The kids have finally left home and now you’re rattling around in a house way bigger than you need. If it’s time to think about downsizing, there’s more to it than simply selling one house and buying another. Here are a few things to consider.
Selling a large house and buying a townhouse or unit, perhaps in a more affordable suburb, can free up a significant sum of money which you could use to help fund your retirement or take that dream international holiday. But before you get too excited by your potential windfall, remember to take into account expenses such as agent’s fees, removalist costs and stamp duty on the new property. This will give you a better idea of how much additional cash you are likely to be left with.
Generally, any capital gains on the sale of the family home are exempt from capital gains tax (CGT). However, if the home has been used for income-producing activity, then a portion of the gain may be subject to CGT.
On the upside, downsizing may reduce your living costs. New homes are usually more energy efficient, and cost less to heat and cool than older housing stock.
The family home is exempt from Centrelink’s age pension asset test. If qualifying for a full or part age pension is important to you, you may not want to free up too much cash when downsizing.
Indeed, some retirees actually dip into their savings to buy a higher value home. Their aim is to reduce their assessable assets and maximise their pension entitlement. This isn’t always a good idea as it increases the risk of being caught in the ‘asset rich, cash poor’ trap.
As an incentive to downsize, the federal government has proposed that from July 2018 Australians over the age of 65 will be permitted to make a contribution to super of up to $300,000 each ($600,000 for a couple) from the proceeds of selling their home. The amount will be treated as a non-concessional (after-tax) contribution, and exempt from the usual restrictions. But this proposal has yet to be legislated.
For most people under 65, super may also be a desirable destination for most of the money freed up by downsizing. Make sure that any contributions fall within the relevant limits.
While the financial benefits of downsizing can be considerable, moving house is amongst life’s most stressful events. This is particularly the case when you are giving up a home full of family memories, and parting with many prized possessions to fit into a smaller space. Just being aware that you may face an emotional reaction is a start, but be open to seeking professional support if moving does bring on a bout of the blues.
Seek financial advice
Downsizing has both financial and lifestyle dimensions, and you’ll want to make the most of any profits you realise. Talk to us before you get the real estate agent in as we will work with you to craft a short-term strategy to help ensure your downsizing experience supports you in achieving your long-term goals.
Many of our best laid plans rarely follow through exactly as we might have hoped. However, it’s another story when it comes to planning for what happens after we’ve left this planet. Our ideas about who will benefit from our estate could potentially change often during our lifetime.
Estate planning ensures that when we die, our assets can be passed promptly and tax-effectively to the people we love or to the charities we support.
Just like life, an estate plan is not static. As life changes, a will should be adjusted to ensure it remains relevant. There are many events that can trigger a need to review an estate plan, for instance:
Here are some examples of when a life changed and the estate plan did not keep up.
Who gets the house?
Joel was a young executive married to Jane, a corporate lawyer. They were both busy and successful in their careers and had no children. They drifted apart and Joel started a new relationship with Sophie. They rented an apartment together and six months later were delighted to discover Sophie was expecting their first child. Joel was finalising an important deal and would “get around to arranging things” as soon as the ink had dried on the contract.
That never happened because he was killed in a car accident driving home from the office. Joel and Jane were still married and as they had owned their house as joint tenants, it passed automatically to her. The trustees of Joel’s super fund split his super between Sophie and Jane. Sophie was left to raise their child on her own without the financial support Joel would have wanted.
Who controls the money?
Trevor and Jennifer had planned their retirement meticulously including an estate plan. Their wills provided for a testamentary trust to be set up when they died. Trevor’s older brother agreed to be the trustee because he knew their family and understood what Trevor and Jennifer wanted. Their intention was that the trust would support their grandchildren through their education and establishment of their lives.
A few years later, Trevor passed away after a brief illness and Jennifer followed shortly afterwards. By this time, Trevor’s brother was in a nursing home suffering dementia and therefore could not fulfil the trustee’s obligations. The family had to approach the courts to appoint a replacement which meant the trust might not have been administered in the way Trevor and Jennifer had earlier wished.
Who supports Alex?
Mandy had brought up three children on a tight budget since divorcing their father. She arranged her finances well and took out insurance to ensure her children would be supported if she died or could not work. Mandy’s will appointed her sister, Penny, as guardian of her children and executor of her estate.
Unfortunately, Penny became seriously ill and Mandy agreed to look after Penny’s son Alex, as well as her own family. When Penny unexpectedly died Alex was left some money from her estate. When Mandy was revising her financial plans to cope with these events, her financial adviser recommended she apply to become Alex’ guardian, increase her insurance cover, appoint a new guardian for the children and include Alex in her will.
