Why superannuation fund fees matter

The fees you pay on your super could have a material impact on how you retire, which is why it’s important to understand how they work.

A quick internet search of the term “super fees” turned up other questions people ask, including “what fees are charged on superannuation?”, “do all super (funds) have fees?” and “how do you calculate super fees?”.

While highly unscientific, this little experiment illustrates an issue that many Australians grapple with when it comes to trying to understand what fees they are charged on their superannuation investments.

But before we break down the various aspects of fees that you should be aware of, perhaps the more vital point to understand here is why fees matter in the first place.

The short answer is that the fees you pay on your super could have a material impact on how you retire. Analysis by the Productivity Commission found that an increase in fees of just 0.5 per cent can cost a typical full-time worker around 12 per cent of their super balance – or $100,000 – by the time they reach retirement. It is not an insignificant amount and given that it is one of the largest assets you will have in your lifetime, it is really important to understand exactly what you are paying for.

Types of fees

There are different types of fees that make up the overall fee you pay but generally, your total fees comprise of an administration fee, an investment fee and a transaction fee. Another fee that you should be aware of are the costs you incur when you make a contribution to your account, switch between investment options and make a withdrawal. These are costs typically associated with buy/sell spreads incurred for the buying or selling of underlying investments and depending on the fund, are usually deducted from your returns. And while this is not a fee, do note that there are tax implications to consider when making an additional contribution, particularly if you’ve exceeded your concessional limit.

One way of checking what you currently pay is by taking a look at the Product Disclosure Statement (PDS) of your super fund, or by checking your annual statement. You can also use the ATO’s YourSuper comparison tool to compare the fees you’re currently paying against other funds, or you can call us on |PHONE|.

Another ‘fee’ or cost to consider is that of insurance premiums, which are typically deducted from your super balance. Most funds automatically provide you with life cover (also known as death cover) and total permanent disability (TPD) while it is an opt-in for others. Some funds also automatically provide income protection insurance while others don’t. Always consider what you need before deciding to keep or cancel your insurance.

Last but not least, another fee you could be charged relates to advice. Your super fund could provide specific types of financial advice if you ask for it, and charge a fee if certain criteria for the provision of advice are met. This fee is non-ongoing (ie charged only when you require the service) and your consent is required before it is deducted.

Comparing like for like

When comparing fees between super funds, it is also important to understand if you are comparing products in the same category. For instance, just like comparing the cost of a bicycle and the cost of a motorcycle would not make sense even though both are vehicles that can get you from point A to point B, comparing fees of products from different categories would not be meaningful.

If you are currently invested in an Australian equities fund, comparing the fees you’re paying with another fund’s cash investment option is unlikely to be useful. Rather, assessing fees between funds that have similar investment styles and asset allocation mixes would be closer to a like for like comparison.

Is it right for you?

While knowing how much you’re paying for a fund is important, knowing what you’re paying for and whether it is right for you is even more so. While the fees of a fund mostly invested in equities (typically labelled a High Growth fund) might be low, the risks of investing in said fund might be inappropriate for a member looking to balance income and capital growth because they are transitioning into or already in retirement. Therefore, the discussion around low fees for such a product would likely be moot for this member.

Similarly, looking at the fees of a single sector fund may be a good starting point but if your investment goals and strategy involves investing in a mix of asset classes, then don’t overlook the multiple sets of fees that are incurred when investing in multiple single sector options.

Every dollar contributed to your super is money you’ve worked hard for – that, and the fact that it will likely constitute a large component of your overall wealth and a critical component in funding your retirement, is reason enough to pay more attention to the what, how and whys of super fund fees.

Talk to us to find out more about your superannuation.

Source: Vanguard

Reproduced with permission of Vanguard Investments Australia Ltd

Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) is the product issuer. We have not taken yours and your clients’ circumstances into account when preparing this material so it may not be applicable to the particular situation you are considering. You should consider your circumstances and our Product Disclosure Statement (PDS) or Prospectus before making any investment decision. You can access our PDS or Prospectus online or by calling us. This material was prepared in good faith and we accept no liability for any errors or omissions. Past performance is not an indication of future performance.

© 2022 Vanguard Investments Australia Ltd. All rights reserved.

Important:
Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business nor our Licensee takes any responsibility for any action or any service provided by the author. Any links have been provided with permission for information purposes only and will take you to external websites, which are not connected to our company in any way. Note: Our company does not endorse and is not responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page.

Tax Alert June 2023

Budget incentives and crackdowns on unpaid tax debts and rental deductions

Although this year’s Federal Budget was short on big changes when it came to tax, there still have still been some important developments in this area. Here are some of the latest developments in the world of tax.

Small business tax incentives and write-offs

The budget ushered in some valuable new tax incentives for small businesses, including halving the increase in quarterly tax instalments from 12 per cent to 6 per cent for both GST and income tax during 2023-24.

The government also introduced a bonus 20 per cent deduction for businesses with turnovers under $50 million when they spend on energy saving upgrades. Up to $100,000 of total expenditure will be eligible, with the maximum bonus tax deduction being $20,000 per business.

Although smaller than the previous year, the instant asset write-off continues in 2023-24 with up to $20,000 available for immediate deduction on eligible assets.

The planned third tranche of personal income tax cuts due to start next financial year also remained in place, while >the low and middle income tax offset was not extended.

Super changes for employers

Another significant tax change announced in the budget will affect employers. From 1 July 2026 employers will be required to pay their Super Guarantee (SG) obligations at the same time they pay employee salary and wages.

