Welcome to our first edition of “Top Quartile” for 2011. It’s been a fairly flat start to the year as far as investment markets are concerned, Australian shares have basically gone nowhere for the last 12 months, residential property prices in Australia have been trending down, and International investments are worth less because of the very strong Australian Dollar.
But looking backwards, the “flat” performance has probably been fairly reasonable considering the geopolitical turmoil and natural disasters that have occurred since the start of the year.
If we have got your email address, then you should be getting our weekly email every Friday which provides an update of the Australian and International economies and various investment markets.
Also enclosed with this newsletter is our “Superannuation Update”, but also touches on a few small changes made in the May 2011 Federal Budget.
IN THIS ISSUE
Case Study – Intelligent salary packaging and using your Superannuation Fund
The Changing Face of Retirement
Drifting Back in Time – Rob & Kaye Adams’ Travel Story
First Home Saver Accounts
Simple Estate Planning can solve a lot of problems
Lost Superannuation Accounts
ASIC – Capital Guarantee
National Survey on Superannuation
Charity Christmas Cards
CASE STUDY – INTELLIGENT SALARY PACKAGING AND USING YOUR SUPERANNUATION FUND
This case study is of a client of our firm (over age 55) that is still employed, they have their own Self Managed Superannuation Fund (SMSF), and are keen on accumulating more investment assets for their eventual retirement.
By structuring their salary package to include additional salary sacrifice superannuation contributions, and having commenced a “Transition to Retirement” allocated pension out of their SMSF (which incidentally is tax free for persons over age 60), we were able to reduce the total amount of tax paid to almost zero. The raw numbers for the 2009/10 financial year were:
$68,515 - Gross personal employment income
$53,092 - Net investment profit for the SMSF
$121,608 - Total gross earnings (personal income and SMSF)
$0 - Net personal income tax paid
$486.62 - Net tax paid on superannuation fund earnings and salary sacrifice contributions
As it works out, with gross earnings of $121,608, and total tax paid of only $486.62, the effective tax rate was only 0.4% on total gross earnings.
The total gross tax payable on the superannuation fund was actually $6,174.15 (mainly contributions tax), but after the refundable franking credits of $5,686.45, and $1.08 in foreign tax credits, the total tax paid by the SMSF was only $486.62, and no personal income tax was paid, so as mentioned above, the effective tax rate on total earnings was only 0.4%.
What’s your marginal tax rate? – It’s probably somewhere between 31.5% and 46.5%.
The intelligent use of an SMSF, a salary sacrifice superannuation arrangement, and a Transition to Retirement pension meant that our client was able to reduce the total tax paid to almost zero.
THE CHANGING FACE OF RETIREMENT
The National Centre for Social and Economic Modelling recently issued a report that looks at the changing face of retirement in Australia. The report was titled – “Don’t Stop Thinking About Tomorrow”.
In 1909, only around 50% of all people born lived to age 65. If they did manage to reach age 65, men lived another 11 years and women lived another 13 years on average. In 2009, the average man or woman lives longer and is much healthier – today 87% of men and 92% of women live until age 65 and can expect to live at least another 20 years in retirement. Yet despite these changes, Australians still dream of retiring earlier than at age 65 years of age.
The report considers how realistic present retirement expectations are, given retirement savings, and what impact increasing future superannuation contributions would have on retirement savings.
Most people grossly under-estimate their income needs in retirement. Most people automatically think that they will spend less, but the reality is, in the vast majority of cases, they spend more, for the following reasons:
Longer, more extensive holidays
Extra health costs
Supporting children and grandchildren
And a simple fact that the basic necessities of life just keep getting more expensive.
DRIFTING BACK THROUGH TIME – ROB & KAYE ADAMS’ TRAVEL STORY
During our recent travels through Europe, we elected to try a river cruise for part of our journey. It was a wonderful experience and if you are looking for a way to see Europe from a slightly different perspective, this might be for you.
We joined Scenic’s MS Sapphire in Amsterdam for a 15 day cruise through 4 countries, Netherlands, Germany, Austria and finally Hungary finishing in Budapest. River cruising was so relaxing as we watched the world slowly drift by …..every turn in the river seemed to bring something new and another photo opportunity!
The ship sailed along the Rhine, Main & Danube Rivers with the important Main – Danube Canal completed in 1992, the vital connection that enables this cruise to be possible. We were both fascinated and surprised by the constant activity along these massive waterways. They are still a very important means of transporting goods throughout Europe and vessels transporting all manner of goods were rarely out of sight. During our travels, we negotiated our way through an amazing 68 locks that control river flow.