These are common scenarios, so if your family situation or ideas change, be sure to ask for professional guidance in updating your estate plan accordingly. We can help you get organised in completing your will and other estate planning documentation.
If 50 really is the new 40, then life has just begun. The kids are gaining independence or may have left home, and the mortgage could be a thing of the past. Bliss. But galloping towards you is… retirement!.
How are you tracking?
According to the Association of Superannuation Funds of Australia (ASFA), a ‘comfortable’ retirement today costs close to $59,000 per year for a couple. If you and your partner are planning to retire at 55, to afford this retirement lifestyle and secure your future, at least into your mid-eighties, you should be looking at having around $1.02 million in super[i]. Over time, inflation will push these figures higher. Leave retirement to age 65 and a couple will need around $79,300 a year[ii] from a nest egg of about $1.08 million[iii].
Find those numbers a bit daunting? Here are some ways to boost your retirement savings.
Increase your pre-tax contributions
You can ask your employer to reduce your take-home pay and make larger contributions to your super fund. If you are self-employed, you can increase your level of tax-deductible contributions. This strategy is commonly known as ‘salary sacrifice’.
If you are earning between $80,000 and $180,000 per year, any income between those limits is taxed at 39%. Salary sacrifice contributions to your superannuation fund are only taxed at 15%. Sacrificing just $1,000 per month to super will, over the course of a year, see you better off by $2,880 on the tax differences alone. Plus, the earnings on those super contributions will be taxed at only 15%, compared to investment earnings outside of super being taxed at your marginal rate.
Don’t overdo it though. If your salary sacrifice plus superannuation guarantee contributions add up to more than $35,000 a year, the excess is added to your assessable income and taxed at your marginal tax rate. This will become even more important with the Budget proposal to lower this figure to $25,000 pa from 1 July 2017.
Once you reach your preservation age[iv] you might start a ‘transition to retirement’ (TTR) pension from your superannuation fund. The idea is to allow people to reduce working hours without reducing their income. Another incentive for starting a TTR pension is that once you reach 60, the income you receive and the earnings on the investments backing the pension are tax-free.
Keep your money working
There is a tendency to opt for more secure, but lower-return investments as we approach retirement. However, even at retirement your investment horizon may still be decades. With cash and fixed interest producing some of their lowest returns in history, it may be beneficial to keep a significant portion of your portfolio invested in growth assets.
Insurance and death benefits
With the mortgage paid off or much diminished and a growing investment pool, your insurance needs have probably changed. You may be paying for cover you no longer need, premiums may be quite high due to age, and that money might be better applied to boosting your savings. This is a good time to review your insurance cover to ensure it continues to be a match for your changing circumstances.
It’s also a good idea to check the death benefit nomination with your super fund. By making a binding nomination you can ensure that your death benefit goes to the beneficiaries of your choice, and may mean they receive the money more quickly.
Get a plan!
Superannuation provides many opportunities for boosting your retirement wealth. However, it is a complex area and strategies that benefit some people may harm others. Good advice is absolutely essential, and the sooner you sit down with us to plan this out the better off you will be.
[i] Sum required to fund an annual income of $59,000 for 30 years at a return of 4% pa after inflation, fees and tax, disregarding any age pension.
[ii] Value of $59,000 today in 10 years at 3% inflation.
[iii] Sum required to fund an annual income of $79,300 for 20 years at a return of 4% pa after inflation, fees and tax, disregarding any age pension.
[iv] Depending on your date of birth, your preservation age will be between 55 and 60. It is the age at which you can access your superannuation under certain conditions.
What would you do if a family member asked to borrow money – besides the less painful option of beating yourself over the head with a fence paling? You want to help, but you’re right to be wary.
It’s a difficult subject that despite everyone’s best intentions, often ends in tears.
You’ve worked hard, saved for retirement, paid off your home and raised your kids. You’re sitting on a nice little nest egg and expect life to be cushy. Here it comes:
Let’s say you agree, now what? Can you be certain you’ll see your money again? How do you preserve the relationship? Where will the money come from: Savings? Superannuation?
Stop right there!
You really should speak with us about this, after all, whether you’re retired or still working, your financial strategy will likely be disrupted.
If you’re working, taking money from savings may adversely affect your investments or other plans, such as your annual holiday. If you’re retired, withdrawals from super or pension accounts may impact your income stream and how long your income will last.
