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Thursday, 26 May 2011 01:10

Uncertain Housing Market

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(Aust Financial Review 25th May 2011)

Australia’s housing market looks very expensive with prices running at around 25% higher than the long-term average.  Further gains will be limited by the high debt levels borrowers have taken on to buy property.

It means they are vulnerable if anything goes wrong.  With this in mind the veiled threats by the Reserve Bank of Australia to raise interest rates must send a shudder through some investors.

A recent run of soft consumer data shows that confidence levels are already low in most households, so any move by the RBA will hit hard.  According to AMP Capital Investors, so far this year prices are down 2%.

Wednesday, 25 May 2011 02:51

Personal Deductible Super Contributions

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For people who are self employed or persons with substantial taxable income personal deductible contributions are a way of tax deductible contributions to superannuation reducing your taxable income leaving more after tax money for investment.

 

What is the strategy?

Making personal deductible contributions reduces a person’s taxable income because the contribution is claimed as a tax deduction.

The contribution is taxed at just 15% which may be less than the tax paid if taken as taxable income. This means more after-tax money is available for investment, which increases a person’s overall retirement benefits.

 

Who is suited to this strategy and why?

This strategy is suitable for individuals who are:

  • primarily self-employed as a sole trader
  • under age 65 and who have not been employed in the income year the contribution is made, or
  • employed, but the income earned from employment is less than 10% of their total income.

The benefits of making personal deductible contributions are:

  • personal income tax is reduced
  • retirement savings are increased, and
  • small business owners can diversify their wealth outside of their business.

 

 

How the strategy works?

Individuals who are eligible to make personal deductible contributions into superannuation can claim a tax deduction equal to the amount of contribution.

The tax deduction reduces the person’s taxable income thereby reducing income tax.

Personal deductible contributions are taxed at 15% upon entry into super. This means the individual making the contribution will ultimately pay tax at 15% on the contributed amount instead of at their marginal rate.

 

Notice of Deductibility

To be eligible to claim a deduction for contributions to super, an individual must lodge a Notice of Deductibility form with their superannuation fund by the earlier of:

  • the date the individual lodges their tax return for that financial year, or
  • the end of the following financial year.

The form must be lodged prior to commencing a pension, rolling the contribution over to another fund or withdrawing the contribution.

 

Example

Kate is age 40. She runs her own mining engineering consultancy business as a sole trader, earning $185,000 per annum.

Kate’s financial adviser has recommended she contribute $20,000 into her superannuation fund as a personal deductible contribution.

Kate is aware that she won’t be able to access the contribution until she meets a condition of release, but she is interested in building up her retirement savings in a tax-effective manner.

The following table shows that Kate has created a tax saving of $5,100 as a result of implementing the strategy. Her cash flow has reduced by $11,900 but she has saved $17,000 for retirement.

 

Cash Flow Before

Strategy

After

Strategy

Gross salary $185,000 $185,000
Less personal deductible contributions $0 $20,000
Taxable income $185,000 $165,000
Tax on taxable income* $59,575 $51,475
After-tax income $125,425 $113,525
Superannuation    
Personal deductible contributions $0 $20,000
Less contributions tax $0 $3,000
Increase to super $0 $17,000
Net Package $125,425 $130,525

* 2010/11 financial year. Includes relevant tax offsets and the 1.5% Medicare levy.

 

Risks and implications

  • Making personal deductible contributions to superannuation reduces a person’s cash flow.
  • Contributions to superannuation are preserved until a ‘condition of release’ is met.
  • Personal deductible contributions count towards a person’s concessional contribution cap, as do SG contributions and salary sacrificed contributions. Contributions in excess of the concessional contribution cap are taxed at 46.5% and count towards the non-concessional contribution cap.
  • Reducing taxable income too low can result in more tax being paid as the 15% contributions tax paid on deductible contributions may be higher than the individual’s marginal tax rate.
  • Individuals who have worked through the year must be certain that they satisfy the 10% rule prior to making the deductible contribution.
  • Changes in legislation may reduce the flexibility or benefits that superannuation currently enjoys.

 

Note: Advice contained in this flyer is general in nature and does not consider your personal situation or needs. Please do not act on this advice until its appropriateness has been determined by a qualified adviser.  While the taxation implications of this strategy have been considered, we are not, nor do we purport to be registered tax agents. We strongly recommend you seek detailed tax advice from an appropriately qualified tax agent before proceeding.  The information provided is current as at May 2011.

Further information on Deductible Super Contributions can be found on our YouTube site which can be accessed via the website below:

Website:  www.gemcapital.com.au

 

or to arrange a no-cost, no-obligation first consultation, please contact the office on 08 8273 3222.

