Tax Scales From 1/7/2007

Taxable Income Tax Rate

$0 - $6,000 Nil

$6,001 - $25,000 - 15%

$25,001 - $75,000 - 30%

$75,001 - $150,000 - 40%

$150,001 and over - 45%

In addition to the above, the Medicare levy will apply once the threshold has bee reached.

The low income Medicare levy threshold is $16,284 and the low income tax offset is $600, which means that no income tax will be payable on incomes below $10,000.

Can your superannuation fund refund contributions tax?

While most superannuation funds offer fairly similar benefits, there is a little know benefit offered by some but not all superannuation funds that can make a significant difference to your beneficiaries in the event of your death.  This is technically known as anti-detriment payments.

Anti-detriment payments are payments made to dependents by a superannuation fund to offset the contributions tax paid by the member for tax-deductible contributions to superannuation.  This means that if you die before you move from the accumulation (contribution) stage to the pension stage of your superannuation, your beneficiaries can receive back the 15% contributions tax that you have paid.

Anti-detriment payments are only payable on lump sum benefits paid to dependents or to the estate for the benefit of dependents.

It is important to be aware that there is a specific definition of who is a dependent for the purpose of anti-detriment payments.  Thus dependents are limited to legal and de facto spouses and children.  Financial dependents, same sex couples and those in interdependency relationships are excluded. 

Thus anti-detriment payments can be a valuable additional benefit that your dependents can receive in the event of your death.

With superannuation account balances steadily rising, the potential losses to beneficiaries who do not receive the anti-detriment payment can be substantial.  It is estimated that these payments are generally 2% to 5% of a member’s total benefit or even more in some cases. 

This means that if your account balance is say $1,000,000, the anti-detriment payment could be $50,000.

Because there is no legal obligation in the taxation legislation for superannuation funds to make anti-detriment payments, it is extremely important to ensure that your superannuation fund, whether it be a public offer fund or a self managed fund has the capacity to make anti-detriment payments.   In order to be sure, it is worthwhile to receive a confirmation in writing from your superannuation fund or super-annuation adviser that the anti-detriment payment is available.

In the case of a self-managed superannuation fund, it will be necessary to examine the trust deed and amend it if the anti-detriment payment capacity is not there. 

However there is a further complication with self managed superannuation funds, in that many may not have the reserves from which to pay an anti-detriment benefit.  This is because the payments to beneficiaries will be made prior to the refund of contributions tax being received from the Australian Tax Office. Furthermore a superannuation fund is not allowed to access the account of any other member in order to make the anti-detriment payment to the beneficiaries of the deceased member.

If you have a self managed superannuation fund, it may be worthwhile to set up a special Section 279D reserve, specifically dedicated to making anti-detriment payments.

Finally, it is important to claim anti-detriment entitlements promptly as superannuation funds will usually only make the payments in the financial year that the death benefit is paid so that they can claim a tax deduction for the payment.

Save tax by splitting your superannuation

Contributions made to superannuation can now be split with your spouse. However the split will actually occur after the end of the financial year (e.g. contributions made between 1 January 2006 and 30 June 2006 will be able to be split after the end of the financial year). 

Superannuation contributions splitting allows a couple to build two separate superannuation accounts even if one spouse is on a low income or not working. A couple can access two separate reasonable benefit limits (RBL) and two eligible termination payment (ETP) low rate thresholds. Thus there will be real taxation benefits at retirement. 

For example if you exceed the current lump sum RBL of $648,946, you are subject to tax at the highest marginal tax rate upon withdrawal of the excess.  However if you split your super with your spouse, between the two of you it is possible to double your RBL.  The same principle also applies to the tax free threshold for lump sum withdrawals, currently $129,751, which means as a couple you can with draw almost $260,000 tax free.

For those who take their super as an income stream, the tax saving from a contribution split will be the scope to better utilise the 15% tax rebate on taxable pension income funded by savings within the lump sum RBL.

Who can split super contributions?

The superannuation contributions splitting measure applies to married and de facto couples of the opposite sex (provisions do not extend to same sex couples or other dependants).

What is the maximum splittable amount?

The maximum splittable amount for any financial year is 85% of taxed splittable contributions and 100% of untaxed splittable contributions.  The 85% limit is a simple means of ensuring that it is the total amount of deductible contributions, net of 15% contributions tax, which can be split.

Which super contributions can be split?