Ultimately, if you decide to go ahead with the loan, it’s recommended that you draft a legal agreement. It should cover the following:
Both lender and borrower agree to the terms, and once it has been checked by a legal professional, each party signs.
If you are reluctant to lend the money but still want to help, there are some alternatives but they also have their pitfalls.
Co-borrowing means the money is borrowed from a financial institution and both of you sign. If either party fails to meet their share of the loan, the other is responsible for repaying the full amount.
Guarantor allows your friend/family member to borrow the money themselves. You sign as guarantor meaning you are legally responsible for repaying the entire loan if payments are not made.
Gifting means you give the money to the borrower. If you’re receiving Centrelink benefits, gift amounts are limited and benefits may be affected. You must seek advice from your adviser and/or Centrelink.
These options may also impact your credit rating and your future borrowing eligibility. Additionally, if you forgive a loan, Centrelink may treat it as a gift and assess you accordingly.
It might seem distasteful, but you must consider your own position carefully. Seek professional advice and take steps to protect yourself.
Remember: “reality” television courtroom shows wouldn’t exist if people didn’t borrow money from one another!
In a rather unusual move in October, the big banks began announcing increases to their home loan interest rates, even though there has been no change in official cash rates.
Why did they do it and what does it mean?
While Australia has a strong banking system, the regulator, the Australian Prudential Regulation Authority (APRA), has introduced rules to make it even stronger. One outcome is that the ‘big four’ banks (ANZ, CBA, NAB and Westpac) will need to hold more capital to help shield them from any potential increase in bad loans or other economic upheavals. Previously, for every dollar that one of these banks lends to its customers the bank would need to hold 16 cents in capital. APRA has increased this to 24 cents per dollar - and this comes at a cost.
In very simple terms, and all else being equal, if a bank can only lend 76 cents for each dollar it has, it is going to earn less interest than it would by lending 84 cents per dollar. On their own, higher capital reserves mean banks earn less interest on their loans, which in turn leads to a reduction in profits.
Profitability is an important measure of a bank’s strength, so to compensate for the reduction in interest income, at least in part, the major banks started raising interest rates.
The Big Four have a tendency to move together on interest rates. It happened when rates on investment loans were increased, so it’s no surprise others have followed Westpac’s lead. They all need to maintain profitability to keep their shares attractive to investors.
Interestingly, smaller banks are not affected by the higher capital requirements.
Winners and losers
While the focus had been on Westpac being the first to increase its mortgage rates, and by the highest amount, it should be noted that Westpac increased the interest paid on some new term deposits by 0.25%. For anyone relying on interest income that’s a plus. We are yet to see if the other banks will be as generous.
On the losing side are homeowners with a variable rate home loan with one of these banks. So too are property investors who will also pay this on top of the earlier increase to investment loan rates. If landlords seek to pass on their higher interest payments, renters may also feel it in the hip pocket. And depending on a complex interplay between depositors, borrowers, capital raisings and profits, bank shareholders may see a reduction in dividends.
But let’s keep things in perspective. The 0.2% Westpac rate rise will increase repayments on a $300,000 loan by $46 per month. Prudent homebuyers will have factored in significantly higher interest rates when calculating how much to borrow, and this modest increase will be something they can take in their stride.
We all have a vision of our perfect retirement. But whether it’s travelling around the country in a luxurious motor home, playing golf every day or spending more time with the grandkids, how do you accumulate enough to pay for your golden years?
How much do I need to live my lifestyle?
Lifestyle is a personal choice. The big question is: How much do you need to save while you’re working to pay your preferred retirement lifestyle?
A good place to start is to calculate how much you need to meet basic living costs. You could use your current expenses as a guide, but keep in mind that these may be quite different during retirement.
What about the age pension?
The age pension is designed as a safety net for those who can’t self-fund their retirement. The payment for a single person represents less than 30% of average male weekly earnings. A person receiving the base maximum single-rate age pension will receive $860.20 each fortnight, or $22,365 annually, while a couple entitled to the full rate will receive a combined amount of $1,296.80 each fortnight, or $33,716.80 annually.
This may be enough to cover basic essential expenses, but most retirees want a better standard of living and are more active in retirement than previous generations. For these people, the age pension won’t be enough. Take this for example.
Living a modest lifestyle
The Association of Superannuation Funds of Australia (AFSA) Retirement Standard provides an insight into the cost of different lifestyle options. First prepared in 2004, it benchmarks on a quarterly basis the annual budget Australians need to fund either a comfortable or a modest standard of living in retirement.
