Most funds have either an online application form or a PDF application form (this is usually found in the Product Disclosure Statement for the chosen fund) that you can complete. There are some things you need to have, or to have decided, before you submit your form:

• Your Tax File Number
• ABN for the employer
• Choice of Risk Profile, or Investment option
• Life and TPD Insurance requirements
• Income Protection Insurance needs
• Beneficiary nomination

In completing the application, whether by a PDF or online, after entering all of your basic personal details including Tax File Number, you will then need to make choices in regard to your super account.

Beneficiary Nomination

This is the person or people you wish to receive your benefit upon your death. Nominations can be binding or non-binding and most funds offer both options. A non-binding nomination means that the trustee of your super fund is not bound to pay your benefit to the person/people nominated, but will be guided by your direction, whereas a binding nomination means that the fund must pay to your nominated beneficiaries.

It is worth remembering that most beneficiary nominations lapse after 3 years, so you need to review regularly to ensure it remains current and still reflects your wishes.

Insurance

Insurance is optional, but most funds offer a default amount of life, TPD and income protection insurance. If you do not require insurance you should opt out, but make sure that you have proper advice from a qualified professional that you do not need insurance.

Most industry funds offer insurance on a unitised basis, where the sum insured will decrease as you age, while the premium remains reasonably level. There is usually also an option to take out insurance for a fixed sum.  This is likely to incur a higher premium but may be a better option to ensure you have an adequate amount of cover.

For income protection insurance of more than the default amount, you will need to provide your annual salary and details of your occupation. The occupation has a bearing on the premium you will pay if you opt for other than default income protection insurance. You can choose a preferred waiting period i.e. the period to expire before your benefit begins to be paid. A shorter waiting period will result in a higher premium.

If you seek more than the default amount of insurance, you may need to complete health questions so that the fund can calculate your premium based on any health or occupation risks.

Investment Option

Funds offer a range of investment options from an automatic premix of asset types to a more customisable mix of asset types. Unless you really know what you are doing, you may be best to stick to premixed options. The basic premixed option is available for all risk profiles, which generally fall into about 5 main categories, with a multitude of variations between funds:

• Conservative
• Moderately Conservative
• Balanced
• Growth
• High Growth

Asset allocation refers to the mix of what is called ‘growth assets’ and ‘defensive assets’.  Growth assets are assets that can grow in value, such as shares or property – they are generally higher risk but have a higher return potential.  Defensive assets are lower risk, with potentially lower returns and usually relate to assets like cash, term deposits and other fixed interest investments like bonds.

The 5 investment options shown above have a different mix of growth and defensive assets, moving from low risk (Conservative) to high risk (High Growth). A Balanced portfolio, is typically middle-of-the-road in terms of asset allocation and may consist of 60% Growth assets and 40% Defensive assets, while a High Growth portfolio may have only 5% or so in Defensive assets and 95% more or less, in Growth assets.

Asset allocation with a higher proportion of Growth assets has the potential for higher growth, but there is a greater risk of negative returns and an increased level of volatility, or value fluctuation. An asset allocation skewed towards Defensive assets reduces the risk of negative returns but also protects against extreme volatility (price fluctuation), and returns over the longer term are likely to be lower.

Choice of investment option should be based on your attitude to risk, your investment timeframe, financial circumstances and your retirement goals.  What is your attitude towards risk? Can you accept some shorter-term losses in order for higher returns over the longer term, or would you rather play safe so that the value of your account doesn’t decrease?

What is your investment timeframe? This is the period between the present and when you retire. If you have a long time until retirement, are you willing to accept some additional risk in order for a better long-term return that will provide you with a bigger balance at retirement, or would you prefer to have a smoother ride knowing that at retirement you will have a smaller retirement sum?  If you only have a short time until you retire, do you want to risk what you have already accumulated by using a risky asset allocation in the hope that you will quickly accumulate a larger balance?

The selection of investment option is one of your most important decisions so far as your superannuation funds are concerned. Don’t take it lightly and do seek qualified professional advice to assist you to build your super balance so that you can achieve your retirement dreams.

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.

