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House (Asset) with coins (cashflow) in front

Asset rich and cash flow poor

The cost of retirement in Australia continues to rise and I have noticed increased cost pressure on retirees everyday expenses.

I am often asked the question “how much do we need to save for retirement?” There is no simple answer to this question as everyone has different living standards and one could go without what you might consider essential.

According to the Association of Superannuation Funds of Australia, to live a comfortable retirement at age 65 a couple will need $640,000 saved or funds of $62,562 per year. For a couple aged around 85, the funds needed per year falls to $58,871.

Some older Australians who are homeowners that I have spoken to feel anxious about their retirement and being able to meet their income needs. Being asset rich and cash flow poor is not an unusual dilemma.

One option to consider is downsizing your family home.

Selling the family home may allow eligible individuals to make a downsizer contribution from the capital proceeds into their superannuation of up to $300,000. A couple can contribute up to $600,000.

A downsizer contribution is not treated as a non-concessional contribution and will not count towards an individual’s contribution caps.

Eligibility criteria

  • Homeowners aged 65 years or over. The 2021-22 budget proposed reducing the eligibility age down to 60.
  • Owned an Australian property for at least 10 years and it must be your primary residence within this period to qualify for the capital gains tax exemption.
    • A houseboat, caravan or mobile home are not included.
  • Must not have previously made a downsizer contribution using the proceeds from the sale of another home.
  • The contribution must be made within 90 days of when the change of ownership occurs.
  • You must provide your superannuation fund with the downsizer contribution into super form.

There is no requirement to purchase another home, for example, you may rent or go into aged care.

Things you should consider

  • Age Pension implication
    • Currently, your primary residence is exempt as an asset from assessment of entitlement to the Age Pension. Your superannuation is assessed and the downsizer contribution may affect your Age Pension entitlement.
  • Contributing to a self-managed super fund.
    • It is essential for trustees or members of a self-managed super fund to ensure that a downsizer contribution into the fund is permitted by the trust deed.

This is just one option older Australian’s have to top up their super for a more comfortable retirement.

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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Man looking at paper on the wall

Investment lessons from a 40 year veteran

David Booth is a US businessman, investor and philanthropist who has been involved in financial markets for 40 years.  Below are five lessons from his decades in the trenches which serve as a timely reminder.

Lesson 1: Gambling is not investing and investing is not gambling

A short-term bet is a punt on chance, nothing new here, however, if one treats the stock market like a casino and tries to time the market, then you need to be right twice in the game of buying low and selling high.  It’s very difficult to pick the right stock at the right time once let alone twice.

Investing on the other hand is a long-term game and while all investments carry risk, a long-term investor can manage those risks and be prepared.  Investing is buying a good quality business at the right price and holding it for a long time.  The bet you’re making is on human ingenuity to find productive solutions to the world’s problems.

Lesson 2: Embrace uncertainty

Over the past 100 years, the S&P 500, an index of the 500 largest companies listed on the US exchange has returned a little over 10% on average per year but hardly ever close to 10% in any given year.

Like most things in our lives, stock market behaviour is uncertain and whilst none of us can make uncertainty disappear altogether, dealing with it thoughtfully can make a huge difference to our investment returns and perhaps, more importantly, our quality of life.

Uncertainty can be dealt with by preparing for it.  It was Benjamin Disraeli,  former Prime Minister of the United Kingdom who was quoted as saying; “I am prepared for the worst, but hope for the best.”

If you’re prepared for uncertainty you can benefit from it when it comes along.  The recent ‘COVID’ crash presented some wonderful buying opportunities.  Without this level of uncertainty or risk, there would be no opportunity to do better than a relatively riskless return like that from a money market fund.

Lesson 3: Implementation is the art of financial science

All the research completed over the years into understanding markets and returns tell us there’s general agreement on what ‘financial science’ tells us, however, so much can be gained or lost in application.

Whilst it does help if you have one or two genuine superstars, successful sports teams execute their strategies with a greater level of consistency and discipline than the opposition.  Investing is no different.  Great implementation requires paying attention to detail, applying sound judgement and maintaining discipline through all stages of the cycle.

Lesson 4: Tune out the noise

If you’ve lived long enough you should know one thing, if an investment sounds too good to be true, it probably is.  Fads come and go and unicorns are not real.

There are a plethora of websites and pundits willing to hand out stock tips or predictions and there’s always that ‘friend’ or family member, a self-proclaimed completely fearless guru, who is happy to tell you what the next big thing will be.

Bottom line is if you don’t understand it or the person who is imparting their ‘wisdom’ can’t explain it to a sixth grader, don’t invest in it.

