The Experts

Paul Rickard
+ About Paul Rickard

Paul Rickard has more than 25 years’ experience in financial services and banking, including 20 years with the Commonwealth Bank Group in senior leadership roles. Paul was the founding Managing Director and CEO of CommSec, and was named Australian ‘Stockbroker of the Year’ in 2005.

In 2012, Paul teamed up with Peter Switzer to launch the Switzer Super Report, a newsletter and website for the trustees of SMSFs. A regular commentator in the media, investment advisor and company director, he is also a Non-Executive Director of Tyro Payments Ltd and Property Exchange Australia Ltd.

Follow Paul on Twitter @PaulRickard17

Shorten screwing brokers is a big bank bonanza

Thursday, February 14, 2019

Australia’s 31st Prime Minister, Bill Shorten, is set to hand the big banks a fee and revenue bonanza. He says that an incoming ALP Government will implement in full all the 76 recommendations from the Royal Commission. This includes Commissioner Hayne’s ideas about the mortgage broking industry.

Hayne and his team of lawyers have made 5 recommendations about “intermediated home lending” or mortgage broking. The first, that the law should be amended such that mortgage brokers must act in the best interests of the intending borrower is sound and arguably, should already have been in place. Strengthening reporting about misconduct and regulating mortgage brokers under the same laws that govern the conduct of financial advisers also makes sense.

But the big recommendation, and the one that will make the big banks richer, is to eliminate all commissions. The consumer, not the lender, should pay the fee to the mortgage broker.

A user pays system, free of conflicts.

Hayne sees this fundamental change to the industry happening over two to three years, first by prohibiting lenders from paying trail commissions on new loans, and then prohibiting lenders from paying other commissions.

This has the major banks licking their lips because it will lead to the demise of the mortgage broking industry. With mortgage brokers out of the way, the major banks will save around $2,400 per loan in upfront commission and then the same again in ongoing trail commissions (on an average loan of $400,000, banks typically pay upfront commission of 0.60% and then a trail commission of 0.20% pa.) They will also increase market share, as mortgage brokers won’t be around to promote the loans of the pesky minor banks and smaller credit providers, who don’t have large branch or proprietary distribution networks.

Why will it lead to the demise of the mortgage broking industry? Simply, Australian consumers won’t pay directly for the service, or if they do, not enough to make it profitable to run a mortgage broking service.

All the evidence, be it in financial advice, superannuation, insurance, real estate, the travel industry etc. is that Australian consumers are very reluctant to pay directly for “intangible” services. That’s why so few Australians have a financial adviser, there are so many self-managed superannuation funds, insurance brokers are paid by the insurer, real estate agents are paid by the seller out of the sale proceeds and travel agents are paid by the airline or travel provider.

Australians are tight and don’t like paying. They certainly won’t want to fork out around $5,000 for a loan.

Hayne acknowledges this problem. Firstly, he suggests that the brokerage service fee could be capitalised in the loan amount and repaid by the consumer over the life of the loan. In other words, consumers would take out bigger loans so they could pay the mortgage broker.

And then his craziest idea – that banks charge an additional fee to consumers who deal with them directly. That’s right, another bank fee! An establishment fee by any other name, but only paid by borrowers dealing directly with the bank.

As I have indicated, it may be that to create a level playing field between banks and brokers, banks should be required to charge a fee to direct customers based on the costs that are incurred by the bank when there is no broker”.

He then goes on to suggest that the ACCC should be responsible for monitoring the fee.

For those with short memories, establishment fees were charged on most home loans up until a decade ago. As competition in the industry picked up, banks realised that  establishment fees were a big turn-off for consumers and eliminating them was an easy market differentiator that led to an immediate boost in share. A thing of the past, it has now turned the full circle with some banks paying customers an upfront bonus to take out a loan. A “negative” establishment fee. This experience is further testament to the fact that consumers don’t like paying

Commissioner Hayne’s recommendation is wrong, not theoretically, but practically. His  ideas to address this (capitalisation and an establishment fee) aren’t going to be welcomed by consumers. And the big banks won’t say too much because it is in their collective interests to see the mortgage broking industry suffer and dwindle.

Bill Shorten needs to pause and reflect very carefully on the Royal Commission’s recommendations. A well-regulated mortgage broking industry is important to competition and helping to ensure that the consumers gets a good deal. He doesn’t want to hand the big banks a revenue bonanza.


Would you buy or sell Coles right now?

Thursday, January 24, 2019

Last November, 530,915 Australians became shareholders in Coles (COL), making it one of the most widely held stocks. While this number has now reduced a tad with shareholders exiting small parcels, it still has one of Australia’s most inverted registers with more than 90% of shareholders owning less than 5,000 shares and the top 0.2% of shareholders owning 60% of the shares on issue.

This is typical of newly demerged companies, but Coles isn’t your typical demerger. Normally, they are the unloved “problem division” that the parent company doesn’t know what to do with, starves of capital, and keeps under a pretty tight leash. This is one of the theories offered to explain why demerged companies have historically outperformed over the medium term. Think S32 from BHP, Orora from Amcor, Pendal from Westpac, BlueScope (eventually) from BHP, Dulux from Orica and Treasury Wine Estates from Fosters.

“Big isn’t always better” and a refreshed management team removed from the bureaucracy and constraints of “head office” is set free to thrive.

But Coles isn’t in this category. It has had access to almost 60% of Wesfarmers capital and been part of a conglomerate that operates with a culture of a thin head office and very autonomous business divisions.

To find out what the upsides and downsides are for Coles investors, plus Paul Rickard's call for the stock, click here to take a free 21-day trial to the Switzer Report.


Shorten to slug our super even more

Thursday, January 17, 2019

Last week, I outlined how Bill Shorten’s proposed tax slugs would hit millions of Australians, (see These slugs are aimed at investors, self-funded retirees and those earning more than $180,000.