Single Touch Payroll is an Australian Government initiative designed to make it simpler for employers to report payroll information to the Australian Taxation Office (ATO).  It was introduced to employers in 2017 and has been compulsory for employers with more than 20 employees (as at 1 April 2018) since 1 July 2018.  New legislation was recently passed in Parliament and it will now be compulsory for all employers from 1 July 2019.

For many small employers, this is going to change to the way they currently report to the ATO.  It is important to keep in mind this is just a change to the way employers will be reporting and will not affect the way which employers currently pay PAYG withholdings or superannuation.  Employers will need to start sending their payroll information to the ATO each time they pay employees.  Because of these changes, employers will not have to provide employees with a yearly PAYG summary like in previous years.  Employees will be able to access their wages information with balances through their My Gov accounts and this information will be there for them when lodging their tax returns.

If you are currently using our recommended software partner Xero for your payroll then the transition will be seamless and we can help you set this up.  If you are not using Xero, it is imperative you check with your current software provider as to what measures you will need to take to ensure you are compliant.  This may mean changing software if your current provider is no longer able to support the changes. We can help you sort this out.

Once you have opted in and set up the system it should be as easy as a click of a button each pay run to ensure the ATO is updated.  Should you wish to opt in before the end of this financial year you do not need to redo all the previous pay runs from the year.  The first time you report it will send year to date figures for the current financial year to the ATO for the current employees.  If you have had employees who have left during the year prior to you opting in don’t worry the software will pick them up when the end of year processing is completed in June.  It is important to note that once you have opted in you cannot opt back out and wait until it is compulsory.  You will need to report on every pay run from that point on.

Handled correctly the change to single touch payroll should be relatively painless.  Employers who are still trying to use a manual system for payroll will feel the change the most.  Remember to speak with an expert regarding your setup to ensure you remain compliant and that your payroll is correct.  Advisers will be able to offer the best and most cost-effective product that suits the needs of your business.  This is one of the biggest changes in payroll for quite a while and it will see a number of employers having to upgrade and update systems to ensure they are compliant.  It should be seen as a positive thing, it provides the perfect opportunity to review their entire systems and processes to become more efficient.  As always remember to ask for advice if you are not sure, the end of the financial year will come quickly and it is essential that you are prepared for these changes.

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

What I really enjoy about being an adviser is the opportunity to resolve client puzzles. Each situation is unique and the solutions are an opportunity to make a real difference to a family’s life.
Recently, I was asked by a client how to protect their child with special needs from potential future financial mistreatment. This was an opportunity for me to dust off my knowledge of trusts and more specifically, special disability trust.

The purpose of a special disability trust

A trust is a legal obligation that details how you want property or assets held for the benefit of a beneficiary administered and managed.

Special disability trusts are primarily established to assist succession planning by parents and family members, for the care and accommodation needs of a child or adult with a severe disability. The name ‘special disability trust’ relates to the social security treatment of the trust, not the actual disability.

The legal requirements for setting up a special disability trust

The first step is to make sure that the special needs person qualifies for a special disability trust. They need to meet the definition of severe disability as detailed in the Social Security Act 1991. The individual will have to go through a process where they are interviewed and assessed by social security. Centrelink has a special division that makes an assessment regarding whether they meet the criteria under section 1209M of the Social Security Act.

The Social Security Act recognises that people with special needs work and positively contribute to our society. If the special needs person is working, the act states that a condition of a disability restricts them from working more than 7 hours a week for a wage that is at or above the relevant minimum wage.

The trust deed must comply with certain conditions, and incorporate compulsory clauses as defined in the model trust deed as laid out by the Department of Social Services.

Anyone except the special needs person or the settlor can be a trustee of a special disability trust. There are two types of trustees and they both must be Australian residents (must be assessed by the Department of Social Services).

1. Independent (corporate) trustee – does not have any relationship with the special needs individual and has to be a professional person or a lawyer.
2. Individual trustee – A minimum of two trustees are required to ensure the special needs individual’s interests are protected.

The trust can either be activated while you are alive – this gives the special needs individual more independence or set up as part of a will – to protect the special needs individual.

