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Archives for Dean Tipping

EOFY Checklist: What A Year It’s Been!

And we’re not even halfway through it…

It’s certainly been an interesting few months, with the threat of potential changes to the financial planning landscape that would probably have occurred if the federal election result had gone the other way.

As the great Ronald Dale Barrassi once said, “The only constant in life is change.” It’s fair to say everyone in our industry; from clients to those earning a living in it, are looking forward to some stability for the time being.

With the election now a thing of the past and the end of the financial year upon us, it’s time to review some of the strategies that assist with our wealth accumulation objectives.

1. Give your super a free kick

Now is a good time of the year to make additional contributions into super, especially if you intend to claim those contributions as a tax deduction.

Any surplus cash you have sitting in a bank account earning the current abysmal rate of interest can be contributed into super before June 30 as a ‘personal’ contribution and claimed as a tax deduction.

Providing you haven’t exhausted your $25K concessional contribution cap, that increased tax deduction will most likely result in you obtaining an increased refund from the ATO.

The benefits are twofold; you get an increased tax refund which can be directed however you wish whilst also increasing the wealth you have accumulating in super.

2. Utilising unused concessional contributions

From 1 July 2018, if you have a total superannuation balance of less than $500K as at 30 June the previous financial year, you will be able to contribute more than the general $25K concessional contributions cap for that year by topping up the contribution with the ‘unused’ concessional cap from prior years.

Here’s how it will work:

In the table above, this individual in the 2019-20 year could potentially make a concessional contribution of up to $47K because they had used $3K in the prior year thereby having an ‘unused’ balance of $22K that can be carried forward into the next year.

In the 2020-21 year, because the balance of their super was above $500K on 30 June 2020, the concessional contributions cap is limited to the yearly amount of $25K.  In the subsequent year, 2021-22, the ball game has really opened up due to the super balance dropping below $500K at 30 June 2021 which has provided an opportunity to contribute up to $94K in that year.

This potentially allows for realised capital gains to be ‘transferred’ into super and be taxed at the 15% contribution rate, as opposed to a higher marginal tax rate because the concessional contribution can be claimed as a tax deduction.

This is a strategy to keep in mind over the coming years especially if you’re approaching retirement and have a sizeable amount invested outside the super environment that has significant unrealised capital gains.

3. Check in on your goals

It’s a good time of the year to check in on your life and financial goals to see if you’re on target to making your dreams become a reality.  Similarly, expectations may need to be revised to take account of changes to your circumstances over the last 12 months that have impacted on your wealth accumulation strategies.

At the end of the day, your super is your money and you are ultimately responsible for how it performs and grows.  You need to ensure it is being invested wisely and in line with the timeframe you intend to access it.

Here’s hoping for more stability and certainty on the financial planning front over the next 12 months, at least!

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

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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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Compare the Pair

This recent article in the Australian Financial Review provided an insight into how some retail and industry super funds are marketing their products as “Balanced” when in reality the profile of the funds looks more like a “Growth” product.

This is misleading in the extreme and something worthy of exploring given a “growth” portfolio carries more risk but will, all things being equal, outperform a “balanced” alternative over the investment horizon more often than not, yet “growth” is marketed as “balanced”.  This has escaped media attention…until now.

The article further supports a fact one of our advisors established earlier this year when a client questioned the performance of the balanced portfolio we constructed and managed with the returns of a “balanced” super fund, which were superior.  Some investigative work revealed the “balanced” super fund was indeed “growth” oriented and more appropriate for the risk tolerant investor.  It was hardly comparing “apples with apples”.

In the low interest rate environment that seems like has been around forever, the returns investors are able to generate from the defensive asset class have been front & centre as a topic for discussion.  The income investors have been able to generate from this asset class has been belted, which has seen an increase of flows into “passive” or index-based investments as investors chase better returns.  However, this “passive” index-based investing artificially inflates the share price of a company whose fundamentals otherwise might suggest they are not performing quite so well.  When global interest rates normalise as has started to happen, all things being equal, companies with poor fundamentals will get sold off, and quickly.  To quote one of the greatest investors in history, “only when the tide goes out do you discover who’s been swimming naked”.