Blog Website:  www.investmentadviceadelaide.com

Sunday, 22 May 2011 05:44

Life Insurance Advice

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Friday, 20 May 2011 05:50

Investing is a rising inflationary environment

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The Reserve Bank has a formal inflation target in place and most investment commentators regularly talk and discuss the threat inflation may have on investors.  This article explains why inflation should be considered by investors and some tips on protecting an investment portfolio in a rising inflationary environment.

For many years there have been deflationary pressures, particularly from 1. an increasing Australian dollar which lowers the cost of imports, and 2. cheap Chinese labour (translating to cheap imports).

In the past 12 months, Chinese wages have increased 30% for average workers, while Chinese construction workers have received about 100% wage increases (source Platinum Asset Management).  Food and energy shortages around the world are also putting upward pressure on prices of basic essentials for daily living.  We believe that the days of deflationary pressures are over for now.

Why is this important?

Consider a business that sells widgets.  It sells 1,000 widgets for $100 each, while the cost to produce the widgets is $50 per widget.  The gross profit for this business is therefore $50,000.

If however the cost to produce widgets due to rising energy prices, increased wages etc goes up to $60, the gross profit falls 20% to $40,000.  Of course the business could raise the sale price of widgets to protect their profits, or sell more widgets if the market will bear, but this is easier said than done. So inflation hurts business profits (read share prices) as well as making the cost of living higher.

What typically happens to interest rates when inflation rises?

History suggests that when inflation rises, interest rates rise.  Below is a chart sourced from the Reserve Bank of Australia that shows the movements of inflation (top part of the chart) and interest rates (referred to as cash rate in green line) over the past 25 years.  You can see how they move closely together.

With these points in mind here are some simple techniques to help you inflation proof your portfolio:

Share Market Investments

Seek to invest in companies that have the ability to pass on price increases to their customers.  These companies typically have the following attributes:

  • Well recognised brand and a dominant market position  (meaning they can pass on increased costs)
  • Management with experience from previous inflationary cycles

If using managed funds, ensure that the fund manager responsible for investment selection is on top of the threat of global inflation.  Evidence of this could come in the form of commentary from the fund manager in recent communications.  Your adviser could also have direct contact with the fund managers’ investment personnel and can confirm this for you as well.

Fixed Interest Investments

Exercise extreme care when investing in long dated fixed interest investments.  Consider an investor who invested $100,000 into a 10 year bond paying 5% interest.  Interest received is $5,000pa.  If interest rates rose to 10%, in order to receive $5,000 of interest the investor would only require $50,000 of capital.  The point here is that if this investor wished to sell their 10 year bond, before the 10 year period was due, it would be unlikely that they would receive anywhere near $100,000.  It is possible to lose capital in fixed interest investments in a rising interest rate environment.

Instead, look at fixed interest investments that are linked to interest rates.  So as interests rates go up, the payment received goes up as well.  Your financial adviser can help you with investments that have these characteristics.

Other suggestions

Property (particularly commercial property) can provide protection in an inflationary environment as lease agreements normally contain an inflation adjustment each year.

Infrastructure investments such as toll roads also contain clauses in the legal agreement, where the toll paid by consumers is increased by inflation each year.

Talk to your adviser to ensure that your portfolio is prepared for the threat of a global inflationary environment.

Thursday, 19 May 2011 11:50

Safe As Houses???

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How would Australians feel if the house that they bought in 1979 was worth almost 10% less today?  It’s fair to say they wouldn’t be too happy.  But this is the scenario that homeowners in the United States, who are experiencing the effects of plummeting wealth, are putting up with.  From 1991 to 2005, US house prices rose at a rapid rate but, adjusted for inflation, prices are now almost 40% off their peak, or roughly US$100,000.  Those who stumped up to buy a house in 1979 are now down about 8.5% - and that’s more than three decades later.

Jeremy Grantham, who is a well respected Investment Analyst from GMO suggests that the Australian property market is well and truly overvalued, when compared with rental income yields, long term historic averages and relative to incomes in Australia.

 

 

Saturday, 07 May 2011 02:22

Superannuation and the Co‑contribution Scheme

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One government incentive to increase our retirement savings is the super co-contribution scheme – the government will contribute $1 for every $1 you personally contribute, up to $1,000. The information below will help you find out if you can use the co‑contribution scheme to boost your retirement savings.

What is the co-contribution scheme?

If your income is less than $31,920, the government will contribute $1 for every dollar you personally contribute, up to a maximum of $1,000. If you earn between $31,920, and $61,920, the government will contribute an adjusted amount.

Who is eligible?

To qualify for the co-contribution you have to meet the following criteria in the financial year:

• receive an assessable income of less than $61,920;

• make a personal contribution to your superannuation account out of your after-tax income;

• receive 10 per cent or more of your total income from employment or carrying on a business or attributable to activities that result in the person being treated as an "employee" for superannuation guarantee purposes, or a combination of both;

• lodge an income tax return; and

•be less than 71 years of age at the end of the financial year.