The special disability trust can only have one beneficiary (the special needs individual) and the beneficiary can only have one trust. There are two main restrictions placed on the beneficiary, their living situation and gifting.

The Social Security Act stipulates that the beneficiary is not able to reside permanently outside of Australia – the reasonable primary care and needs for the beneficiary must be met in Australia.

There is also a gifting concession available and the contribution made must be unconditional (you can’t get it back), and without the expectation of receiving any payment or benefit in return (if gifted by you). The beneficiary is only able to give money that they received as an inheritance within 3 years of receipt into the trust. Also, a gifting concession, that does not impact any Centrelink benefits is available for the first $500,000 of gifts contributed to the trust.

The social security implications of a special disability trust

There is no limit to the dollar value of assets that can be held in a special disability trust, however, there is an asset test exemption (for Centrelink benefits) of up to $669,750 (indexed 1 July each year) available to the beneficiary. Another advantage is no income is assessed under the social security income test for the beneficiary. The special needs individual can also have their primary residence in the special disability trust, which is also exempt.

Centrelink has also added a limit of $11,750 to ‘discretionary expenses’ for beneficiaries to improve their level of health, wellbeing, recreation and independence.

Further information about special disability trusts can be found on the Department of Veteran’s Affairs site and the Department of Social Services site.

In conclusion, the aim of establishing a special disability trust is to provide protection and to ensure that those we love have a secure financial future.

Please note this article provides general advice and information only, 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.

If I had a dollar for every time someone told me, “Yes, I have insurance, it’s in my super fund”, I’d be one rich lady! Whilst I’m not disagreeing that you may indeed have cover, my problem lies with the quality of cover.

Industry and retail funds are required by law to offer default insurance within your superannuation account. However, there are no rules around the benefits they offer within these policies and what most people don’t realise is they may not be covered at all.

Here are a few fun facts you should know about insurance held inside your super:

Policy indexation

Most policies within these funds decrease as you get older. They usually start tapering off at around age 40. This is usually the time when you need cover most because you have a mortgage to repay and kids to put through school. Policy indexation is important to ensure cover keeps in line with the time value of money.

Guaranteed renewability

Industry and retail fund policies are not guaranteed to renew. Most policies have a hidden clause which states that the cover can be cancelled at the decision of the trustees for any reason at any time. You could think you’re fully protected, then the unthinkable happens and you find out you weren’t protected.

Tax on benefits

Regardless of the superannuation fund, you will always pay tax on Total & Permanent Disablement (TPD) benefits. The implication of this means you may think you’re going to receive a $500,000 benefit but what you actually receive will be far less.

Underwriting on claim

When you opened your superannuation account, you are offered default cover, meaning you never have to answer a long list of personal medical questions. You may not realise there are serious implications to not doing this. Say for instance you’re diagnosed with diabetes at age 25. Then two years later you change superannuation providers and you’re offered default cover within that fund. Fast forward to another two years and you’ve had to take an extended time off work due to complications of your diabetes. You try to claim on your income protection/salary continuance only to be denied the claim. This is because two years prior to you taking out this new policy, you had already been diagnosed and this is technically a “pre-existing condition” in the eyes of the claims assessor.

There are many more reasons why you shouldn’t rely on default cover within your superannuation. To be certain you know what you’re covered for, be sure to come and see us for a full insurance review. We’ll prepare a detailed analysis of your current cover compared to other policies on the market you’ll know exactly what you’re covered for.

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 advice, please contact us today, one of our advisers would be delighted to speak with you.

If you are looking to buy your first home, here are some things to consider to improve your chances of finding the right property, securing the funding, and realising your dreams.

Watch your spending

Due to recent pressure from Australian Prudential Regulation Authority (APRA), and the fallout from the banking royal commission, lenders are under increased pressure to tighten credit eligibility guidelines and ensure stricter adherence to responsible lending practices. The lender will need to assess that an applicant can more easily afford to service the debt by applying actual living expenses, as opposed to the Household Expenditure Measure used until recently.