The ATO has received additional resources to help it detect unpaid super payments earlier.

Employers also need to remember the SG amount for employee super rises to 11 per cent from 1 July 2023.

Tax debt warnings sent out

The ATO is continuing to write to directors of companies with tax debts warning if the company hasn’t paid the amount owing or contacted it to make other arrangements, a director penalty notice(DPN) may be issued.

DPNs are issued to current directors and anyone who was a director at the time the company failed to pay. They make directors personally liable for failure to meet pay-as-you-go withholding (PAYGW), GST and Super Guarantee Charge obligations.

Directors receiving these letters need to arrange payment of the overdue amount or enter into a payment plan.

Data-matching adds investment properties

Residential investment property loans (RIPL) are the latest target of the ATO’s increasingly wide-ranging data-matching program.

Data will be obtained from financial institutions including all the major banks, regional banks and building societies.

The information is being collected following the ATO’s identification of a tax gap of $1 billion for individuals in the 2020-21 financial year due to incorrect reporting of rental property expenses.

Self-education expenses under spotlight

The ATO is currently developinga new draft taxation ruling covering the deductibility of self-education expenses incurred by an employee or an individual carrying on a business.

The draft ruling will reflect the current rules in this area following repeal of several sections of the Income Tax Assessment Act and some new legal decisions. The new ruling is expected to be completed in late June.

Taxpayers claiming self-education expenses recently had the existing requirement to exclude the first $250 of deductions removed.

GST fraud enforcement continues

Search warrants were executed in three states against individuals suspected of promoting the fraud. This follows previous compliance action against more than 53,000 people, with two individuals sentenced to jail time for their GST fraud activities.

Cyber safety checklist released

The ATO is again emphasising the importance of business cyber safety by releasing a new checklist for small businesses.

The tips include simple ideas for keeping business and client data safe from cybercriminals, such as turning on automatic updates and using multi-factor authentication when possible.

Resources for training staff on preventing, recognising, and reporting cyber incidents are available from the government’s Australian Cyber Security Centre.

Why is ageing hard to talk about?

In life, many of us are totally at ease and comfortable talking to our family and friends about many topics. However, for whatever reason, there are certain subjects that we’re either reluctant or feel uneasy to discuss openly – typically they are love and relationships, politics, religion and money … call them the “taboo topics”.

Add another taboo topic to the list. That is the topic of ageing. As we age and reach our elderly years, asking for some help to do things to make life easier can be really hard to bring up in conversation.

When families get together, there are things we just notice but we’re reluctant to say anything. We notice that Dad might be starting to forget things or Mum is having difficulty getting out of her chair and seems a bit uneasy on her feet. Any attempt to say something is usually met either in silence or the words “I’m okay, just getting older” are uttered.

And for many families that’s where things are left.

Then there’s a crisis…

Families are then drawn together when there’s been a crisis such as a fall or a hospital admission. Then discussions and decisions are usually being made under high stress and emotion in hospital hallways and carparks. This is not an optimal starting point.

Making decisions and what’s the trade-off…

Like other life decisions, when it comes to ageing decisions, some are relatively simple to make with minimal consequences, whilst others can be very difficult.  When making decisions, there are usually “trade-offs” to be considered.

The impact of these trade-offs usually increases as the importance of the decision increases. Therefore, to make the best possible decision, it’s important to consider as many options as humanly possible.

So what needs to be thought about…

When it comes to ageing and getting some help there are usually many options to consider and everyone is different. For instance, when getting some help in the home, exactly what help is required and possible now and into the future, who will provide the help and at what cost? If moving into an aged care facility, what care will be required, where will the new home be, what to do with the family home, and how to pay for this are all decisions that need to be made and there are usually many options to consider.

So how do families identify these options and make appropriate decisions?

Where do you start? What questions do you ask and who to?  Are the answers you get back in your best interest … or someone else’s? What needs to be done and when? What happens if there’s a problem?

How Family Aged Care Advocates fit in…

That’s where Family Aged Care Advocates step in. We provide guidance and support to help families identify the relevant options to help you make informed decisions to get the best care outcomes for the people you love and care for most. We’re independent aged care specialists only interested in the right outcomes for your family … that’s all that matters and there’s no trade-off with that.

Material contained in this publication is a summary only and is based on information believed to be reliable and received from sources within the market. It is not the intention of RGM Financial Planners Pty Ltd ABN 36 419 582 Australian Financial Services Licence Number 229471, RGM Accountants & Advisors Pty Ltd ABN 69 528 723 510 that this publication be used as the primary source of readers’ information but as an adjunct to their own resources and training. No representation is given, warranty made or responsibility taken as to the accuracy, timeliness or completeness of any information or recommendation contained in this publication and RGM and its related bodies corporate will not be liable to the reader in contract or tort (including for negligence) or otherwise for any loss or damage arising as a result of the reader relying on any such information or recommendation (except in so far as any statutory liability cannot be excluded).

Liability limited by a scheme approved under Professional Standards Legislation.

The advantages of investing early

You may have heard it said, “No risk, no reward.” But did you know that time can actually decrease your risk while increasing your reward? 

Investing: Risky business?

When some people think of investing, they focus on the potential for great rewards—the possibility of picking a winning share that will increase in value over time.

Other people focus on the risk—the possibility of losing everything in a market crash or on a bad stock pick.

Who’s right? Well, it’s true that all investing involves some risk. It’s also true that investing is one of the best ways to build your wealth over time.

