12 Tax Time Steps - Part 2

Recently we briefly discussed 8 super strategies for year end. We now offer a further 4 tax strategies. As with the super ideas, these are general in nature, and professional advice should be sought before looking to implement.

Strategy 9.Use losses to reduce capital gains.
This is suitable if you have some loss making investments that no longer meet your needs. You can save some tax, and free up more funds to invest.

Strategy 10. Defer asset sales to manage CGT.
If you are thinking of selling an asset this financial year, deferring to next financial year can delay when the tax needs to be paid. It may further provide for an opportunity to reduce the CGT as well.

Strategy 11. Pre-pay interest on a investment loan.
If you have a geared investment, you may be able to prepay the interest. This will bring forward the deduction, providing the potential for a reduced income tax liability.

Strategy 12. Pre-pay deductible risk protection premiums.
Similar to the above strategy, pre-paying these premiums will bring forward the deduction. Often people think only of income protection, but for business owners, this may cover more types of policies.

Over the next few weeks, we will look at the practicalities of some of the above strategies.

12 Tax Time Steps - Part 1

Superannuation is still one of the best ways to build wealth and save for retirement. This is primarily because the maximum tax rate during the 'accumulation phase' is 15%. In the lead up to the end of financial year, contributing to super can be even more rewarding.

In part 1 of the 12 tax time steps, we will look at 8 year-end super strategies. In part 2, we will look at a further 4 tax strategies.

Before you implement any of these, make sure you seek financial advice.

Strategy 1. Salary Sacrifice.
Ideal if you are expecting a bonus. The benefits are that you may be able to reduce your tax, and increase the level of after tax investment.

Strategy 2. Get a top up from the Government.
If you qualify, you may be eligible for up to $1,000 from the government, tax free. This also may be an ideal way to pay for insurance premiums (paid for by the government).

Strategy 3. Contribute for your spouse.
If your spouse has a lower income, you may be eligible to contribute, and recieve a tax rebate. This can assist in maximising the benefits of super as a couple.

Strategy 4. Maximise deductible contributions.
If you are eligible, you can pay less tax. This may be an ideal way for a business owner to reduce tax, and create wealth outside of their business.

Strategy 5. Offset capital gains tax.
You may be able to reduce or offset the impact of CGT if you have sold an asset for a profit. While saving tax, you may be able to make a larger after tax investment.

Strategy 6. Split contributions with your spouse.
You may be able to receive your combined super in a more tax effective manner, and even allow yourself to receive concessions on deductible contributions longer if you are eligible to utilise this strategy.

Strategy 7. Purchase Life & TPD tax effectively.
If you are eligible for any of the tax concessions above, you may be able to save on the cost of insurance premiums, or get 'more bang for your buck'.

Strategy 8. Delay withdrawing from super. If you are eligible to withdraw from super, there are some very tax effective reasons to delay, or even postpone withdrawing from super. This can save significant lump sum tax, and allow for a greater after tax investment.

As always, the strategies utlined above are neccessarily general, and my not be suitable for everyone. However, it is likely that any working Australian, and many who are not, can benefit from effective use of super.

In the next few days, we will outline the 4 tax strategies. As ever, if you have any questions, please let us know.

Is there a Chinese proverb for everything?

There is a saying that has been credited as a Chinese proverb that goes along the lines of "The best time to plant a tree was 20 years ago. The second best time is now." Put simply, what it means is that if you wanted a tree, you should have planned ahead. If you have not planned ahead, you had better get started.

Of course, the same goes for wealth creation and planning for your retirement. If you want to retire, you had better do something well before 65. For some of us, it might seem a long way off, but rather than take that for granted, you can use this to your advantage. Small steps taken over a longer period of time can achieve the same result, with less impact on your current lifestyle. And, as important as it is to plan for later in life, there has to be some balance between future goals, and current lifestyle. So then it would appear to make sense to give yourself as long as possible to get where you want, with the smallest impact while you are getting there.

Elsewhere in the blog we have highlighted why you need to plan ahead. But, is now really the second best time to plant your retirement 'tree'.

At the time of writing, many Australians remain concerned at the events unfolding in Europe, specifically the Greek financial crisis and what this might mean for the whole of Europe. The purpose of this post is to help make sense of current financial events and offer some guarded guidance for the future.

The cause of the Global Financial Crisis was fundamentally an excess of debt in the private sector of the economy caused by interest rates kept too low for too long. When you combine too much debt (much of it was lent to people and companies that had little hope of making their repayments if they ever hit a rough patch) with debt securities even the smartest people couldn't understand, well there's a recipe for a financial crisis. When the crisis did happen governments around the world did two things. Firstly, they took on the bad private debt of troubled institutions (those that were "too big to fail") and made the governments responsible for them. This was needed to make sure that the financial system continued to operate in as normal a way as possible. Secondly, they promised that the financial system would be better regulated in the future so that the financial crisis would not happen again (we are still waiting on this one).

The current situation has a direct linkage with these events. Greece spent up big when interest rates were low and the government thought economic growth would go on forever (thereby paying back the debt from a smaller proportion of future income). Now that economic growth is much weaker throughout the developed world, they won't have a bigger economy to pay back the debt. In fact, the proportion of the economy that will be needed to pay back the debt is so big that it will, in fact, slow the economy, because of the higher cost of borrowing.

So these are a number of reasons to be concerned about investing. But, currently, we are looking at data courtesy of datastream that shows why now might just be the second best time, on the assumption that you are looking to grow your wealth over the long term. The data is a graph that shows the average return of a 'growth' portfolio (85% growth assets/15% cash & fixed interest) over the last 20 years to the end of June 2010. This is then compared torolling 12 month returns, or what an investor would have received from being invested in a 'generic' growth portfolio over the same time period.