The lender will scrutinise your usual living expenses, check your spending habits and financial discipline by obtaining your transaction account(s) and credit card statements.

You could be jeopardising your chances of getting approval for a home loan if you are overspending on discretionary items such as entertainment or holidays. There have been recent headlines in the Australian Financial Review about lenders reviewing spending patterns on Netflix, Afterpay and Uber Eats. Set a budget and minimise your discretionary spending. Most importantly, make sure you have the discipline to stick to it!

Check your credit rating

A key part of your success in obtaining a home loan will be your credit score. A lender will lodge an enquiry on your credit file to check your credit history, and to confirm if you have had any history of late payments or defaults with other providers.

Credit reporting agencies such as Experian, Equifax and Illion (previously known as Dunn & Bradstreet) obtain information from banks, credit providers and utility companies to calculate a credit score. Your credit rating is based on the amount of credit you have borrowed, the number of applications you have previously made, if you have any overdue or unpaid debts, and if you have any history of bankruptcy or insolvency agreements.

Lenders use your credit rating to determine if you are suitable for a loan. Understanding what makes up and affects your credit rating is important for any homebuyer. You can obtain your own credit rating – including any defaults listed against your name by registering online. There can be mistakes on your report – if you pick up on them you can request they get altered. This could be the difference between a loan application being approved or declined!

The Australian Securities and Investments Commission (ASIC) MoneySmart website provides links to the credit reporting agencies which offer an online credit score check.

Reduce your credit and store card limits and minimise other debt

If you have larger credit card limits or other debt, you may not be able to borrow as much, or be eligible for a home loan approval. Reduce your credit card limits and decrease/pay off any existing debts you may have before you apply for a home loan, especially high-interest debts such as credit cards and store cards.

Due to credit policy changes in line with the tightening of responsible lending guidelines, lenders have increased the assessment rate on the servicing of existing credit card limits when reviewing a loan application. This may affect your eligibility for approval on a home loan at the required amount. Reducing debt or lowering your existing card limits will increase the likelihood of your loan being approved.

Higher deposit, better outcome

If you’ve saved less than 20% of the purchase price, there are a limited number of lenders who can offer a loan. Deposits of less than 20% may require Lenders Mortgage Insurance (LMI) to qualify for the loan, and the rate offered and fees may be higher to offset the increased risk to the credit provider.

While some lenders offer lower deposit loans, if you have saved a deposit of 20% or more, you may be eligible for a loan with a wider range of lenders with reduced rates/fees, and you will save the cost of an LMI premium.

Be aware of purchase costs and your eligibility for first home buyer grants and/or stamp duty concessions in your state

Buying a home incurs costs in addition to the purchase price. Allow for property inspection fees, loan application costs, mortgage registration fees and stamp duty. Loan establishment costs, mortgage registration and stamp duty can be covered via the lender if you qualify for the amount required. You may be eligible for the First Home Owners Grant (FHOG) or stamp duty exemptions/concessions. If you’re eligible, you’ll save thousands of dollars. Check online with your state revenue office to see if you qualify.

Check the features and options available with the lender

The interest rate is not the only thing to consider with a home loan. Make sure you understand the fees payable, product features/options available and how they work to suit your needs.
Some loan products include redraw facilities, offsets via linked transaction accounts, the ability to split the loan into several accounts on a fixed or variable rate, and greater repayment flexibility.

Be wary of discounted first home buyer specials

Lenders may offer a special discounted introductory rate for first home buyers. Check the terms and conditions carefully as the initial rate may default to a much higher rate at the expiry of the introductory period. These products may also incur higher establishment costs and ongoing fees.

Know the market in your target area

Thoroughly research the property market where you want to buy. Get an understanding of the average prices, supply/demand, local facilities, market activity/trends and recent auction results. This will ensure that your market knowledge will increase, and that your target area has what you need in terms of both lifestyle now and future growth opportunity.
Often the difference between getting value or paying a premium price is the buyer’s level of market knowledge.