But there are also 5 proposed changes to super that will raise an estimated $19 billion over the next decade. Writing in The Weekend Australian, Treasurer Josh Frydenberg labelled these as a “desperate tax grab” and said that they would hit another million workers, including those Mums and Dads taking parental leave, individuals wanting to make voluntary contributions and tradies wanting to start their own business.

Here’s a look at the 5 changes, Frydenberg’s estimate of the number impacted, and my view to whether the change will make the system “fairer”.

1. Non-concessional contribution cap slashed to $75,000

Originally set at $150,000 12 years ago for the 2007/08 financial year, increased to $180,000 for 2014/15, reduced back to $100,000 for 2017/18 and 2018/19, the annual cap on non-concessional contributions is set to be cut back to just $75,000.

Non-concessional contributions are, of course, personal contributions to super from your own resources and are made from your “after tax” monies.

The cut in the cap will reduce the ability to make a large “one-off” contribution to super that may come from the proceeds of selling an asset, an inheritance, a termination payment or some other means. By using the ‘bring-forward’ rule, a person under 65 can make three years’ worth of non-concessional contributions in one year. This means that under current policy, a person can get $300,000 into super in one hit, while a couple can potentially contribute up to $600,000. Under the ALP, this will fall to $225,000 or $450,000 for a couple.

Frydenberg says that this change will hit about 20,000 taxpayers. While that’s a small number in the first year, the change continues the recent shift in thinking in Canberra, which is directed at narrowing the utility of super as a savings vehicle. “We want you to have some money in super…….but not too much”.

2. Abolish catch-up concessional contributions

Probably the dumbest of Shorten’s super slugs, he plans to abolish ‘catch-up’ concessional contributions. This will impact, according to the Treasurer, about 230,000 workers.

An initiative of the current Government, the ability to make ‘catch-up’ contributions only came into effect last July. It is designed to allow people with interrupted work patterns, such as a mother who goes on maternity leave, to make additional super contributions when they return to work and still receive the same tax concessions.

The unused portion of the annual concessional cap of $25,000 can be carried forward for up to five years. Concessional contributions are primarily your employer’s compulsory 9.5% plus salary sacrifice contributions. If you don’t make any concessional contributions for four years, you could potentially make a concessional contribution of up to $125,000 in the fifth year. Or if you made a concessional contribution of $5,000 in the first year, you could make a concessional contribution of $45,000 in the second year. 

Eligibility is restricted to those with a total superannuation balance under $500,000 (as at 30 June of the previous year).

Shorten says that he will announce policies that deal with some of the perceived inequities of the super system (such as the materially lower balances women have when they retire), but for some reason, ‘catch-up’ contributions doesn’t appear to pass the test. Hard not to think that this isn’t a case of the “not invented here” syndrome at work.

3. End deductibility of personal contributions within the concessional cap

Concessional contributions include your employer’s compulsory super guarantee contribution of 9.5%, salary sacrifice contributions and personal  contributions you make and claim a tax deduction for. They are capped at $25,000 in total.

Until recently, the third category was only available to “self-employed” persons who satisfied the “10% rule”, that is, they received less than 10% of their income in wages or salary (i.e. genuinely self-employed). Last year, the Government scrapped the 10% rule so that anyone who was eligible to contribute to super could claim a tax deduction for personal super contributions (within the overall concessional cap of $25,000). This was designed to assist, amongst others, employees whose employer didn’t offer salary sacrifice facilities.

Shorten says that an ALP Government will reverse the change and scrap the widespread deductibility of personal super contributions. (It is not clear whether this means the re-instatement of the 10% rule.) According to Frydenberg, this would also impact up to 800,000 workers who are working part-time at the same time as running a small business. Many are using the salary from their part-time job as the cash flow to make their business grow. He says that “the concession (tax deduction) specifically encourages the dual objective of entrepreneurship and savings for retirement, and helps strengthen the small business sector – the backbone of the economy”.

4. Higher income super tax lowered to $200,000

Persons on incomes from $200,000 to $250,000 will have their concessional super contributions taxed at 30% (rather than 15%). Known as Division 293 tax, a higher tax rate (effectively 30%) applies to concessional super contributions made by higher income earners. Originally introduced to apply to persons on incomes of $300,000 or more, the threshold was reduced last year to $250,000. Now, Shorten proposes to lower it to $200,000.

130,000 additional people will pay 30% tax on their super contributions. While they are not going to thank me, I am not against the change per se because they currently get the biggest tax concession on salary sacrifice contributions. The problem is that the highest marginal tax rate of 47% starts at too low a level of $180,000, meaning that this group (for equity reasons) needs to be drawn into the Division 293 tax net.

And if you are wondering why the threshold is $200,000 rather than $180,000, the income definition for Division 293 tax includes super contributions (which is approximately $180,000 plus the 9.5%).

5. SMSFs won’t be allowed to borrow  

David Murray’s Financial System Inquiry recommended that SMSFs be prohibited from borrowing to purchase investment assets such as property. The current Government chose not to adopt this recommendation.

Shorten’s Treasury Spokesman Chris Bowen has stated that an incoming ALP Government would adopt this recommendation and change the law to prohibit SMSFs from borrowing. Presumably, this will apply prospectively, with some form of grandfathering or transitional “wind-down” period applying to SMSFs with existing loans. If it doesn’t, then we will all be screaming.


Shorten’s 6 big tax slugs to hit Aussie middle class

Thursday, January 10, 2019

In a little over four months, Australians are set to elect Bill Shorten as their 31st Prime Minister. He will lead a left of centre, anti-business Government that will slug millions of Australians with higher taxes. Those impacted will include investors, self-funded retirees, small business entrepreneurs, professionals, managers and savers. While the “filthy rich” will also be hurt, the majority will be hard working, middle class Australians.

What can you do about it?

