Which business structure is best?

A catchy business name, a trustworthy brand and an engaging website or social media presence are all vital to any small business. But don’t underestimate the effect of the business structure.

Choosing whether to operate as a sole trader, company, partnership or trust depends on many factors including cost, the size of the business, whether you have dependants and family members to share income with, and the degree of financial or legal risk involved in running the business.

Sole trader

Many small operators start out as a sole trader, and some decide to continue with this structure.

On the positive side, it’s easy to set it up and, with fewer business reporting obligations, it’s cheaper to run than other business structures.

There are one or two considerations that, depending on your circumstances, could mean a sole trader structure doesn’t work for you.

One of these is the extent of your liability if things go wrong. When you’re a sole trader your liability is unlimited, meaning your assets are at risk in the case of legal action. Some businesses may consider their risk to be too low to warrant changing the business structure or they may choose to find an insurance product to provide some protection.

Tax is another consideration. Among other issues, as a sole trader, you’re liable to pay tax on all income received by the business and you can’t split profits or losses with family members.i

Partnership

Two or more people can form a business partnership and distribute business income among themselves.

Like a sole trader structure, a partnership structure can be slightly cheaper to operate because there are minimal reporting requirements.

All partners are liable for all the debts and obligations of the business although there are different types of partnerships that vary liability among the partners.

For tax purposes, each partner reports their share of the partnership income or loss in their own return and pays tax on any income. Partners cannot claim a deduction for any money they withdraw from the business. Amounts taken from a partnership are not considered wages for tax purposes.ii

Company

A company structure has a number of advantages over a sole trader or partnership structure, but it costs more to set up and operate and there are more reporting requirements.

A company is considered a separate legal entity and has its own tax and superannuation obligations, but company directors have a number of legal responsibilities.

Companies pay an annual fee to be registered with the Australian Securities and Investments Commission (ASIC) and they usually cost more to put together the necessary annual accounts and tax return.

On the plus side, you will be able to employ yourself and claim a tax deduction for your wages.

But be aware of the Personal Services Income (PSI) rules. If more than 50 per cent of the income of the business is produced by your personal exertion, it’s considered PSI and you will pay tax at your marginal rate, rather than the lower company tax rate. This rule affects taxpayers with any business structure.

Trust

A trust is the most expensive and complex business structure to operate but it might be the most appropriate for your needs.

There are some pluses and minuses so expert advice from your accountant and lawyer is crucial. You will need help to decide on the type of trust, to set up a formal trust deed and to carry out annual administrative tasks.

On the positive side, there may be tax advantages and there are some protections from financial and legal liability.

On the flip side, all income earned must be distributed to beneficiaries each year otherwise tax is paid at the highest marginal rate. Also, losses can’t be distributed to beneficiaries, it may be difficult to dissolve or change elements of a trust and it may be more difficult to borrow funds.

Ask for guidance

The importance of choosing the best business structure for your needs and understanding the regulatory requirements is crucial to the success of any small business. Check in with us for expert guidance.

i Sole trader | business.gov.au
ii Business structures – key tax obligations | Australian Taxation Office (ato.gov.au)

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Tax update September 2024

New deductions and employer obligations

Employers need to check that payroll systems reflect recent legislative changes, and the ATO is highlighting deduction opportunities available to some small businesses. Here’s your roundup of the latest tax news.

Updated employer obligations

The ATO is reminding employers to stay on top of legislative changes affecting payroll systems.

The Super Guarantee rate increased on 1 July 2024 to 11.5 per cent of ordinary times earnings, so all payments (starting with those for the July to September quarter) to super accounts for eligible workers must reflect the new rate.i

Individual income tax rate thresholds and tax tables changed also changed on 1 July 2024 so you may need to check calculations for your Pay As You Go Withholding obligations.

Claims for energy expenses

Many small business are eligible for a bonus 20 per cent tax deduction for new assets (or improvements to existing assets), that support more efficient energy usage.

The Small Business Energy Incentive applies to eligible assets first used or installed ready for use between 1 July 2023 and 30 June 2024.ii

Eligible expenditure for external training courses for employees incurred between 29 March 2022 and 30 June 2024 could also qualify for a 20 per cent bonus tax deduction from the Small Business Skills and Training Boost.iii

Pay less capital gains tax (CGT)

While a business can reduce capital gains made during a tax year by offsetting them with capital losses from the same or previous income years, not all capital losses are eligible.iv

Capital losses carried forward from previous years need to be used first, with losses from collectables (such as artwork and antiques) only permitted to be offset against capital gains from collectables.