Get pre-approval

Obtain a pre-approval from your lender. This will ensure that you know your borrowing capacity in advance, and you can negotiate your purchase price.
Typically, there’s no cooling-off period at auctions, once you’ve made an accepted bid that’s it. Bidders without finance approval can find themselves in deep water if they sign a sale contract. You cannot make the contract subject to any conditions such as obtaining finance unless the seller agrees to the provision.

Get advice

You can get advice with any stage of the home buying process.

Buyers’ agents can assist in locating, evaluating and negotiating the purchase on behalf of the buyer.

A conveyancer will ensure that the buyer is meeting their legal obligations during the purchase and make certain that the title transfers smoothly.

A mortgage broker can review the thousands of products available to source the most appropriate loan solution for your needs, and assist with the finance process from application right through to settlement.

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 advice please contact us today, or refer your family and friends, for a confidential, cost and obligation free discussion about your lending needs.

Just over 10 years ago we were in the midst of what is now known as the Global Financial Crisis (GFC). I recall at the time a flurry of job losses from the financial services industry, Australian banks and the collapse of the American investment bank Lehman Brothers. Our country just avoided a technical recession but it felt like one for many people.

The GFC referred to a period of severe stress in the global financial markets and banking systems between mid-2007 and early 2009 as the US housing boom ended and defaults increased. Banks’ access to short-term borrowing evaporated and funding account holders withdrawals were problematic.

Why did the US housing boom impact the world economy?  For many years prior to the GFC, house prices in the US grew strongly as banks and other lenders were willing to make highly profitable increasingly large volumes of risky loans to buyers. The loans were risky as the lender did not closely assess the borrower’s ability to make loan repayments. You might recall the nickname NINJA (no income, no job, no assets) loans, symbolising the lack of documentation the banks and other lenders had to provide to secure funding.

Financial innovation allowed banks and other lenders to reduce their lending risk by packaging these risky loans into mortgage-backed securities (MBS) and collateralised debt obligations (CDO). In the US, over $500 billion USD in CDOs were issued in both 2006 and 2007 (source). Credit rating agencies provided these financial products with a high credit rating signalling to investors that they were low risk. The high rating allowed pension funds, governments, US and global banks to invest. Many investors borrowed large sums to purchase high yielding ‘low risk’ MBS and CDOs without understanding the complex and illiquid nature of the underlying investment.

When the US housing boom ended and defaults increased the demand and liquidity for MBS and CDOs evaporated and prices dived. MBS and CDOs could only be sold at a large loss of up to 95 percent (source).

The systematic problems started in the United States and rapidly spread across the globe. Banks and other financial institutions stopped lending as they were unable to easily assess how badly a potential borrower was impacted by the toxic debt. This credit freeze spread globally, many companies were unable to access funds and those that could, found there was a substantial increase in the cost of debt making the venture unprofitable.

In the wake of the turmoil, central banks globally lowered interest rates rapidly (in many cases to near zero) and lent large amounts of money to banks and other financial institutions that could not borrow in financial markets. Central banks also purchased financial securities to support markets.

Governments increased their spending on infrastructure to support employment throughout the economy, Australia handed taxpayers $1,000 relief money and guaranteed deposits and bank bonds. Governments also increased their oversight of financial firms that must assess more closely the risk of the loans.

The severity of the Global Financial Crisis caused a global economic slowdown that led to unprecedented government bailouts and economic stimulus globally. The support from governments and central banks paved the way to an economic recovery.

Please note, this article provides general information and advice only. If you would like tailored financial advice, please contact us today.

Read more articles in our Financial Literacy series. 

Generally speaking, there are two ways to make more money in life: by working day in, day out, or by letting your money and assets work for you.  Now I can only speak for myself, but letting my assets work for me sounds much better than grinding away at the office for the rest of my life (not that I don’t love my job!).

It may sound like prudent practice, but leaving your entire life savings under a mattress will not give you any return or increase in capital (in fact, after inflation your buying power has actually decreased).  Even leaving your money in a bank account will only generate a minimal return.  On the other hand, investors can earn additional money through dividends and distributions from their investments or by purchasing assets that increase in value.

The purpose of this article is to introduce you to the world of investing and provide clarity on key concepts that we are often asked about by our clients.

