (PYS) Package Act on 1 July 2019. The PYS package is designed to protect members with smaller super balances from having their benefits eroded by fees and insurance premiums. Some of the key reforms covered by the package include:

  • Super accounts with balances under $6,000 that are inactive for a period of 16 months, i.e. they have not received any contributions or rollovers, will be closed;
  • Exit fees on super accounts will be banned. This means you can rollover or transfer your super to a different fund without being charged a fee;
  • Super accounts with insurance that have been inactive for 16 months will have the insurance cancelled unless the member opts-in to keep it.

Whilst on the whole this will help protect the consumer, you need to be aware of these changes as non-response to communications may result in a loss of benefits to you.

If you are impacted by the above you will receive correspondence from your superannuation fund explaining the options available.  If you receive this communication it is important that you read and action any requests.  If no action is taken and this relates to insurance, your policy will be cancelled and you will be left without cover.

If you have any questions or concerns regarding these reforms or the communication you have received please contact your adviser who can provide guidance.

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

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The motivational concept of Ikigai

One of the exciting things about working in financial services is the sense of synchronicity between what we learn in theory and how we see it play out in practice. Rarely a day goes by when I’m not reminded how meaningful our work is, in breaking down the complexities of the financial world, so our clients can move toward achieving their goals in a way which seems simple. Helping my clients provide for their future, for their families’ future, is how I make a living and in turn provide for my family… could there be any better motivation for getting out of bed each day?

I saw this concept of motivation and purpose beautifully illustrated when I attended a symposium for health professionals, as part of my work for an organisation that is involved in helping doctors manage their own health.

Like other great graphic organisers, this one looks impressive in and of itself. The overlapping outer circles look petals of an iconic Asian flower such as the chrysanthemum, which features prominently in Chinese artwork as a symbol of survival. In the ‘inner petals’, one can make out a face or a star or a mask. And all of those layers meet in the middle, in its heart – as all good treasures do – at the point described as ikigai, which loosely translates to your reason for being.

The Japanese island of Okinawa, where ikigai has its origins, is said to be home to the largest number of centenarians in the world. Researchers who try to understand their vitality have arrived at varying conclusions – about their diet and exercise, the quality of their air – but they also keep coming back to the concept of a meaningful life directly contributing to a longer life. To put it another way, a meaningless life – a sense of emptiness, uncertainty or uselessness about how you spend your days – could well shorten your lifespan.

Just days after I saw this concept of ikigai illustrated for the first time, I read in the paper about a local sculptor who is using her previous experience in retail to develop her artistic products and processes. She said the hardest thing about art is the stigma that artists make their pieces ‘for the love of it.’

“If you go into making art with the mentality you won’t make money then you won’t,” she said.

Now I think that’s a very clever and very pertinent observation.

I hear all the time about other artists – photographers, designers, website developers and musicians – who are invited to donate their work or time in exchange for ‘exposure.’ About these so-called ‘influencers’ who make demands on retail business to donate their goods or services in exchange for a shout out on their Instagram page. It’s all good and well to be good at art, to love making art, and to justify its importance in contributing to a given region’s cultural offerings.

But, if at the end of the day, you don’t plan to at least recoup your costs – in terms of materials, packing, postage, transport and so on – let alone pay yourself a wage for the hours you put into each piece, then it seems unlikely your art is going to bring you much peace of mind. Worse, pouring all that money into something you don’t get paid for is probably going to cause you some degree of uncertainty – about how to pay the bills, for example – and leave your pockets empty.

How about you… how’s your ikigai?

  • Are you slogging away at a job which bores you because it pays the bills?
  • Are you barely paying the bills in a job which you nevertheless love because you’re helping people?
  • Are you getting paid heaps to do a job which you’re not even sure you’re very good at?

Making an appointment with a trusted financial planner is the first step to balancing out what you love and are good at with how society values your work and what you get paid for it.

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

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Why don’t we seek financial advice?

This week, I received the dreaded email – ‘Sue, it’s your turn to write the adviser article.’ My mind was a total blank, until I read a story posted on Facebook, that made me think.

The story was about a man who had been on the brink of suicide, at age 65. He felt like a failure and indeed, had failed with many things in life. At retirement he had received a cheque from the government for $105.00 and he again felt that he was a failure. Something stopped him, and instead he wrote down what he had accomplished in his life. It made him realise that he still had more things that he wanted to achieve in life, things that he hadn’t done. He knew that there was something that he could do very well, and that was cooking. He borrowed against his retirement cheque to buy some chicken that he fried up and sold door to door. Do you know who it was? Yes, none other than Colonel Sanders of the 11 different herbs and spices recipe, the founder of what is now Kentucky Fried Chicken (KFC).

When he died, at age 88, he was a billionaire.