Back on the article…it lists the top 60 performing super funds with an asset allocation of 61-80% into growth assets i.e.; Australian & international equities, commercial property and infrastructure assets.  Some of the funds listed are designed to “hug” the index to keep administration costs down.  Fees are an emotional issue and under the spotlight given the revelations provided at the ongoing Royal Commission.

The problem with index hugging is it involves no active stock picking but rather, capital is deployed into each company comprising the index in line with their weighting thereof.  As indicated above, this can artificially inflate the share price of a poor company you might otherwise not invest in.

The returns shown in the article are net of investment fees & tax but before administration fees and are provided over 1, 5 & 10 years.  The median return of those top 60 “growth” super funds over 10 years is 6.6%, before admin fees.

I thought that was an interesting number as the portfolios I’ve seen since I started with The Investment Collective stacked up very well against that 6.6% median return for “growth”.

Digging into PAS, our portfolio management system, the first growth profile I randomly selected has achieved a return net of fees since inception of 11.26%, the second 7.68%, the third 13.58%, the fourth 7.89%, the fifth 7.54%, the sixth 8.31%, and the seventh 13.96%.

I then wanted to “compare the pair” with how some of our truly balanced portfolios have performed since inception.  The first portfolio has returned 6.18% net of fees, the second 7.35%, the third 7.27%, the fourth 7.25%, the fifth 6.47%, the sixth 6.82%, and the seventh 6.55%.

Whilst the social agenda these days in this instantaneous world concentrates on the “here & now”, with investing, long-term returns are what matter most.  The effect of compounding returns on wealth accumulation over time warrants the need to take a long-term view.

We actively manage client portfolios as many of you already know.  Whilst we don’t get it right 100% of the time, I’ll let you make your mind up on “comparing the pair”…especially so given we provide full transparency around what we do and how we do it.

Please note that this article provides general advice. It 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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Your EOFY Super Checklist

With the close of another financial year upon us, apart from being one year closer to retirement and living the dream than you were 12 months ago, it’s an opportune time to attend to one or all of the following:

1. Give your super a free kick

Now is a good time of the year to make additional contributions into super especially if you intend to claim those contributions as a tax deduction as well as lodging your tax return early in the financial year.

Why is that, you may ask?

Well, any surplus cash you have sitting in a bank account earning an abysmal rate of interest can be contributed into super before June 30 as a “personal” contribution and claimed as a tax deduction.

Providing you haven’t exhausted your $25K concessional contribution cap, that increased tax deduction, all things being equal, will most likely result in you obtaining an increased refund from the ATO once your tax return is lodged and assessed.

The benefits are twofold; you get an increased tax refund which can be directed however you wish whilst increasing the wealth you have accumulating in super.

2. Share the wealth

If you have a partner you should be thinking about your finances together and make the most of opportunities that present.

For instance, if your partner has taken time out of the workforce or is a low-income earner, there’s every chance their super could do with a boost.  If your partner earns below $37,000 you can claim the maximum tax offset of $540 if you contribute $3,000 into their super before 30 June.

You get $540 off your tax bill whilst increasing the wealth accumulating inside super.

3. Check in on your goals

As we traverse life our needs and circumstances change, hence it is important to check in on your life and financial goals every 12 months to see how you’re tracking.

Are you on target for making your dreams a reality or do expectations need to be revised to take account of changes to your circumstances?

In relation to your super, at the end of the day, your super is your money.  You are ultimately responsible for how it performs and grows.  You need to ensure it is being invested wisely and in line with the timeframe you intend to access it.

As we enter winter and move another year closer to retirement, check in on one or all of the above…you might just get a good outcome in the future and surprise yourself.

Please note the above has been provided as general advice. 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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Why Is A Power Of Attorney So Important?

A power of attorney is a legal document that allows another person, the attorney, to act on your behalf to make financial decisions for you.  For example, an attorney may sell real estate, buy & sell shares or use money in your bank account to pay your medical bills.

It is crucial to make a power of attorney before you need it because once you have lost mental capacity you cannot make a power of attorney because, for it to be effective, you must be able to fully understand what you are signing.