Lesson 5: Have a philosophy you can stick with

This one is an extension of those above.

During periods of extreme market volatility, you need to call on your levels of intestinal fortitude to avoid the trap of making poor decisions based on emotion.

We will remember the year 2020 for the rest of our lives.  It’s an example of how important it is to maintain discipline and to stick to your plan when things don’t go as planned.

By embracing uncertainty, you can focus on what you can control.  Whilst you can have some effect on how much you earn, you most definitely can control how much you spend, how much you invest and the risk level you are prepared to accept.  A professional you can trust can help here.

Discipline applied over a lifetime can have a powerful impact.  Look at those you know who are not and decide for yourself which path you would like to follow.

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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Your age can have a significant impact on your risk profile

Risk profiling in financial plans

Clients often wonder why as advisers we explore client’s risk profiles, and what does it really do? Risk profiling is a process for determining appropriate investment asset allocations for each investor.  There is no right or wrong answers, only what suits you.

The key components for establishing a risk profile are:

  • What is the level of risk the client is comfortable taking?
  • How much financial risk can a client afford to take?
  • How much risk is required to achieve the goals with the financial assets at the client’s disposal?

What risk is a client willing to take?

At some point you will have encountered the classic risk vs return curve, that is to get the most return you must take the most risk.  The lure of the high prize must be traded off against the risk of significant loss.  Like at a casino, the odds are not always in your favour and a high-risk strategy can see high volatility and sharp rises and falls in a client’s portfolio. This may appeal to some clients but to others, this is a nightmare, it could mean an extension of your working career rather than early retirement or vice versa. Generally speaking, age is often a key factor associated with risk tolerance, the younger we are the more risk we are willing to accept and as we age, we slide back along the risk curve to a less risky asset allocation.  This is often termed as reducing “sequencing risk”.

How much financial risk can a client afford to take?

This component will often consider two items, stage of life and the number of assets available.  The younger we are, we have greater time to recover and rebuild from a financial setback.  Similarly, if we have a higher amount of financial assets at our disposal, we may choose to allocate a higher percentage of these targeting greater returns knowing we still have a sound financial base to fall back on.

How much risk do my goals need?

Something that many people ignore is that to achieve their goals, they simply do not need to take excessive levels of risk. The ability to recognize and discuss this is something to work through with your financial adviser.  Similarly, sometimes goals require a level of risky investment that is inappropriate to a client.  Discussion over conflicting goals and risk is very important to ensure you get the right investment plan for you.

Through each of these components of risk profiling, there are some common factors and gaining an understanding of these factors for each client is critical in the development of financial plans:

  • Goals – what is it, how much, and what is the priority?
  • Timeframe – what is the timeline for each of your goals?
  • Investment capital – how much do you have to build wealth?
  • Client age – how far into your life cycle are you?
  • Liquidity, Income and Growth – do you require liquid funds for lump sum expenditure, do you require regular income from investments, are you focused on growth only?

In summary, the main issue isn’t if you have a high growth, balanced or conservative profile, the most important aspect is that your risk profile reflects you and your personal circumstances. Risk profiling is important for an adviser to review regularly with clients to ensure the clients’ thoughts and preferences have not changed over time and that the investment remains appropriate.

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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Man sitting down viewing stock market on laptop

Is the tide turning?

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.

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Person reading receipt for tax time

It’s that time of the year, tax time!

“It’s that time of year! What do I need to think of before the 30th 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.

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Two people shaking hands

The value of trust

Melissa Caddick was a Sydney based fraudster who went missing late last year. Her foot, still secure within her sports shoe, recently washed up on a beach.

Melissa held herself out to be a financial planner, and over several years, weaved an elaborate web of deceit designed to entrap friends and family into investing through her. However, Melissa’s only ‘investment’ was in herself, using investor funds to establish and maintain a lavish lifestyle.

In carrying out her charade she assumed the identity of another, genuine, financial adviser. And it was only when this financial adviser reported the misuse of her identity to the Australian Securities and Investment Commission (ASIC) that the charade finally unravelled.

Melissa was very successful in duping many people out of a lot of money over an extended period of time. How is that possible? A simple check on the ASIC website would have exposed her, but no-one bothered to check. They trusted her, they wanted to believe, and if truth be told, they were greedy to participate in the ‘fabulous returns’ that Melissa seemed to be able to achieve for her investors.