This story made me think about how much we hold ourselves back from achieving things, whether at work, financially, or life in general. We are masters at hiding the truth from ourselves. We will all have heard stories of people on their death beds, concerned about how much money they have. Let’s take a dose of cold hard reality here – we can’t help that person with their financial state at that point in their life, but we can help the family that they leave.

What intrigues me is why we don’t address these things in life while we can? Are we afraid to seek help from someone such as a financial adviser? Why would anyone be afraid of coming to see an adviser? We don’t judge people, but rather assess a situation and provide strategies to deal with it. Once it starts to fall in place, people can expect an immediate improvement in their overall financial situation, and probably their state of mind as well. I have come to the realisation that it isn’t so much that we are afraid of baring our financial situation to, possibly, a complete stranger, but that we are afraid to admit to ourselves that we haven’t done as well as we would have liked. So, we take the ‘do nothing’ option. Face your fears people! What are you waiting for? Come and see us – you don’t need to know what a P/E ratio is, or anything about the stock market, or even how much money you spend [although it does help to have some awareness]. We can work out the things that you don’t know and we can help you to understand some of the terminology associated with finance.  While I can’t turn you into an instant billionaire, I can certainly make improvements for you and your family.

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

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Should I invest or pay off my home loan?

It is a common dilemma for Australians all over the country. Do you use spare money to pay off your mortgage and reduce debt? Or do you invest it somewhere else in the hope of boosting returns and improving your overall net worth?

Making a decision based on numbers alone is relatively straightforward (I’ll show you this soon). However, it is not that simple. For all of us, there are other considerations that come into play, including our emotional response to money and security. Let’s take a look.

If there were a simple answer, it would be this.

It may be worth investing if the ‘after-tax return’ you get on your investment is greater than the interest rate on your mortgage.

Let’s say, for example, that the interest rate on your mortgage is 5 per cent, with your investment returns 7 per cent at after tax and other costs. Financially, you are 2 per cent ahead. You could reinvest this money or even use it to pay down your mortgage – helping you achieve both goals.

Of course, this approach depends on your personal income and the marginal tax rate you pay. In the table below, you can see how much investment return you need for this strategy to make sense. If, for example, you earn the average Australian full-time income of $81,530 (with a marginal tax rate of 32.5 per cent), you need 7.4 per cent pre-tax from investment to achieve an after-tax return of 5 per cent.

Can you see what this table shows us? The higher your income, the more you need to make on your investments in order for this strategy to work.

There are other things you need to consider such as the impact of variable interest rates and the actual return of the investment. But it does give you a general idea of where your money might be better off.

Some other reasons people choose to invest their money instead of paying off their mortgage include diversification and accessibility.

Some people worry about having all their money tied up in their home. What happens if prices fall dramatically? We can’t predict the property market but diversifying investments can offer some protection.

Another consideration is accessibility. You need a lot of money to buy a property. Investing in shares or managed funds, on the other hand, requires much smaller amounts. It’s also generally easier to get your money out when you need it.

Reasons you might pay off your mortgage instead of investing

· Peace of mind: The emotional aspect of investing is just as important as the numbers. If your number one goal is the security that comes from owning the roof over your head, then that’s what you should do.

· Pay less interest while getting a guaranteed return: Additional money you pay into your mortgage reduces the interest you’ll need to pay and the duration of the loan. Plus, it acts as a guaranteed return. If the interest rate is 5 per cent, you’re effectively getting a guaranteed 5 per cent return on any extra money you add to your mortgage.

· Build equity: The more you pay off your loan, the more equity you have in your home. Coupled with capital growth over the long term, you can borrow against this equity in your home to build a larger property portfolio.

At the end of the day, we all want to sleep easy at night. For some of us that means feeling comfortable with our financial decisions. If your focus is debt reduction, then go with paying down your mortgage. On the other hand, if your goal is long-term wealth creation and the numbers stack up, then look to invest your money at an appropriate level of risk.

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Australia’s Household Debt

Australia’s household debt to income ratio is currently at 190% which is among the highest in the world. This number is a far cry from the debt to income ratio from nearly 30 years ago which stood at around 56%. The rapid increase of household debts can be attributed to a rise in mortgage debt which has been brought on by Australian’s looking to purchase their own home or investment property. Other reasons as to why we have seen a sharp increase in the debt to income ratio is that over the last decade we have been given easier access to credit, built a reliance on credit cards and experienced lower mortgage interest rates.

Facts About Australia’s Debt to Income Crisis

The recent property market boom has resulted in many Australians borrowing higher amounts with wage growth not keeping up with rising housing and living costs.

  • Lower interest rates have been a key factor in growing debt. When credit is offered at a lower rate, borrowers want more of it.
  • Whilst some developed countries have seen a decrease of debt to income ratios since the Global Financial Crisis, Australia’s debt levels have increased to record levels.
  • The Reserve Bank of Australia is carefully monitoring the levels of residential lending, and the risks associated with high household debt. Further cash rate cuts may be required as the outlook for household consumption has slowed.

