The Royal Commission

The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry that concluded in early 2019 discovered a number of lax lending practices by some of Australia’s biggest lenders. Of particular concern was that some banks failed to verify the living expenses of home loan applicants. In many cases this lead to people receiving loans that they were unable to repay. The Royal Commission also revealed that one of the bank regulators, ASIC, did little to punish misconduct, so there was little incentive for banks to comply with their legal obligations.

In response to the Royal Commission ASIC promised greater scrutiny of lending practices and lenders began to ask for a lot more information when assessing home loan applications. They now require detailed proof of both income and expenditure at a level that many people may find intrusive.

Bigger deposits

The decline in home prices in Australia’s major cities mean that buyers don’t need to borrow as much for a given property, which should make it easier to get a loan. However, falling prices create a greater risk for the banks, and one way to reduce this risk is to require a higher deposit, extending the time it takes to save that deposit.

Stringent stress testing

Even before the Royal Commission the prudential bank regulator, APRA, introduced a requirement that banks check on their borrowers’ ability to service their loans if there is a significant increase in interest rates. While it might be possible to borrow at an interest rate of less than 4% per annum (pa), the banks need to check that the loan is still affordable at an interest rate of more than 7% pa, thus reducing the amount that can be borrowed.

Being prepared

The main response to this more difficult lending environment is simple, but that doesn’t make it pleasant. Unless you are able to increase your income, you’ll need to save more. Inevitably, that means spending less:

• Apps such as TrackMySPEND from MoneySmart can help you track your spending and make it easier to work to a budget.
• Keep detailed records of saving and spending. You will be asked for them come loan application time.
• Start early. You are more likely to be successful in your home loan quest if you can show a consistent history of saving and responsible spending spanning years rather than months.
• Shop around. By all means start with your regular bank, but also check out what the non-bank lenders and mortgage brokers can offer.

Need to speak with a financial advisor? Call the Leenane Templeton Wealth Management team to chat about your current financial situation and needs. Contact Us Today.

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Why do it?

A prime reason to rentvest is to get a foot in the door of the housing market. While 67% of Australian homes are owner-occupied, that figure is well under 50% for under-35s.

It has become popular for young adults to stay in the family home, contributing a bit of board to Mum and Dad while paying off an investment property with the help of a tenant. It can provide for a quicker entry into property investment or home ownership than would otherwise be possible.

Increasingly, ‘rentvestors’ are renting homes in attractive suburbs in which they can’t afford to buy, while investing in a less attractive, but potentially higher growth location. Driving this trend is the difference in rental yields. As a percentage of property values, rents tend to be lower in desirable areas, down as low as 2%, than the yields of over 6% available in more affordable suburbs.

In the reverse situation, some people opt to rent cheaply while buying a higher-value property, often with the expectation the investment property will enjoy a higher rate of capital growth.

And then there are those who want to or need to regularly move house but still seek the comfort that owning a property can provide.

Making it work

Attractive as the lifestyle benefits may be, rentvesting also needs to work financially. At the minimum you need to be able to pay your rent and cover any net expenses on your investment property.

Over the long term you also want to end up in a better financial position through rentvesting than would otherwise be the case, so it’s important to understand the property market and form an opinion on where prices are headed.

There are also a number of tax issues, both positive and negative, to bear in mind:

• You can claim a tax deduction against your earned income if the outgoings on your investment property (interest payments, council rates, insurance, agent fees, etc.) exceed the rental income, i.e. if the property is negatively geared.
• Rental income in excess of expenses is taxable at your marginal tax rate.
• Rent on the property you live in needs to be paid from after-tax income.
• Any profit on the sale of a rental property is subject to capital gains tax, whereas the profit on a principle residence is tax-free.

Is it right for you?

Like the idea of taking in the sea views from your rented home while a tenant is paying off the mortgage on your investment gem in a suburb set to boom? It’s definitely worth exploring. Just make sure you understand the concept from all angles. Your financial adviser may not provide advice on direct property investment, but he or she can act as a sounding board to help you ensure you have everything covered.

For more information, contact one of our advisors at Leenane Templeton on (02) 4926 2300 or email success@leenanetemplton.com.au.

Source: Australian Tax Office website www.ato.gov.au Residential rental properties.

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This isn’t necessarily because your demographic is particularly gullible. Rather, it’s because you’re more likely to control higher levels of wealth, perhaps as the trustee of a self-managed super fund (SMSF); you’re accustomed to making financial decisions; and you’re actively looking for attractive investment opportunities. What scammer wouldn’t want to target you?

Scams take many forms but when it comes to superannuation, two stand out:

1. fraudulent investment schemes, and
2. schemes offering early access to superannuation.

Either way, the result can be a major financial loss and dreams destroyed.

Golden opportunity

One clear warning of a scam is an unsolicited approach. Someone contacts you, usually by phone or email, offering an investment that is ‘both safe and delivering high returns’. This person will often know a lot about you, reciting accurate personal details they claim you provided in a questionnaire you completed earlier. Their story is supported by an apparently authentic website and, enticed by the attractive returns and smooth sales talk, you make an initial investment. At the beginning you receive statements showing your investment is growing steadily prompting you to add further funds. Then things go silent. Their phone number is disconnected, emails bounce and the website disappears, along with any hope of recovering your funds. Your stomach lurches. A cold sweat saturates you. You’ve been scammed.

Wonderful as modern technology is, it makes it easier for fraudsters to appear legitimate and transfer money in an instant. They close down one operation and set up another with ease. It doesn’t help that we give away much of our personal information, and what isn’t available for free can often be purchased by criminals.