Well, apart from voting for the other side or the populists who sit on the Senate cross-bench, spread the word about the extent and impact of the changes. They are not “top of mind” issues with the general populace, so Shorten hasn’t been required to debate their consequences. The tax slugs will reduce the incentive to invest, save and work harder, lead to increased property rents and unfairly punish self-funded retirees and others who have played by the  rules. If they are going to hurt you, they will one day hurt your children or grandchildren.  

Spread the word. Here is a run-down on the six big tax slugs that Shorten is proposing.

1. Tax on capital gains to soar

Australia will have one of the highest effective tax rates on capital gains in the world  under Shorten’s plan to slash the discount from 50% to 25%.

Presently, an investor who holds an asset (such as shares, property, land, managed funds etc) for more than 12 months pays tax on 50% of any gain. This means that an individual who is paying tax at the highest marginal tax rate of 47% (45% plus 2% Medicare Levy) pays an effective tax rate on a gain of 23.5%. 

Under the Shorten plan, only 25% of the gain will be exempted, so that tax at the marginal rate will apply to 75% of the gain. For an investor paying tax at the highest rate of 47%, the effective tax rate will rise to 35.25%. And, with the top marginal tax rate set to rise by a further 2% to 49% (see below), the effective tax rate will be 36.75%.

The tax paid on a capital gain of $100 of $23.50 will increase to $36.75, an effective increase of 56.4%.

The only good news is that the lower discount rate won’t be applied retrospectively so that investments made before the effective date of the change  (“sometime after the election”) will be grandfathered. 

2. Negative Gearing

Negative gearing will be limited to “new housing”. The commencement date will be announced after the election, with investments made before this date grandfathered.

The change will also apply to other assets including shares which are purchased with the assistance of a margin loan, or an investment in a business using borrowed monies. While interest will still be deductible, it will only be deductible to the extent that the income and the allowable deductions are fully offset – you won’t be able to claim a ‘net’ investment loss.

Although grandfathering will help existing investors, all property owners could be impacted if investors withdraw from the market and house prices fall. Rents are expected to increase, as investors will require higher returns to compensate for the loss of the tax benefit.

3. Retiree tax

Shorten will stop the re-funding in cash of excess franking credits. Attached to share dividends paid by companies such as Telstra, Woolworths, BHP and the major banks, the franking credits act as a tax offset and if not used, are currently refunded in cash by the Australian Taxation Office.

The change will apply to dividends paid from 1 July 2019.

Known as the “retiree tax”, this change will impact hundreds of thousands of self-funded retirees who are drawing a pension from their SMSF. While the impact will vary, a typical example sees a self-funded retiree drawing a pension of $60,000 pa from their SMSF being around $10,000 pa worse off.

Other low rate or 0% taxpayers, such as a non-working spouse who owns shares, will also be impacted.

In his first backdown, Shorten announced that persons in receipt of a government benefit such as the aged pension, or an SMSF where one member was on a government benefit on 26 March 2018, will be exempted from the change.

4. Top tax rate rises to 49%

A legacy of the horror 2014 Abbott/Hockey budget, a temporary “budget repair levy” of 2% was applied to those on the highest marginal tax rate of 45%. The levy expired on 30 June 2017.

Shorten proposes to re-instate the levy by making a permanent increase of 2% to the top tax rate. Under Shorten, the top tax rate will increase to an effective 49% (47% plus 2% Medicare Levy). Taxpayers earning more than $180,000 pa will be impacted.

5. Super contributions cap slashed to $75,000

Two years ago, the cap on non-concessional contribution to super – those contributions using your own ‘after tax’ monies  – was reduced from $150,000 to $100,000 pa. Now, Shorten proposes to lower this again to just $75,000 pa. 

The cut in the cap will reduce the ability to make a large “one-off” contribution to super which may come from the proceeds of selling an asset, an inheritance, a termination payment or some other means. By using the ‘bring-forward’ rule, a person under 65 can make 3 years’ worth of non-concessional contributions in one year. Under current policy, a person can get $300,000 into super in one hit while a couple can potentially contribute up to $600,000. Under Shorten, this will fall to $225,000 or up to $450,000 for a couple.

Clearly, Shorten doesn’t see the super system as a place for savers or the “comfortably off” to invest their surplus funds.

Shorten has also announced that he will abolish ‘catch-up’ concessional contributions and end the deductibility of personal contributions within the concessional cap. The latter can be used by individuals whose employer doesn’t offer salary sacrifice facilities.

6. More to pay higher tax rate on super contributions

Known as Division 293 tax, a higher tax rate (effectively 30%) applies to concessional super contributions made by higher income earners. Originally introduced to apply to persons on incomes of $300,000 or more, the threshold was reduced last year to $250,000.

Shorten proposes to lower it to $200,000, meaning that persons on incomes from $200,000 to $250,000 will have their concessional super contributions taxed at 30% (rather than 15%).  

For savers and those planning to fund their own retirement (as opposed to the Government), another change that makes the super system less attractive.


Preparing for Prime Minister Bill Shorten

Thursday, January 03, 2019

It is now almost certain that Australia will go to the polls on Saturday 18 May 2019, the last possible day that a half Senate election can be held in conjunction with the House of Representatives. And if the outcome of the Victorian state election is any guide, the prospects of a change of Government and Bill Shorten becoming Australia’s 31st Prime Minister look increasingly likely.

On paper at least, some of the policies he has announced are troubling to investors and retirees. What are these policies, and what actions can you take now to prepare for this possibility of an ALP Government? Here is my assessment.

1. Capital gains tax discount

In the medium term, the halving of the capital gains tax discount for individuals from 50% to 25% could be the most significant change as this will apply to all investments – shares, property, managed funds, collectables etc.

Presently, an investor who holds an asset for more than 12 months pays tax on half the gain. This means that an individual who is paying tax at the highest marginal tax rate of 47% pays an effective tax rate on a gain of 23.5%.  

Under the ALP plan, only 25% of the gain will be exempted, so that tax at the marginal rate will apply to 75% of the gain. For an investor paying tax at the highest rate of 47%, the effective tax rate will rise to 35.25%.