In fact, there’s typically a direct relationship between the amount of risk involved in an investment and the potential amount of money it could make.

Different types of investments fall all along this risk-reward spectrum. No matter what your goal is, you can find investments that could help you reach your goal without taking on unnecessary risk.

Time is on your side

Here’s the secret ingredient that can make investments less risky: time.

But there’s a caveat.

If you invest in just a handful of investments or only within the same industry, time won’t necessarily make your portfolio any safer.

The reason it works for diversified investment portfolios that incorporate a range of asset classes (i.e. bonds), regions and markets is that over time, there tend to be more “winners” than “losers.” And the investments that gain money offset the ones that don’t do as well.

The more time you have, the more you benefit from compounding

Not only can the passage of time help lower your investment risk, it can potentially increase the rewards of investing.

Imagine you place one checker on the corner of a checker board. Then you place two checkers on the next square and continue doubling the number of checkers on each following square.

If you’ve heard this brainteaser before, you know that by the time you get to the last square on the board—the 64th—your board will hold a total of 18,446,744,073,709,551,615 checkers.

While there’s no guarantee you can double your money every year, the principle behind this – known as “compounding” – is important to understand that when your starting amount is higher, your increases are higher too. And over time, it can add up to be a material increase.

For example, if you earn 6% on a $10,000 investment, you’ll make $600 in the first year. But then you start the second year with $10,600—during which your 6% returns will net you $636. This is a hypothetical example that does not take into consideration investment costs or taxes.

In the 20th year of this example, you’ll earn more than $1,800—and your balance will have increased more than 200%.

A caveat: reinvesting is key

If you take your earnings out of your account and spend them every year, your balance will never get any bigger—and neither will your annual earnings. So instead of making more than $20,000 over 20 years in the hypothetical example above, you’d only collect your $600 every year for a total of $12,000.

If you instead leave your money alone, your “earnings on earnings” will eventually grow to be larger than the earnings on your original investment – and that’s the power of compounding!

Understanding long-term investing can be confusing, that is why we are here to help. Contact us today to find out more. 

Source: Vanguard

Reproduced with permission of Vanguard Investments Australia Ltd

Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) is the product issuer. We have not taken yours and your clients’ circumstances into account when preparing this material so it may not be applicable to the particular situation you are considering. You should consider your circumstances and our Product Disclosure Statement (PDS) or Prospectus before making any investment decision. You can access our PDS or Prospectus online or by calling us. This material was prepared in good faith and we accept no liability for any errors or omissions. Past performance is not an indication of future performance.

© 2022 Vanguard Investments Australia Ltd. All rights reserved.

Important:
Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business nor our Licensee takes any responsibility for any action or any service provided by the author. Any links have been provided with permission for information purposes only and will take you to external websites, which are not connected to our company in any way. Note: Our company does not endorse and is not responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page.

Mortgage vs super

With interest rates on the rise and investment returns increasingly volatile, Australians with cash to spare may be wondering how to make the most of it. If you have a mortgage, should you make extra repayments or would you be better off in the long run boosting your super?

The answer is, it depends. Your personal circumstances, interest rates, tax and the investment outlook all need to be taken into consideration.

What to consider

Some of the things you need to weigh up before committing your hard-earned cash include:

Your age and years to retirement

The closer you are to retirement and the smaller your mortgage, the more sense it makes to prioritise super. Younger people with a big mortgage, dependent children, and decades until they can access their super have more incentive to pay down housing debt, perhaps building up investments outside super they can access if necessary.

Your mortgage interest rate

This will depend on whether you have a fixed or variable rate, but both are on the rise. As a guide, the average variable mortgage interest rate is currently around 4.5 per cent so any money directed to your mortgage earns an effective return of 4.5 per cent.i

When interest rates were at historic lows, you could earn better returns from super and other investments; but with interest rates rising, the pendulum is swinging back towards repaying the mortgage. The earlier in the term of your loan you make extra repayments, the bigger the savings over the life of the loan. The question then is the amount you can save on your mortgage compared to your potential earnings if you invest in super.

Super fund returns

In the 10 years to 30 June 2022, super funds returned 8.1 per cent a year on average but fell 3.3 per cent in the final 12 months.ii In the short-term, financial markets can be volatile but the longer your investment horizon, the more time there is to ride out market fluctuations. As your money is locked away until you retire, the combination of time, compound interest and concessional tax rates make super an attractive investment for retirement savings.

Tax

Super is a concessionally taxed retirement savings vehicle, with tax on investment earnings of 15 per cent compared with tax at your marginal rate on investments outside super.

Contributions are taxed at 15 per cent going in, but this is likely to be less than your marginal tax rate if you salary sacrifice into super from your pre-tax income. You may even be able to claim a tax deduction for personal contributions you make up to your annual cap. Once you turn 60 and retire, income from super is generally tax free. By comparison, mortgage interest payments are not tax-deductible.

Personal sense of security

For many people there is an enormous sense of relief and security that comes with having a home fully paid for and being debt-free heading into retirement. As mortgage interest payments are not tax deductible for the family home (as opposed to investment properties), younger borrowers are often encouraged to pay off their mortgage as quickly as possible. But for those close to retirement, it may make sense to put extra savings into super and use their super to repay any outstanding mortgage debt after they retire.

These days, more people are entering retirement with mortgage debt. So whatever your age, your decision will also depend on the size of your outstanding home loan and your super balance. If your mortgage is a major burden, or you have other outstanding debts, then debt repayment is likely a priority.