Losses from personal use assets (such as boats or furniture), CGT exempt assets (such as cars and motorcycles), paying personal services income to yourself through an entity you set up, and leases producing income (such as commercial rental property), are ineligible as offsets.

Fuel tax credit rates change

Before claiming fuel tax credits in your next Business Activity Statement (BAS), check you are using the latest rates as they have changed twice in the new financial year.v

On 1 July 2024, the rate for heavy vehicles travelling on public roads changed due to an increase in the road user charge, with the rate altering again on 5 August 2024 due to a change in fuel excise indexation.

Different rates apply based on when you acquired fuel for your business’ use, so ensure you use the correct rate. If you are unsure, try the ATO’s online Fuel Tax Credit Calculator to work out the amount to report in your BAS.

Records essential for rental expense claims

Rental property investors without correct documentation to substantiate their expense deductions may find their claims declared invalid.vi

The ATO is warning investors they need all receipts, invoices and bank statements plus details of how deductions were calculated and apportioned for a valid claim.

Lodging a ‘nil’ BAS

While taxpayers registered for GST automatically receive a Business Activity Statement and are required to lodge and pay in full by the due date, businesses with nothing to report are still required to lodge.

If you have paused your business, you are required to lodge a ‘nil’ BAS by the due date either online or via the ATO’s automated phone service.vii

i How much super to pay | Australian Taxation Office (ato.gov.au)

ii Small business energy incentive | Australian Taxation Office (ato.gov.au)

iii Small business skills and training boost | Australian Taxation Office (ato.gov.au)

iv Pay less capital gains tax (CGT) | Australian Taxation Office (ato.gov.au)

v From 1 July 2024 to 30 June 2025 | Australian Taxation Office (ato.gov.au)

vi ATO warning to rental property owners: don’t let your tax return be a ‘fixer-upper’ | Australian Taxation Office

vii Cancelling your GST registration | Australian Taxation Office (ato.gov.au)

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Rental investor? How to get your tax return right

With Treasury estimating the government misses out on billions in potential tax revenue from rental property deductions and the ATO recently warning extra care is needed when lodging returns with this type of income, rental investors can consider themselves well and truly in the tax man’s sights.

In fact, the ATO’s Random Enquiry Program (REP) showed 9 out of 10 returns reporting net rental income needed adjustment, leading ATO second commissioner Jeremy Hirschhorn to note: “This is startling and clearly something we need to address”.

So, if you’re a rental property investor, it’s time to ensure you’re getting your deductions right.

Deductions under the microscope

Rental property investors can claim a wide range of deductions for expenses associated with maintaining and financing their property interests. These include interest expenses, capital works and other deductions required to maintain the property.

It’s clear from the REP, however, many rental property investors need to learn a little more about what is deductible and also when they can claim a deduction for the amount.

Although some expenses can be claimed immediately (such as management fees and council rates), other expenses (such as borrowing costs and capital works) must be claimed over a number of years.

Red flags for the ATO

Common mistakes rental property investors are making include failing to include rental income for short-term arrangements and insurance payouts, overclaiming deductions, and claiming for improvements to private properties.

Rental income must be the gross amount received and must be reported in the same financial year the tenant pays.

Another common mistake is claiming an immediate deduction for initial repairs when purchasing. Existing damage must be claimed over several years as a capital works deduction and is also used to work out your capital gain or loss on selling.

Improvements such as renovating a bathroom, are a building cost and must be claimed at 2.5 per cent annually over 40 years from completion, while damaged detachable items costing more than $300 should be claimed as a depreciating asset.

Tips to get your tax return right

When completing your return, it’s essential to apportion both your rental income and deductions in line with your ownership share of the property.

If there is a mortgage over the property and the loan is also used for private purposes (such as a buying a new car or taking a holiday), your interest expenses must be apportioned. This needs to continue for the duration of the loan, even if you repay the personal expense.

Deductions also need to be split to reflect any private use. This also applies if you only use part of the property to earn rent.

Ensure your deductions are in order

Borrowing expenses (such as loan establishment fees and title searches costing over $100) must be deducted over five years. In the first year, these expenses should be apportioned for the number of days of ownership.

Purchase costs (such as conveyancing fees and stamp duty outside the ACT) cannot be claimed but form part of your capital gains tax (CGT) calculations.

