If you’ve had a gutful of the dreaded COVID-19 virus and the media coverage it has brought with it, you’re not Robinson Crusoe.

Let’s put all of that negativity to one side and focus on real data which indicates to me that perhaps the tide is turning in a positive direction, which could be to the benefit of the thousands of part owners of the banks.

I’ll get to the point, home loan deferrals.

Back in March last year when the ‘you know what hit the fan’, the banks offered borrowers of both home and business loans the option to defer or ‘hit pause’ on their repayments for 6 months.

Data announced by the CBA in their full-year results back in August indicated that at the peak of home loan deferrals there were 154K loans on pause. At 30 June 2020, this had dropped to 145K, and at the end of July 2020 they were 135K or 8% of their book.

As reported in ‘The Australian’, data produced by regulator, the Australian Prudential Regulation Authority (APRA) indicated that at the end of November this number had dropped to just over 2%. At the same date, WBC’s deferred loans sat at 3%, NAB’s at just over 1% and ANZ’s had dropped to 3%.

It’s evident all lenders have experienced the positivity of this trend with the total value of the $2.7 trillion in loans across all lenders on deferral dropping from 10% in May – June 2020 to 1% currently.

How is this going to be of benefit to a bank shareholder?

Well, banks account for loan defaults by making a ‘provision’ for bad debts in their accounts. They book an entry that hits profit now and when the loan goes bad it is written off against the liability on the balance sheet. They essentially ‘provide’ for the likelihood of debts going bad without knowing what will actually go bad before it does go bad.

The CBA in their FY20 accounts made an additional $1.5 billion provision for the potential default of loans due to the impact COVID-19 was forecast to have on their loan book. This provision amounted to 15.8% of full-year net profit after tax. At the time of provisioning in June 2020, there was still a great deal of uncertainty around how bad the economic impact would be and by extension the number of loans that would go bad. Fast forward to today and it appears the fallout will be nowhere near as bad as what the CBA thought it might be when they made that $1.5 billion provision.

While the landscape is not as bad as feared, the CBA did not undo the provisioning in the half-year to 31 December but instead chose to be conservative and keep that powder dry due to the lingering doubts over the tourism, leisure and hospitality industries, those specifically hardest hit by COVID.

The CBA did increase their payout ratio to 67% for the interim dividend after the withdrawal of the 50% restriction imposed by APRA, however, there is still room for significant dividend growth in the full-year results which will be announced in August.  The other ‘Big 3’ are about to report their half-year results…we anxiously await their dividend announcements.

With the availability of franking credits attached to those bank dividends, yields can become even more compelling to investors, especially for self-funded retirees in the tax-free pension phase, given the average term deposit rate over the 12 months is ~0.50%.

On the back of improving economic growth as the vaccine rolls out, we could continue to see some air getting pumped into the share prices of the banks over the coming months, but we all know how things can quickly change for the worse.

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.

“It’s that time of year! What do I need to think of before the 30^th of June rolls around again?”

If you use a tax agent for your annual tax return, you will have provided your information to your accountant and your tax return is probably ready to submit to the Tax Office, for last year’s tax.

What is different for me this year?

Many of us worked from home during the year due to COVID-19, this can mean a small tax deduction. If you worked out of your own home from mid-March to 30 June 2020, you can claim a deduction of $0.80 for every hour out of your home office. The accountant can work it out for you, but it’s as simple as letting them know the date you began working from home and your usual weekly hours worked. Assuming you worked 15 weeks at home at 40 hours/week, this could mean a tax deduction of about $480.

What about Division 293 tax? If you are a high-income earner (>$250K/year) you may have to pay additional tax on super contributions. Check your MyGov account to make sure you don’t miss seeing the notification from the ATO. You do need to pay the tax, but you don’t need any penalty on top for late payment.

How can a high-income earner get a tax break? If your spouse is younger than 75 and their income is less than $37,000, you can make a contribution to your spouse’s super account and receive a tax offset that will reduce your tax. The maximum offset is $540 and the optimum contribution amount to receive this offset is $3,000.

“I have surplus income, and I pay tax at the top marginal tax rate. How can I reduce my tax?” Talk to your pay office about setting up a salary sacrifice arrangement. This arrangement can save you some tax, and boost your future retirement benefits – that’s a win/win solution.

There is a cap in place that limits how much you can contribute to super on a pre-tax basis and this is made up of the employer contributions and any contribution you make, such as salary sacrifice. It’s important not to exceed this cap. The cap for 2020/21 is $25,000. You can also contribute a lump sum amount if you have made some savings during the year, and then claim a tax deduction against that amount, again it’s important you don’t exceed the cap.

“I sold some shares during the year at a profit and now I’m going to have to pay tax on the capital gain, can I do anything to reduce or eliminate this tax?” Yes, if you have spare capacity under the concessional contributions cap mentioned above, you can contribute part of the proceeds to superannuation and claim a tax deduction, again providing you don’t contribute more than the cap.

“During the year I sold the family home where we had lived for 20 years, but now I can’t put it into my superannuation.” Well, yes, under certain circumstances you can put it into super if you meet all the downsizer contribution rules, one of which is that you are 65 years of age or older. You don’t have to meet the work test and any downsizer contribution sits outside normal contribution caps.

Don’t forget that you can speak to one of our friendly financial advisers for information and assistance with your tax. Call us today!

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.