All things considered

As you can see, working out how to get the most out of your savings is rarely simple and the calculations will be different for everyone. The best course of action will ultimately depend on your personal and financial goals.

Buying a home and saving for retirement are both long-term financial commitments that require regular review. If you would like to discuss your overall investment strategy, give us a call.


https://www.finder.com.au/the-average-home-loan-interest-rate

ii https://www.chantwest.com.au/resources/super-members-spared-the-worst-in-a-rough-year-for-markets

How to manage rising interest rates

Rising interest rates are almost always portrayed as bad news, by the media and by politicians of all persuasions. But a rise in rates cuts both ways. 

Higher interest rates are a worry for people with home loans and borrowers generally. But they are good news for older Australians who depend on income from bank deposits and young people trying to save for a deposit on their first home.

Rising interest rates are also a sign of a growing economy, which creates jobs and provides the income people need to pay the mortgage and other bills. By lifting interest rates, the Reserve Bank hopes to keep a lid on inflation and rising prices. Yes, it’s complicated.

How high will rates go?

In early May, the Reserve Bank lifted the official cash rate for the first time since November 2010, from its historic low of 0.1 per cent. The reason the cash rate is watched so closely is that it flows through to mortgages and other lending rates in the economy.

To tackle the rising cost of living, the Reserve Bank expects to lift the cash rate further, to around 2.5 per cent.i Inflation is currently running at 5.1 per cent, which means annual wages growth of 2.4 per cent is not keeping pace with rising prices.ii

So what does this mean for household budgets?

Mortgage rates on the rise

The people most affected by rising rates are likely those who recently bought their first home. In a double whammy, after several years of booming house prices the size of the average mortgage has also increased.

According to CoreLogic, even though price growth is slowing, the median home value rose 16.7 per cent nationally in the year to April to $748,635. Prices are higher in Sydney, Canberra and Melbourne.

CoreLogic estimates a 1 per cent rise would add $486 a month to repayments on the median new home loan in Sydney, and an additional $1,006 a month for a 2 per cent rise.

While the big four banks are not obliged to pass on the cash rate changes, in May they passed on the Reserve Bank’s 0.25 per cent increase in the cash rate in full to their standard variable mortgage rates which range from 4.6 to 4.8 per cent. The lowest standard variable rates from smaller lenders are below 2 per cent.

Still, it’s believed most homeowners should be able to absorb a 2 per cent rise in their repayments.iii

The financial regulator, APRA now insists all lenders apply three percentage points on top of their headline borrowing rate, as a stress test on the amount you can borrow (up from 2.5 per cent prior to October 2021).iv

Rate rise action plan

Whatever your circumstances, the shift from a low interest rate, low inflation economic environment to rising rates and inflation is a signal that it’s time to revisit some of your financial assumptions.

The first thing you need to do is update your budget to factor in higher loan repayments and the rising cost of essential items such as food, fuel, power, childcare, health and insurances. You could then look for easy cuts from your non-essential spending on things like regular takeaways, eating out and streaming services.

If you have a home loan, then potentially the biggest saving involves absolutely no sacrifice to your lifestyle. Simply pick up the phone and ask your lender to give you a better deal. Banks all offer lower rates to new customers than they do to existing customers, but you can often negotiate a lower rate simply by asking.

If your bank won’t budge, then consider switching lenders. Just the mention of switching can often land you a better rate with your existing lender.

The challenge for savers

Older Australians and young savers face a tougher task. Bank savings rates are generally non-negotiable, but it does pay to shop around.

The silver lining is that many people will also see increased interest rates on their savings accounts as the cash rate increases. By mid-May only three of the big four banks had increased rates for savings accounts. Several lenders also announced increased rates for term deposits of up to 0.6 per cent.v

High interest rates traditionally put a dampener on returns from shares and property, so commentators are warning investors to prepare for lower returns from these investments and superannuation.

That makes it more important than ever to ensure you are getting the best return on your savings and not paying more than necessary on your loans. If you would like to discuss a budgeting and savings plan, give us a call on 03 5120 1400.

https://www.rba.gov.au/speeches/2022/sp-gov-2022-05-03-q-and-a-transcript.html

ii https://www.abs.gov.au/

iii https://www.canstar.com.au/home-loans/banks-respond-cash-rate-increase/

iv https://www.apra.gov.au/news-and-publications/apra-increases-banks

https://www.ratecity.com.au/term-deposits/news/banks-increased-term-deposit-interest-rates

Material contained in this publication is a summary only and is based on information believed to be reliable and received from sources within the market. It is not the intention of RGM Financial Planners Pty Ltd ABN 36 419 582 Australian Financial Services Licence Number 229471, RGM Accountants & Advisors Pty Ltd ABN 69 528 723 510 that this publication be used as the primary source of readers’ information but as an adjunct to their own resources and training. No representation is given, warranty made or responsibility taken as to the accuracy, timeliness or completeness of any information or recommendation contained in this publication and RGM and its related bodies corporate will not be liable to the reader in contract or tort (including for negligence) or otherwise for any loss or damage arising as a result of the reader relying on any such information or recommendation (except in so far as any statutory liability cannot be excluded).

Liability limited by a scheme approved under Professional Standards Legislation.

Federal Budget 2021-22 Analysis

Investing in recovery

In his third and possibly last Budget before the next federal election, Treasurer Josh Frydenberg is counting on a new wave of spending to ensure Australia’s economic recovery maintains its momentum.