Ask the previous owner for details of any capital works deductions claimed so you can correctly calculate your own deductions. Alternatively, hire a qualified professional to estimate previous construction costs.

Although payments to a body corporate administration fund are fully deductible in the year incurred, payments to a special purpose fund for capital improvements or repairs are not immediately deductible.

Don’t forget CGT

It sounds obvious, but it’s essential to have evidence of all your rental income and expenses when lodging a claim. This needs to be retained while you own the property and for five years after selling.

Another tip is to ensure you calculate your capital gain (or loss) correctly when selling.

You are not permitted to include amounts already claimed as a deduction, including depreciation and capital works.

Capital gains must be included in your tax return for the income year the property is sold, while capital losses can be carried forward.

Please don’t hesitate to call if you have any questions regarding the preparation of documentation for your next tax return.

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To sell or not to sell is the question for moving into aged care

Moving into residential aged care can trigger a range of emotions, particularly if it involves the sale of the family home.

What is often a major financial asset, is also one that many people believe should be either kept in the family or its value preserved for future generations.

Whether or not the home has to be sold to pay for aged care depends on a number of factors, including who is living in it and what other financial resources or options are available to cover the potential cost of care.

It also makes a difference if the person moving into care receives Centrelink or Department of Veterans Affairs payments.

Cost of care

Centrelink determines the cost of aged care based on a person’s income and assets.i

For aged care cost purposes, the home is exempt from the cost of care calculation if a “protected person” is living in it when you move into care.

A protected person could be a spouse (including de facto); a dependent child or student; a close relative who has lived with the aged care resident for at least five years and who is entitled to Centrelink income support; or a residential carer who has lived with the aged care resident for at least two years and is eligible for Centrelink income support.ii

Capped home value

If the home is not exempt, the value of the home is capped at the current indexed rate of $201,231.iii

If you have assets above $201,231 – outside of the family home – then Centrelink would determine you pay the advertised Refundable Accommodation Deposit (RAD) or equivalent daily interest rate known as the Daily Accommodation Payment (DAP), or a combination of both.

The average RAD is about $450,000. Based on the current interest rate of 8.36% [note – this is the rate from July 1] the equivalent DAP would be $103.07 a day.

Depending on your total income and assets, you may also be required to pay a daily means tested care fee. This fee has an indexed annual cap of $33,309 and lifetime cap of $79,942.

This is in addition to the basic daily fee of $61.96 and potentially an additional or extra service fee.

There is no requirement to sell the home to pay these potentially substantial costs, but if it is a major asset that is going to be left empty, it may make sense.

Other options to cover the costs may include using income or assets such as superannuation, renting the home (although this pushes up the means tested care fee and can reduce the age pension) or asking family to cover the costs.

Centrelink rules

For someone receiving Centrelink or DVA benefits, there is an important two-year rule.

The home is exempt for pension purposes if occupied by a spouse, otherwise it is exempt for up to two years or until sold.

If you are the last person living in the house and you move into aged care and still have your home after two years, its full value will be counted towards the age pension calculation. It can mean the loss of the pension.

Importantly, money paid towards the RAD, including the proceeds from a house, is exempt for age pension purposes.

Refundable Deposit

As the name suggests, the RAD is fully refundable when a person leaves aged care. If a house is sold to pay a RAD, then the full amount will ultimately be paid to the estate and distributed according to the person’s Will.

The decisions around whether to sell a home to pay for aged care are financial and emotional.

It’s important to understand all the implications before you make a decision.

Please call us to explore your options.

i https://www.myagedcare.gov.au/understanding-aged-care-home-accommodation-costs
ii https://www.myagedcare.gov.au/income-and-means-assessments
iii https://www.myagedcare.gov.au/income-and-means-assessments

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Victorian Stamp Duty for Industrial and Commercial Property changes

In the latest budget, the Victorian Government announced significant changes to the payment and application of Stamp Duty for Industrial and Commercial Properties as of 1 July 2024.

The Commercial and Industrial Property Tax Reform Act 2024 (Vic) (the Act) provides that commercial and industrial properties in Victoria will be subject to stamp duty for a final time when it is next sold or otherwise transacted after 1 July 2024. Ten years later from the time at which the transaction takes place, it will transition to the new annual Commercial and Industrial Property Tax (CIPT) imposed at the rate of 1% of the unimproved value of the land. The CIPT will be in addition to land tax.