Only personal contributions from your after-tax income qualify for a co-contribution. Superannuation payments from your employer and contributions for which a tax deduction has already been claimed (for example under a salary sacrifice arrangement or if you are self-employed) are not eligible.

What are the current levels of co-contribution payable?

The maximum co-contribution that will be made by the government is $1,000, and is available if you have an assessable income of less than $31,920 a year. The maximum co‑contribution is reduced at a rate of 3.33 cents in the dollar if you have an income of between $31,920 and $61,920.

The following table highlights the level of co-contribution the government will make to superannuation, if you make a personal contribution of $1,000.

Income                         Co-contribution

$31,920 or less         $1,000

$35,000                       $897

$40,000                       $731

$45,000                        $564

$50,000                        $397

55,000                            $231

$61,920                          $0

How to apply for the co‑contribution If you qualify for the co-contribution payment, you don’t need to apply. The only actions required from you are to make the extra contribution to your super fund before 30 June and lodge an income tax return. The Australian Taxation Office (ATO) will work out if you are entitled to a co-contribution using information from your tax return and your super fund. If you are eligible, the ATO will then pay the co-contribution directly into your super account where it must remain until you retire. You need to supply your super fund with your tax file number so it will be easier for the ATO to link your personal contribution to your taxable income.

If you feel that you qualify and no payment has been made, you should contact the ATO to find out what has happened.

When will the co-contribution payment be made?

The ATO anticipates that the co-contribution will be paid late in the year. The ATO firstly has to collect information from your super fund about contributions (due 31 October). The ATO also has to wait until you lodge your tax return before they can determine if you are eligible.

Remember you must make your personal super contributions before 30 June to be eligible for a co‑contribution within the current financial year.

The government’s co-contribution scheme is a great incentive to grow your super savings. If your own salary is above the threshold, consider boosting the super of someone in the family who works part time such as your spouse or child. Take full advantage of this scheme if you can.

The co-contribution scheme at a glance

What is it?

The government will make super contributions (up to a maximum of $1,000) for low-income earners who make personal super contributions.

To be eligible you must:

  • receive income of less than $60,342;
  • contribute to super (from post-tax income);
  • receive 10 per cent or more of your total income from employment or carrying on a business;
  • be under 71 years of age; and
  • complete an income tax return.

How much will be paid?

An amount up to $1,000 (if income less than $31,920). An adjusted amount, if income less than $61,920.

When will I receive the money?

Late in the year.

How do I apply?

You don’t need to apply. Make a contribution and the ATO will deposit the co-contribution automatically.

Note: Advice contained in this flyer is general in nature and does not consider your particular situation or needs. Please do not act on this advice until its appropriateness has been determined by a qualified adviser.

For more information about the co-contribution scheme or to arrange a no-cost, no-obligation first consultation, please contact the office on 08 8273 3222.

Website:  www.gemcapital.com.au

Blog Website:  www.investmentadviceadelaide.com

Saturday, 07 May 2011 01:59

Save Tax With Dividend Imputation

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Saturday, 07 May 2011 01:52

The Investment Opportunity in Soft Commodities

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Soft Commodities are commodities that are grown not mined, and they include:
• Coarse grains, such as corn, wheat and barley
• Specialty products such as coffee, cocoa, sugar and palm oil
• Proteins such as beef, pork, chicken and fish
• Forestry products

The global soft commodity sector is experiencing a structural change predominately driven by growing demand from the developing world and constrained supply. The important question from an investor’s perspective is: how can I benefit from this trend? The answer we believe, is that superior investment returns can be made from investing in companies that are able to grow volume to meet this demand.

The rising long term demand for soft commodities is being driven by 3 factors:
1. Population Growth – United Nations is forecasting 40% population growth by 2050
2. Rising Living Standards – increasing wealth per capita in emerging economies is resulting in shifting patterns of food consumption and a rise in demand for grain and other soft commodities

At the same time, supply of soft commodities is being constrained by:
1. Falling arable land per person
2. Slowing productivity gains
3. Water – is currently being consumed above its replacement rate
4. Climate Change

Any time where there are large imbalances between supply and demand of commodities, an interesting investment opportunity exists. This is a very difficult theme to play within Australia as the companies exposed to this sector are relatively small by world standards.

There is a comprehensive 8 page paper available from GEM Capital that further explores one way of investing in this sector. If you would like a copy of this report please contact us by either phoning (08) 8273 3222 or via email on This email address is being protected from spambots. You need JavaScript enabled to view it.

Thursday, 14 April 2011 07:40

Maximsing Age Pension

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Wednesday, 13 April 2011 13:14

Advice On Income Protection

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