As expected, the focus is on jobs and major new spending on support for aged care, women and first-home buyers with some superannuation sweeteners for good measure.

With the emphasis on spending, balancing the Budget has been put on the back burner until employment and wages pick up.

The big picture

This year’s Budget is based on a successful vaccine rollout which would allow Australia’s borders to open from mid-2022. The Treasurer says he expects all Australians who want to be vaccinated could have two doses by the end of the year.

So far, the economic outlook is better than anyone dared hope at the height of the pandemic just a year ago, but challenges remain.

Unemployment, at 5.6%, has already fallen below pre-pandemic levels and is expected to fall sharply to 5% by mid-2022. But wage growth remains stubbornly low, currently growing at rate of 1.25% and forecast to rise by just 1.5% next year. This is well below inflation which is forecast to rise 3.5% in 2020-21 and 1.75% in 2021-22.

The treasurer forecast a budget deficit of $161 billion this financial year (7.8% of GDP), $52.7 billion less than expected just six months ago, and $106.6 billion (5% of GDP) in 2021-22.

Net debt is forecast to increase to an eye-watering $617.5 billion (30% of GDP) by June this year before peaking at $920.4 billion four years from now.

The large improvement in the deficit has been underpinned by the stronger than expected economic recovery and booming iron ore prices. Iron ore prices have surged 44% this year to a record US$228 recently.i

Funding for aged care

The centrepiece of the Budget is a $17.7 billion commitment over five years to implement key recommendations of the Aged Care Royal Commission. This includes $7.8 billion to reform residential aged care and $6.5 billion for an immediate investment in an additional 80,000 Home Care Packages.

In other health-related initiatives, the Treasurer announced additional funding of $13.2 billion over the next four years for the National Disability Insurance Scheme, taking total funding to $122 billion.

And in recognition of the toll the pandemic has taken on the nation’s mental health, the Government will provide an extra $2.3 billion for mental health and suicide prevention services.

Focus on Women

After criticism that last year’s Budget did not do enough to support women’s economic engagement, this Budget works hard to restore gender equity. The Women’s Budget Statement outlines total spending of $3.4 billion on women’s safety and economic security.

Funding initiatives include:

  • Funding for domestic violence prevention more than doubled to at least $680 million.
  • Funding for women’s health, including cervical and breast cancer and endometriosis and reproductive health, boosted by $354 million over the next four years.ii
  • Increased subsidies for second and subsequent children in childcare from a maximum of 85% to 95%, while families with household incomes above $189,390 will no longer have their annual payments capped at $10,560.iii

While childcare is of benefit to all parents, it is generally mothers who rely on affordable care to increase their working hours.

As widely touted, proposed changes to superannuation and support for first home buyers also have women in mind.

Superannuation gets a boost

In a move that will benefit part-time workers who are largely women, the Treasurer announced he will scrap the requirement for workers to earn at least $450 a month before their employers are obliged to pay super.

The Government will also expand a scheme allowing retirees to make a one-off super contribution of up to $300,000 (or $600,000 per couple) when they downsize and sell their family home. The age requirement will be lowered from 65 to 60.

In addition, from 1 July 2022 the work test that currently applies to super contributions (when either making or receiving non-concessional or salary sacrificed contributions) made by people aged 67 to 74 will be abolished.

Despite opposition from within Coalition ranks, Superannuation Guarantee payments by employers will increase from the current 9.5% of earnings to 10% on 1 July and then gradually increase to 12% as originally legislated.

Support for first home buyers

Housing affordability is on the agenda again as the property market booms. To help first home buyers and single parents get a foot on the housing ladder, the Government has announcediv:

  • The Family Home Guarantee, which will allow 10,000 single parents to buy a home with a deposit of just 2%.
  • An extra 10,000 places on the First Home Loan Deposit Scheme in 2020-21. Now called the New Home Guarantee, the scheme gives loan guarantees to first home buyers, so they can buy a home with a deposit as low as 5%.
  • An increase in the maximum voluntary contributions that Australians can release under the First Home Super Saver Scheme from $30,000 to $50,000.

Improvements to the Pensions Loan Scheme

In a move that will please cash-strapped pensioners, the Treasurer announced that the Pensions Loan scheme – a form of reverse mortgage offered by the Government – will allow people to withdraw a capped lump sum from 1 July 2022. Currently income must be taken as regular income, which makes it difficult to fund larger purchases or home maintenance.

Under the new rules, a single person will be able to withdraw up to the equivalent to 50% of the maximum Age Pension each year, currently around $12,385 a year ($18,670 for couples).

The Government will also introduce a No Negative Equity Guarantee which means the loan amount can never exceed the value of the home.

Tax cuts for low-and-middle-income earners

Approximately ten million Australians will avoid a drop in income of up to $1,080 next financial year, with the low-and-middle-income tax offset extended for another 12 months at a cost of $7.8 billion.

Anyone earning between $37,000 and $126,000 a year will receive some benefit, with people earning between $48,001 and $90,000 to receive the full offset of $1,080.

Low and middle income tax offset

Taxable incomeOffset
$37,000 or less$255
Between $37,001 and $48,000$255 plus 7.5 cents for every dollar above $37,000, up to a maximum of $1,080
Between $48,001 and $90,000$1,080
Between $90,001 and $126,000$1,080 minus 3 cents for every dollar of the amount above $90,000

Source: ATO

Job creation and training

With companies warning of labour shortages while the nation’s borders are closed, the Government has been under pressure to do more to help unemployed Australians back into work.

