May Dividends

May Economic Calendar

May Sector Analysis

May Volatility Analysis

The Australian Economy & Financial Markets Chart Pack – Reserve Bank of Australia 

Of the 1,751,679 property investors recorded by the ATO in 2009-10, 63% or 1,110,922 were “negatively geared”, meaning that holding costs (eg, interest payments, maintenance, and other costs) outweighed income from rents. Of these negatively geared investors, nearly three-quarters earned less than $80,000 in 2009-10, and the average loss was $9132 per negatively geared investor, or $176 per week. Not only are investment property holdings In Australia concentrated in lower-to-middle income groups, but also older age cohorts.

According to the 2009-10 Australian Bureau of Statistics (ABS) Household Wealth and Wealth Distribution, nearly three-quarters of Australia’s investment properties by value were held by individuals aged 45 and over, with Australia’s Baby Boomer generation (45 to 64 years-old in 2009 10) holding just over 55 per cent of these homes.

Risk of widespread selling rising The concentration of negatively geared properties in lower income and older age cohorts has potentially important ramifications for the Australian housing market. First, negative gearing is only attractive as a tax minimisation strategy when there is labour income to offset rental losses against. However, once an investor enters retirement and ceases working, they lose the ability to offset losses for taxation purposes, and negatively geared property investment loses its attractiveness. Second, once somebody enters retirement, they tend to become more risk-averse and more concerned with achieving a stable flow of income rather than potential capital growth. Retirees with inadequate income are also more likely to become net sellers of property (as well as financial assets) in order to generate the funds necessary to maintain their standard of living in retirement. With the oldest Baby Boomers having turned 65 in 2011, the large migration into retirement in Australia has already officially begun, and will only gain strength throughout the decade as more and more Baby Boomers exit the workforce.
Logically, therefore, the incentive to unwind property holdings would be greatest amongst the lower-to-middle income earners and the older age cohorts that hold the bulk of Australia’s negatively geared investment properties. In addition, the risk of widespread selling of investment properties is likely to intensify once Australia’s 1.1 million negatively geared investors come to the realisation that there is little prospect of a resumption of past strong rates of capital growth and they are stuck with a loss-making investment. With the release of these figures by the ATO, the big question remains: with Australian housing values down over 5 per cent since 2009-10, and with the outlook for capital growth subdued, will Australia’s 825,000 middle to lower income earners continue pay their property a dividend in the hope that it repays them with capital growth?

Leith Van Onselen is an economist who has previously held positions at the Australian and Victorian Treasury and Goldman Sachs. This is an extract from a report on negative gearing available free at MacroBusiness.

Before answering this question it is important to understand what risk is and how this affects our investment decisions. Risk exists when there are multiple outcomes to a situation. The risk is the uncertainty of what the final outcome will be. When it comes to investing the risk is whether the desired financial result is achieved. Risk is a combination of two aspects, Risk Tolerance and Risk Capacity.

Risk tolerance is how willing someone is to accept a negative outcome in the pursuit of a more favourable result. Risk tolerance is purely psychological and is shaped by a person’s past experiences, attitudes, age, gender, education, their family and friends, and other outside influences.

Risk capacity is more black and white, it is a measure of the amount of risk an investor can afford to take to reach their financial goals. An investor’s risk capacity is limited to their assets, liabilities and income.

It is important to understand that one area of risk is emotional and psychological while the other is not. Our emotions are easily swayed by our day to day experiences, what we read in the paper, what we see on the news and numerous other external factors. When it comes to investment decisions, emotions are easily influenced by the current environment. If the news about the economy is negative then generally people’s emotions are also negative which leads to a lower risk tolerance; and conversely when media reports and general economic sentiment are positive, the investors’ risk tolerance increases. The problem with this is that when it comes to investing our risk tolerance should be inverse to our emotions, that is when economic sentiment is negative and asset prices have plummeted this should be the time when we have a high risk tolerance and when asset prices have escalated we should have a low risk tolerance. Let me explain with a day to day example and an investment scenario.

Let’s say you are in the market for a new TV, you have done your research and you know the exact make and model you are after. You walk into shop A and they are selling the TV for $1,000, after which you walk into shop B and they are selling the exact same TV for $800. Naturally you will buy the TV from shop B as you are getting the same TV for better value. This is a fairly straight forward concept that almost everyone would agree with. Let’s now look at two similar investment scenarios.