The good news is that the ALP says that the change in tax rate won’t be applied retrospectively so that all investment made before the effective date of the change  (“sometime after the election”) will be fully grandfathered.

Super funds won’t be impacted, so that the current discount of one-third that applies to investments owned by a super fund (which effectively brings the tax rate down to 10% for an SMSF in accumulation phase) will be maintained.

No action required.

2. Negative Gearing

The ALP says that it “will limit negative gearing to new housing from a yet-to-be-determined date after the next election. All investments made before this date will not be affected by this change and will be fully grandfathered.”

The policy will also apply to other assets including shares which are purchased with the assistance of a margin loan, or an investment in a business using borrowed monies. While interest will still be deductible, it will only be deductible to the extent that the income and the allowable deductions are fully offset – you won’t be able to claim a ‘net’ investment loss.

In the residential property market, although grandfathering will protect investors with existing properties, the  impact on the market could be material if investors withdraw from the market. Offsetting this in the medium term could be an increase in rental returns.

If the property market comes under pressure, ASX companies involved in the industry could be impacted. This would include real estate listings and advertising groups REA Group (REA) and  Domain (DHG), real estate agent McGrath (MEA) and new home builders such as Mirvac (MGR) or Watpac (WTP).

No action required, but if you are considering investing in an existing rental property and negatively gearing, you may want to act before the change takes effect.

3. Franking credits

The ALP will stop the re-funding in cash of excess franking (imputation) credits. Persons in receipt of a government benefit such as a pension, or an SMSF where one member was on a government benefit on 26 March 2018, will be exempted.

The policy will apply from 1 July 2019, which means it will only affect future earnings and franked dividends that start flowing in the 19/20 financial year.

Importantly, the change will have no impact on taxpayers paying tax at a marginal tax rate of 30% or higher (above the company tax rate), very limited impact on most institutional investors, and no direct impact on foreign investors.

It will however impact low or zero rate taxpayers such as a SMSF in pension mode or a non-working spouse who owns shares, and some SMSFs/super funds in accumulation mode who have excess credits and presently receive a cash refund. If they don’t receive a cash refund, they aren’t directly impacted.

As a tax change, it will need to be legislated and pass through the Senate. The position of a “populist” Senate cross bench is unknown and could be interesting.

So, should you take any action now?

The major banks and “high yielders” such as Telstra and hybrid securities could be impacted if some of the “SMSF army” decide to reduce their holdings. The data says that they are on average overweight these stocks. Against this is the proposition is that the yield on these stocks will still be relatively attractive, notwithstanding the loss of the tax refund.

My sense is that some of the recent underperformance in the financials sector is due to concerns about the prospect of a Shorten government. Given the uncertainty around the legislation and that only part of the investor community is impacted, I am not convinced that we are going to see a further markdown on these stocks.

Listed investment companies (LICs) paying fully franked dividends could be more severely impacted, particularly if they are trading at a premium. This is because they have retail investor bases (very few, if any, institutional or foreign investors), a finite number of buyers and if trading at a premium to the LIC’s net tangible asset value, are arguably over-valued.

Consider selling LICs trading at a premium.   

4. Industry specific policies

Industries that are subject to regulation, or rely upon the Government for subsidies or spending, are always vulnerable to a change of government and a redirection of priorities or policies. This category includes healthcare, telecommunications, energy, education, aged care, financial services and media.

Healthcare is right up there, and one of the earlier announcements from the ALP was a proposal to cap the increase in health insurance premiums to 2% pa. There has been some commentary that this policy is under review as it could have unintended consequence on some of the smaller regional health funds. If the policy is implemented, potential losers would include Medibank (MBL) and NIB (NHF). Private hospital operators Ramsay Health Care (RHC) and Healthscope (HSO) could also feel the pressure if the insurers are being squeezed.

Sectors that could be positively impacted includer renewable energy, education and infrastructure, although the timing might be too far off for investors to capitalise on this opportunity.

In the short term, review exposures to sectors that could be negatively impacted, particularly companies in the hospital/insurance sector.


5 even “sexier” ways to boost super

Friday, December 28, 2018

Peter Switzer lamented the other day that “a problem for super is that it’s not sexy like property. Everyone wants to talk about property when we go out to dinner but who wants to spoil a good night out by uttering the word “super”?” (read the full article here).

Focusing on how women (and men) could boost their super balances, he outlined 6 key strategies:

1. Know what you’ve got — what’s the balance now?

2. Know what you want — set yourself a dollar goal and date it, like $1 million by age 65.

3. Get into the best fund — compare your fund against the best of breed and check out what you’re being charged.

4. Put extra in — either do it by salary sacrifice or slam extra in maybe by doing a second job or starting a part-time business. 

5. Do a budget — get your spending under control. 

6. Avoid dud partners — divorce is a wealth-killer!

I particularly like the “avoid dud partners” strategy. No doubt easier in hindsight, some  would also be reminded of the refrain from their parents of “I told you so”. But with more than 1 in 3 marriages ending in divorce, this is clearly a big wealth-killer.

Now let’s focus on the “putting extra in”, particularly in relation to your partner, and 5 even “sexier” ways to boost their super.

1. Get a tax offset for topping up your partner’s super

This could make you popular.

While it has been around for decades, the Government has recently increased the income test threshold to make this more accessible. Known as the Spouse Tax Offset, if you contribute $3,000 to your partner’s super, you can claim a personal tax offset of 18% of the contribution, up to a maximum of $540.

Your partner needs to earn less than $37,000 for you to get the full tax offset, and the tax offset phases out completely if he/she earns more than $40,000. For calculation purposes, your maximum rebatable contribution of $3,000 is reduced on a $ for $ basis for each $ of income that your spouse earns over $37,000. The offset is then 18% of the lesser of the actual super contribution or the reduced maximum rebatable contribution.