Trust is a very fragile ‘creature’. Once it’s been lost, it’s almost impossible to restore. It’s a fundamental aspect of a relationship that you’d have with a real financial adviser. I’ll often say to a prospective new client, “I’d like to earn your trust”. What I mean by this is that I don’t assume that someone is going to trust me simply because I’ve asked them to. I wouldn’t! I expect to be able to demonstrate through my actions that their trust has been earnt by way of me aiming to deliver tangible and verifiable results. Sometimes this means telling clients things that they’d rather not hear; this investment didn’t perform as we would have liked, but these did; you don’t have enough capital to retire, your fees will need to increase. However, these are all examples of being transparent and correctly managing people’s expectations which is an integral part of trust.

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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Man turning out pockets to find no money

Good Debt, Bad Debt, Smart Debt

Debt. In a time where the Reserve Bank cash rate and similarly the interest rates for borrowing are the lowest we have seen, it has become a temptation for us as consumers to borrow.

So, what exactly is debt? Debt is the obligation for one party (debtor) to pay money to another (creditor). We almost all certainly have had a debt, and it remains one of the most common financial goals of clients to repay debt and be debt-free.

A case can easily be made that there is no such thing as good debt and that to owe money is always bad, but this does not have to be true.

Let’s break debt up into 3 areas. Good, bad and smart

Good

Often when it comes to a big-ticket item, debt may be the only option as a means of raising funds to purchase the good. The main item here is your home. A home can be seen as a key item that can be funded through rent or home ownership. The idea of rent being ‘dead money’ which could be used towards a home purchase through debt repayment, leads many consumers to the decision to borrow for their own home, and why not when the government also provides incentives for first home buyers. Another benefit is that under most circumstances, the primary residence is also capital gains exempt.

Knowledge is a powerful resource and with it can often come greater opportunity to build wealth through employment. Borrowing for study can be very beneficial to help get that new job or to ask for a pay rise. Care must be taken to ensure, when selecting a course of study, that the future benefit will be there. The Higher Education Loan Program (HELP) is a government support loan that may help fund further education.

The last item I will cover as ‘good debt’ is one to borrow for a small business. Being your own boss, earning a salary and controlling your employment are all very positive features. There is a greater risk with this loan given the history of failures of small businesses. Much of the business success will depend on your willingness to work hard to build and maintain the business, determining from the outset that the business will be profitable and be able to repay the debt, and gaining an understanding of the type of business and how to manage a business prior to commencing.

Bad

‘Bad debt’ involves the borrowing of money to purchase a depreciating asset often through a personal loan. We all know this one and are guilty of discretionary spending on items in this category. Loans of this type are typically at higher interest rates, only increasing the reason for defining them as ‘bad’.

Our most common item for ‘bad debt’ is the family car. It is often seen as a ‘good debt’ for the reason of the functionality it provides, but the reality is that in most cases, the value of a car depreciates (in cases of new cars by up to ~$5000 upon leaving the showroom). By the time of debt repayment, the vehicle is often worth less than 50% of the value initially paid. Boats, motorbikes and jet skis are all similar examples of ‘bad debt’ loans.

Credit card and ‘Buy Now Pay Later’ debt is by far the biggest issue of ‘bad debt’ for most Australian households. Our penchant for spending on consumables, goods and services ensure that many of us require these credit options. Whilst an increase in the use of debit cards (spending money you already have) has reduced credit card use; through COVID-19, with reductions on the use of cash and an increase in online purchases, we have seen this type of debt continue to increase. For more information on credit cards, refer to the article in The Investment Collective’s Winter 2020 Newsletter by Cheng Qian. Our ever-increasing desire for discretionary spending on clothing, music, holidays, take away meals and even that morning coffee can all contribute to bad debt.

Smart

The last category is smart debt. Often referred to as an investment debt or gearing. This debt involves borrowing money (at a low rate) to invest in a product that will hopefully have a higher rate of return to generate wealth in a faster manner. There is an obvious risk with this debt and that is the need to generate a return with a higher rate than that being paid, otherwise, there is financial loss. That is, whilst it can magnify a gain, it can also magnify a loss. This type of borrowing can provide an income tax deduction and enable a larger portfolio to provide greater diversification in your portfolio to reduce risk. Gearing should only be considered after discussions with your financial adviser to see if it is a suitable option for you and your financial circumstances and goals.

In summary, commencing debt can be very tempting and even seen as a need, and at the right time and for the right reason, can easily be a justified option rather than saving the amount in full prior to purchase. Debt will always need to be repaid and when looking at commencing a significant debt, always take the time to discuss the situation with your financial adviser to see how it fits with your financial situation, goals and objectives. A well-managed approach to debt can ensure that no matter what category of debt (good, bad or smart) that it delivers for you.