Scenario one: You want to invest in the share market, you have done your research and you wish to invest in the company XYZ which is currently trading for $10. The share market has been performing strongly it has moved 15% higher over the last six months and everyone is feeling positive about its future prospects so you decide that you are happy to take on this risk and you buy XYZ shares at $10.

Scenario two: XYZ is a company that you like and it is currently trading for $8, however everyone is very downbeat about the share market, it has fallen 15% in three months, and your emotions are telling you that everything is very negative and risky so you decide not to buy, you would rather wait for confidence to improve.

In these scenarios you have exactly the same company XYZ, in scenario one you can buy it for $10 and in scenario two you can buy it for $8. Most investors behave like the example in scenario one, they are happy to buy the company for $10 because everything seems fine. However in scenario 2 you can buy the exact same company for only $8. It is important to understand that a stock price reflects two things, the business’s earnings and sentiment (general feeling about the share market). Since companies only report earnings twice a year the remainder of the time a stock price is driven by sentiment, sometimes the sentiment is positive other times it is negative, either way the true value of the business is often overlooked as sentiment becomes the main driver of the stock price. Let’s also examine the risk between the two scenarios if you buy XYZ at $8 you have a lower risk profile than if you bought at $10 as your maximum downside is $2 less. Like the example of the TV, we can all agree that buying it for $800 is a better outcome than buying it for $1,000; this same principal should apply to our investments.

When the share market is strong and prices are increasing people get caught in the positive euphoria and decide that it is a good time to buy, and when sentiment is negative and prices are falling buying is furthest from people’s minds. So is investing in the share market too risky? There is always risk when investing in any asset and the share market is no exception. However if you have the right strategy and have an understanding of risk and how emotions effect your investment decisions then your next question should be is it riskier to buy XYZ at $10 or $8?

Simon Bylsma – Investment Adviser at Bellmont Securities

This article was written for the Peninsula Living Magazine and will be published in their April 2012 edition

April Dividends

April Economic Calendar

April Sector Analysis

April Volatility Analysis

The Australian Economy & Financial Markets Chart Pack – Reserve Bank of Australia 

From our definition there flows an important corollary: The riskiness of an investment is not measured by beta (a Wall Street term encompassing volatility and often used in measuring risk) but rather by the probability – the reasoned probability – of that investment causing its owner a loss of purchasing-power over his contemplated holding period. Assets can fluctuate greatly in price and not be risky as long as they are reasonably certain to deliver increased purchasing power over their holding period. And as we will see, a non-fluctuating asset can be laden with risk.

Investment possibilities are both many and varied. There are three major categories, however, and it’s important to understand the characteristics of each. So let’s survey the field.

Investments that are denominated in a given currency include money-market funds, bonds, mortgages, bank deposits, and other instruments. Most of these currency-based investments are thought of as “safe.” In truth they are among the most dangerous of assets. Their beta may be zero, but their risk is huge.

Over the past century these instruments have destroyed the purchasing power of investors in many countries, even as the holders continued to receive timely payments of interest and principal. This ugly result, moreover, will forever recur. Governments determine the ultimate value of money, and systemic forces will sometimes cause them to gravitate to policies that produce inflation. From time to time such policies spin out of control.

Even in the U.S., where the wish for a stable currency is strong, the dollar has fallen a staggering 86% in value since 1965, when I took over management of Berkshire. It takes no less than $7 today to buy what $1 did at that time. Consequently, a tax-free institution would have needed 4.3% interest annually from bond investments over that period to simply maintain its purchasing power. Its managers would have been kidding themselves if they thought of any portion of that interest as “income.”

For tax-paying investors like you and me, the picture has been far worse. During the same 47-year period, continuous rolling of U.S. Treasury bills produced 5.7% annually. That sounds satisfactory. But if an individual investor paid personal income taxes at a rate averaging 25%, this 5.7% return would have yielded nothing in the way of real income. This investor’s visible income tax would have stripped him of 1.4 points of the stated yield, and the invisible inflation tax would have devoured the remaining 4.3 points. It’s noteworthy that the implicit inflation “tax” was more than triple the explicit income tax that our investor probably thought of as his main burden. “In God We Trust” may be imprinted on our currency, but the hand that activates our government’s printing press has been all too human.

High interest rates, of course, can compensate purchasers for the inflation risk they face with currency-based investments – and indeed, rates in the early 1980s did that job nicely. Current rates, however, do not come close to offsetting the purchasing-power risk that investors assume. Right now bonds should come with a warning label.