The Standard defines a modest retirement lifestyle as “better than the age pension, but still only able to afford fairly basic activities”. The June 2015 ASFA figures suggest that a single person would need $23,662 a year to achieve this, while couples would need a combined income of $34,051.
Upgrading to a comfortable lifestyle
The Standard defines a comfortable retirement as one that enables “…an older, healthy retiree to be involved in a broad range of leisure and recreational activities and to have a good standard of living through the purchase of such things as: household goods, private health insurance, a reasonable car, good clothes, a range of electronic equipment, and domestic and occasionally international holiday travel”.
The June 2015 ASFA figures suggest that a single person would need $42,861 a year to have a comfortable lifestyle, while couples would need a combined amount of $58,784.
Obviously these figures are just a guide, and the actual amount needed to fund your preferred retirement lifestyle will depend on the choices you make about the things you want to do. Your financial adviser can help you more accurately determine the amount needed for your retirement based on your goals, needs and preferences.
How much is enough?
Looking at the figures above, it’s clearly apparent that if you want more than a basic lifestyle in retirement, you’ll need more than the age pension to live on. Your superannuation and non-superannuation savings will need to supplement the difference, and in some cases, fully fund your retirement.
The ASIC MoneySmart Retirement Planner calculator, available at www.moneysmart.gov.au, is a useful tool.
The figures generated suggest that to achieve a modest retirement, as defined by the ASFA Retirement Standard, a single person should save about $473,000, and a couple should save about $681,000. To achieve a comfortable retirement, a single person should have about $857,000 and a couple should have about $1,175,000 and the how much is enough questions is always very specific to clients personal circumstances. These are generic calculations based on a 5% return on investments.
What’s the best way to save?
Superannuation is the most tax-effective way to save for retirement. You can build your super through employer contributions (including salary sacrifice), your own contributions, spouse contributions and government co-contributions.
There are certain restrictions on superannuation contributions and withdrawals, so you may need to supplement your superannuation with other investments such as managed funds, term deposits or property.
Regardless of how much you need, it’s important to start planning early to ensure you have enough to retire on. We can work with you to develop strategies that suit your individual circumstances and help you to look forward to enjoying your retirement dream.
Assumption for calculation: value is based on today’s dollars and retiring at age 65. It does not take into account the Age Pension.
Age pension figures quoted include supplements.
Are you aged between 55 and 65? Want to save tax and supercharge your super? Or cut your work hours without reducing your income? A TTR strategy could be the answer.
After working hard over the last few decades, you might be starting to dream about all the things you would love to do when you retire – travel, buy that house at the beach, play more golf, or spend time with the grandchildren. At first blush that sounds like bliss but you know in your heart that you would be bored silly after the first six months. Is there a way to ease into retirement and have the best of both worlds? Yes, there is! You can transition into retirement.
What is a Transition to Retirement (TTR) strategy?
If you have reached your Preservation Age, a TTR Pension can enable you to access some of your super benefits whilst you continue to work.
What is your Preservation Age?
Date of Birth
Before July 1960
1 July 1960 – 30 June 1961
1 July 1961 – 30 June 1962
1 July 1962 – 30 June 1963
1 July 1963 – 30 June 1964
After 30 June 1964
A TTR strategy can be very beneficial as it can help you ease into retirement and provide you with significant tax savings.
What’s the difference between super and a pension?
The main difference between a super account and a pension account is the tax rates applicable to the withdrawal options and investment earnings.
You cannot withdraw lump sums from your super account until you have reached Preservation Age and have fully retired (or have met another condition of release). You can; however, access some of your super as a pension without the need to fully retire.
Before withdrawing from your pension fund, your financial adviser will need to determine the tax-free and taxable components of your super balance. The split between these components will determine the tax payable on your pension payments.
Any withdrawals from the tax-free component of your pension are not taxed.
If you have reached your Preservation Age but are still under age 60, you will need to pay tax on the taxable component of your pension payments. This will be added to your assessable income and taxed at your marginal tax rate. However, you will receive a 15% tax offset for the tax paid on this component.
Once you have reached age 60, all pension payments are received tax free.
b)Tax on investment earnings
Investment earnings on funds held within the super environment are subject to a 15% concessional tax environment whereas investment earnings on funds held within pension phase are completely tax free.
How does a TTR work?
There are two ways to use a TTR strategy – with a lifestyle focus or a tax-saving focus.
Lifestyle Focus: A TTR strategy can enable you to reduce your work hours and still maintain the same level of income. Effectively, you draw down an income stream from your super benefits in order to top up the shortfall in your income.