Managing Your Debt

If you are having difficulties managing your debt, here’s a few tips to keep in mind:

  • If you have multiple credit cards and other personal loans, you should consider consolidating your debts into one loan account. If you have equity in your home, you could consider refinancing the debts at a reduced interest rate.
  • Create a budget and have the discipline to stick to it.
  • Set up a savings account and try to contribute any surplus from your budget for upcoming expenses. This may assist you to avoid using a credit card or drawing down on other loans to cover expenses.
  • Resist the urge to splurge on credit cards!

Please contact us today for a confidential, cost and obligation free discussion about your lending needs.  We would also be happy for you to refer your family or friends so we can assist them in creating a cost-effective home loan which suits their needs.

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The Importance of Dividends

Any supporters of the Aussie Test Cricket team who watched the recent Headingly Test would have felt like they were on an emotional rollercoaster akin to the uncertainty, fluctuations and volatility that financial markets can deliver.

When the English captain J. E. Root fell to N. M. Lyon (aka the ‘Greatest of All Time’) on the 3rd ball he bowled that day, The Ashes were all but retained, but alas it was not to be. To be fair, it was an outstanding game of cricket in anyone’s language…probably one the Aussies let slip through their fingers, but hats off to B. A. Stokes who played one of Test cricket’s all-time mighty innings under intense pressure to keep England ‘alive’.

What does Test cricket have to do with dividends?

Well, dividends can provide certainty of returns…unlike that damn Headingly Test.

Dividends have been, are, and always will be an important component of portfolio construction because:

  • They provide a reliable source of returns from Australian companies year-in, year-out.
  • The amounts paid are not impacted by the current level of the share market.
  • The dividend yield can act as a ‘safety net’ in times of volatility.

A source of reliable returns

Over the long term, returns from equities come from capital growth and the dividends paid along the way.  Below is a comparison of the returns from those two sources over the last 20 & 40 years:

As can be seen from the table above, dividends have provided more than half of the returns over the last 20 years, and 40% of returns over 40 years.  When you include the benefits of franking credits to those who can receive a refund thereof, the importance of dividends is paramount.

The level of the share market has no impact

While capital returns are affected by share market movement, dividends are dependent on the underlying earnings of a company, not the fluctuation of the share price.  The amount of dividends paid and ratio of profits paid out as a dividend is decided solely by the company’s Board of Directors.

Since the dividend is a reflection of the company’s profitability and not the current share price, it is important to remember in periods of volatility and negative share price performance, dividends received from quality companies with the right fundamentals should not vary greatly from one period to the next.  The chart below demonstrates the deviation away from the ‘standard’ returns from both sources:

From the above we can clearly see the returns achieved from dividends hardly fluctuated over that 20 year period.  This is further highlighted in the chart below:

The returns from dividends, as evidenced by the orange bar, are not impacted by volatility and fluctuations of the share market.

The safety net effect

Short term share price movements over 6-12 months are generally a reflection of the mood of investors based on predictions of economic growth, interest rates or inflation…or what seems to be more common lately, a tweet from ‘The Donald’!

With the benefit of hindsight however, more often than not these events which have created the mood swings that led to large declines in share markets have turned out to be not as bad for markets as we thought at the time.  Take the war with Iraq as an example.  At the time, there were many predictions of ‘doom-and-gloom’ and an impending global recession which caused panic selling even by companies demonstrating the strongest of fundamentals.

Once panic subsides and some normalcy is restored after such an event, the companies with a reliable and predictable growing earnings and dividend stream experience the quickest rebound in their share price.  This is because rational long-term investors are attracted to quality companies at the right price.

Conclusion

Never underestimate the part dividends play in the performance of your investments.

Here’s hoping the last 2 Tests of the current Ashes series provide the Aussie Test team with a healthy dividend.  After Headingly, one suspects they’re up against it…

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Upside with protection

We’ve seen global markets correct as global growth wanes under pressure of protectionist political policies and an escalating trade war with China and the United States. The fear of a global recession pushed our Australian stock market lower.

Has this market volatility scared you?

Rewind a few weeks and the Standard and Poor’s (S&P) Australian Stock Exchange (ASX) 200 closed at a fresh record high surpassing the closing price reached on 1 November, 2007. Our asset allocation strategy provides our clients with the comfort of knowing that a vast majority of their investments are not exposed to the Australian stock market.

Firstly, we assess our clients’ risk tolerance and understanding of the risks associated with investing, then allocate a risk profile (such as Balanced) based on this assessment. Each risk profile divides our clients’ money up between defensive and growth asset classes to produce a diversified portfolio. Defensive investments include cash, term deposits and fixed interest investments (government and corporate bonds). Growth investments include Australian shares, international shares, property and infrastructure.

Effective asset allocation not only provides protection when markets correct but also offers opportunity to maximise returns. I often say to my clients that defensive investments can be compared to shock absorbers of a car as they smooth out the bumps in the road.

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