Under today’s conditions, therefore, I do not like currency-based investments. Even so, Berkshire holds significant amounts of them, primarily of the short-term variety. At Berkshire the need for ample liquidity occupies center stage and will never be slighted, however inadequate rates may be. Accommodating this need, we primarily hold U.S. Treasury bills, the only investment that can be counted on for liquidity under the most chaotic of economic conditions. Our working level for liquidity is $20 billion; $10 billion is our absolute minimum.

Beyond the requirements that liquidity and regulators impose on us, we will purchase currency-related securities only if they offer the possibility of unusual gain – either because a particular credit is mispriced, as can occur in periodic junk-bond debacles, or because rates rise to a level that offers the possibility of realizing substantial capital gains on high-grade bonds when rates fall. Though we’ve exploited both opportunities in the past – and may do so again – we are now 180 degrees removed from such prospects. Today, a wry comment that Wall Streeter Shelby Cullom Davis made long ago seems apt: “Bonds promoted as offering risk-free returns are now priced to deliver return-free risk.”

The second major category of investments involves assets that will never produce anything, but that are purchased in the buyer’s hope that someone else – who also knows that the assets will be forever unproductive – will pay more for them in the future. Tulips, of all things, briefly became a favorite of such buyers in the 17th century.

This type of investment requires an expanding pool of buyers, who, in turn, are enticed because they believe the buying pool will expand still further. Owners are not inspired by what the asset itself can produce – it will remain lifeless forever – but rather by the belief that others will desire it even more avidly in the future.

The major asset in this category is gold, currently a huge favorite of investors who fear almost all other assets, especially paper money (of whose value, as noted, they are right to be fearful). Gold, however, has two significant shortcomings, being neither of much use nor procreative. True, gold has some industrial and decorative utility, but the demand for these purposes is both limited and incapable of soaking up new production. Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end.

What motivates most gold purchasers is their belief that the ranks of the fearful will grow. During the past decade that belief has proved correct. Beyond that, the rising price has on its own generated additional buying enthusiasm, attracting purchasers who see the rise as validating an investment thesis. As “bandwagon” investors join any party, they create their own truth – for a while.

Over the past 15 years, both Internet stocks and houses have demonstrated the extraordinary excesses that can be created by combining an initially sensible thesis with well-publicized rising prices. In these bubbles, an army of originally skeptical investors succumbed to the “proof” delivered by the market, and the pool of buyers – for a time – expanded sufficiently to keep the bandwagon rolling. But bubbles blown large enough inevitably pop. And then the old proverb is confirmed once again: “What the wise man does in the beginning, the fool does in the end.”

Today the world’s gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce – gold’s price as I write this – its value would be $9.6 trillion. Call this cube pile A.

Let’s now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world’s most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?

Beyond the staggering valuation given the existing stock of gold, current prices make today’s annual production of gold command about $160 billion. Buyers – whether jewelry and industrial users, frightened individuals, or speculators – must continually absorb this additional supply to merely maintain an equilibrium at present prices.

A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops – and will continue to produce that valuable bounty, whatever the currency may be. Exxon Mobil will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons). The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond.

Admittedly, when people a century from now are fearful, it’s likely many will still rush to gold. I’m confident, however, that the $9.6 trillion current valuation of pile A will compound over the century at a rate far inferior to that achieved by pile B.

Our first two categories enjoy maximum popularity at peaks of fear: Terror over economic collapse drives individuals to currency-based assets, most particularly U.S. obligations, and fear of currency collapse fosters movement to sterile assets such as gold. We heard “cash is king” in late 2008, just when cash should have been deployed rather than held. Similarly, we heard “cash is trash” in the early 1980s just when fixed-dollar investments were at their most attractive level in memory. On those occasions, investors who required a supportive crowd paid dearly for that comfort.

My own preference – and you knew this was coming – is our third category: investment in productive assets, whether businesses, farms, or real estate. Ideally, these assets should have the ability in inflationary times to deliver output that will retain its purchasing-power value while requiring a minimum of new capital investment. Farms, real estate, and many businesses such as Coca-Cola, IBM and our own See’s Candy meet that double-barreled test. Certain other companies – think of our regulated utilities, for example – fail it because inflation places heavy capital requirements on them. To earn more, their owners must invest more. Even so, these investments will remain superior to nonproductive or currency-based assets.