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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Bitcoin is a volatile investment

The Crypto Craze

2020 was a rollercoaster ride for investors, as we experienced the most volatile stock market in decades. However, the 30-40% dip experienced by ASX investors in a mere matter of weeks is nothing in comparison to cryptocurrency investors and Bitcoin fanatics who can experience this on a daily basis. Bitcoin has been all over the news recently as it has surpassed the psychologically important level of US$50,000 per coin on the back of Tesla’s $1.5 billion investment. This leaves the question, what exactly is a Bitcoin and can we view it as a valid investment?

What is Bitcoin

Attempting an analogy to explain Bitcoin is no easy task as there is nothing quite like it. Even the best comparisons out there will be imperfect.

Bitcoin is a virtual currency created in 2009 as an alternative to government issued ‘medium of exchange’, which most of us know as physical money. It is designed to hold a similar function as a ‘store of value’ with the closest comparison being gold, this is why many refer to Bitcoin as ‘Digital Gold’. The major difference between Bitcoin, gold and cash is that you cannot hold onto a Bitcoin and you definitely cannot fashion it into a piece of jewellery, it only exists on an electric file. Transactions for Bitcoins are recorded and distributed via a decentralised ledger, which removes the need for government control in the regulation of money supply, and hence Bitcoin is referenced as ‘Decentralised Money.’

Is Bitcoin money?

There are generally three functions of money:

  • Money is a store of value: Consider it as a means of saving and allocation of capital. The issue with physical money is that inflation will erode the associated purchasing power over time.
  • Money is a unit of account: This allows it to measure value in transactions and facilitates a means of exchange. All financial terms around profits, losses, income, expenses, debt and wealth can be measured against money.
  • Money as a means of exchange: Put simply, you can buy things with it and it will be accepted almost anywhere and everywhere. Grocery shopping, buying a home or even lending services are all applicable with a universal understanding and acceptance of money.

Bitcoin has been surging in popularity; however, it is nowhere near being universally accepted as a unit of account or a means of payment. In light of recent events, some countries have even gone so far as to ban it entirely. Quoting billionaire Mark Cuban “Bitcoin would have to be so easy to use it’s a no-brainer. It would have to be completely friction-free and understandable by everybody first. So easy, in fact, that grandma could do it.”

Is Bitcoin like gold?

The common theme around Bitcoin and gold is that they are both speculative in terms of their valuations and are both viewed as a hedge to conventional monies such as the USD. The main reason Bitcoin is more closely aligned to gold as opposed to shares is that cash flow, revenue, earnings, interest payments or dividends do not determine the prices of these instruments. They are only worth as much as people are willing to pay for them as an alternative asset and as a ‘store of value’.

Bitcoin specifics

  • Bitcoin is a cryptocurrency; however, it is only one of the many thousands of cryptocurrencies available on the digital market.
  • A cryptocurrency is held electronically and can be used to buy goods and services online.
  • Cryptocurrencies are powered by Blockchain, which is a decentralised technology that manages and records transactions spread across many computers.
  • Bitcoin is not dependant on central banks or governments in control of the money supply. It also does not flow through the traditional banking system.

To put it simply, regular people like you and I can contribute to the record-keeping of Bitcoin transactions via our private computers, however in reality, it is not that simple. The key takeaway is that Bitcoin is decentralised which removes the need for central banks (such as the Reserve Bank of Australia) and retail banks (such as our Big 4, CBA, WBC, ANZ & NAB). For those with little faith in government regulation and a heavy distrust in our banking system, this is Bitcoins greatest appeal yet this same definition around unregulated monies is also why so many stay far away from the digital asset.

In summary, we are not able to conclude whether Bitcoin can be viewed as a valid investment. It is somewhat similar to money, somewhat similar to gold and the price volatility of late bears similarity to an extremely volatile stock market. What we can agree on is that the digital asset cannot be ignored, with over $1.5 Trillion in cryptocurrency assets, it will be interesting to see if Bitcoin is still around at the end of the decade.

Please note this article provides general advice only and has not taken your personal, business or financial circumstances into consideration. Bitcoin is not on The Investment Collective’s Approved Products List and will not form part of any client portfolios. If you would like more tailored advice, please contact us today.

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Are you eligible for the Concessional Catch-up Rule?

The Concessional Catch-up Rule

The ‘Concessional Catch-up Rule’ (catch-up rule) was introduced by the government a couple of years ago and provides individuals with superannuation balances less than $500,000 greater flexibility when making concessional contributions. From 1 July 2018, individuals have been able to accumulate unused concessional caps and utilise the difference in future financial years.