When should I start investing?

If we ignore transaction costs and the cyclicality (ups and downs) of markets, the answer to this question would be an easy one: RIGHT NOW! The power of compounding interest means that you are better off investing as soon as possible so your future returns are off a higher base.  This concept is best conveyed in the chart below.  Chart 1 shows that an individual who invests $100,000 today (Blue) for 20 years at an 8% return will earn $96,000 more than an individual that invests the same amount, earning the same return, only 3 years later (Orange).  In the fourth year, Blue would earn 8% on $126,000 ($10,000) whereas Orange would earn 8% on the initial $100,000 ($8,000).  Therefore, it seems the early bird gets the worm after all!

How much should I start investing with?

Unfortunately, for us investors, we do live in a world with transaction costs such as brokerage so it can be unwise to invest small amounts of money where your returns will be “eaten up” by these costs.  A common brokerage fee structure for a number of retail stockbroking firms (including our own) is:

• $55.00 for trades up to $10,000
• 55% for trades over $10,000

As an example, if I buy $15,000 worth of shares and sell them a year later for $16,500, I would earn $1,500 in capital gains minus $173 in brokerage (buying and selling) to have a net capital gain of $1,327.   This example shows that a reasonable capital return of 10% has been reduced to 8.8% after fees.  Now, imagine if I only invested $1,000 and sold my shares for $1,100.  My $100 (10%) capital return would reduce by $110, leaving me with a measly -1% return – which isn’t very sexy at all.

So, what does this all mean? If you are an individual that wishes to purchase some Australian shares, I would recommend building up cash to a level that minimises the ratio between brokerage/investment.  If you are interested in creating a portfolio with a number of assets, I would recommend coming into one of our offices for a consultation (if you are good at something, you don’t do it for free).

How much risk should I take?

This is an extremely important question and one that can be the difference between living comfortably in retirement or couch surfing at your grandkid’s place.  The amount of risk you take on is also dependent on your investment goals.  For example, an 85 year old trying to provide for their retirement would have a much more conservative approach to investing than a 28 year old who is trying to build wealth to purchase their first home.

In addition to understanding your goals, at our firm, and in the advising community as a whole, we require our clients to complete a risk profile questionnaire, which provides a clearer picture of exactly how to risk averse they are.  The results of this questionnaire then distinguishes which risk profile our clients fall into and how their money should be invested.  The financial advisory industry uses five risk profiles:

1. Conservative
2. Moderately conservative
3. Balanced
4. Growth
5. High growth

What should I invest in?

The answer to this question is a direct result of what risk profile you are aligned with.  There are five main asset classes that we invest in at our firm.  They are, in ascending order of riskiness:

• Cash
• Fixed interest: corporate, government or semi-government debt
• Property and infrastructure: shares or holdings in property and infrastructure assets
• Australian shares: shares listed on the ASX
• International shares: shares listed on foreign stock exchanges

The proportion of your wealth that you should invest in each asset class is dependent on your risk profile.  For example, a balanced portfolio at our firm invests 5% in cash, 35% in fixed interest, 20% property, 30% Australian shares and 10% international shares.  The holdings in cash and fixed interest will ensure that 40% of your portfolio is invested in assets that will preserve your capital while paying some income.  The 20% of property holdings provides investors with the potential for capital gains while maintaining some level of capital preservation and income.  The 40% held in Australian and international shares provides exposure to riskier assets that can provide greater capital gains and income in the form of dividends.

Another benefit of investing in different asset classes is to diversify your portfolio and take advantage of the low, or even negative, correlation between some investments.  Correlation is a mutual relationship between two variables (assets).  By way of example, Chart 2 shows how the defensive fixed interest asset class increased by 2% from October to December 2018 as investors fled the riskier Australian shares asset class that decreased by 8% over the same period.  If you were invested entirely in Australian shares, you would have lost 8% of your capital whereas you have only lost 3% if you were invested 50/50 across the asset classes.