Tax-Saving Focus: On the other hand, you can also use a TTR strategy while you continue to work full time to help minimise your tax and maximise your retirement savings - and maintain the same level of income. Using this strategy you commence drawing an income stream from your super benefits and make Salary Sacrifice (before-tax) contributions to super in order to boost your retirement savings.
Things to consider
There are restrictions in relation to how much you can draw from your TTR Pension. The minimum pension requirement for a TTR Pension is 4% pa and the maximum drawdown is 10% pa of your account balance.
If your super benefits are held within a Self-Managed Super Fund (SMSF), you will need to ensure your funds’ Trust Deed allows for this type of pension to be paid. The assets and liabilities of the fund will then need to be valued to determine the value that will support each member’s pension.
Its a great strategy for those that can access it.
Falling in love is a magical and wondrous experience, but once the heart flutters have settled a little and two people move towards a more serious relationship, various challenges may need to be addressed. Many of these challenges can be easily resolved when we’re young and carefree, but what happens when Cupid appears – or reappears - later in life?
Unlike earlier relationships, when love blossoms late in life careers have slowed down or ceased, the children have left home, and health and fitness may not be what it had been, meaning that a ‘lifetime’ of togetherness may not be as long as first anticipated.
From a less romantic perspective, the financial implications of beginning a relationship at this time of life are serious and need to be considered carefully. In many circumstances, the couple’s children are adults whose voices want to be heard, particularly in relation to matters of the will. Parents who re-partner without considering the broader families and important people who took part in their life journey are at risk of unknowingly creating negative repercussions. For example, ‘new’ partners who pass on their estates only to each other, leaving at least one of the couples’ children with nothing while the other partner’s children inherit all, can cause long-term hurt and pain. In many cases, this act may not be intentional.
Another financial aspect unique to this stage of life emerges when there is a high level of financial disparity between the two partners. While one partner has accumulated a lot of wealth, the other may have not. Questions are then raised in regard to how finances are distributed between the couple while they are alive and after one or both die.
Other implications can relate to health issues. They include questions such as who would be the primary carer for a sick partner? The sick partner’s children, or the new spouse? What are the role divisions between the children, other family members and the spouse?
Take advice and make a plan
Whilst every situation will be different, here are some guidelines for addressing the unique features of financial planning in later life. In particular, emphasis is given to the inter-generational and multi-stakeholder aspects of this relationship.
1: Involve everyone long before the will is read
For many years it was customary to not involve children and other relevant stakeholders in formulating a will. History books are filled with disputes and hurt feelings over wills that were read leaving the beneficiaries astonished and devastated over the deceased’s final decisions. Don’t wait until it is too late. Financial matters that can have serious impacts on the future lives of your loved ones need to be discussed well in advance with all relevant stakeholders. Preferably before your will is signed and sealed.
2: Plan for the present with a view to the future
New relationships require new financial arrangements. For example, if buying a property together, what are the consequences of sharing a dwelling?
Below are some examples:
When couples decide to purchase a property jointly it has immediate consequences for the beneficiaries of the couple following the death of a partner. This issue can be addressed by registering the property owners as “tenants-in-common”, ensuring that the deceased’s beneficiaries will inherit their appropriate share of the property. Couples may give themselves a “life interest” in the property to allow each to remain living there after their partner’s death. The implication of this for the beneficiaries is that they will only be allowed to receive their inheritance after both partners have died.
An age pension payment will change as a consequence of living together. This can occur when one partner is still working and the other is retired and receiving the pension; or both partners have previously been eligible for a single pension. The difference between the age pensions for a single person is $860.20 per fortnight compared to $1,296.80 as a combined couple – $436.60 less per fortnight.
Case study: Moving In Together
Brian and Elizabeth recently moved in together. Brian is semi-retired and received a part-age pension from Centrelink. Elizabeth is still working full-time and earning a salary. When Brian informed Centrelink of his new living arrangement he had to provide detailed information about Elizabeth’s financial circumstances. Based on their combined assets and income, Centrelink assessed that Brian was no longer eligible for any pension, and his payments stopped. His concession card was also cancelled, so he no longer had access to a wide range of concessions with service providers and public transport. As the Centrelink assessment was completed weeks after he had moved in with Elizabeth, Brian had to repay Centrelink the overpaid pension amount.
If new partners are members of a superannuation fund they need to review their instructions regarding which beneficiaries receive a death benefit. For example, if a couple has specified a “non-binding” nomination for their beneficiaries, this will be invalid now that they have partnered. This is a complex area of estate planning that requires personalised advice.
