Stay up to date with what’s happened in markets and the Australian economy over the past month.
Consumer prices eased by more than expected in October. The news that inflation may have been tamed means interest rate rises may be behind us, for now.
Even the Organization for Economic Cooperation and Development (OECD) is optimistic about our economic recovery, predicting rate cuts from late 2024.
The ASX200 regained most of its October losses through November. Hopes the US may be ceasing its interest rate hikes impacted investor sentiment, as did the better than expected inflation figures locally.
Click the video below to view our update.
Please get in touch if you’d like assistance with your personal financial situation.
Stay up to date with what’s happened in Australian markets over the past month.
Household wealth has grown for the third quarter in a row, rising by 2.6% in the June quarter, pushed up by rising house prices and increases in super balances.
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 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.
Interest rates are an important financial lever for world economies. They affect the cost of borrowing and the return on savings, and it makes them an integral part of the return on many investments. It can also affect the value of the currency, which has a further trickle-down effect on other investments.
So, when rates are low they can influence more business investment because it is cheaper to borrow. When rates are high or rising, economic activity slows. As a result, interest rate movements are also a useful tool to control inflation.
Rising steadily
For the past few years, interest rates have been close to zero or even in negative territory in some countries, but that all started to change in the last year or so.
Australia lagged other world economies when it came to increasing rates but since the rises began here last year, the Reserve Bank of Australia (RBA) has introduced hikes on a fairly regular basis. Indeed, the base rate has risen 3.5 per cent since June last year.
The key reason for the rises is the need to dampen inflation. The RBA has long aimed to keep inflation between the 2 and 3 per cent mark. Clearly, that benchmark has been sharply breached and now the consumer price index is well over 7 per cent a year.
Winners and losers
There are two sides to rising interest rates. It hurts if you are a borrower, and it is generally welcomed if you are a saver.
But not all consequences of an interest rate rise are equal for investors and sometimes the extent of its impact may be more of a reflection of your approach to investment risk. If you are a conservative investor with cash making up a significant proportion of your portfolio, then rate rises may be welcome. On the other hand, if your portfolio is focussed on growth with most investments in say, shares and property, higher rates may start to erode the total value of your holdings.
Clearly this underlines the argument for diversity across your investments and an understanding of your goals in the short, medium, and long-term.
Shares take a hit
Higher interest rates tend to have a negative impact on sharemarkets. While it may take time for the effect of higher rates to filter through to the economy, the sharemarket often reacts instantly as investors downgrade their outlook for future company growth.
In addition, shares are viewed as a higher risk investment than more conservative fixed interest options. So, if low risk fixed interest investments are delivering better returns, investors may switch to bonds.
But that does not mean stock prices fall across the board. Traditionally, value stocks such as banks, insurance companies and resources have performed better than growth stocks in this environment.iAlso investors prefer stocks earning money today rather than those with a promise of future earnings.
But there are a lot of jitters in the sharemarket particularly in the wake of the failure of a number of mid-tier US banks. As a result, the traditional better performers are also struggling.
Fixed interest options
Fixed interest investments include government and semi-government bonds and corporate bonds. If you are invested in long-term bonds, then the outlook is not so rosy because the recent interest rates increases mean your current investments have lost value.
At the moment, fixed interest is experiencing an inverted yield curve, which means long term rates are lower than short term. Such a situation reflects investor uncertainty about potential economic growth and can be a key predictor of recession and deflation. Of course, this is not the only measure to determine the possibility of a recession and many commentators in Australia believe we may avoid this scenario.ii
What about housing?
House prices have fallen from their peak in 2022, which is not surprising given the slackening demand as a result of higher mortgage rates.
Australian Bureau of Statistics data showed an annual 35 per cent drop in new investment loans earlier this year.iii
The changing times in Australia’s economic fortunes can lead to concern about whether you have the right investment mix. If you are unsure about your portfolio, then give us a call to discuss.
As we move towards the end of the 2022-2023 financial year, tax planning becomes a crucial part of any business’s success.