Whether the currency a century from now is based on gold, seashells, shark teeth, or a piece of paper (as today), people will be willing to exchange a couple of minutes of their daily labor for a Coca-Cola or some See’s peanut brittle. In the future the U.S. population will move more goods, consume more food, and require more living space than it does now. People will forever exchange what they produce for what others produce.

Our country’s businesses will continue to efficiently deliver goods and services wanted by our citizens. Metaphorically, these commercial “cows” will live for centuries and give ever greater quantities of “milk” to boot. Their value will be determined not by the medium of exchange but rather by their capacity to deliver milk. Proceeds from the sale of the milk will compound for the owners of the cows, just as they did during the 20th century when the Dow increased from 66 to 11,497 (and paid loads of dividends as well). Berkshire’s goal will be to increase its ownership of first-class businesses. Our first choice will be to own them in their entirety – but we will also be owners by way of holding sizable amounts of marketable stocks. I believe that over any extended period of time this category of investing will prove to be the runaway winner among the three we’ve examined. More important, it will be by far the safest.

This article is an excerpt (p17-19) from Warrens Buffett’s annual letter to Berkshire Hathaway shareholders.

The complete letter can be found at: http://www.berkshirehathaway.com/letters/2011ltr.pdf

March Dividends

March Economic Calendar

March Sector Analysis

March Volatility Analysis

The Australian Economy & Financial Markets Chart Pack – RBA 

A new ATO ruling released last month helps to clarify what you can and can’t do with property that is under a limited recourse borrowing arrangement (LRBA).

The ruling addresses three key areas:

• Under the borrowing rules in the Superannuation Industry and Supervision (SIS) Act, the borrowing must be used to acquire a “single acquirable asset.”  The ruling seeks to define what constitutes a single asset.
• The borrowing rules allow an asset that is held under a borrowing arrangement to be improved, however, the trustees cannot use borrowed funds to make the improvements. There is a fine line between what is a repair or improvement and the ruling attempts to clarify how the ATO assess the difference between these terms.
• Also, if you do improve the property, any improvement must not result in the asset becoming a different asset.  The ruling looks at the factors the ATO considers, and what your SMSF auditor needs to consider, when they assess whether a property has been changed to such an extent that it is no longer the same asset.

If a fund falls outside of these rules, the fund must sell the asset.  Imagine having to sell a property your fund recently acquired, leaving your fund with the stamp duty, legal and agent’s fees (or perhaps making a loss because the market conditions were not as good as they were when you purchased the property).

Is the property a single asset?

Assuming the fund is able to purchase the asset, the borrowing rules require that the money is used to acquire a single asset.  For example, if the fund purchased a block of units, is the block considered to be one asset or are each of the units inside the block individual assets?

In the ruling the ATO concedes that “it may be possible … that the trustee is acquiring a single object of property notwithstanding that it is comprised of two or more proprietary rights. However, this will only be so where … the separate proprietary rights is distinctly identifiable as a single asset.”  The bottom line is that if the rights can be dealt with separately, then they are not a single asset regardless of how the trustee wants to treat them.

Common examples include:

where the fund acquires a property and the car park is held on a separate title but laws do not allow separation of ownership then there is a single acquirable asset.

where a warehouse is constructed on multiple titles, then there may be a single acquirable asset

Maintenance, repair or improvement?

There has been confusion in this area as ‘maintaining’ ‘repairing’ and ‘improving’ are common terms and not defined in the legislation.  In the ruling, the ATO states:

• Maintaining generally means work done (or in anticipation) to prevent defects, damage or deterioration of an asset provided that it merely ensures the functional efficiency of the asset is maintained in its present state.
• Repairing generally means remedying or making good defects in, damage to, or deterioration of, an asset and contemplates the continued existence of the asset.  The ATO goes on to state that “an asset may be acquired in a state in which a part of the asset is defective, damaged or suffering some deterioration of what would be considered to be its normal level of functional efficiency. Restoration of that part of the asset to its functional efficiency would be a repair for LRBA purposes.”

The ruling seems to suggest that the repair needs to bring the item back to its original condition but not go beyond that.  The cost of the repair in the context of the overall asset is also likely to be a factor in the ATOs assessment of whether or not what has occurred is repair, maintenance or an improvement.

Defining improvement remains a grey area as it is a matter interpretation whether something is merely repaired or maintained or has been improved.

Can you improve a property?

Trustees can use money provisioned under a borrowing arrangement to maintain or repair the property but not improve it.  If the trustees use money from other sources outside of the borrowing, they can improve the property as long as the improvements do not turn it into a different asset.  For example, if the fund borrows money to acquire a vacant block of land and then builds a block of units on it, the asset would be fundamentally changed and considered to be a different asset.