Untaxed splittable contributions and taxed splittable contributions made to a superannuation fund or RSA on or after 1 January 2006 may be split to the spouse's superannuation account.

Can you claim a tax deduction for amounts split with your spouse?

If you intend to claim a personal tax deduction for personal contributions made to superannuation, a notice must be lodged before the superannuation contributions splitting application can be lodged. If the notice is lodged after the application to split, no deduction will be allowed.

When can you make a super contributions splitting application?

You may make an application to split an amount of either or both taxed splittable contributions or untaxed splittable contributions made on or after 1 January 2006.

The application must be either:

When is a split invalid?

Exploding the share trading myth

To trade or to hold? – that is the question.  How tax impacts investment returns and why it is important to look at your returns after tax has been paid.

The impact of capital gains tax

When taking a very long term view of an investment portfolio it seems that it is always the “magic of compound interest” that makes the difference! However, it shouldn’t be forgotten that any impost your investment balance during the period of compounding is also compounded. The key impost on every investor’s portfolio is taxation payable on capital gains earned during the investment period.

A very simplified case study

Consider the situation of Bob a top marginal tax rate individual who constructs a $100,000 portfolio that grows at 8% per annum. For simplicity assume the growth is all unrealised capital gains and that there are no dividends/distributions of income. In the absence of tax that portfolio will grow to $466,096 in 20 years.

If the portfolio is then sold the capital gain ($366,096) will be subject to Capital Gains Tax (CGT). Since it has been held for (much) more than 12 months the 50% concession is available. On a marginal tax rate of 48.5% (including Medicare levy), CGT of $88,778 will be paid, leaving a net sum of $377,318. This equates to an annual return over 20 years of 6.86%, which is only a modest tax leakage from the 8% gross return.

On the other hand, consider Margaret whose portfolio also achieves 8% per annum growth but which is very actively traded, with turnover of 100% or more each year over the entire portfolio of securities. In this case, almost half (48.5%) of the gain each year is lost to tax, so compounding occurs off a lower base each year and never reaches anywhere near the same level. Assuming the after tax distributions are reinvested, the portfolio will grow to only $224,255 after 20 years at a rate of 4.12% per annum.

This means that the impact of tax on Margaret’s actively traded shares is $153,063 more than Bob’s!

A second case study

As a portfolio ages, the size of unrealised capital gains will grow. It becomes increasingly difficult to justify trading on a successful holding due to the cost of realising the gain. 

Consider this scenario. In September 1989 Julius bought 2,000 shares in the National Australia Bank at a cost of $6.00 each. The shares have increased in value since then and 15 years later they are now trading at $30. The $12,000 initial investment has grown to $60,000 (figures rounded but approximately right) so that there is an unrealised capital gain of $48,000. The stock has delivered an average capital gain of 11.33% per annum. It also pays a fully franked dividend of $3,000 per annum, giving a yield of 5%.

On the other hand the share price is well below its high, that was reached in 2001/2002 of almost $35 and Julius is being advised to “move on” to some better performing alternatives. Selling the shares will crystallise the $48,000 capital gain. The shares are subject to the 50% concession so $24,000 will be added to his taxable income. With a marginal tax rate of 48.5%, CGT of $11,640 would have to be paid and only $48,360 would be available to invest in new shares. (This is ignoring all transaction costs including brokerage).

An alternative stock will have to grow at a rate of 4.4% per annum for 5 years just to regain the $60,000 starting point. It will also have to pay a franked dividend of $3,000 per annum, which is a yield of 6.2% on $48,360, for Julius to be in the same position. In other words, the new shares will have to grow some 5% faster and pay a higher dividend yield before Julius should be any more than break even between the two alternatives. It is very difficult to find outstanding investment opportunities that can overcome this hurdle. 

Subject to maintaining vigilance against deterioration in a share’s position, a “hold” strategy often remains a better recommendation. Of course, once you have grounds to form the view that a share’s position is not going to improve within the investment time, then the better approach is to crystallise the gain and to move on.

In the end these are always questions of judgement.  

USING THE NEW TRANSITION TO RETIREMENT RULES

A new strategy, which combines salary sacrifice with a superannuation pension to provide significant income tax savings.

The new regulations

These came into effect on 1 July, are part of the Government's plan to help older Australians adjust with the transition from work to retirement.