Notably, properties that are not sold or transacted (a change of ownership of more than 50%) will remain outside the CIPT regime and CIPT will not be payable even after the 10 year transition period.

What properties does this apply to?
Only properties and land zoned Commercial or Industrial fall within this new reform. The State Revenue Office will rely on Council Rates for assessing whether a property is Commercial or Industrial.

Mixed-use properties will be assessed on a case by case basis and the Commissioner will make a determination as to whether the property is primarily used for Commercial or Industrial. If so, CIPT will be payable. If not, CIPT will not be payable. This is an all or nothing situation.

What triggers the introduction of CIPT?
A change of 50% or more ownership in a property will trigger the transition to CIPT. Minority investors may become subject to CIPT directly or indirectly if a majority interest in the property is changed (which may occur in a syndicate) on or after 1 July 2024.

Owners seeking to change ownership of their commercial or industrial property between trusts, SMSFs or corporations that transact after 1 July 2024 will also trigger the implementation of CIPT.

Do I still pay Stamp Duty?
Stamp Duty will still be payable on the first transaction for that particular property that occurs on or after 1 July 2024. Stamp Duty can be paid upfront (as would usually occur) or you can apply for a Government Funded Support Loan which incurs interest (rate still be determined but looking like approximately 7%pa) and repayments are to be paid annually over 10 years. If you sell within the 10 years the Loan is to be repaid in full and it is likely that break costs will be charged. The Loan does not fall to the next purchaser.

This first transaction triggers the property to enter the CIPT scheme and 10 years from that date CIPT will be payable. If, for example, 3 years after the first transaction, the property is then sold, this next transaction does not incur Stamp Duty but CIPT will be payable in 7 years time by whoever owns the property at that time.

What is the rate of CIPT?
The rate of CIPT is 1% of the unimproved value of the property (as assessed on your Council Rates Certificate). It is an annual tax and is to be paid in addition to regular land tax. For example, if the unimproved value of the property is $800,000 your CIPT will be $8,000 annually.

The owner of the property as of 31 December immediately preceding the tax year has the liability of the CIPT and this cannot be adjusted on the sale of the property.

Can I pass CIPT onto my Tenant?
In most instances, no you cannot pass CIPT onto your Tenant for payment as an outgoing. The Retail Leases Act 2003 prohibits the passing on of CIPT and Land Tax to a Tenant as an outgoing. If your Lease does not fall within the confines of the Retail Leases Act 2003 then, subject to the terms of your lease, you may be able to pass on payment of CIPT to the Tenant.

What if I leave my property as it is for the next 20 years?
If you do not change the ownership of your property over the next 20-30 years then you will not trigger CIPT and it will not be payable. Bear in mind that this is the case under the current legislative framework and there is no guarantee that this, or the rate of the CIPT, will not change in the future.

What should I do?
If you have no intention of changing the ownership structure of your property for the foreseeable future, then you do not need to do anything. If a change is on the cards, you should transact this change (sign a Contract or Transfer of Land) prior to 1 July 2024.

If you are looking at purchasing a Commercial or Industrial property, you should sign a Contract of Sale before 1 July 2024.

In summary:

  1. CIPT applies to changes in ownership of Commercial or Industrial properties with a Contract signed and settlement taking place after 1 July 2024;
  2. The first transaction after 1 July 2024 will incur Stamp Duty which can be paid in full or via a government funded transition loan;
  3. 10 years after the first transaction, CIPT will be payable by the then current owner at the rate of 1% of the unimproved value.
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Living your best life in retirement

If you’re nearing retirement age, it’s likely you’re wondering if you will have enough saved to give up work and take it easy, particularly as cost-of-living increases hit some of the basic expenses such as energy, insurance, food and health costs.

Fortunately, someone has already worked out what you might need.

The Association of Superannuation Funds in Australia (ASFA) updates its Retirement Standard every year, which provides a breakdown of expenses for two types of lifestyles: modest and comfortable.i

Based on our average life expectancy – for women it is just over 85 years and men 81 – if you are about to retire at say age 67, you will have between 14 and 18 years in retirement, on average and depending on your gender.ii

ASFA finds that a couple needs $46,944 a year to live a modest lifestyle and $72,148 to live a comfortable lifestyle. That’s equal to $902 a week and $1387 respectively. The figure is of course lower for a single person – $32,666 for a modest lifestyle ($628 a week) or $51,278 ($986) for a comfortable lifestyle.iii

What does that add up to? ASFA estimates that, for a modest lifestyle, a single person or a couple would need savings of $100,000 at retirement age, while for a modest lifestyle, a couple would need at least $690,000.iv

A modest lifestyle means being able to afford everyday expenses such as basic health insurance, communication, clothing and household goods but not going overboard. The difference between a modest and a comfortable lifestyle can be significant. For example, there is no room in a modest budget to update a kitchen or a bathroom; similarly overseas holidays are not an option.