Your spouse’s income includes their assessable income, fringe benefits and any reportable employer super contributions such as salary sacrifice. And to cover the rest of the fine print,  you cannot claim the offset if your spouse exceeded their non-concessional cap of $100,000 or their total super balance was more than $1.6 million. Your spouse must be under 70, or if aged between 65 and 69, meet the work test.  

2. Split contributions with your partner

This could make you even more popular.

You can split your concessional contributions with your spouse, which means that  contributions such as the 9.5% your employer pays or salary sacrifice contributions are “transferred” to  your spouse. You make the election to split after the completion of the financial year.

While “splitting” won’t increase the amount you and your partner have in super, it can be a good idea if the balances are uneven or if you are getting close to the total super balance cap of $1,6000,000. Also, looking to the future and Governments’ propensity to change the super system, restrictions based on account balance can’t be ruled out 

The amount you can split is up to 85% of your concessional contributions (this is the amount left over after the super fund pays tax at 15% on the contributions), and as concessional contributions are capped at $25,000, a maximum of $21,250.

In regards to the fine print, your spouse must be under 65, or if over the preservation age and under 65, not retired. You make the application to split to your super fund in the following financial year (so you can apply now to split contributions made in 17/18).

3. Get the Government to make a co-contribution

There aren’t too many free handouts from Government, but the government super co-contribution remains one of the few still available. A legacy from John Howard’s era, if eligible, the Government will contribute up to $500 if a personal (non-concessional) super contribution of $1,000 is made.

The Government matches a personal contribution on a 50% basis. This means that for each dollar of personal contribution made, the Government makes a co-contribution of $0.50, up to an overall maximum contribution by the Government of $500.

To be eligible, there are 3 tests. Your taxable income must be under $37,697 (it starts to phase out from this level, cutting out completely at $52,697), you must be under 71 at the end of the financial year, and critically, at least 10% of your income must be earned from an employment source. Also, you can’t have exceeded the non-concessional contributions cap of $100,000 or have a total super balance over $1.6 million. 

While you may not qualify for the co-contribution, your partner might and can be a great way to boost their super. If they qualify and don’t have the cash, give them the money to make a  contribution. 

4. Help your partner claim a tax deduction

Many people use salary sacrifice to make additional contributions to super from pre-tax monies. However, not all employers offer this facility and many of us are self-employed.

An important change last year to the super system was the abolition of the ‘10%’ rule. This rule allowed the self-employed (which were defined as those who received less than 10% of their income in wages or salary) to claim a tax deduction for personal contributions to super (up to the concessional cap of $25,000). Now, everyone who is eligible to make super contributions can potentially claim this tax deduction. 

So, if you (or your partner’s employer) doesn’t offer salary sacrifice, you (or your spouse) could make an additional contribution to super and claim a tax deduction. You aren’t allowed to exceed the concessional contributions cap of $25,000, which also includes the employer’s 9.5%.  

Let’s take an example. Fiona is 45 and earns a gross salary of $100,000. Her employer contributes $9,500 to super, but doesn’t offer a salary sacrifice facility. Prior to 30 June, Fiona contributes a further $15,500 to super and claims this amount as a tax deduction. She does this when she completes her 18/19 tax return.

Fiona will also need to notify her super fund that she is claiming a tax deduction, which she is required to do before she lodges her tax return for the 18/19 year.

5. Can your partner make “catch up” contributions?  

Announced back in the 2017 Federal Budget, the ability to carry forward unused concessional contributions and make “catch up” contributions commenced from 1 July. This may suit someone with a low superannuation balance who leaves the workforce for a period of time (such as maternity leave), or who for other reasons is unable to utilise their full concessional cap. 

The unused portion of the concessional cap of $25,000 per annum can be carried forward for up to 5 years. This means that if you didn’t make any concessional contributions for four years, you could potentially make a concessional contribution of up to $125,000 in the fifth year. Or if you made a concessional contribution of $5,000 in the first year, you could make a concessional contribution of $45,000 in the second year.  

To be eligible, your total superannuation balance must be under $500,000 as at 30 June of the previous year.

Contributions are measured over a rolling five- year period and unused portions expire if not used. As the scheme only started this year, the first year that you can access it to make a higher concessional contribution is next financial year (2019/2020) and the carry forward will only relate to 2018/19. 


4 money lessons your kids should know

Monday, December 24, 2018

Being a “non-cool old man” (hell, I’m not even 60 yet!), some might say it’s a bit rich for me to be lecturing millennials less than half my age about how to save and invest. So this appeal is through you – their elder siblings, parents, or perhaps even grandparents – to share these tips about how they can spend, save or invest “smarter”. And also, a couple of things they shouldn’t do.

1. Spending

Firstly, I’m not going to labour the point about doing a budget (which sounds incredibly boring). It goes without saying that this is a good idea. By working out that you spend $12 a day on those three take away cappuccinos and if you cut back to just two per day how much that would improve your bank balance over a month – that is the power of a budget. Peter Switzer called doing a budget “exciting” as “it gives you the money firepower to turbo charge your wealth-building” (see here).

But I do want to address how you pay for things. Using Afterpay (which for the non-millennials is electronic lay-buy) is OK, provided you are really disciplined about your payments. Remember, you will pay 4 equal instalments due every 2 weeks by direct debit to your debit or credit card. Miss one instalment on an item under $40 and you pay a late fee of $10 (a simple interest rate of 25% - the effective per annum rate could be in the 100’s of percent), and on larger items, a simple interest rate of 25% capped at $68. Could it happen to you? Possibly. While only 5% of instalments incur a late fee, Afterpay says 22% of customers have paid late fees.

Debit or credit card? Debit cards are fine. If you get a credit card, and there are sound reasons to do so including establishing a credit history with a bank, keep it simple. Low or no fee, low interest rate, no reward or loyalty points.