Just picture this…

Your spouse suffers a stroke and is hospitalised.  The medicos inform you that he is suffering from memory loss and the prognosis is not good.  Some weeks later his condition worsens; he loses mental capacity and is transferred into full time care.

You live on a farm outside of town which you are now forced to sell to enable you to purchase a small unit in town to be close to your spouse and to also meet ongoing medical bills.

You make an appointment with a solicitor to affect the sale of the farm.  The solicitor tells you that as you and your husband own the farm in joint names, both of you need to sign the necessary documents.  You explain your husband’s situation to the solicitor, to which they reply; “that’s ok, we can exercise his Power of Attorney, so you can sign on his behalf”.

Your heart suddenly skips a beat as you realise that you and your husband never got around to getting that power of attorney organised after being prompted by your financial adviser every time you’ve seen them over the last half a dozen or so years.

In the above scenario, it is too late for the husband to get a power of attorney as he has lost mental capacity.  The only way to sell the farm now is to make an application for the appointment of a Guardian through the Guardianship Tribunal.  This process can take several months as the tribunal gathers all evidence, makes enquiries and holds a hearing in which a decision to appoint a Guardian is made.

All of this stress and running around, in a traumatic time of your life, could have easily been avoided by having an Enduring Power of Attorney in place.

An Enduring Power of Attorney provides you with the knowledge that your affairs will be managed by someone that you have chosen and can trust to act in your best interests.  An Enduring Power of Attorney can commence immediately or on a pre-determined date in the future or alternatively, upon you losing mental capacity due to: dementia, Alzheimer’s, an accident or illness.

You should appoint someone you trust absolutely and your attorney must also:

  • Be over 18 years of age
  • Have mental capacity
  • Not be bankrupt, and
  • Not be your health care provider or a paid carer

You should also consider appointing more than one person in case the first attorney appointed is unable to act for some reason.

So, get that power of attorney in place so you can save yourself the stress.

This above advice is provided as general advice and should not be interpreted as personal advice. If you would like to discuss the suitability of a power of attorney for yourself or someone you know, or to discuss how to/who to set up a power of attorney, don’t hesitate to contact our friendly staff today for a free initial consultation.

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Starting an Investment Plan

Benjamin Franklin, one of the Founding Fathers of the United States, has been attributed as saying; “If you fail to plan, you are planning to fail!”

Whilst foresight is blind and the best-laid plans often go awry, it makes a lot of sense to have a plan, or at least some idea or intention on what you are going to do, or where you want to be in the future, and how you are going to get there.

An ‘Investment Plan’ lays down the pathway or strategy/ies for your finances to provide you with the greatest potential for getting you to your desired destination over the short, medium and long-term.

Before the plan can be implemented, however, you need to:

  • Understand your current finances: establish where and how much of your money comes from, and where it goes, thereby leaving you with an idea of what surplus cash you have at your disposal. You may also want to establish what you own and what you owe.
  • Develop your objectives and goals: what do you hope to achieve over the next 1-3 years, 4-6 years and beyond that? This allows a strategy to be developed, that if it plays out as planned, gives you the greatest prospect of being where you want to be at the end of the short, medium and long-term timeframes.
  • Understand the relationship between ‘risk vs return’: the two are directly correlated in that the lower the risk, the lower the potential return; and conversely, the greater the risk, the greater the potential return. It is crucial you understand this concept and that you are aware of your level of tolerance to risk, because this must align with your objectives and goals.  For instance, if you have no tolerance to risk, but have a high growth return objective on your investment portfolio, there is a mismatch in the ‘risk vs relationship’ which will need to be addressed.  You will need to either: trim your return expectations or take on more risk in order to achieve your desired objective.

Once the above concepts have been grasped and documented in writing, you have started your ‘investment plan’.

The next step in the process is developing the strategy/ies to be implemented over the respective time frames.  This will be driven by the goals you want to achieve for each timeframe.

The above advice is provided as general advice and is not intended to be taken as personal advice. It has not taken into account your personal circumstances, objectives, financial situation or needs. You should therefore discuss with your financial adviser before implementing them to your current financial position. If you would like to discuss options and get more personal advice that is tailored to your current financial situation, please contact us and make an appointment with an adviser at The Investment Collective today.

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