If you have been going to sleep on a mattress full of your life savings every night, or if you are interested in learning more about investing, please feel free to come into one of our offices to have a chat.  Our investment team relishes any opportunity to educate people on the benefits and techniques of investing and there is nothing more satisfying than helping others unlock the power of sitting back, and letting your money work for you.

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

Read more articles in our Financial Literacy series. 

For many of us, we are able to contribute to superannuation for our entire working lives. Thanks to the superannuation guarantee arrangement, employers are obliged to contribute a minimum percentage (currently 9.5%) of your earnings to your nominated super fund. While this might seem like a lot, depending on your ideal cost of living in retirement, you may wish to contribute additional money to boost your savings. One way of doing this is through salary sacrificing.

Salary sacrificing is where you establish an arrangement with your employer to pay a portion of your pre-tax salary to your super account as a concessional contribution. There are a few benefits to this:

• Boost to your overall contributions to your super fund
• Reduce your taxable income, therefore, paying less tax
• Works as a forced saving so you don’t need to worry about putting money away to contribute later

To show you how this could work for you, here’s an example for someone earning $90,000 p.a.:

The above example shows how your after-tax pay would be affected if you salary sacrificed $10,000 in one year, the difference is $6,550 per year or $126 per week. If this looks too much for your circumstance, perhaps consider reducing your super contributions to $5,000. Now your take-home pay is $64,658, therefore an after-tax reduction of $3,275 per year or $63 per week.

Salary sacrificing is a great tool to help boost your super savings, however, there can be some traps for young players. Be sure to speak with your financial adviser to establish how salary sacrificing can best work for you.

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

Read more articles in our Financial Literacy series. 

During our lifetime we all pay tax on our income at some point.  This is called Pay As You Go tax (PAYG).  In Australia, our PAYG is a progressive tax, which means the more you earn the more you pay.  This and all other taxes are defined as the contribution to the government revenue compulsorily levied on individuals, property, businesses, goods etc.  This money is used to provide those services we expect in our society, roads, hospitals, schools etc.

PAYG tax can be confusing, especially if you have a varied income.  Some weeks you will only earn a small amount and so may not pay tax at all but the next you will work extra hours perhaps even on a weekend and suddenly you lose a lot in tax.  In Australia, our rate of PAYG is based on our annual income but this is calculated based on each pay event.  Below is a table from the Australian Taxation Office (ATO) showing the individual resident rates of tax for the 2018-2019 financial year.

**These rates do not include the Medicare levy.

For a lot of people where the confusion will come in is when they are changing tax brackets because of their variable earnings.  If you are a part-time or casual worker but perhaps do some extra work during holidays or peak work periods you could see your weekly income move from the second tax bracket to the third, which means a significant increase in your tax for the week.  It doesn’t necessarily mean you are going to earn over $37,001 for the year but because our tax is calculated on each pay event you will be taxed that period as if you are.

For a working example, we have someone who works casually and this week earns $519 before tax.  They would pay $41 that week in tax.  The next week is busy and they work extra shifts and earn $769 for the week, the amount of tax is $102.  When we look at the weeks individually the employee has jumped up in tax brackets.  Come to the end of the financial year they have only earnt $30,000 for the year.  They will be issued with a PAYG statement showing this and also the amount of tax they are have paid throughout the year.  This is when the ATO will look at those amounts and a refund would be issued for the overpaid tax.

For many Australians they find this confusing and unfair, however, the alternatives can be even more confusing and can result in people having large tax bills at the end of the financial period to pay resulting in hardship and meaning that the Government doesn’t get the income it is expecting.  This can have serious flow-on effects for all of the economy.

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

Read more articles in our Financial Literacy series. 

The word mortgage originated in England during the middle ages from the old French “death pledge.”   This pledge refers to a contract which ends (dies) when the debt is repaid, or possession of the property is taken by the lender in the event that the borrower cannot repay.

In more recent times, a mortgage involves a loan contract offered by a credit provider at interest, secured against the borrower’s property, with scheduled repayments over an agreed term.