So, the focus in this Budget is squarely on skills training with $6.4 billion on offer to increase workforce participation and help boost economic growth.

This includes a 12-month extension to the Government’s JobTrainer program to December 2022 and an additional 163,000 places. The Treasurer also announced funding of $2.7 billion for 170,000 new apprenticeships.

Job creation is also at the heart of an extra $15.2 billion in road and rail infrastructure projects, expected to create 30,000 jobs. This is on top of the existing 10-year $110 billion infrastructure spend announced previously.

Looking ahead

With an election due by May 21 next year, this is as much an election Budget as a COVID-recovery one. Although another Budget could be squeezed in before an election, it would have to be brought forward from the normal time.

The Government will be hoping that it has done enough to provide funds where they are needed most to continue the job of economic recovery.

If you have any questions about any of the Budget measures and how you might take advantage of them, don’t hesitate to contact us on 03 5120 1400.

Information in this article has been sourced from the Budget Speech 2021-22 and Federal Budget support documents.

It is important to note that the policies outlined in this publication are yet to be passed as legislation and therefore may be subject to change.

https://tradingeconomics.com/commodities (viewed 11/5/2021)

ii https://www.health.gov.au/ministers/the-hon-greg-hunt-mp/media/354-million-to-support-the-health-and-wellbeing-of-australias-women

iii https://ministers.treasury.gov.au/ministers/josh-frydenberg-2018/media-releases/making-child-care-more-affordable-and-boosting

iv https://ministers.treasury.gov.au/ministers/josh-frydenberg-2018/media-releases/improving-opportunities-home-ownership

Material contained in this publication is a summary only and is based on information believed to be reliable and received from sources within the market. It is not the intention of RGM Financial Planners Pty Ltd ABN 36 419 582 Australian Financial Services Licence Number 229471, RGM Accountants & Advisors Pty Ltd ABN 69 528 723 510 or RGM Finance Brokers Pty Ltd ABN 81 330 778 236 (RGM) that this publication be used as the primary source of readers’ information but as an adjunct to their own resources and training. No representation is given, warranty made or responsibility taken as to the accuracy, timeliness or completeness of any information or recommendation contained in this publication and RGM and its related bodies corporate will not be liable to the reader in contract or tort (including for negligence) or otherwise for any loss or damage arising as a result of the reader relying on any such information or recommendation (except in so far as any statutory liability cannot be excluded).

Liability limited by a scheme approved under Professional Standards Legislation.


Making your savings work harder

With tax cuts and stimulus payments on the way, Treasurer Josh Frydenberg is urging us to open our wallets and spend to kick start the national economy. But if your personal balance sheet could do with a kick along, then saving and investing what you can also makes sense.

One positive from this COVID-19 induced recession, is that it has made many of us more aware of the importance of building a financial buffer to tide us over in lean times. Even people with secure employment have caught the savings bug. 

According to the latest ME Bank Household Finance Confidence Report, 57 per cent of households are spending less than they earn. This is the highest percentage in almost a decade.i

More troubling however, was the finding that one in five households has less than $1,000 in savings, and only one third of households could maintain their lifestyle for three months if they lost their income. 

Whatever your financial position, if saving is a priority the next step is deciding where to put your cash. 

Banking on low interest

Everyone needs cash in the bank for living expenses and a rainy day. If you’ve been caught short this year, then building a cash buffer may be a priority. 

If you have a short-term savings goal such as buying a car or your first home within the next year or so, then the bank is also the best place for your savings. Your capital is guaranteed by the Government so there’s no risk of investment losses. 

But with interest rates close to zero, the bank is probably not the best place for long-term savings. So once your need for readily accessible cash is covered, there are more attractive places to build long-term wealth. 

Pay down your mortgage

A question often asked is whether it’s better to put savings into super or your mortgage. Well, it depends on factors including your age, personal circumstances and preferences, interest rates and tax bracket. 

If you have a mortgage, then making extra repayments can reduce the total amount of interest you pay and cut years off the life of your loan. This strategy has the most impact for younger people in the early years of a 25 to 30-year loan. 

If your mortgage has a redraw or offset facility, you can still access your savings if you need cash for an emergency or home renovations down the track. This may be a deciding factor if retirement is a long way off. 

Boost your super

Making extra super contributions is arguably the most tax-effective investment, especially for higher income earners. 

Even so, super is likely to be more attractive as you get closer to retirement, the kids have left home, and your home is close to being paid off. 

You can make personal, tax-deductible contributions up to the annual cap of $25,000. Be aware though that this cap includes super guarantee payments made by your employer and salary sacrifice amounts. 

You can also make after-tax contributions of up to $100,000 a year up to age 75, subject to a work test after age 67. 

Invest outside your super

If you would like to invest in shares or property but don’t want to lock your money away in super until you retire, then you could invest outside super. 

If you are new to investing, you could wait until you have saved $5,000 or so in the bank and then buy a parcel of shares or an exchange-traded fund (ETF). ETFs give you access to a diversified portfolio of investments in a particular market, market sector or asset class. 

First home buyers might consider the Federal Government’s expanded First Home Loan Deposit Scheme with as little as 5 per cent deposit. There are limited packages available and price caps on the home value, depending on where you live. 