So, it’s never too early to start thinking about how to minimise your tax liability, and RGM is here to help you navigate the complexities of the Australian tax system.
Whether you’re an established business or a startup, there are strategies you should be discussing with your RGM advisor to ensure you’re taking advantage of all available tax planning opportunities.
For established businesses, tax planning is about maximising profits and minimising tax liability. Here are some strategies you should consider discussing with your RGM accountant:
CGT Concessions
As an established business, it’s important to consider the Capital Gains Tax (CGT) concessions available to you. These concessions can help reduce the tax you owe on the sale of certain assets, which can have a significant impact on your financial success.
Small businesses in Australia can access specific CGT concessions, including the 15-year exemption, 50% active asset reduction, retirement exemption, rollover, and restructure rollover. By applying these concessions, you may be able to reduce your capital gain and potentially eliminate some or all the tax owed on the sale of assets.
However, the rules around these concessions are complex and can be costly if you get them wrong. That’s why we recommend seeking professional advice before restructuring or disposing of assets and ensuring your business structure is designed to take advantage of the available concessions.
At RGM, our team of qualified tax professionals can help you navigate the complexities of CGT concessions and advise on the most effective strategy to minimise your tax liability while complying with Australian tax laws and regulations. We can review your business’s financials and provide tailored advice to help you maximise the benefits of CGT concessions and position your business for long-term financial success.
For established businesses, the Instant Asset Write-off can be a powerful tax planning strategy to help stay competitive in the market. This measure enables businesses to claim an immediate deduction for the full cost of newly acquired assets in the first year they are used or installed, rather than depreciating the cost over several years.
This can help free up cash flow, allowing you to invest in new equipment, technology, or other assets that can help grow your business and improve your bottom line.
It’s worth noting that this temporary full expensing measure is set to expire on June 30, 2023, so if you’re considering purchasing new assets, it’s important to act quickly to take advantage of this opportunity.
It’s also crucial to carefully assess your options and determine whether the Instant Asset Write-off is the right strategy for your business. Our team can help you identify whether this measure aligns with your business goals and needs, and ensure that you’re taking advantage of all the available tax planning opportunities.
Contact us today to discuss your business’s unique situation and how we can assist you in optimising your tax planning strategy.
The loss carry-back strategy is a tax planning tool that can provide relief to established businesses facing financial difficulties. It allows businesses to offset losses incurred in the current financial year against profits made in the previous financial years, potentially resulting in a refund of taxes paid in those years.
This strategy can help businesses to manage cash flow and remain financially stable during challenging times such as we are currently seeing, economic downturns or changes in the market.
However, it’s important to be aware that utilising this strategy can reduce a company’s franking account balance, which may impact the ability to pay fully franked dividends to shareholders and affect investor confidence.
Before deciding to implement the loss carry-back strategy, it’s important to carefully consider the potential benefits and drawbacks and seek professional advice to ensure it aligns with your business goals and overall tax planning strategy.
Our team at RGM can provide expert advice and guidance tailored to your business needs and we encourage you to discuss any tax planning opportunities with us.
Writing off bad debt is another tax planning strategy that can benefit established businesses in Australia.
When a business sells goods or services on credit and the customer fails to pay, the business may have to write off the debt as bad debt. By doing so, you can claim a tax deduction on the amount of the bad debt, which can reduce your taxable income and lower your tax liability.
For instance, let’s say that your business has a bad debt of $50,000 from a customer who failed to pay for goods or services delivered on credit. By writing off this bad debt, your business can claim a tax deduction of $50,000, which would reduce the taxable income and lower the tax liability for the financial year.
However, it’s important to note that there are strict rules and requirements around writing off bad debt for tax purposes, and businesses must ensure your meet these requirements to claim the tax deduction.
For example, the debt must be considered irrecoverable, and your business must have taken reasonable steps to recover the debt before writing it off.