Whilst there are many lenders, and there is an abundance of products and features available with a mortgage, the following may assist newcomers to clarify how a mortgage works:

Deposit

Most lenders will require you to save at least 20% of the value of the property as a deposit.  There are some providers who will offer a loan to borrowers with a reduced deposit, but traditionally, lenders will offer funds up to a maximum Loan to Valuation Ratio (LVR) of 80%.

Lenders Mortgage Insurance

In the event that your deposit is below the minimum required by the lender, you will be required to purchase Lenders’ Mortgage Insurance (LMI).  LMI is an insurance policy which protects the lender in the event that you are unable to repay the loan.  The cost of cover is paid by the borrower via a one off premium.  The LMI premium can be financed (up to limits) via the loan, which means it will be added to the interest you pay over the life of the mortgage.

Using your property as collateral

Banks love security and seek to minimise the risk in lending funds to a home buyer.  The security property can be used as protection by the lender in the event that you default on your mortgage.  If you cannot repay, or if you suffer from financial difficulties, the lender can take possession of the property (foreclose).  The lender will then sell the security property to clear the debt.

Types of loans available

When obtaining a loan there are several options to consider.

Variable Rate:  The interest rate and therefore the minimum repayments on a variable rate loan will move up or down with the rates set by the lender.  This may be due to movement in the official cash rate set by the Reserve Bank of Australia (RBA), or at the discretion of the lender.  Variable rate loans allow more flexibility in repayments and usually do not incur penalties for early repayment.

Fixed Rate:  The interest rate and minimum repayments will remain the same during the fixed rate term of your loan.  A fixed rate loan will provide certainty in your repayments over the period, however, there are often restrictions in repaying above the minimum, and penalties may apply for early repayment of the debt.  If interest rates fall, you are locked into the fixed rate.  If interest rates rise, your repayments and rate will remain the same.

Split loans:  A split loan allows you to lock in a fixed rate amount, and a variable rate amount.  You may wish to reduce the risk of future interest rate increases, and ensure your repayments are set over the fixed rate period by obtaining a portion of your loan at a fixed rate.  The remainder of the loan balance can be held at a variable rate so you can make unlimited repayments.  A split loan will allow you to ‘hedge your bets!’

Principal and Interest:  A Principal and Interest (P & I) loan is divided into two portions.  The principal owing is the amount you borrowed, less repayments.  Interest is the amount charged in addition to the principal, and is based on the interest rate and the principal balance.  The lender has worked out how much you will need to repay at each instalment to pay your loan off in the loan term you have elected.  This is known as the amortisation schedule and shows how much of your repayment goes towards interest and the amount that goes towards paying off the principal.  With a P & I loan, most of your repayment will go towards paying interest at the beginning.  As the loan progresses, the amount paid off the principal will increase.

Interest only:  As the name suggests, an interest only loan provides a facility whereby the borrower only pays the lender the interest component owing.  These loans are available with various interest only period options and will revert to a P & I loan at the end of the interest only term.  Interest only loans have been a popular choice for investors and for home owners looking to reduce the repayments on their property.

Repayments

Lenders will usually offer the option to make repayments on a weekly, fortnightly or monthly basis.  Loan terms are usually 25 or 30 years.

Redraw facility

If you make loan repayments in addition to the minimum payable, you can access these surplus funds at a later date.  A redraw facility allows you to withdraw money that you’ve already contributed on your home loan.  A redraw provides the benefit of paying more off your home loan, and not locking away the extra repayments.

The interest rate on your home loan will be higher than the interest rate offered in a typical cash management account.  The interest saved on your home loan by making additional repayments over the term of the loan will be substantial, and the redraw may come in handy in the event of needing to access funds in an emergency.

NB. A redraw facility may include fees and restrictions on the amount and frequency of withdrawals you can make each year.

Offset account(s)

An offset account is a savings or transaction account which is linked to your home loan balance.  The balance held in your offset account will reduce the amount you owe on your mortgage, and can be up to 100% depending on the loan product.  With an offset facility, the interest payable on your home loan is reduced by the difference between your loan balance and the offset account balance.

Please contact us today for a confidential, cost and obligation free discussion about your lending needs. 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 mortgage broking or financial advice, please contact us today.

Read more articles in our Financial Literacy series.