The rule of thumb for a comfortable retirement is an estimated 70 per cent of your current annual income.v (The reason you need less is that you no longer need to commute to work and you don’t need to buy work clothes.)

Building your nest egg

So how can you build up a sufficient nest egg to provide for a good life in retirement? There are three main sources: superannuation, pension and investments/savings. Superannuation has the key advantage that the money in your pension is tax free in retirement.

Your superannuation pension can be augmented with the government’s Aged Pension either from the moment you retire or later when your original nest egg diminishes.

Your income and assets will be taken into account if you apply for the Age Pension but even if you receive a pension from your super fund, you may still be eligible for a part Age Pension. You may also be eligible for rent assistance and a Health Care Card, which provides concessions on medicines.vi

Money keeps growing

It’s also important to remember that the amount you accumulate up to retirement will still be generating an income, whether its rentals from investment properties or merely the growth in the value of your share investments and the accumulation of money from any dividends paid.

You can also continue to add to your superannuation by, for instance, selling your family home and downsizing, as long as you have lived in the home for more than 10 years.

If you are single, $300,000 can go into your super when you downsize and $600,000 if you are a couple. This figure is independent of any other superannuation caps.vii

Planning for a good life in retirement often require just that – planning. If you would like to discuss how retirement will work for you, then give us a call.

i Retirement Standard – Association of Superannuation Funds of Australia
ii Life expectancy, 2020 – 2022 | Australian Bureau of Statistics (abs.gov.au)
iii https://www.superannuation.asn.au/media-release/retiree-budgets-continue-to-face-significant-cost-pressures
iv https://www.superannuation.asn.au/resources/retirement-standard/
v https://www.gesb.wa.gov.au/members/retirement/how-retirement-works/cost-of-living-in-retirement
vi Assets test for Age Pension – Age Pension – Services Australia
vii Downsizer super contributions | Australian Taxation Office (ato.gov.au)

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Insurance is a sound investment

Managing risk is an essential part of investment strategy to reduce the potential for losses.

Risk is not just associated with investing though – life can throw a curve ball or two and insurance is one way to manage risk in a broader context.

It’s a matter of weighing up your risks and thinking about what you would do if the worst happened. Could you afford to build a new house, buy a new car or support your family if you became too ill to work?

Various insurance products or self-insurance can help to mitigate these types of risks.

Underinsurance

While many Australians have some form of life insurance through their superannuation, the level of cover is rarely sufficient. The standard offering within the super framework is well below what your family need to live comfortably should you die or lose your ability to earn an income.

A Financial Services Council report, estimates that as many as one million Australians are underinsured for death and total permanent disability (TPD) and 3.4 million for income protection.i

Rice Warner estimates that insurance cover for a 30-year-old with dependents should equal eight times the annual family income for life insurance, four times the family income for TPD and 85 per cent of the family income for income protection. The default superannuation offering falls well short of this figure.ii

Home and contents

But it’s not just life insurance. There is also a fair amount of underinsurance in home and contents.

With the growing incidence of bushfires, floods and storms, protecting your home and possessions with insurance is more important than ever.

The biggest mistake is insufficient cover to rebuild your property particularly with the recent surge in building costs. You should also consider the costs associated with demolition and removal of debris, the cost of architects and builders and the need to find alternative accommodation while your home is being rebuilt.

It is important not to head for the cheapest policy as this may well fail to meet your needs. Read the product disclosure statement to make sure the cover delivers exactly what you need.

Health and travel

Health insurance and travel insurance are also important considerations.

You will pay a Medicare Levy surcharge if you do not take out private health insurance and have a taxable income above $93,000 for singles or $186,000 for a family, couple or a single parent (increased by $1,500 for each dependent child after the first child). This starts at 1 per cent of your taxable income and goes up to 2.5 per cent. So, it is worthwhile weighing up whether taking out private health insurance is the better option.iii

When it comes to travel insurance, if you can’t afford it, you can’t afford to travel overseas, according to the Federal Governments Smart Traveller website.iv The cost of medical care in other countries can be exorbitant and you may need to be transported back to Australia. The expenses can be enormous.