Loyalty points are great for people who always pay their credit card balance off in full by the due date, but for everyone else, they are a waste of time. They are the classic marketing illusion – they look and feel valuable, but in reality, they aren’t worth that much. In most loyalty schemes, one point is worth on average half of one cent. That means 100 points, which you get when you spend $100, is worth 50 cents. 1,000 points is worth $5, 10,000 points is worth $50 and 100,000 points is worth $500. That’s right – you have to spend $100,000 to earn $500!

Miss a credit card payment (or not pay the full amount) and you could be paying interest at over 20% pa, and you pay it from the statement date, not the date you miss the payment. The “interest free” period only applies when you pay the whole amount by the due date.

 An idea to help with budgeting and spending is to manage the timing of direct debits around when you get paid. For example, if you get paid monthly, see if you can get all your direct debits timed to occur on the day (perhaps the day after) you get paid. That way, you get all the regular payments out of the way – and know what you have left over for the month. If your landlord or utility won’t co-operate, open a second bank account to act as a holding account so you can set these funds aside.

2. Saving

I am a bit old fashioned when it comes to owning your own home – I think this should be the number one savings priority for younger Australians. While a case can be made that renting a home and buying an investment property can produce a better outcome, most people don’t buy “the worst house in the best street”. Further, the comfort of owning the roof over your head, let alone a tax system that biases home ownership through the absence of capital gains tax and latter on when it comes to eligibility for the government pension, speaks to making this a priority.

The Government’s new First Home Super Saver Scheme has changed the game for millennials saving for their first home. This is an absolute “no brainer” (see here). It is not the panacea to address the housing affordability challenge, but it will make it easier for those trying to breach the deposit gap.

The scheme allows savers to make voluntary contributions to super of up to $15,000 in any one year, and then up to a maximum of $30,000 over the duration of the scheme. This means that a couple can effectively save $60,000.

Critically, the contributions to super can be out of “pre-tax” dollars – just like salary sacrifice contributions - making them particularly tax effective.

Bottom line is that when withdrawn from super to purchase the first home, net of all taxes,  savers will have about 30% more on average than if they had saved the same amount in a bank term deposit.

Like any Government scheme, there are several rules that govern eligibility. 

You can participate in the scheme if you have never previously owned property (including an investment property). There is no age limit or minimum – but you must be at least 18 to make a withdrawal from the scheme. And you must intend to live in the property as soon as practicable, and for at least 6 months of the first 12 months you own the property. Further, the monies must be used for a home or home and land package – you just can’t use the funds to buy land.

Finally, eligibility is assessed individually, so while your partner might not qualify (because he/she owns an investment property), you can still qualify.

3. Investing

If you have already got the first home sorted, investing surplus cash in other growth assets should be a good strategy over the medium term. Putting extra money into  superannuation is probably not the smartest strategy because you won’t be able to access it for 30, 40 or possibly even 50 years. With retirement ages moving out and the Government capping how much you can have in super, millennials in this position will have lots of  time to build up their super nest egg.

The obvious investment assets are shares or property. The former have the advantage that you can start with as little as $500 per share (arguably, this is too small for the brokerage charges and a few thousand makes more sense), and shares can be readily liquidated so that they can be used as savings for your first home. If you don’t know what to buy, CommSec offers starter “share packs” (pre-blended portfolios of shares from $4,000). Alternatively, you could look at an index tracking exchange traded fund such as IOZ ; an actively managed fund such as SWTZ; or companies that you know and understand such as your bank or telco.

Buying an investment property is a bigger decision. The important thing to remember here is that your investment return will come from an appreciation in the price of the property. While the rental income should cover your operating expenses, it won’t usually cover your interest costs. If you negatively gear (best suited to those paying tax at a high marginal rate of tax such as 47%), by definition, you are losing money (outgoings, including interest costs, exceed income).

Not everyone is a great buyer of property, and with the market looking like it has further to pull back, this strategy should be carefully considered. The ALP’s proposed ban on negative gearing is another factor to consider. While this could be a negative in the medium term for property investors, as existing properties will be grandfathered, there is an argument that says to get in ahead of an expected ALP win.

4. Cancel

Finally, two things to cancel. Unless you have dependents or a mortgage, you probably don’t  need life insurance. While many super funds automatically deduct from your employer’s 9.5% super contribution a life insurance premium, it is your call whether you want this or not. Tell your super fund to cancel the deduction. Also, cancel any salary sacrifice contributions (outside those which can be put in to the First Home Super Saver Scheme) and invest these monies outside the super system.


How can I get my super but not retire?

Friday, December 21, 2018

I am surprised at how often I get asked this question, which I guess is a sign of the times with an ageing workforce and many mature age workers expressing a clear preference to keep working. 

There are three key ages when it comes to accessing your super. 65 years old, 60 years old and your “preservation age”. I  won’t dwell too much on the “preservation age” because for most people it is also 60 years. If you were born before 1 July 1960, it is only 55 years. There is a transitional scale from 56 years to 59 years for those born on or after 1 July 1960 up to 30 June 1964, and after that, it is 60 years.  

65 years is “magic” because this the age when there are absolutely no restrictions about accessing your super. You can withdraw by lump sum as much or as little as you want, or commence a regular pension, even if you are working full-time.

60 years is “special” because this is the age when withdrawals from super by lump sum or regular pension will generally be tax free. If you are in an older style defined benefit scheme, you may have some tax to pay, but for most of us, withdrawals will be tax free.

Turning 60 also opens up the opportunity to access your super without retiring. There are two ways.

Firstly, you can commence a transition to retirement pension and access part of your super. (It is also available if you reach your preservation age at an earlier age). Introduced by the Howard government some years ago with the aim of allowing people to scale back on their work commitments and ease into retirement without too much financial pain, it comes with several rules.

You can’t take a lump sum withdrawal and you must open an account-based pension. You are then required to take a minimum of 4% of your account balance as a pension each year, and a maximum of 10%. For example, if your super balance is $500,000 and you start a transition to retirement pension, you must take at least $20,000 as a pension payment each year and you can’t take more than $50,000.