At RGM, we can help established businesses navigate the complex rules and requirements around writing off bad debt for tax purposes. Our team can review your business’s financials and advise on the most effective way to write off bad debt and claim the tax deduction while ensuring compliance with Australian tax laws and regulations.
If you’re a startup business, tax planning is equally important. Our team can help you develop a comprehensive tax strategy that aligns with your unique needs and goals.
Some tax planning strategies that may be relevant for startups include:
Structuring your business:
Choosing the right business structure is one of the most important tax planning strategies for startup businesses. The structure you choose can have a significant impact on your tax liability, as well as your legal and financial obligations.
For example, setting up a businessas a sole trader may be the simplest and most cost-effective option, but it also means that you are personally liable for any debts the business incurs. Alternatively, incorporating your business as a company can provide more legal protection but may result in higher compliance costs.
Our team of experts can help you navigate the different business structures available and determine which one is the most tax-effective for your startup. This may involve assessing factors such as your business goals, the size and complexity of your business, your expected profits, and your personal financial situation.
Additionally, we can help you understand the ongoing tax obligations associated with your chosen structure, such as tax reporting requirements, compliance with regulations, and managing your tax liabilities. By having a clear understanding of your tax obligations, you can avoid costly penalties and ensure that your startup is positioned for success.
Contact our team today to discuss how we can help you choose the right business structure for your startup and minimise your tax liability.
In addition to choosing the right business structure, startups can also benefit from taking advantage of the Research and Development (R&D) Tax Incentive. This government program provides tax offsets for eligible R&D activities, which can be a crucial source of funding for startups looking to invest in innovation and growth.
To determine if your startup is eligible for the R&D Tax Incentive, our team can help you assess your R&D activities and expenses to ensure they meet the program’s eligibility criteria. We can also guide you through the application process to ensure you receive the maximum benefit available.
Our team can also provide ongoing support to ensure that you continue to meet the program’s requirements and maintain your eligibility over time. By taking advantage of the R&D Tax Incentive, your startup can potentially access significant funding to fuel your growth and innovation efforts.
As a startup business, you may have incurred significant expenses in setting up your business. These expenses can add up quickly and put a strain on cash flow, which is why it’s important to take advantage of any tax deductions available.
Our team of experts can help you identify which startup expenses are tax-deductible and how to claim them. This can include expenses associated with registering your business, such as ASIC fees, legal fees for setting up your business structure, and costs associated with obtaining any necessary licences or permits.
Other deductible startup expenses may include advertising and marketing costs, website development expenses, and expenses related to product development or research and development activities.
By properly claiming these startup expenses, you can potentially reduce your taxable income and minimise your tax liability.
Our team can work with you to ensure that you are taking advantage of all available deductions and claiming them correctly on your tax return. This can help to improve your cash flow and allow you to reinvest in your business.
Overall, tax planning is essential for businesses as it can significantly impact your financial success.
By taking a proactive approach and seeking professional guidance where necessary, you can ensure that you’re taking advantage of all available tax deductions and concessions. This can result in improved cash flow, reduced tax liability, and increased profitability.
Businesses need to prioritise tax planning and work with qualified tax professionals to develop a comprehensive strategy that aligns with their unique needs and goals. By doing so, you can position yourself for long-term financial success and stability.
At RGM, we are committed to helping businesses of all sizes achieve their financial goals through effective tax planning strategies.
Whether you’re an established business or a startup, we have the expertise to help you navigate the complexities of the Australian tax system.
Start your tax planning today by booking a meeting with your RGM advisor.
Succession planning can be difficult at the best of times without dealing with the added pressures farmers need to face including droughts, fires and floods.
And that’s why it is even more important to plan early and get it right when you are on the land. You are not just dealing with a business, but invariably also with a home.
Some 99 per cent of the 135,000 farms in Australia are family owned with the average age of farmers being 52.i It is believed that farmers are five times more likely than other Australians to be working beyond the age of 65. There are a variety of reasons for this, from a reluctance to relinquish control, to a lack of family willing to take over the reins and financial necessity.