Importantly, any time that the red line is at or below the blue line, an investor should be able to expect average or above average returns over the long term. At present, the red line, is just about on the blue line. This does not mean that there will not be short term volatility, or that returns over the next 1 year will be high, but that someone investing now can reasonably expect to generate an average return over the long term. Also of note is that this average return is ahead of the cash rate, and the current mortgage rate.

Of course, as always, the comments here are general in nature, and do not take into consideration anyone's individual position. But the principle behind the post is that waiting for the 'perfect' time might mean you get to retirement and your 'tree' is bare.

She'll be right - Part 2

What is your most important asset? Your house? Your super? How about your ability to earn an income, or to perform household tasks without having to pay for them?

Research has consistently shown Australians don’t take out adequate levels of insurance to protect themselves and their family. While most people would never consider driving a car without motor insurance, less than a third of us insure our most important asset – our ability to earn an income.

If you own a house, then chances are, you have home insurance. In fact, in 12 years, I have not met a single homeowner who doesn't. If you are a homeowner, you probably took out cover becauue you do not want to lose your house in the event of unforseen circumstances. Yet, how long would you be able to keep your house if you weren't receiving any income, or in the event of being diagnosed with a critical illness or accident.

Research commissioned by IFSA in 2005 showed parents with dependents were critically underinsured by $1.37 trillion. Thinking of that another way – only 4% of the total population with dependent children have adequate levels of Life Insurance cover.

More than three in four Australians will be diagnosed with a serious illness in their working life. The majority of us will rely on savings, selling assets in a depressed market or government welfare. And a significant proportion of Australians would face financial hardship if they were to have an accident, become sick or die.

Worringly, The ING Research Optimistic Australians report (December 2008) surveyed the opinions of Australians aged 25 to 65 and found:

* 89% said they were not likely to have an accident (making them unable to work) in the next 20 years
* 80% said they were not likely to suffer a serious illness in the next 20 years
* 83% did not expect to pass away in the next 20 years

So, research tells us that the vast majority of Australians think 'she'll be right' when it comes to insurance, but that 3 in 4 will need it. Oh, and at odds like 3 in 4, it doesn't seem like a matter of insurance 'just in case' any more, but rather insuring for the distinct possibility that you will have an issue.

There are a number of reasons why people don't have insurance, including a lack of awareness, a feeling that it is too complicated, and thinking that what they may have in their super fund is 'enough'. However, the main reason may be the perception that life insurance is too expensive. ING research says that - 81% of respondents thought that life insurance is too expensive. Interestingly, 61% over estimated the cost of insurance.

Finally, 63% of people with a partner say that they have not discussed life insurance with their partner, with a large proportion saying it is becasue it is too unpleasant to discuss. Not nearly as unpleasant as the alternatives.

She'll be right - Part 1

Every quarter, the Association of Superannuation Funds Australia (ASFA) update their Westpac ASFA Retirement Standard. The standard benchmarks the annual budget needed by Australians to fund either a 'comfortable' or a 'modest' standard of living in the post work years.

That obviously leads us to what ASFA mean by 'comfortable' and 'moderate'. Moderate is defined as better than the Age Pension, but still only able to afford basic activities. Comfortable is defined as enabling a healthy retiree to be involved in a range of leisure activities, and to be able to purchase a range of things, including household goods, a reasonable car, electronic equipment and domestic, and occasional international holiday travel. So comfortable is not 'luxury', and moderate is probably well below what most Australians would realistically want for themselves.

Don't be fooled by the idea that you will be happy spending significantly less in retirement. Just think quickly...is there not extra hobbies and activities that you would like to do in retirement that you don't do now? Maybe some travel? And what activities that you do now will you be 'happy' to give up?

The figures released by ASFA for the March Quarter 2010 show that for a couple to lead a comfortable retirement, they will need $53, 565 per annum. And remember, this is for a 'reasonable' car, and occasional overseas travel.

The next step here is to 'carry forward' this amount of money, and work out what will be needed when you go to retire. Roughly, if you are 40, and inflation continues at an average of 3%, then you will need about $110,000 per annum to meet these living standards. And to do that, and ensure that your money will last longer than you do, you will need a capital sum of around $2,000,000. And again, this funds a 'comfortable' $53,000 lifestyle in todays value. If you want a better lifestyle, you'll need more capital.

So where does 'she'll be right' come in. ASFA statistics show that the mean balance in super for men in Autralia is $87,600 and for women is $52,300 (more on this imbalance in She'll be right - Part 3). That is a long way short of the $2,000,000 mentioned above.

Further, ASFA figures indicate that the primary source of income for 66% of retirees aged 45+ is Government Pensions, which provide for less than a moderate standard of living. 7% have zero or negative income.

Summing up then, 'most people' would want for themselves a comfortable lifestyle, but have not funded this, and are not funding this, with the result being that nearly three quarters of retirees can expect, at best, a retirement that is less than modest.

If you are lucky, then your retirement might still be a few years off, but 'she might not be looking so right' after all.

The value of advice

So you think good advice is picking good investments? Or that you need 'a lot' of money to bother seeking finacial advice.

The true value of advice lies elsewhere. Put simply, the value of advice lies in working with a planner to formulate a strategy, and then following through on the agreed steps to allow the strategy to work. In short, it is direction, and discipline.

Good advice is about giving you support and guidance on the best way to manage your current position to help you to achieve your long term goals. While investments play an important role, good advice also includes debt management, estate planning, salary planning, retirement planning and protecting you and your family from the finacial consequences of accidents and illness.

Most importantly, the value of advice is not limited to the wealthy. We all have the ability to build financial independence. Sometimes all it takes is a partnership with a skilled planner to help us reach our potential.

Good advice might just be your best investment after all.