Pension payments can be made as often as you want (fortnightly, monthly, quarterly or just once a year etc), and if you commence a pension during the financial year, the minimum and maximum amounts are prorated (for example, if you start a pension midway through the financial year on 1 January, the minimum and maximum amounts are half the full year amounts).

You can continue to work full or part time and make super contributions as normal. These contributions will  be kept separately from the balance you used to start the transition to retirement pension.  

When you turn 65, you can either take the monies out as a lump sum, or just keep it as a normal account-based pension. One important change at that time is that the investment earnings on the assets supporting the payment of the pension will become tax free (inside a transition to retirement pension, they are taxed at 15%).

The other way to access your super when you turn 60 is to cease an employment arrangement (e.g. quit your job). Potentially, you can access all your accumulated super benefits to that point of time, either as a lump sum or use to start an account-based pension. If you continue in another employment arrangement, or start a new job, the contributions that you or your employer make will be kept separately in the accumulation part of the super system.

The point to note here is that there is no need to retire – simply the act of ceasing an employment arrangement after reaching age 60 allows you to access your accumulated super.

If you do decide to retire, it doesn’t mean that you can’t work at all. The super laws define “retirement” for a person over 60 as having no intention again to be “gainfully employed”, either on a full-time or part-time basis. Part-time means working up to 30 hours a week and a minimum of 10 hours per week. So, potentially you can retire and start a new position provided you work just short of 10 hours per week. And if you retire and decide that you’re not cut out for retirement or your financial circumstances change, you are not locked out of the super system for ever. It’s an “intention”, rather than a permanent  commitment.

Finally, for completeness, you can also access your super early in the event of a terminal medical condition, severe financial hardship and on compassionate grounds, but hopefully, these won’t apply to you. 


4 ways to get around Bill Shorten’s retiree tax

Thursday, December 13, 2018

The latest Newspoll shows that despite a lot of noise and agitation, community opposition to Bill Shorten’s retiree tax hasn’t grown over the last several months. According to the poll, support for the tax has only dropped from 33% to 30% between March and December, while opposition has remained relatively steady at around 48%. Reflecting that a lot of people don’t understand the proposal, 22% are uncommitted.

The retiree tax is a proposal to abolish the refunding in cash of excess franking credits that go with share dividends. It will particularly impact around 1,000,000 self-funded retirees who are drawing a pension from their SMSF (self-managed super fund) and who do not receive a government pension. It will also impact other low rate taxpayers such as a non-working spouse or adult child who owns some shares, and may impact the investment returns of SMSFs and other super funds in the accumulation mode of super (that is, when monies are being paid in).

Take this example. Bill and Mary are retired and have a combined total of $1,500,000 in their SMSF. This is above the assets test threshold so they don’t receive the government aged pension. They want as much as possible to preserve the capital of the fund to provide for their retirement, so they draw down the fund’s investment income each year as a pension. If the fund is invested 50% in fully franked shares yielding 5% and 50% in other assets (cash, term deposits, international shares) yielding 3%, this provides them with a total income of $76,071,  including a cash refund of $16,071 for the franking credits.  A nice sum, but not an exorbitant sum to live off. Under Shorten, the cash refund goes and the sum available to take out as a pension will drop to $60,000 – they will be $16,071 worse off!

Like all tax changes, Shorten and his ALP team will need to pass supporting legislation through both houses of parliament. The position of a “populist” Senate cross-bench has been in doubt, and news yesterday that nine out of 10 of the current cross-bench oppose the plan (the other Senator is undecided) will come as a relief to self-funded retirees. Of course, the ALP and the Greens could yet achieve a majority in the Senate in their own right. A more likely scenario is a compromise with the cross-bench, which caps the amount of franking credits that can be refunded in cash each year at (say) $10,000 or $20,000. This way, most of the 1,000,000 retires are spared from the tax grab, while Shorten gets a victory and stops the multi-millionaires retires from receiving what he believes is an unfair tax break.

While these scenarios will no doubt play out over 2019, the question is: can you, or should you do anything now about the tax? The answer is that you can’t do that much, and given the uncertainty about the change itself, the prudent strategy is probably to wait. However, if you are still worried, here are 4 actions to consider.

1. Switch to other higher yielding investments

There is no doubt that over the medium term, SMSFs overweight the major fully franked dividend paying stocks such as the 4 major banks, Telstra, Woolworths and even BHP, will diversify into other stocks and alternative income producing assets. Property, both direct and indirect through syndicates and property trusts, infrastructure assets and infrastructure stocks such as Transurban or APA, and “riskier” fixed interest assets including corporate bonds, mortgage trusts and direct financing will be on the shopping list. Hybrid securities and listed investment companies trading at a premium will be on the exit list. SMSF trustees in the pension phase won’t be a slave to the franked dividend, but will evaluate income returns on pre-tax basis.

But the market has already anticipated some of this switching, with property trusts and infrastructure stocks bid up in price and down in yield, and the major bank stocks down in price and up in yield. While there are other factors at play, yields on the major bank stocks now sit around 7% (without franking). My sense is that there isn’t much left in this trade and that the switching will happen over the medium term.

The other thing to remember is that only a small part of the market is impacted by the tax. Foreign investors aren’t impacted, domestic fund managers and most institutional super funds aren’t impacted, individuals paying tax at 39% or 47% aren’t impacted and most SMSFs in accumulation phase aren’t impacted.

2. Upsize

A more radical action, and something that requires very careful consideration, is to upsize. Yes, that’s right – not downsize, but upsize to a more expensive family home.

The strategy here is to let the Government help with your income needs and become eligible for a part-aged pension. The family home is of course exempt from the pensioner assets test, so by withdrawing money from your super and putting it into the family home or upsizing into a more expensive home, you get below the assets test cut-off.

The cut-off for a home-owning couple to receive a part pension is assets below $848,000 and for a single, $564,000. Assets include super balances, motor vehicles, home contents and financial assets outside super such as money in the bank.