Concessional contributions are a valuable retirement planning tool that can enable Australian’s to build a retirement nest egg whilst also receiving valuable tax concessions in the process.

Why make concessional contributions?

Concessional contributions are a great way to reduce tax, as these contributions are those which are either sourced from pre-tax monies (before tax is paid at your marginal tax rate (MTR)), or voluntary contributions for which you intend to make a tax deduction claim. In both situations, the result is that rather than being taxed at your MTR, which could be up to 47% including Medicare levy, you are instead taxed at either 15% or 30% for high income earners. This means that so long as your MTR is lower than the applicable superannuation tax rate, there is a tax benefit to be had.

The introduction of the catch-up rule is great news for those with low superannuation balances with plans to boost their savings in preparation for retirement. However, there is also room for creativity in its use, where strategies can be devised to assist in the minimisation of large tax bills in future years.

In order to be eligible to utilise the Concessional Catch-up Rule, you must satisfy the following criteria

  • Be eligible to make concessional contributions: it is a requirement that you be eligible to contribute to superannuation in order to utilize this rule.
  • Have a Total Super Balance (TSB) of less than $500,000 at the end of the preceding financial year: in order to be eligible, you must have a TSB less than $500,000 as of 30 June of the previous financial year. Your TSB is the total sum of all funds held within the superannuation environment and includes those held in accumulation, pension, defined benefit and those funds in transit due to a rollover between funds.
  • Have unused concessional caps from the past 5 financial years: it is unlikely for anyone to meet this criterion at this moment, as due to the recent nature of this legislation you have only been able to accumulate unused caps from 1 July 2018 onwards. This means that at the time of writing, only 2 financial years are readily available to be brought forward.

The following table illustrates how the accumulation of unused caps can play out going into the future:

Catch-up rule comparison

Tax planning strategies utilising the catch-up rule

The introduction of the carry forward rule has opened the doors to some creative tax planning strategies, as eligible individuals can take advantage of unused concessional caps to reduce tax payable. We can see this being exceptionally valuable going forward for those with an investment property, business asset sale or share portfolio with a large unrealised capital gain tax (CGT) liability. Essentially, if an investor knows that they will generate a large capital gain and consequently incur a large tax bill, the catch-up rule could be used to their advantage.

If you would like to discuss how this could be applicable to you or if you are interested in discussing your broader financial goals & objectives, please contact one of our advisers for a no obligation discussion.

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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Everyone should have a financial plan

Why you need a financial plan

Everyone needs a financial plan and everyone should make a plan that suits their particular circumstances.

You can make your own financial plan that will set you on the path to good financial health. The first, and possibly the most important part is goal setting.

We’ve talked about goals here before, so it’s important to remember to set SMART (specific, measurable, achievable, realistic and time-based) goals. You will need to think about what you want in the short-term, which might be anywhere from now through to 3-4 years, the medium-term which could be from 5-8 years and then long-term goals that look well into the future.

An example of a short-term goal is to finance a new car in 2 years’ time, a medium-term goal might be to save enough for a deposit on a house within 5 years and a long-term goal could be that you don’t want to rely on social security payments when you retire.

It does not matter whether the goal is a short-term or a long-term one, the means to achieving every one of those goals is the same!

You must first look at your income and expenses. Make a budget, this is a pretty simple thing to do these days with a proliferation of budgeting and cashflow apps available, the MoneySmart website is always a good place to begin.

Now you have made your budget and identified that you have some surplus income that you can direct towards saving for your goals, but the critical thing then is to stick to it! You must be very disciplined in ensuring that the identified savings part of your salary goes into your savings and stays there. It’s worth checking with your pay office to see if they will pay your salary into 2 different accounts, but if not, then you must make the transfer as soon as your pay comes in or set up a regular direct debit to occur at that time.  You must also avoid drawing from that account until you are ready to buy the object for which you have been saving.

Unfortunately, in the current economic climate you aren’t going to get much help in growing your savings account via interest payments. This means that you will need to shop around to find an account that pays at least some interest, and as your savings grow, you may be able to use term deposits or other high interest savings accounts for a larger balance.

This will matter to you less when you’re saving for a short-term goal than it will if you are looking at long-term savings. If your goals are long-term, the best course of action is to contact a financial adviser to assist, as you will need their expertise to advise you in relation to how to invest your funds and where to invest them.

Don’t hesitate to call one of our friendly advisers to assist you with your financial progress.

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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2020