If the fund does not have to borrow money to acquire the property, then the property can be improved as long as the investment decisions are in line with the funds investment strategy (don’t forget to minute key decisions) and all other SIS requirements are met – note there are some traps when using related parties to carry out the improvements.

Property and natural disasters

Trustees can now take some comfort in knowing that they can rebuild an asset that has been destroyed by flood or fire and not breach the borrowing rule.  Using an insurance pay-out in these cases to rebuild what is essentially the same asset that existed prior to the event seems to be allowed.

Get advice!

Despite the clarifications offered by the ruling, the borrowing rules remain complex and rely on subjective decision making.  Trustees should ensure that they seek advice before purchasing, renovating or changing any property held by their fund.

Alex Novello & Grant Moss

http://www.bnm.com.au

The settlement prices for S&P/ASX 200 (XJO) put and call options are used to derive a weighted average of the implied volatility being incorporated into the options. Two maturities are used with the nearby having at least a week until expiry. The volatility of the options closest to maturity is interpolated with that of the options farthest from maturity to arrive at a constant 30 day indication of expected volatility in S&P/ASX 200.1

Uses and interpretation

The volatility index is primarily used as an indicator of investor sentiment and market expectations. A volatility index at relatively high levels implies a market expectation of very large changes in the S&P/ASX 200 over the next 30 days while a relatively low volatility index value implies a market expectation of very little change. Similarly, when the volatility index is at relatively high levels, and market expectation is for high levels of volatility, investor sentiment is perceived to be uncertain. Conversely, when the volatility index is at relatively low levels, market expectation is for low levels of volatility which implies greater levels of investor confidence. Volatility indicators such as the volatility index are often perceived to exhibit characteristics of mean reversion by oscillating around a long term average (or mean). In other words, a move away from the long term average towards high or low extremes is usually followed by a move back towards the long term average. The implication of mean reversion is that high levels of volatility may be followed by a return to more normal levels of volatility and very low levels of volatility may be pre-cursors to an increase in volatility. The volatility index value is similar to rate of return volatility with the volatility index reported as an annualised standard deviation percentage that can be converted to a shorter time period. For instance, a volatility index value of 20% can be converted to a monthly figure remembering that volatility scales at the square root of time. The formula to do this is:

20% x √1/12 = 5.77%

In the above example, index options over the S&P/ASX 200 are incorporating the potential for a one standard deviation return over the next month of +/- 5.77%. More information on volatility index can be found at

www.asx.com.au/volatilityindex

The VIX® — CBOE Volatility Index methodology is the property of the Chicago Board Options Exchange (‘CBOE’). CBOE  has granted Standard & Poor’s Financial Services LLC (‘S&P’), a license to use such methodology to create the S&P/ ASX 200 VIX Index. S&P has granted ASX Ltd a license to use and distribute the S&P/ASX 200 VIX Index, with the  permission of CBOE.

ASX Disclaimer: Information provided is for educational purposes and does not constitute financial product advice.  You should obtain independent advice from an Australian financial services licensee before making any financial  decisions. Although ASX Limited ABN 98 008 624 691 and its related bodies corporate (‘ASX’) has made every  effort to ensure the accuracy of the information as at the date of publication, ASX does not give any warranty or  representation as the accuracy, reliability or completeness of the information. To the extent permitted by law, ASX  and its employees, officers and contractors shall not be liable for any loss or damage arising in any way (including by  way of negligence) from or in connection with any information provided or omitted or from any one acting or refraining  to act in reliance on this information.

S&P Disclaimer: Reproduction of any information obtained from S&P or the S&P/ASX 200 VIX in any form  is prohibited except with the written permission of S&P. S&P does not guarantee the accuracy, adequacy,  completeness or availability of any information and is not responsible for any errors or omissions or for the results  obtained from the use of such information. THERE ARE NO EXPRESS OR IMPLIED WARRANTIES, INCLUDING,  BUT NOT LIMITED TO, WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE.  All information provided by Standard & Poor’s is impersonal and not tailored to the needs of any person, entity  or group of persons. Standard & Poor’s and its affiliates do not sponsor, endorse, sell, promote or manage any  investment fund or other vehicle that is offered by third parties and that seeks to provide an investment return  based on the returns of any Standard & Poor’s index. Individual investors should rely on their own judgment and/or  the judgment of their personal financial advisor in making any investment decisions. In no event shall S&P be liable  for any damages, including but not limited to direct, special or consequential damages, in connections with the use  of S&P/ASX 200 VIX. S&P and STANDARD & POOR’S are registered trademarks of Standard & Poor’s Financial  Services LLC.