From 1 July 2005, a new condition of release will be introduced for people who reach age 55 but do not retire permanently from the workforce.  These people can now take a non-commutable allocated annuity or pension, or a non-commutable 'complying' annuity or pension.

 Non-commutable allocated annuity / pension

 This is not a new product as such, rather it places a restriction on the encashment (of existing Allocated Pension / annuities) until retirement or other condition of release. A non-commutable allocated pension /annuity can be commenced by a person who has reached age 55 but has not retired permanently from the workforce.

 What makes these new rules so interesting?

 When used appropriately, these new rules allow for some very effective tax planning when used in conjunction with a salary sacrifice strategy.

 The basic strategy is quite straightforward and involves these steps:

1.       Work out how much you need to meet your living expenses after tax.

2.       Lower your taxable income by making regular tax deductible contributions to your superannuation fund.

3.       Commence a regular monthly pension from your superannuation fund to replace the income forgone by the salary sacrifice arrangement.

 Case study 1 – the old way

 David works as a GP in a small practice.  He will soon turn 55 and has decided that he will reduce his working hours so that he can spend more time with his family, play more golf and go fishing. 

 David has negotiated a new salary of $96,000 including superannuation entitlements as he feels that his family can live quite comfortably on about $5,000 a month now that the mortgage is paid off.  As well, under this arrangement David should be able to save about $750 each month into his superannuation, which has a current balance of $440,000

 David will pay about $28,500 in income and superannuation contributions taxes over the year.

 Case study 2 – the new way

Julie is also a GP in a different practice, by coincidence her situation is exactly the same as David’s, however she decides that she will utilise the new transition to retirement rules in conjunction with salary sacrifice.

 Even though she needs $5,000 a month to live on, she decides to reduce her salary to $50,000 and to salary sacrifice $46,000 into superannuation.  Her after tax income will now be about $38,000, which means that she will need to draw a non commutable superannuation pension of about $22,000 a year in order to have her $5,000 each month to live on.

 Julie will pay about $15,000 in income and contributions taxes over the year.

 So who is better off?

 Both David and Julie start off with $440,000 in superannuation. David adds $7,650 after tax and gets a 6% investment return, after one year his superannuation balance will be about $474,000.

 Julie adds $39,100 into superannuation and also gets a 6% investment return, however she withdraws $22,000 in pension payments.  After one year her superannuation balance will be about $483,000.

 So by using this strategy, Julie will be about $9,000 better off than David after just one year.  Imagine the added benefit if they both work through to full retirement at age 65!

 But there’s more!  Because Julie’s superannuation pension comes with a 15% tax rebate, Julies after tax income will be about $63,000 a year or $250 each month more than David’s.

Do you have enough superannuation?

Superannuation is one of the most tax-effective ways of saving for retirement. But it is important to ensure that you save enough money to live comfortably.

 Planning for a secure financial future is important

 If we track the life of 95 people who are currently aged 25, over the next 40 years to retirement at age 65, we'd find that:

 The benefits of superannuation

 There are currently six Australians working for every retiree.  By 2020 this will reduce to three.  As Australians we can no longer rely upon the government to provide us with a pension on retirement.

 Not only are we an ageing population, we are also living longer.

 The percentage of your salary you need to invest in your superannuation will depend upon what percentage of your final income you want at retirement.  For example if you plan to retire in 15 years time, you need to invest 30% of your current salary now in order to receive 50% of your final salary as income in retirement.

 What do I need to know about superannuation?

 Superannuation is one of the most tax effective ways of saving for retirement.  The maximum rate of tax you pay on your earnings in your superannuation fund is 15%, whereas earnings on your normal savings outside of superannuation are taxed at your marginal tax rate up to 48.5%.  While superannuation can be transferred between superannuation funds, you must be aware that contributions to superannuation are almost always compulsory preserved.  This means that you cannot withdraw them until you are over 60 (over 55 if you were born before 1 July 1960) AND retired.

 What is the best way to have enough superannuation?

 Start saving right away.  When you invest regularly, you will enjoy the effects of compounding..  Compounding occurs when income earned on your savings is reinvested, so you earn more money on your initial capital as well as on any income you have already earned. 

 Case study

 Carol and Jim are both aged 40.  Carol decides to invest to invest $1,000 per month for the next 20 years in preparation for her retirement.

 Jim decides to invest $2,000 a month but does not begin his program until he reaches 50.  They both intend to retire at age 60 and it is assumed that their investment will generate 8% per annum after tax.  Even though they both invested $240,000, at retirement Carol will have almost $600,000, while Jim will have less than $400,000.  Carol’s savings are larger because of an extra ten years of compound interest.