With tax cuts set to flow and a new appreciation of the importance of financial security, now is the perfect time to start a savings plan. Contact our office if you would like to discuss your savings and investment strategy. 

https://www.mebank.com.au/getmedia/c27b0a0d-cc4e-470e-8a37-722d6f00af98/Household_Financial_Comfort_Report_July_2020_FINAL.pdf

Material contained in this publication is a summary only and is based on information believed to be reliable and received from sources within the market. It is not the intention of RGM Financial Planners Pty Ltd ABN 36 419 582 Australian Financial Services Licence Number 229471, RGM Accountants & Advisors Pty Ltd ABN 69 528 723 510 or RGM Finance Brokers Pty Ltd ABN 81 330 778 236 (RGM) that this publication be used as the primary source of readers’ information but as an adjunct to their own resources and training. No representation is given, warranty made or responsibility taken as to the accuracy, timeliness or completeness of any information or recommendation contained in this publication and RGM and its related bodies corporate will not be liable to the reader in contract or tort (including for negligence) or otherwise for any loss or damage arising as a result of the reader relying on any such information or recommendation (except in so far as any statutory liability cannot be excluded).

Liability limited by a scheme approved under Professional Standards Legislation.

Where is the best place to stash your cash?

If like many Australians you’re looking for ways to put some cash away for a rainy day, a holiday or to earn extra income, the job has just become a bit harder. It’s also become more urgent if you are expecting a handy tax return. 

In early July, the Reserve Bank cut rates to 1 per cent. Soon after, the Morrison Government got its tax package passed. As a result, those on incomes from $25,000-$120,000 got an immediate tax cut of up to $1080. 

So, whether you are looking to make the most of your tax cut or other savings, here are some suggestions. 

1.Throw it on the mortgage

For those who have a mortgage, tipping in a bit extra, especially in the early years, can save you substantial amounts. It can also shave years off the life of the loan, meaning you’ll enjoy the priceless peace of mind that comes with paying off your home sooner. 

Banks charge more for the money you’ve borrowed from them than the interest they pay on money you deposit with them. So, it may not make much sense to put money in a savings account paying 1.5 per cent interest when you’re paying 3.5 per cent interest on your home loan. 

Say you have a $400,000 loan at 4 per cent with 20 years to run. Using ASIC’s MoneySmart mortgage calculator, by increasing your monthly payments by just $50, you could save $6,146 in interest and shave 7 months off the term of the loan.i 

2. Up your super contributions

It’s hard to go past super as a tax-effective investment option if you are happy to lock your money away until you retire. 

Over the last seven years, while interest rates and inflation have been low, growth funds (where most Australians have their savings) achieved returns of 9.3 per cent a year after tax and fees, on average. ii 

You can make tax-deductible contributions of up to $25,000 a year into super, this includes your employer’s payments, salary sacrifice and any voluntary contributions you make. Once your money is in super it’s taxed at concessional rates. New rules also allow you to “carry forward” unused concessional contributions from previous years. Conditions apply so call us to see if you are eligible. 

Most Australians pay little attention to super until they are approaching retirement. That means they fail to harness the power of compounding interest to the extent they could have. If you’re a decade or two away from leaving the workforce with cash to spare, it’s difficult to find a better pay-off than the one you’ll (eventually) receive from channelling savings into super. 

3. Invest in shares

For longer-term savings, it’s tough to beat the returns generated by a share portfolio. Over 30 years to 2018, which included many ups and downs including the GFC, the average annual return from Australian shares was 9.8 per cent.iii Last financial year the total return from capital gains and dividends was 11 per cent.iv 

Whether you are just starting out or wanting to expand an existing portfolio, we can help you align your investments with your goals. 

If you would like to direct some extra cash into shares, there are now even “micro-investment” apps such as Raiz and Spaceship Voyager, which you can access via your mobile phone. 

4. Put it in the bank

Australia’s current inflation rate is 1.3 per cent. If your bank is paying you less than 1.3 per cent you are losing money. 

If you have a so-called high interest savings account paying you a standard variable rate of between 1.5-2 per cent, you’re getting a near negligible return.v Also be aware of high introductory rates that revert to the standard base rate once the honeymoon ends. 

Term deposits are currently paying around 2-2.25 per cent which is a bit better but not much.vi 

Despite these low rates, it’s wise to have some money parked in a savings account or in your mortgage offset or redraw account so that it’s available in case of an unforeseen expense. 

If you would like to discuss your savings and investment goals and how to achieve them, give us a call. 

https://www.moneysmart.gov.au/tools-and-resources/calculators-and-apps/mortgage-calculator#!how-can-i-repay-my-loan-sooner 

ii https://www.chantwest.com.au/resources/super-funds-on-the-brink-of-a-record-breaking-run 

iii https://static.vgcontent.info/crp/intl/auw/docs/resources/2018-index-chart-brochure.pdf?20180806%7C220825 (p4) 

iv ‘Year in Review’, CommSec Economic Insights, 1 July 2019 

https://www.finder.com.au/savings-accounts/high-interest-savings-accounts?futm_medium=cpc&futm_source=google_ppc~1659806132~61996044697~kwd-1281462095~saving%20accounts%20interest%20rates~e~c~g~1t2~~EAIaIQobChMIqpag-O-a4wIVjw4rCh18wwQrEAAYAiAAEgIMwPD_BwE&gclid=EAIaIQobChMIqpag-O-a4wIVjw4rCh18wwQrEAAYAiAAEgIMwPD_BwE 

vi https://www.finder.com.au/term-deposits

Material contained in this publication is a summary only and is based on information believed to be reliable and received from sources within the market. It is not the intention of RGM Financial Planners Pty Ltd ABN 36 419 582 Australian Financial Services Licence Number 229471, RGM Accountants & Advisors Pty Ltd ABN 69 528 723 510 or RGM Finance Brokers Pty Ltd ABN 81 330 778 236 (RGM) that this publication be used as the primary source of readers’ information but as an adjunct to their own resources and training. No representation is given, warranty made or responsibility taken as to the accuracy, timeliness or completeness of any information or recommendation contained in this publication and RGM and its related bodies corporate will not be liable to the reader in contract or tort (including for negligence) or otherwise for any loss or damage arising as a result of the reader relying on any such information or recommendation (except in so far as any statutory liability cannot be excluded).