3: Design financial agreements suited to the partners’ financial circumstances
A happy relationship is a transparent one, particularly when it comes to money. A good start is to draw up a personal “balance sheet” listing the values of all assets each person owns (eg. property, superannuation, car, bank accounts, etc). All debts and liabilities, such as an outstanding mortgage, personal loans and credit card balances, should also be included.
After both partners are aware of the other’s current financial situation, and if appropriate, a “Binding Financial Agreement” could be considered. This is a legal document that sets out how their property and assets would be divided were they to separate. This is particularly appropriate when there is a high level of financial disparity between partners.
4: Plan health care prudently
Growing old together involves increasing health costs and risks of illness. It is recommended that the partners review their health insurances and redesign them to fit the new life arrangements. Redesigning may also reduce premium costs.
Health care plans need to involve relevant family members who may wish to take part in managing care at times of need. Planning in advance could reduce future friction between the cared one’s family and the new spouse regarding treatment strategies and expenses.
Planning and preparing financially should by no means lessen the excitement of a new love experience, but when addressed properly will allow the newly formed relationship to be a source of growth for the couple and their loved ones, in the present, and into the future.
It is recommended to discuss these matters with an estate planning lawyer and your financial planner sooner rather than later.
 Includes maximum pension supplement and energy supplement.
During a share market correction or downturn the media will report that a certain market has ‘lost’ billions of dollars. But what happens to all that money and where does it go? Is it really lost?
The answer is that it is purely a book figure – a ‘paper loss’. There is no magical drain other than the metaphorical one to explain this economic concept.
Imagine a real estate agent estimated the value of your home as $450,000. Next week a second agent estimates it would sell for $400,000. Have you lost $50,000? No, even though no money has changed hands, you may feel poorer. This is the difference between value (what someone may be prepared to pay) and the price at which a sale actually happened.
It’s the same with the share market. When there are more buyers than sellers, the price of a share increases and holders of that share feel richer. Conversely, when there are more sellers than buyers, share prices fall. The holder of the devalued shares has not actually lost any money - unless they sell the shares and realise the loss.
Share speculators get burnt by rapid changes in value because they want to realise short-term profits. Investors hold on to their shares in quality companies throughout price fluctuations because they believe in the future of the business and the flow of future dividends and profit.
The secret is to follow your investment strategy not the headlines.
Both Paul and Cameron have recently taken the Banking and Finance Oath http://www.thebfo.org/home which provides for the following committments from both of them
Click here (Cameron) and here (Paul) to see the certification issued by the Banking and Finance Oath Association.
Budget 2014 / 15 – Moran Howlett Financial Planning – 14/05/2014
Well, as promised there are some pretty significant changes to government revenue and spending within Joe Hockey’s first budget as Treasurer. Apparently he was pretty excited about it as he was caught dancing to the song “This would be the best day of my life” just prior to the budget being announced. Anyway, here is a brief outline as to what some of the proposed changes are and how you could potentially take advantage of some of them.
A levy of 2% will apply to anyone who has taxable income above $180,000. For example, if you earned $200,000, then on the extra $20,000 you will pay an additional 2% tax or $400.
Comment: Importantly, as this is taxable income, strategies can be employed to reduce the level of taxable income that you have. ie. Deductible Super contributions, interest on investment loans etc.
Currently, if you make a contribution to super that exceeds the non-concessional contribution limit (currently $450,000 this year if you borrow from the following two years), then you would have paid tax of 46.5% on the amount you go above that limit. Ie. If you mistakenly put in $540,000 (the limit next financial year) this year, then on the additional $90,000 that you have put in you would pay tax of $41,850.
The government has recognised the failings in the above system and has decided to allow people to withdraw the excess contributions above these limits (in the case above - $90,000) without incurring the excess tax. A good outcome when you consider that most of the contributions above the amounts have been made by honest mistakes – expensive mistakes.
This will have impact sooner than what is being portrayed in the media as per below
Qualifying Age At
1 July 1952 to 31 December 1953
1 July 2017
1 January 1954 to 30 June 1955
1 July 2019
1 July 1955 to 31 December 1956
1 July 2021
From 1 January 1957
1 July 2023
1 July 1958 to 31 December 1959
1 July 2025
1 January 1960 to 30 June 1961
1 July 2027
1 July 1961 to 31 December 1962
1 July 2029
1 January 1963 to 30 June 1964
1 July 2031
1 July 1964 to 31 December 1965
1 July 2033
1 January 1966 onwards
1 July 2035
Comment: The Age Pension eligibility age was always increasing to 67 as per the above, the government has simply extended it.