 Successful investment requires you to regularly maintain your investment plan.  One of the best ways of doing this is to arrange a direct debit from your pay or bank account into the investment vehicle you have chosen. 

The key to financial success is to establish your financial goals, develop an investment plan and start saving regularly as soon as you can so that compound interest works for you.

 How do I choose a superannuation fund?

You should consider the following:

What is a self managed superannuation fund?

A Self Managed Superannuation Fund (SMSF) is a trust where money or assets are held and managed on behalf of up to four members to provide future retirement benefits. Subject to certain exceptions, all members of the Fund must be Trustees of the Fund or directors of the Fund’s corporate trustee.

The rules of every SMSF are set out in its trust deed, the operation of which is subject to Superannuation law. If a SMSF has more than four members at any time, it will be in breach of Superannuation laws and cease to qualify as a SMSF. It may lose its concessional tax treatment as a result.

A SMSF can invest in a wide range of assets (subject to some restrictions) including investment properties, shares and managed investments. A SMSF must invest in accordance with its documented investment strategy.

The Australian Taxation Office (ATO) oversees the regulation of SMSFs. The Superannuation Industry (Supervision) Act 1993 and Regulations (SIS) and related legislation govern Australian superannuation funds, including SMSFs, by:

The trustees of the fund may appoint accountants, investment advisers or administrators to assist in the management of the fund. However the ultimate responsibility for the management of the fund remains with the Trustees.

Control  

The Trustees decide on the Fund’s investment strategy and choose what the Fund’s assets are invested in, and how and when the Fund’s assets are invested. The members may give the Trustees directions about how their share of the Fund is to be invested in relation to the investment strategy. The Trustees are also responsible for monitoring the ongoing performance of the Fund’s investments.  

Flexibility

The Fund’s investments can be tailored to suit the members’ specific needs before and after retirement. The Trustees have the flexibility to make changes to the Fund’s investments quickly and easily, and the Fund may pay a pension to the member on their retirement without the need to sell down assets.

Investment Choice

Self Managed Superannuation Funds (SMSF) are (subject to certain limitations) generally able to invest in an extensive range of investments available to Australian investors including investments not typically available in other superannuation funds such as investment properties, direct Australian and international shares and direct fixed interest.

Longevity and estate planning

SMSFs have an unlimited life span and may continue to provide benefits into the future for the members and their dependants, subject to applicable Superannuation laws.

Contributions  

Subject to Superannuation laws, SMSFs can accept the following types of contribution:

In specie contributions

Subject to the investment rules, a member may be able to transfer certain assets that are currently held in their name into their SMSF in place of cash contributions. These transfers may be subject to stamp duty and tax.

Cost Savings  

Depending on the individual circumstances of the members, a SMSF may provide cost savings compared with other types of superannuation funds.

How to pay less superannuation excess benefits tax and superannuation surcharge

A frequent criticism of the taxation of superannuation in Australia has been the potential for multiple taxes to apply to the same superannuation money at different points in its lifecycle.  For example, total taxes on a taxable contribution that eventually gives rise to an excess benefit could be as high as 64%, when contributions tax, surcharge and excess benefits tax are taken into account.

Recent legislative changes have addressed this issue, so that the tax on an excess benefit paid from superannuation after 1 July 2002 should be no more than 48.5%. The measures put in place to achieve this result may provide you with some tax saving opportunities, provided you plan carefully before lump sum superannuation benefits are withdrawn.

How is this achieved?

Rather than trying to track taxable contributions to the point of withdrawal, the new measure considers entry and exit taxes separately and provides relief both for surcharge and excess benefits. It is a two part process that should be done in conjunction with your financial planner.

Step One

The first step in the process reduces the tax rate on excessive benefits.

The next step reduces a person’s surcharge liability by reducing their surchargeable contributions when an excessive Eligible Termination Payment (ETP) is withdrawn from the same fund, in the same financial year that the contributions were made.

Strategies

Many common retirement planning strategies can be

Delaying receipt of a superannuation ETP  – many people choose to delay taking an ETP until the start of a new financial year in order to reduce benefits tax by using the higher Reasonable Benefits Limits and post 83 tax free thresholds. However, where an excessive superannuation ETP is withdrawn in the new financial year when no surchargeable contributions are made, there will be no reduction in surcharge. This may result in a higher overall tax liability than if the ETP was taken in the current year. Analysis is therefore required to determine the most tax-effective time to take your benefits, and will depend upon your excess, surchargeable contributions and service period.