Liability limited by a scheme approved under Professional Standards Legislation.

Is the tide turning for property?

For the first time in years, the planets seem to be aligning for homebuyers and property investors. Interest rates are falling, property prices largely appear to be stabilising and constraints on bank mortgage lending have been relaxed.

It’s welcome news for first homebuyers and anyone who has been waiting on the sidelines for a signal that the downturn in house prices could be at or near the bottom in key markets such as Melbourne and Sydney.

As is always the case though with the national housing market, the full story is more than a tale of two cities.

House price slide losing momentum

According to research group CoreLogic, in the year to July the national housing market fell 6.4 per cent. This fall was driven by the two biggest markets Sydney (down 9.0 per cent) and Melbourne (down 8.2 per cent). 

Perth, still coming down from the peak of the mining boom, and Darwin suffered similar declines. Brisbane fell 2.4 per cent and Adelaide was down 0.8 per cent from a much lower peak. Hobart (up 2.8 per cent) and Canberra (up 1.1 per cent) were the only capital cities to rise in the year to July. 

But in the aftermath of the May federal election and the first of the Reserve Bank’s two recent interest rate cuts, the downhill slide in prices began to lose momentum. 

In July, home values recorded zero growth nationally, with signs the housing conditions are stabilising. Most tellingly, prices rose slightly for the second month in a row in both Sydney (up 0.2 per cent) and Melbourne (up 0.2 per cent). However the stabilisation in housing values is becoming more broadly based with Brisbane, Hobart and Darwin also recording rises in values. i 

Reserve Bank opens the bidding

In hindsight, the Reserve Bank’s recent decision to cut interest rates for the first time since 2016 could mark the beginning of the end of the downturn in home prices. 

In June, the Reserve Bank lowered the cash rate from 1.5 per cent to a new historic low 1.25 per cent and followed up in July with another cut to 1 per cent. 

Mortgage interest rates are also low by historic standards. In early July, the average standard variable mortgage rates of the big four banks were all around 4.9 per cent. The best available rates from smaller lenders are now below 3 per cent. ii 

Banking regulator joins in

The Australian Prudential Regulatory Authority (APRA) is also doing its bit to breathe new life into the property market. 

In July, the banking regulator scrapped a rule that required banks to assess new mortgage customers on their ability to manage repayments with 7.25 per cent interest rates no matter what their actual rate might be. 

APRA will now require banks to test if borrowers can manage repayments at least 2.5 percentage points above a loan’s current rate. With many mortgage rates for new customers currently around 3.5 per cent, this would mean banks would have to test whether customers could afford repayments of 6 per cent instead of 7.25 per cent. iii 

As a result, comparison website RateCity estimates someone earning the average wage ($83,455) could see their borrowing power increase by $66,000 to $544,000. iv 

Property investing beyond houses

Australians’ love affair with bricks and mortar is legendary, but there is more than one way to profit from property. 

If you’re thinking of buying as an investment, rather than as a place to call home, there may be opportunities to invest directly in commercial property or via a managed fund. 

Listed property trusts, property ETFs (exchange traded funds) and traditional unlisted managed funds offer a way to invest in a diversified portfolio of properties in Australia and overseas. As well as residential property they can invest in retail, office and industrial property. 

If you would like to discuss your property investment strategy in light of recent developments, give us a call. 

i All house price data from Core Logic, 1 July 2019, https://www.corelogic.com.au/sites/default/files/2019-07/CoreLogic%20home%20value%20index%20JULY%202019%20FINAL.pdf 

ii The Sun Herald, 1 August 2019, https://www.corelogic.com.au/sites/default/files/2019-08/CoreLogic%20home%20value%20index%20AUGUST%20FINAL.pdf 

iii APRA, 5 July 2019, https://www.apra.gov.au/media-centre/media-releases/apra-finalises-amendments-guidance-residential-mortgage-lending 

iv RateCity, 5 July 2019, https://www.ratecity.com.au/home-loans/mortgage-news/apra-changes-average-aussie-family-can-now-borrow-60k

Material contained in this publication is a summary only and is based on information believed to be reliable and received from sources within the market. It is not the intention of RGM Financial Planners Pty Ltd ABN 36 419 582 Australian Financial Services Licence Number 229471, RGM Accountants & Advisors Pty Ltd ABN 69 528 723 510 or RGM Finance Brokers Pty Ltd ABN 81 330 778 236 (RGM) that this publication be used as the primary source of readers’ information but as an adjunct to their own resources and training. No representation is given, warranty made or responsibility taken as to the accuracy, timeliness or completeness of any information or recommendation contained in this publication and RGM and its related bodies corporate will not be liable to the reader in contract or tort (including for negligence) or otherwise for any loss or damage arising as a result of the reader relying on any such information or recommendation (except in so far as any statutory liability cannot be excluded).

Liability limited by a scheme approved under Professional Standards Legislation.