Of course, travel insurance can also help to compensate for cancelled or delayed trips and lost luggage.

Self-insurance alternative

An alternative to taking out an insurance policy is to self-insure. That means putting money aside regularly to build up a big enough fund to help keep a roof over your head or replace a vehicle.v

The upside is that these funds are yours and, properly invested, can grow over time. The downside is that you may not have enough money together when a disaster happens.

Insurance can be the difference between successfully recovering from an event and changing your life forever. If you would like to discuss your insurance needs, call us.

i https://fsc.org.au/resources/2537-fsc-australias-life-underinsurance-gap-research-report-2022/file page 18
ii https://www.ricewarner.com/life-insurance-adequacy/
iii https://www.ato.gov.au/individuals-and-families/medicare-and-private-health-insurance/medicare-levy-surcharge/medicare-levy-surcharge-income-thresholds-and-rates
iv https://www.smartraveller.gov.au/before-you-go/the-basics/insurance
v https://www.investopedia.com/terms/s/selfinsurance.asp

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Financial wellbeing is a gift worth giving yourself

The festive season is a time of joy and celebration but, for some, it can also lead to a financial hangover in the New Year.

Overspending on gifts, parties, and decorations can quickly add-up, leaving us with unwanted debt in the New Year.

In 2022, Australians spent more than $66.7 billion during the pre-Christmas sales in preparation for the festive season. The rising cost of goods and services mean that even though many are trying to curb their spending, it is expected that we will spend a little extra this year.

5 ways to rein in Christmas spending

  1. Create a Christmas budget – A budget is an effective way of controlling spending. It may not sound like fun, but it helps you to understand what you would like to spend and how much debt you are prepared to live with. List all of the costs you can think of (gifts, decorations, food, travel and entertainment), then set limits for each category and stick to them diligently. Consider using budgeting apps or spreadsheets to track your expenses and ensure you stay on track.
  2. Embrace the spirit of giving – Instead of buying individual gifts for every family member or friend, organise a Kris Kringle or Secret Santa gift exchange. This not only reduces the financial burden for everyone, but it adds an element of surprise and excitement to the holiday festivities.
  3. Take advantage of sales and discounts – Begin your Christmas shopping early to take advantage of sales and discounts. Stockpiling non-perishable food items and other essentials before prices rise closer to Christmas can deliver big savings.
  4. Online shopping – You can often find better prices by shopping around online and various third-party websites offer cash back or rewards not available in store.
  5. DIY and personalised gifts – Tap into your creativity by making your own gifts. Handmade gifts can be a welcome and thoughtful way of giving. Consider creating homemade cards, photo albums, or baking treats for loved ones.

Tackle any debt now

With many household budgets feeling the pinch due to rising housing, power, petrol and other costs, debts may already be increasing. But if you are feeling burdened with debt, don’t decide to leave it until after Christmas. The time to tackle it is now before it gets out of hand.

One option to consider, is to consolidate your high interest debts into a single more manageable loan. This approach can simplify repayments and potentially reduce interest rates, making it easier to eliminate debt over time. But it is important to do your calculations carefully to make sure it is worthwhile for you and then to be vigilant about watching spending.

Another option is to take a cold, hard look at your expenses. Is there something that can be cut back, and that money diverted to repaying debt? Any reduction of your debt load will help, no matter how small. Some people like to implement the snowball method in tackling their debts: while continuing to make the minimum repayments on all your debts you pay a little extra on the smallest debt to pay it off faster. Getting rid of debts can help to inspire you to continue.

Taking control of Christmas spending and debt is crucial for starting the New Year on a positive financial note. So, start planning early, know what you can afford to spend and prioritise your financial wellbeing for a debt-free and stress-free holiday season.

If you are struggling with post-Christmas debt or need assistance to manage your finances, we are here to help. Contact our team of financial experts today to discuss strategies to regain control of your financial future. Make this Christmas season a time of joy and financial empowerment.

i Pre-Christmas spending forecast to tread water as uncertainty looms for discretionary retailers | Australian Retailers Association

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The challenges of market timing

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.

Source: Vanguard

1 https://corporate.vanguard.com/content/dam/corp/research/pdf/Cash-panickers-Coronavirus-market-volatility-US-CVMV_072020_online.pdf

Reproduced with permission of Vanguard Investments Australia Ltd

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