Consolidation of superannuation accounts – if benefits in multiple superannuation funds are consolidated prior to withdrawal to make use of an earlier service period, the surchargeable contributions reduction may not be available. Care should be taken to consolidate benefits into the fund to which all (or the majority) of surchargeable contributions were made during the financial year. If this is not possible, careful analysis is needed to determine what gives you the better tax outcome – a reduction in your surcharge orlower ETP tax.

Employer ETP’s – another strategy area that could be affected by the new measures is the cash out or rollover decision associated with the receipt of a large employer ETP. When an employer ETP is rolled over to a superannuation fund, an amount of surchargeable contributions may be received by the fund, depending upon the individual’s post 20 August 1996 service. The subsequent cash-out of this amount as an excessive ETP from the superannuation fund, in the same financial year as the rollover, may result in both a lower rate of excess benefits tax and a reduction in surchargeable contributions, making a rollover-then-cash out strategy more tax effective.

Overcoming the barriers to wealth

Have you ever wondered why it seems that some people ‘get rich’ while you don’t seem to be getting anywhere? hat steps can you take to get you on the path to wealth creation?

1. Examine your barriers and change them (if you can)

There are two types of barriers to wealth creation.

·       The emotional barrier – in particular hesitation, when you delay taking the action you need to take to get you on the right path to wealth creation.

·       The physical barrier – events such as divorce, illness, or the death of a partner can have an adverse effect on your financial situation.

Look at the things that may be stopping you from getting ahead financially. If you identify barriers that you can control, try to change them.

2. Look at your budget

Prior to starting your savings plan, you need to consider your budget. Do you have a budget? Before you can make any inroads into wealth creation, you need to understand your income and your outlays. What do you spend your income on? Pay close attention to the non-essential items and decide which of these you could do without in order to save more money.

3.Take a good look at your spending habits

Are you an ‘impulse buyer’? If so, try thinking before you buy, especially before you go ahead and buy that ‘luxury’ item. Weigh up the cost and decide if you can really afford it, or better still, ask yourself if you need it – the sporty car, the boat, the holiday home? One alternative to buying such items is to hire them as and when you feel you need them. Although the cost of hiring a boat (for example) may seem prohibitive, if you compare this outlay to the cost of buying and maintaining your own boat, then it makes sense to hire instead.

4. Start a realistic savings plan

In order to create wealth, you need money to invest. You need to take a disciplined approach to saving. For a savings plan to work, you must decide on a fixed amount you can save out of your income and stick to it. Put the money aside and be determined to live on what’s left over. When you realise you can still live comfortably on less, it’s easy!

5. Construct a sound financial plan

A comprehensive financial plan will take into account these key aspects of your personal situation:

·       your tolerance to investment risk

·       your family obligations and other liabilities

·       your financial goals.

The way you invest will determine how much wealth you create and a good financial planner can help you choose the investments to suit your situation. When you’ve finalised the plan, put it into action. Don’t try to time the markets – procrastination often means missed opportunities.

6. Insure your assets

 Other events can stand in the way of wealth building, such as having property lost or stolen. You may be unfortunate enough to suffer a traumatic illness, become disabled, or die an untimely death. If you have a family and debts, it’s vital to insure against these events so you can rest assured your family won’t be left in dire financial straits. If you’re the only breadwinner, you should cover yourself against loss of income in the event you become seriously ill or disabled.

So don’t sit there waiting for a miracle to happen. Overcome your barriers and put yourself on the road to riches today.

Share investing in a lower return environment

Events of recent years have significantly changed the investment environment going forward. From an investment market perspective, the recent bear market has changed the mindset of investors in terms of expected investment returns and risk appetite. Australian shares historically less volatile

Further, events such as September 11 and the Iraq war have added an additional element of uncertainty, with heightened geo-political risk likely to be a permanent feature of the investment landscape. Overlaying these factors is the structural adjustment to a lower inflation and interest rate environment, both in Australia and the global economy. This is expected to result in lower long-term nominal returns, combined with lower business cycle volatility.