Rob and Kaye at Wurzburg in Germany by the river with Fortress Marienberg on hill behind
There were so many highlights with each day offering opportunities off ship to wander through some magnificent historic and beautifully preserved towns. Amongst the highlights was our time sailing through the spectacular Rhine Gorge with its fairytale scenery of stunning castle after castle, all perched high above steep vine covered slopes and surrounded by colourful little villages. Another standout and surprise was our trip to the small medieval town of Cesky Krumlov in the South Bohemian Region. Old Cesky is a UNESCO World Heritage site with a large castle towering over an ancient untouched cobblestoned town with the picturesque Vltava River meandering through the town….a magical place.
The ship was beautifully appointed and fine dining was on offer every day for lunch and dinner with local wines from the regions through which we were sailing cleverly matched to complement our meals. Our cabin had a private balcony for those quiet times but we found that sitting on either the top deck or bow observation lounge with the many new friends we met was a great way to relax.
We left the ship at Budapest with much sadness, farewelling the friendly crew and our new friends as we headed towards Tuscany for the next stage of our travels…….but that’s another story.
Rob and Kaye Adams
MOVIE NIGHT – “THE KING’S SPEECH”
Kaye Adams, Kevin & Vivienne Campagnolo, Margaret & Bruce Williams
In early December, we held our 9th Annual Movie Night at the Rivoli Cinema. We were joined by 155 clients to watch the pre release of “The King’s Speech” which was a wonderful movie. It was funny, historically fascinating and entertaining. Colin Firth and Geoffrey Rush were outstanding. “The Kings Speech” won an Oscar for Best Picture and Colin Firth for Best Actor. Our clients had a fantastic night.
Necia and Rob Richards, Sue and Frank Clark
THE FIRST HOME SAVER ACCOUNTS
First Home Saver Accounts (FHSAs) are intended to provide a simple, tax-effective way for individuals to save for their first home through a combination of personal contributions, government contributions and concessional taxes. Contributions can only be made with after-tax money, and there is no annual contribution limit (subject to the account balance cap).
The account balance cap for an FHSA has increased from $75,000 for the 2009/10 financial year to $80,000 for the 2010/11 financial year.
For 2010/11, the government will contribute 17% on the first $5,500 of personal contributions, i.e. a maximum government contribution of $935 in 2010/11.
SIMPLE ESTATE PLANNING CAN SOLVE A LOT OF PROBLEMS
Isn’t it funny how people find the time to do the things they like to do, but procrastinate on those things that are slightly unpleasant to undertake. There are two certainties in life: death and taxes. Try as you might, you can’t avoid either, but many people find it difficult to confront their own mortality, and we guess that’s the reason why only around 50% of adult Australians actually have a valid Will. Generally speaking, one or more of our family members will eventually have to plan our funeral, but only you can plan the distribution of your estate assets, assuming that you are mentally capable.
It is important to understand that in the majority of cases, your two biggest assets, your home and your superannuation fund, are not normally directed in the way in which you have written your Will.
If we could plan our estate perfectly, I guess most people would want the following:
But unfortunately, most estates do end up with some problems, and the seven most common problems are:
1) Invalid or no Will
If you die without a valid Will, the Government decides how your estate is split up. The wrong people may receive some or all of your assets, and the three de facto death duties take a cut. These are income tax, stamp duty and capital gains tax.
2) Your Will is out of date
It is not uncommon for us to have clients tell us that they wrote their original Will either 30 or 40 years ago. A Will is a legal document that might dictate how perhaps $1 million or $2 million might be distributed, but your original Will might be hopelessly out of line with what your current intentions are, and may not take into account your superannuation assets and capital gains tax implications (which came about 25 years ago).
3) Failing to minimise death taxes
There are three de facto death taxes – income tax, capital gains tax and stamp duty. Failure to plan allows these hungry taxes to eat away at your estate’s value. Just because you die doesn’t mean that you can avoid these taxes.
4) Appointing an unsuitable executor
Not only should you have a competent executor (presumably a capable family member), but you should have an alternative executor just in case your first executor predeceases you, or is not capable of acting at the time.
5) Failing to include both intended and unintended beneficiaries
Your Will should consider all possible beneficiaries. It doesn’t matter who you are, your Will can be challenged, but only by certain people. Those people are:
Your children (including adopted children)
Anyone that you are “maintaining”, or supporting financially.
Your spouse also includes a de facto spouse, and in some states, a same-sex partner. And it’s not limited to one spouse. Look at Richard Pratt – seems he ended up with three spouses.
6) Failing to dispose of all assets
You should provide for all assets that you wish to distribute. It is possible that you might end up owning an asset (such as a share in a business) that wasn’t considered in the Will.