Given the physicality of farming, it would seem to make a lot more sense to start thinking about succession planning well before that stage.
Start talking
The first thing you need to do is open the doors of communication. Arrange a time to talk with your family to discuss:
Who wants to inherit and work on the farm and who wants to leave the property
Whether they agree each child should be treated equally or accept that the one inheriting the farm should receive preferential treatment
How everybody feels about splitting the property between siblings, or
The way forward if none of your children wants to stay on the land.
These are all considerations that need to be addressed and revisited over time to ensure they meet with everybody’s wishes.
If just one of the children wants to remain on the property, will they need to find the finance to pay out the other siblings? If so, then the next decision is how that finance will be found.
Perhaps the answer is to transfer the property before you die. If that is the case, then where will you live in retirement and what will be your source of income once you retire? Again, you need to examine the options. Perhaps you may receive an ongoing income from the property, or maybe find income from other investments. Importantly, you also need to revisit these options over time to ensure they still work for you.
One danger of not having a succession plan and working well beyond your best years, is that you can run the farm into the ground and make it a far less attractive property to sell.
Structure your plans
There are so many questions to ask and what is right for one family, may not be right for another.
But once you determine how you want to move forward, you then need to examine the best structures to put in place to make the process as efficient as possible. Some of the key advice you may need is on tax, trusts and land ownership and the intersection of all three.
Tax is particularly important as you want to avoid or at least minimise capital gains tax (CGT).
If you are 55 years of age or more and retiring and have owned your property for at least 15 years, then you may qualify for the small business 15-year CGT exemption on your entire capital gains. Other concessions may apply if you don’t qualify the 15-year exemption.
For couples where the family farm is held in their own name, perhaps you might want to consider a joint tenancy agreement as it leads to automatic transfer of ownership if one dies.
Or you might consider putting the farm into a family trust or perhaps holding it as an asset in your self-managed super fund. There are so many what-ifs to consider when it comes to rural properties. If you want to discuss how to move forward on your estate and succession planning and what will work best for you, then give us a call.
When markets fall, it’s natural to want to take action to prevent further losses. Doing so however can do more harm than good. Here’s why timing the market to buy low and sell high is not as easy as it sounds.
If you’re invested in the financial markets and also keeping up with the news, you’re probably wondering if you should do anything to insulate your portfolio from incurring further losses alongside rising interest rates and inflation.
In times like these, reminding investors to “maintain discipline” and “stay the course” – in other words, stay invested and here’s why:
Reacting to the here and now
Most market commentary are about the events of the day, with a focus on the here and now. However, the ‘today’ is not as significant to financial markets as they’re generally forward looking and more concerned about what will happen in the future. Thus, using daily developments to make constant adjustments to your portfolio is unlikely to help you accumulate wealth over the long term as the market will have already priced it in.
Additionally, to successfully time the market, investors need to get all five of these investment factors right including precisely timing exit and re-entry – a near impossible feat for even the most experienced of investors.
Locking in your losses
When markets fall, it’s natural to want to sell riskier assets (i.e. equities) and move to cash or safer assets like government securities. But exiting the share market now means locking in your losses permanently and not giving your portfolio the opportunity to benefit when markets recover. Research found that 80 per cent of investors who panicked and moved to cash during the 2020 sell off would have been better off if they had stayed invested1.
Investing at the peak
While we all want to “buy low and sell high” so our portfolios can outperform the market average, in reality, it is extremely hard to execute perfectly every single time. Analysis of the last 5 decades reveals that even in the worst-case scenarios – where investors bought into the market at its peak, just before a dip – as long as investors stayed invested instead of moving to cash, they still benefited from positive annual returns of almost 11%.
If the recent market volatility is keeping you up at night, take a moment to reflect on whether your emotions are short-term reactions to the current conditions, or something you really need to act on. If you feel like you cannot stomach temporary losses, consider if your asset allocation is right for your overall investment goals and risk appetite.