The key question

A key question for Australian investor is where do equities, and particularly Australian shares, fit within an investment portfolio? A period of long-term lower investment returns may mean you need to reexamine your return expectations and investment asset allocations. Depending on your risk/return objectives, you may need to increase your exposure to growth assets (such as equity) in order to achieve your investment objectives.

Going forward it will be important to focus on the total return of your portfolio – that is both capital gain and dividend. During the bull run of the 1990s, investors tended to be more focused on the capital gain as this typically delivered the bulk of the total return of an investment. Looking ahead, capital gains are expected to be smaller, and as a result, dividends are likely to make up a greater share of the total return.

The Australian perspective

Australia’s broad market currently offers a relatively attractive dividend yield of around 4%, and once franking credits are taken into account this equates to a yield of around 5%.This compares with a dividend yield for the global market of an average of around 2%.

Another important feature of the Australian market, within a broader equity portfolio, is that it has tended to exhibit lower volatility of return, relative to global equities. Over the longer-term, from a risk/return perspective, Australia offers an attractive total return, with a lower level of risk, relative to global equity markets. This suggests that Australia should be an integral element of an investor’s equity portfolio.

However, while the Australian market has outperformed global equities significantly in recent years, this outperformance is expected to pull back as the recovery in the global economy slowly gains traction. Offsetting some of the gain from offshore equities, however, is the likelihood of some further strength in the Australian dollar in the coming six to twelve months.

Splitting up and splitting assets

New rules have come into effect allowing for superannuation entitlements to be split when a couple divorces. Changes to the Family Law Act and Superannuation legislation accommodate the splitting of superannuation upon the breakdown of marriage, either through an agreement between the spouses or a court order. Put simply, the new law treats superannuation entitlements as ‘property’, enabling them to be valued and split.

Prior to 28 December 2002, superannuation benefits could not be split upon the breakdown of a marriage, although their value could be taken into account when determining a property settlement. This position resulted in a person with a substantial superannuation balance retaining their super (but not being able to access it), while the other party was awarded other assets including the house and the car.

The courts now have the power to split super-annuation interests and flag superannuation for a future split. This means the Family Court has the power to split superannuation upon payment or alternatively, freeze superannuation so it can be split at a later date.

 How can this be done?

A superannuation agreement allows parties to split a

 What happened with Tom and Nicole?

 After nearly ten years of marriage, Tom and Nicole have decided to divorce. Nicole is 54 years of age and has an account with a public offer super fund with an eligible start date of 23 February 1981.The balance in her fund is minimal, as she has not worked for several years. Tom is 64 years of age and he is the only member of the T & N Self Managed Super Fund. He has an eligible start date of 1 January 1981 and has a current balance of $1,000,000. The components of his superannuation are as follows:

Concessional amount: $ 100,000

CGT Exempt amount: $ 70,000

Undeducted contributions: $ 500,000

Pre-July 83 component: $ 93,696

Post-June 83 component: $ 236,304

Tom and Nicole have entered into a financial agreement that states upon divorce, Nicole will receive 50% of Tom’s superannuation money. Nicole’s components of the payment split will be as follows:

Concessional amount: $ 50,000

CGT Exempt amount: $ 35,000

Undeducted contributions: $ 250,000

Pre-July 83 component: $ nil

Post-June 83 component: $ 165,000*

*Includes 50% of Tom’s pre-July 83 entitlement

 The splittable amount of superannuation will be taken proportionally from Tom’s unrestricted non-preserved, restricted non-preserved and preserved components. The components will be the same in Nicole’s account. However, if Tom transfers some preserved components to Nicole, she will have to meet her own condition of release before she can access these monies.

 Are there any exclusions?

 It is important to note that the new laws do not apply to same sex couples or couples in a de facto relationship. The new measures applying to superannuation upon divorce are quite complex. It is also important to note that these new measures are not compulsorily enforced, that is, superannuation monies do not have to be split upon divorce – the new legislation simply means that they can be.

Saving $132,000 off your mortgage

Now may be a good time to review your mortgage and home loans.  In a recent study Westpac Banking Corporation found that 70% of Australians have mortgages funded at the old standard variable rate, currently 6.57%.  As these loans were written in a less competitive market than today’s, there is now the opportunity of refinancing your borrowings at up to a 0.7% discount off standard variable rates for the life of the new loan. 

On a $250,000 loan over twenty-five years the saving this represents would equate to approximately $65,500. Not only would there be a saving of $65,500, but by maintaining the same rate of monthly payment that you had with your old loan, the term of the loan would reduce by almost three and a half years to 21.7 years.