February Dividends

February Economic Calendar

February Sector Analysis

February Volatility Analysis

Transition to Retirement

The transition to retirement provisions came about as a result of the need to supplement the income of people wishing to semi-retire. The provisions allow anyone over their preservation age (currently 55) to roll over their super to a Non Commutable Allocated Pension. They can then draw an income from their pension, up to a maximum of 10%, and also subject to a minimum amount. By salary sacrificing to superannuation, and then replacing your income by drawing a monthly pension, those on tax rates of 30% or higher may be able to reduce the total tax payable.

• Rolling over to pension changes the tax on the fund earnings from 15% to zero
• Taking income from a pension (instead of salary) potentially reduces income tax.

There is software available where we can calculate not only your potential tax benefit, but also at what point you can equalise your income, thereby allowing your tax benefit to accumulate as a retirement benefit in your superannuation fund. This strategy is most effective for those with high incomes, high superannuation balances and those aged 60 or more. It may also be effective for anyone over 55 who is still working.

Insurance inside Superannuation

It is common for me to meet people who have cash flow issues, particularly since the Global Financial Crisis. One of the things they decide that they can no longer afford is personal insurance. The problem with this thinking is that if you can’t afford the insurance, then how will you cope if you cannot work for say, six months, and have no income protection? This happened to me years ago, and was not a pleasant experience.

For many people, the best place to hold your personal insurances (life, total and permanent disability and income protection) is inside superannuation. This means that you are not paying for it from your personal cash flow. As long as there is sufficient value in the super to fund the cost of the insurance premiums, then the cash flow problem of paying for the insurance is solved.  The cost is sometimes less inside superannuation than outside, and if you are eligible to make deductible contributions to super, you can pay for your insurance with pre tax dollars.

Large Superannuation Contributions

I have met a number of clients with large lump sums who want to get as much as they can into superannuation. This happened in June this year and my strategy was as follows:

• Make a concessional (tax deductible) contribution to super before the end of June – the maximum is $25,000 if you are under age 50 and $50,000 if you are 50 or over (subject to work test if you are over 65, and ability to contribute ceases at age 75)
• Contribute $150,000 as a non concessional (not tax deductible) contribution before the end of June
• Make another concessional contribution in July up to the maximum ($25,000 or $50,000)
• Contribute $450,000 (non concessional) in July

This allows you to contribute up to $700,000 into superannuation in the space of a few weeks. For a couple over the age of 50, this increases to $1,400,000. It is important to get advice before you contribute. If you get the timing wrong, e.g. pay the $450,000 at the end of June, then you will not be able to make a non concessional contribution (without penalty) for the next two financial years.

Superannuation and Estate Planning

Estate planning is one of those issues that in spite of the fact that most of us don’t want to address it, it won’t go away. We all need to ensure that our assets go to our nominated beneficiaries, and that they are distributed in a tax effective manner. A lack of planning could well result in a boon for the tax office, and less for those we love.

Superannuation can allow for tax effective estate planning. Super is particularly effective if left to a spouse (includes de facto/same sex spouse, interdependency relationship and financial dependant) or minor child (under age 18). There is no lump sum tax payable on the proceeds from a superannuation policy, and if left as a pension to minor children, they are taxed at adult rates. As well as this, a pension when paid to a pension dependant (includes all those listed above) receives a 15% rebate on the income. Let’s look at an example:

If Jack (age 10) receives a pension of $40,000 per annum from his mother, Jill, who died at age 40, how much tax will he pay? We are assuming no tax free portion. It is also important to note that Jack will pay adult tax rates, which are much more generous than child tax rates.

Pension: $40,000

Pension Rebate 15%: $40,000 x 15% = $6,000

Tax on $40,000: $6,000

Tax payable: $6,000 – $6,000 (rebate) = Nil tax payable.

This pension can only continue until Jack turns 25, and then it must be commuted to a tax free lump sum.

There are still a whole host of benefits that super can offer that I have not discussed here. If you have any questions, please send them in and I can answer them in my next article. Of course, for a comprehensive analysis of your own financial position, nothing beats professional advice.

Janne Ashton

www.planprotect.com.au