Whilst the policy intention is to encourage people to continue working until age 70, the reality is many people will be unable to continue working. Effectively meaning that they will have to fund the gap between when you retire and when you are eligible for the age pension.
Our analysis shows that to fully fund this gap a single person will require an additional $96,432 in superannuation, whilst a couple will require an additional $145,378 to fund the five year gap.
The Commonwealth Seniors Health Card allows self-funded retirees to gain access to medicines listed on the PBS at a concessional rates. Currently to be eligible you must have an adjusted taxable income of $50,000 (singles) or $80,000 (couples, combined).
The changes mean the following:
Comment: Under the proposed change, assuming no other income a new applicant will not qualify for a Seniors Health Card if their Account Based Pension exceeds $1,448,543 (singles) or $2,318,886 (couple, combined).
Worse still, the proposed change effectively locks people into their existing Account Based Pension provider as any change after 1st of January 2015 will see the new Account Based Pension deemed for the Seniors Health Care Card as well as the income test. As such, you need to review if the product you are currently in is the right one between now and the end of this calender year. Please see section below for the impact this change has on Age Pensions.
As per our media release sent earlier this week, this change will have a dramatic impact on clients.
Currently, the deeming thresholds are $46,600 for singles, $77,400 for pensioner couples. From 20 September 2017, the deeming thresholds for means tested payments will be reset to $30,000 for singles and $50,000 for couples (for both pensioners and those receiving allowances).
Put simply, in the past using Account Based pensions allowed you to significantly reduce the amount of income that was assessed from your pension for the Centrelink Income Test. For example, if you had $250,000 and was receiving the minimum pension from your Account Based Pension ($12,500), none of the income received would be included as part of the income test. However, from 1 July 2015, single pensioners would be assessed as earning $8,284 per annum from the account based pension, resulting in a reduction in Age Pension income of $2,113 per annum or approximately $80 per fortnight.
The income test cut-off limit is currently at $1,841.60 per fortnight for Single people and $2,817.20 per fortnight for couples. Meanwhile the asset test cut-off limits are $758,750 for single people and $1,126,500 for couples. These limits will stay where there are for the next 3 years, whereas in the past they have been indexed with AWOTE.?
Currently, Pension payments are indexed using Male Total Average Weekly earnings (usually increased each year by around 5%), from 1 July 2017, this will change and they will simply increase in line with CPI.
As the government is not so keen to fund our retirements through the age pension system, they would rather we did it ourselves. As such, they are still looking to increase the SG rate employers pay to their employees super to 9.5% next financial year. Although there has been some change to the rate of increase, by 2022/23 employers will be required to pay 12% of Salary into Superannuation.
The company tax rate will be reduced by 1.5% to 28.5% from 1 July 2015 for companies that earn less than $5,000,000 in taxable income.
Comment : This may have an impact on Franking credits as those companies (think of large listed companies like CBA) that earn more than $5,000,000 in profit will pay 28.5% tax, however, there is a levy being applied to these companies of an additional 1.5% which will fund the Paid Parental Leave Scheme bringing the total back up to 30%. If the levy is not included (and it is not clear yet whether it will be), shareholders may receive the same level of dividends but less franking credits (assuming the levy is not franked) leaving them worse off.
Currently the Medicare levy is 1.5%, however from 1 July 2014, this is going to increase to 2.0% to provide funding for Disability Care Australia. Please see the table below which outlines tax rates from 1 July 2014 financial year.
For example, if you earn $180,000 for the year, then any monies you earn above $180,000 will mean you are taxed at 47% in income tax, plus 2% in medicare – totalling 49%.
From 1 July 2015, the government will proceed with the paid parental leave scheme whereby Mothers will receive up to 26 weeks of salary up to a cap of $100,000 (or $50,000) over 6 months. This is to be funded by a 1.5% levy on company’s earnings taxable income over $5,000,000.
Comment: Not only do you get a bundle of joy, you also now get a bundle of cash! A pretty nice baby bonus!
From 1 July 2016, you now have to start paying back your HELP debt when you earn more than $50,638. Meanwhile, the annual indexation method applied to HELP will be changed from CPI to a rate equivalent to the 10 year Government Bond yield (currently 3.84%)
Universities will have complete freedom to set their own fees from 2016 onwards. The expectation is that fees from more prestigious universities will rise, whilst the fees in some less popular courses will fall. This is in line with the Coalition Governments philosophical thinking around less government interference the better.