A well-diversified core portfolio, aligned to your risk appetite will help spread your risk and afford you a margin of safety over the long term. Get this right and you will probably sleep better at night.
Contact us if you would like to discuss this further.
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.
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.
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.
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.
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.
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.
As Australia’s system of compulsory superannuation celebrated its 30th anniversary in July, this is a good time to take a closer look at one of super’s biggest success stories – the number of people deciding to take control of their retirement savings with a self-managed super fund (SMSF).
There are now almost 607,000 SMSFs worth a combined $894 million, with 1.1 million members.
While one of the benefits of running your own fund is the flexibility to chart your own course, concerns have been raised over the years that SMSFs are too heavily invested in cash and shares and not as well diversified as large public funds. The latest figures show these concerns are largely unfounded.
Comparing SMSFs and large funds
SMSF administrator, SuperConcepts recently surveyed 4,500 funds to find out how SMSF trustees invest and identify any emerging trends.i They also wanted to see how SMSFs compare with large APRA-regulated funds including – industry, retail, public sector and corporate funds – in terms of their investments.
The table below shows the overall asset breakdown as at 31 March 2022.
Asset type
SMSF %
APRA fund %
Cash and short-term deposits
12.2
9.1
Australian fixed interest
8.4
10.0
International fixed interest
2.1
7.9
Australian shares
40.0
28.5
International shares
16.4
27.0
Property
16.0
8.5
Other (incl. infrastructure, cryptocurrency, commodities and collectables)
4.9
9.0
Total
100
100
Source: SuperConcepts
Several differences stand out:
SMSFs have a higher level of cash and short-term deposits, although not massively so.
SMSFs hold more Australian shares and property
APRA funds hold more international shares and fixed interest, and more alternative assets.
At first glance, these differences conform to the stereotype of SMSFs being too dependent on cash, Australian shares and property.
However, the preference for cash may come down to a higher proportion of SMSF members in pension phase (45 per cent of SMSFs are partly or fully in pension phase according to the ATO). The more members a fund has in pension phase, the more cash and liquid investments it needs to cover benefit payments.
Also, the differences are not so stark when you group assets. For instance, cash and fixed interest combined amount to 22.7 per cent for SMSFs and 27.0 per cent for APRA funds. Similarly, local and international shares (56.4 per cent for SMSFs, 55.5 per cent for APRA funds) and property and other (20.9 per cent vs 17.5 per cent ).
It’s likely that the differences within these broad asset groupings are driven by access to different markets, and SMSF trustees being more comfortable picking investments they know such as local shares and property.
What’s more, while big funds can invest directly in large infrastructure projects with steady capital appreciation and reliable income streams, SMSF investors may be pursuing a similar strategy but with real property instead.
Top 10 SMSF investments
Whether it’s the familiarity factor or ease of access, the top 10 investments by value held by SMSFs in the SuperConcepts survey were all Australian shares. As you might expect, the major banks dominate the top 10, along with market heavyweights BHP, CSL and Telstra.
Another thing the top 10 have in common, apart from being household names and easy to access, is dividends. Just as SMSFs in retirement phase hold higher levels of cash to fund their daily income needs, high dividend paying shares are prized for their regular income stream.
Use of ETFs and managed funds
While SMSFs hold large sums in direct Australian shares, diversification improves markedly when you add investments in Australian and international shares held via ETFs and managed funds.
The SuperConcepts survey found almost one third of SMSF investments by value are held in pooled investments. The highest usage is for international shares and fixed interest, where 75 per cent of exposure is via ETFs and managed funds.
As it’s still relatively difficult to access direct investments in international shares, it’s not surprising that global share funds account for eight of the top 10 ETFs and managed funds.
This latest research shows that the diversification of SMSF investment portfolios is broadly comparable to the big super funds. After 30 years of growth and a new generation taking control of their investments, the SMSF sector has well and truly come of age.
If you would like to discuss your SMSF’s investment strategy or you are thinking of setting up your own fund, give us a call.