7) Estate planning is more than a Will
A very simple Will, in many cases, will do the job of directing assets to certain beneficiaries, but might not take into account some or all of the following:
Income tax and capital gains tax implications
Embedded capital gains in existing assets
Taxation treatment of certain superannuation benefits
Perhaps no provision for grandchildren
Not protecting estate assets from marriage breakdown of intended beneficiaries
Not considering beneficiaries that might squander the money (drug, alcohol and gambling problems)
Without a properly thought out Will, an estate of say $1 million, could easily squander $100,000 or more in income tax, capital gains tax and legal and accounting costs, which in many cases can be completely avoided through some careful planning.
Talk to us about comprehensive estate planning the next time we do a review of your superannuation and investment assets, and we can guide you to estate planning experts that can draft a comprehensive Will with the intention of minimising, as best as possible, unintended consequences and taxation implications arising out of a poor estate plan.
LOST SUPERANNUATION ACCOUNTS
A massive problem for the superannuation industry in Australia is the very large number of “lost member accounts”. The Federal Government could gain around $10 billion in unclaimed superannuation, with the superannuation industry conceding that the owners of many lost accounts are almost impossible to track down.
A new member joining a fund now has to provide their tax file number, but when Australia first introduced compulsory employer superannuation contributions back in 1992, the government opposed the recording of TFNs by super funds, fearing some sort of breach of privacy. What a joke.
There are currently more than a million lost member accounts that don’t have a TFN, making it very hard for the ATO to data match any lost member accounts with the actual tax payer. One of the recent government proposals is to automatically consolidate inactive superannuation accounts using member TFNs, and this will probably come about within the next couple of years, and it sounds like a very good idea, but obviously the automatic consolidation of lost member accounts without a TFN, basically won’t be possible.
Currently there are more than 6,000,000 lost member accounts, totaling $5.15 billion, or an average of $858 per lost member account.
I know this will be very hard to believe, but there are more than 40,000 lost member accounts that have an account balance in excess of $50,000.
ASIC WARNS ON CAPITAL GUARANTEED OR PROTECTED INVESTMENTS
In the wake of the Global Financial Crisis, there has been a significant push for capital guaranteed or protected investments, and no doubt you have seen some of the emotive ads that claim there is no chance (or limited chance) of generating a negative return. There is no such thing as a “risk free” investment, and if someone offers you a guarantee on something, there must be a cost involved. A recent ASIC bulletin about capital guaranteed investment products, said the following:
Capital guaranteed or protected investments may sound like a simple way to protect your capital, but are actually more complex than regular investments.
Capital guaranteed or protected products offer a market linked investment return, with a promise that you should at least get the dollar value of your initial investment back on a fixed maturity date if investment markets lose value.
Each capital guaranteed or protected investment will be different, so you need to pay special attention to the structure, investment maturity date and terms and conditions that apply.
Each product is generally more expensive than simpler investment products because of the extra cost of providing a guarantee or protection.
This does not necessarily mean, however, that the returns will be higher, especially over the long term. Check the product disclosure statement or prospectus to see what fees and costs you will be charged.
The guarantee or protection is only as good as whoever stands behind it.
In our opinion, there are a limited number of capital guaranteed or protected investments that do serve a useful purpose for some clients, but generally speaking, the cost of the guarantee, which in some cases can be as much as 3% or 4% a year, means that it is almost certain that you will underperform unprotected investment assets over the long term.
NATIONAL SURVEY ON SUPERANNUATION
During 2010, the Federal Government commissioned a national survey into community attitudes and values towards superannuation.
Broadly, the survey revealed:
Universal concern that superannuation contributions of 9% of salary was not enough
That most Australians support compulsory saving for retirement
Almost one-third of people are not confident that they will have enough retirement savings
Attitudes to superannuation are generally positive
Concern regarding the reduction in pre-tax concessional contribution caps
Better tax efficiency on superannuation savings for low income earners (those earning less than $37,000)
Superannuation members would like to have a better idea of the amounts required to have sufficient superannuation for retirement.
The respondents’ attitude to superannuation was, not surprisingly, influenced by their age.
Persons aged 18-29 considered superannuation to be boring and complex
Persons age 30-44 considered superannuation important, but a higher priority was raising children and meeting mortgage repayments
Those aged 45 and over had concerns with super as a result of the GFC, and the poor returns during 2008 and 2009.
And finally, there was general resentment from employers, with compulsory contributions rising from 9% to 12%, but many employees not reciprocating with voluntary payments of their own.
CHARITY CHRISTMAS CARDS
For the last 14 years, instead of sending Christmas cards, we have donated a comparable amount to charities. This initiative has been well supported by our clients. The Christmas 2010 money has been donated to the following charities as nominated by our clients:
Murdoch Childrens Research Institute
Somaly Mam Foundation