Comment: This sounds to us like it is getting closer to the American College system. Importantly, when planning for education costs, we may now need to plan for a significant outlay in tertiary education spending for our children.
Given the lack of take-up of these accounts the government has decided that the system is not really working and as such the Co-Contribution will cease as at 1 July 2014 and the tax concessions will cease as at 1 July 2015.
From 1 July 2015, existing account holders will be able to withdraw their account balances without restriction.
The Government will introduce a new wage subsidy, to encourage businesses to employ Australians who are aged 50 and over and have been on income support for at least six months. Employers may receive up to $10,000 over 24 months in Government Assistance.
There have also been some significant changes to the Family Tax Benefit Part A and B and some other government payments, if you require further information on these please let us know. However, overall the intention of the budget is clear. The Coalition government wants us to “stand on our own two feet” especially when it comes to retirement income support.
If you have any questions about our budget summary please get in contact with us to chat through how this affects you personally you can either call Cameron or Paul on 03 9380 8844.
Moran Howlett Financial Planning has for a number of years been working with key clients that have moved offshore (namely Hong Kong, United States, Thailand and Singapore) to enjoy a better working/family life whilst also looking to increase their earnings. However, there is often a trap when you move offshore that people dont take advantage of the special tax circumstances this places them in, whilst also not taking advantage of their increasing income. As such, people often come to us (referred by existing clients) after a year or so of being Overseas asking how they can take advantage of the “5 years they are spending away” to ensure they are in a good financial position when they finally come back to Australia.
If you are living and working overseas there are a number of additional factors you need to be aware of when managing your money.
Usually, it will mean that you wont be a tax resident here in Australia. Instead, you will have become a tax resident of the country in which you are residing. Becoming a non-resident for tax purposes in Australia gives rise to a number of considerations. For instance, non-residents pay a higher rate of tax (29% or more) and are not afforded a tax-free threshold. This is very relevant if you own assets in Australia that produce an income. Typically, this might be an investment property or even renting out your family home whilst you are away. As such, it is vitally important that you are across the tax implications of such a move for your assets here in Australia.
If you are considered a non resident for tax purposes will depend upon whether the country you are moving to has a Double Tax Agreement (DTA) with Australia. Generally speaking, a DTA will ensure that you “dont pay tax twice”. ie. once in the country you are working and once here in Australia. This is particularly important when it comes to your salary being earned as well as your investment income on assets (ie. family home being rented) here in Australia.
Any investment income from Term Deposits or Dividends are taxed here in Australia and are subject to a withholding tax which is 10% for interest and 30% for dividends (however, as the dividends come with a tax credit of 30% this effectively means that there is no tax payable upon receipt of these dividends.)
In most cases, non-residents are still eligible to make contributions to an Australian superannuation fund. Super contributions may even be tax deductible, but this may only be of benefit where you have sufficient assessable income (which could come about in the form a rental income on your family home) in Australia against which to claim the deduction.
The application of capital gains tax (CGT) is also something you need to consider. Presently, non-residents are entitled to the 50% CGT discount where an asset is sold but was owned for longer than 12 months. CGT applies to profits realised on property in Australia, but profits on Australian shares are exempt for non-residents.
We have found that the key to making your “offshoring” work is to continue to be considered in your approach to savings. Often, clients will receive a significant salary benefit when they move offshore – however, the temptation to turn this salary increase into “Lifestyle benefits” is often too much for most expats. As such, we help our clients manage their cashflows and give them an understanding of the impact that their current spending is having their longer term goals and objectives. As I often say if one of the reasons you want to move offshore is that you are looking to catapult your financial position, then you best take advantage of this. We often say, make sure you enjoy the lifestyle living in Europe/Asia gives you, but lets make it work from both a lifestyle and financial perspective.
The final item that all expats working overseas need to be aware of is unscrupulous financial advisers that get paid a commission from “selling product” – In the most part most offshore markets are completely unregulated and advisers can receive up to 20% commissions on client savings plans. That is, if you invest $50,000 over the first year, the adviser can recieve 20% of that as an upfront payment ($10,000). Of course, the products that are being sold have very high fees involved to be able to ensure that the commissions can be paid. As always, our view is that you need to pay a fee for service to ensure the “advice is in your best interests and free from conflict”
If you have any further questions about how you can take advantage of your offshoring experience, feel free to contact us on +61 3 93808844, or firstname.lastname@example.org. We make regular trips to see some of our offshore clients in Thailand, Singapore, Hong Kong and the United States, whilst also Skype is a great tool for initial client conversations and interactions.