There could be some big financial downsides with this strategy. By withdrawing money from super and accessing the Government’s help, your income will probably reduce. Critically, will the upsized  home appreciate enough in value to cover the transaction and investment opportunity costs? And what is the long term strategy? Do you downsize at some later point, or leave the home to your kids? Do they provide income support as you use up your super and become more dependent on the government aged pension?

3. Can you access a part pension and invest outside super?.   

The ALP has announced that it will exempt from the tax change persons who are in receipt of a government benefit (not SMSFs – only the 13,000 who had a member in receipt of a government benefit on 28 March 2018). So, If you are approaching pension age, you may  want to consider investing outside super into shares paying franked dividends to maximise the tax free income threshold of $18,200, while ensuring that you qualify for the age pension. To get under the assets test limit and qualify for a part pension, you may have to invest in the family home or spend (not gift) some of your funds.

4. Accelerate the payment of private company dividends

If you own a private company, you may want to check the franking account balance and if positive, pay a franked dividend. The ALP has said that the change will (at the earliest) take effect from  1/7/19, meaning that fully franked dividends received this financial year won’t be impacted. Just as several public companies will accelerate the payment of dividends into the first half of 2019, private companies should also consider if this is appropriate.


4 key investor lessons from 2018

Thursday, December 06, 2018

The obligatory disclaimer used by fund managers saying that “past performance is no indicator of future performance” could also be said to apply to predictions based on what happened last year occurring again next year. However, with President Trump into his third year of office in the USA and a federal election due in Australia, I think 2019 could look a little like 2018 in regard to the lessons investors should consider.  

Here is my take on four key lessons from 2018.

1. President Trump sets the tone

Whether you love him or loathe him, there is no doubt that President Trump is the biggest single influence on world stock markets. Maybe because he is a maverick, unconventional or as some would say erratic, he wields more power over the markets than any of his predecessors.

Consider these actions since he came to office:

·      The huge cut in company tax rates, which propelled US and many other global stock markets to all-time highs. US company earnings grew at over 20% pa, consumer confidence and spending lifted as companies shared some of the largesse with their staff by paying  across the board bonuses, and the US dollar strengthened as monies were repatriated. The US economy went into overdrive;

·      The sabre rattling about North Korea, which had markets on edge for months until Donald pulled off a summit with President Kim Jon Un;

·      The trade spat with China and imposition of tariffs (initially 10% on about US$253bn of Chinese goods). Trump has threatened to lift the rate to 25% and impose tariffs on the remaining US$267bn of Chinese exports to the USA. While  these new measures are on hold for 90 days, the development of a trade war remains the biggest single threat to global growth and the continuation of the global equity bull market;

·      The bullying of Saudi Arabia and other OPEC members to increase oil production, which was one of the drivers for the sharp drop in the oil price from almost US$75 per barrel in late September to US$50 a barrel in November; and

·      More bullying, this time about the pace and extent of the increase in US interest rates, with Trump becoming a critic of US Federal Reserve Chair Jerome Powell.  Interestingly, Powell has recently switched tack and now says that US rates are “just below neutral”.

2019 will be Trump’s third year in office. Notwithstanding that his party has lost control of the Congress, Trump is likely to be just as influential on world stock markets in 2019 as he was in 2018. Watch Trump’s actions.

2. Government Intervention is increasing and is a major investor risk

I, like many others, didn’t believe that there was a need for a Royal Commission into misconduct in the Banking, Superannuation and Financial Services Industry. I got this wrong.

I also got wrong the impact it would have on the share prices of the four major banks and the AMP.

Almost out of the blue, the Morrison Government initiated a Royal Commission into Aged Care Quality and Safety. It is due to provide an interim report by 31 October 2019, and its final report no later than 30 April 2020. ASX listed companies in this sector, including Estia Health, Regis Healthcare and Japara HealthCare saw their share prices tank following the announcement.

Now, the Government is looking at energy companies and discussing legislation that may  force the divestiture of key power station assets. Described by some as “Venezuelan-style intervention”, it is partly in response to AGL’s woeful mishandling of the Liddell Power Station closure.

The common theme is that Government, in response to legitimate community concerns and the demonstrable success of the banking Royal Commission, is starting to take a more interventionist position in how industries and companies operate. This has particular risks for share investors. In the lead up to an election where “populist policies” are sure to get a run, and a change of government is almost certain, this is not going to go away. If anything, expect to hear more calls for “intervention” or “enquiries” in 2019.

3. The top 20 outperformed

This will surprise many, but the top 20 stocks on the ASX have outperformed the rest of the market in 2018. For the 11 months to 30 November, the ASX 200 has, after taking dividends into account and looking at total shareholder returns, delivered a return of  -2.7%. The top 20 has returned -1.2%.

While both are negative numbers and the difference is only small, it is somewhat remarkable given that the top 20 comprises Commonwealth Bank in first place by market weighting, Westpac in third position, ANZ in fifth position and the NAB in sixth position. Another poor performer, Telstra, is in tenth position. The power of dividends.

With the public hearings of the Royal Commission over, and a glut of special dividends/off market buybacks to come ahead of Bill Shorten becoming Australia’s thirty first Prime Minister, I expect this outperformance to continue in 2019. 

4. All crazes come to an end

Finally, a statement about the obvious – all crazes come to an end. They always seem to go on a bit longer than you expect, but when the bubble bursts, it does so with a bang. That’s the case with Bitcoin. I couldn’t understand why any “rational” person would pay more than the cost to mine a bitcoin of about US$3,000, watched it trade all the way up to almost US$20,000 just before Christmas last year, before plummeting all the way back down. Yesterday, it was around US$3,830.

Bitcoin (USD) - Coinbase

Source: CNBC

I can’t tell you yet what the “craze” of 2019 will be – but there will be something, there always is! For traders, the story will be about knowing when to jump off the bus and leave something for the next punter.



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