The larger your loan the bigger the savings become. On a $500,000 loan over twenty-five years the saving would equate to approximately $132,500 and the term of the loan would also reduce by almost three and a half years to 21.7 years.

There are even greater savings to be made if you make use of the professional loan packages that some banks offer.  Under a professional package, by paying a fixed annual fee of in the order of $300 all other bank fees including the new loan application fees are waived.  Furthermore, if your loan is for an investment or business purpose, then the $300 annual fee could be tax deductible as well. All of this means that the costs associated with refinancing your loan should be minimal as the up front establishment fees will be waived, and stamp duty is not applicable if you are refinancing an existing mortgage.

You may also wish to consider refinancing your current principal and interest facilities, to interest only.  In either event your current repayment schedule may be better structured to suit your requirements.

Should you have more than one mortgage you could consider consolidating them with one lender.  As well as accessing cheaper rates, by consolidating your finances the administration of your finances can be significantly reduced and simplified thus saving your time and effort. 

Perhaps of greater importance however, is the potential of effectively “creating” available capital within your existing property portfolio.   Optimising your mortgages in this manner may enable you to under take your next investment without having to contribute any additional capital.  This happens for two reasons: First, provided that you have adequate security, by moving to an interest only loan, your monthly payments reduce and may become fully tax deductible when borrowing for the purpose of investment or business, thus increasing your monthly cash flow enabling you fund an increased level of borrowing.  Secondly, this benefit is extended even further when your new loan is at a lower interest rate than the old loan as illustrated above.

Money for life!

Our life goals are diverse and ultimately they need to be funded one way or another.

First of all it is helpful to prioritise our life goals and this may not always be easy as we often confuse something that is urgent with something that is important.  Urgent tasks can easily overwhelm important goals (not to mention ourselves).

One simple technique that we can use here is to take a few moments to visualise how we would be living our lives right now if we knew we only had one year to live.  Then shorten the time frame to six months, three months, one month, one week and then one day.

We can also extend this exercise by considering the regrets that we may have about things done and not done.

At this stage you may be asking what all of this has to do with financial planning.  I would suggest that unless we are aware of our life goals and integrate them with our financial goals, then the outcome is likely to be one of disappointment.

Most of us seek financial security, want to provide for and spend time with family and feel a sense of satisfaction in our work.  However financial security can be an elusive goal, one that keeps forever moving.  Some people will never feel secure financially because they create ever more expensive lifestyles for themselves, which can become ever harder to maintain (especially as retirement looms).  And of course the more we have, the more fearful we may become of losing it.

To maintain an ever more expensive lifestyle requires a constantly rising income.  For most medical practitioners, income will be limited by the number of patients that can be seen in a day.  The more you see, the more you earn but the more it costs in terms of the quality of work done and the quality of life lived.

So what do you do if you don’t want to work even harder?  You can work smarter (say by seeing fewer patients and charging more), you can look at more effective ways of using your income and capital and / your can spend less. 

Are you spending money on things that perhaps you don’t need, simply out of habit?  Do you have a well thought out savings and investment strategy?  Are your borrowings giving you the maximum tax benefits?

Perhaps the two most important financial questions are: do you know how much you earn after all expenses associated with your practice and do you know precisely where you spend your money?  The thing to find out is how much you are worth – that is assets less liabilities.  Also consider the effect of death or disablement on your family’s cash flow and net worth.

Once you know the answers to these questions, you can then exercise more control over your life.  For example if you want to cut back your hours of work to spend more time with friends, family, on the golf course or whatever, then by knowing where your money goes, you may be able to identify areas of expenditure that can be reduced. 

In other words you can reset your priorities.

Holistic Integration of Your Life and Money

Many people tend to look at financial planning from a rather narrow perspective, that is they place a lot of emphasis upon finding the so called best investment Then if they happen to find it, they then worry about when is the best time to sell and what to invest in next.

In my view a more integrated view makes a lot more sense.  First of all the starting point should not be ”what do I want to invest in?”, rather it should be “what is important about money to me?”.  The answers to this question then naturally flow into determining your life goals.  Once this has been done, we can then complete the circle and find the best way to financially achieve these life goals.

So what are some life goals that people may have?

·         Security

·         Time with family and friends

·         Deep relationships

·         Providing for family

·         A satisfying vocation