Early access

The other major scam that lures many who need money quickly is the promise of early access to superannuation. This is how it works.

Bob’s superannuation is just sitting there, the solution to his financial problems if only he could access it.

He searches the internet for options and an advertisement promising early access to super pops up. This puts Bob in touch with a ‘specialist’ who helps him set up a SMSF, telling him that as the fund trustee he will be able to get hold of his super money. Bob signs the paperwork to set up the fund and rollover his super, but the money doesn’t turn up where it should. Eventually Bob discovers that his retirement savings were transferred to a bank account controlled by the scammer then moved overseas.

Not only has he lost the lot, Bob now faces a big tax bill for accessing his super prematurely. The scammers didn’t tell him that early access to super is only available:

• in cases of incapacity,
• to pay for medical treatment if seriously ill,
• if in severe financial hardship and can’t meet immediate living expenses, or
• if terminally ill.

Protection is the best cure

A few simple precautions can help protect your super (and other savings) from scammers.

• Hang up on unsolicited phone calls and delete suspicious emails.
• Take care when sharing personal information.
• Visit scamwatch.gov.au for updates on scams that are doing the rounds.
• If you suspect a scam report it to Scamwatch, even if you haven’t lost any money.
• Seek advice from a licensed adviser. Legitimate advisers and investment managers appear on ASIC’s list of Australian Financial Service Licence holders.
• And beware of dating and romance schemes. They are more common than fraudulent investment schemes, result in bigger financial losses, and are targeted at the same demographic!

For more information, contact Leenane Templeton on (02) 4926 2300 or email success@leenanetempleton.com.au.

Source: ASIC’s website www.moneysmart.gov.au – Financial advisers register

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Concentration risk is the increase in investment risk that comes about from not sufficiently diversifying your portfolio. In other words, too much money is concentrated in too few assets, sectors or geographical markets.

This can happen:

• Intentionally, because you have a strong belief that a particular share or sector, such as resources, banks or property, is likely to outperform in the future.
• Unintentionally, through asset performance. One or two shares deliver spectacular gains, making the entire portfolio more sensitive to moves in just a couple of assets. Or maybe shares as a whole enjoy a period of strong growth. Even though you hold a large number of different shares, the increased exposure to one asset class increases the risk to your portfolio.
• Accidentally, through poor asset selection. Nine out of the ten top companies that make up the MSCI World Index also appear on the top ten list of the main US index, the S&P 500. Investing in two funds, one that tracks the world market and one that tracks the US market won’t deliver the level of diversification you might expect.

Managing your risk

The solution to concentration risk is our old friend, diversification.

• Appreciate the importance of asset allocation, the art of spreading your money across the main asset classes of shares, property, fixed interest and cash. Ensure your asset allocation matches your tolerance to investment risk.
• Diversify within each asset class. Holding the big four banks is not a diversified share portfolio. If property is your thing, buying four one-bedroom apartments in the same building, or even in the same area, creates a huge concentration risk.
• Rebalance your portfolio to keep it broadly in line with your ideal asset allocation. This may create a tax liability, but often it’s better to pay some tax than to carry too high a level of concentration risk.
• Understand each investment and its role in your portfolio. Does share fund A hold similar shares as share fund B? Do they both have the same strategy?
• Get a professional opinion. Even if you are confident in making your own investment decisions it’s wise to run them by a licensed adviser.

It’s surprisingly common for investors to develop an emotional attachment to particular shares or properties they own. Concentration risk can also increase over time due to lack of attention. Your financial planner will assess your portfolio for hidden concentration risk and help you achieve a better balance of investments.

For more information about managing your investments, contact our office on (02) 4926 2300 or email success@leenanetempleton.com.au

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The 10 percent rule is history! This rule prevented employees making additional tax deductible contributions into superannuation, even though their additional contributions were within the concessional (tax deductible) contributions cap.

Outline of new measures

From 1 July 2017, you may make personal deductible personal contributions into superannuation, provided that you do not exceed your concessional contribution cap. This means that any unused concessional contribution cap amounts can fund insurance arrangements in a tax effective way.

For example, consider the situation where your employer makes a $15,000 contribution into your super during the income year ended 30 June 2018. You now have the capacity to make an additional deductible personal contribution of $10,000 in the 2018 income year. If your insurance premium is $5,000 per annum, you can make a tax deductible personal contribution of $5,000 to a superannuation fund, and have the superannuation fund pay the requisite premium.

How does this benefit you?

(i) Substantial out of pocket cost reduction

Funding insurance through superannuation in this way can substantially reduce the cost of insurance.  Unfortunately, the cost of insurance outside superannuation is generally not deductible for tax purposes. If we structure an insurance arrangement in super funded by deductible personal contributions, we can achieve a substantially different out of pocket cost outcome for you. For example, if you earn $90,000 per annum in 2017/2018, you will have a marginal tax rate of 39 percent. In order to fund an annual insurance premium of $5,000, you must earn $8,197 before tax. Using the insurance in superannuation route, you can reduce the out of pocket cost of this insurance to $5,000 per annum. The out of pocket cost reduction is based on your marginal tax rates. The higher the marginal tax rate, the greater the reduction.

(ii) No erosion of retirement savings

A major criticism is that insurance in superannuation erodes retirement savings. This is certainly true when we are using superannuation balances to fund life insurance costs. However, in this instance there is no erosion of retirement savings. The $15,000 employer contribution made on your behalf is not eroded by this arrangement.

(iii) No contributions tax

Everyone gets confused over the imposition of the 15 per cent contributions tax. The good news is that the above arrangement does not carry a 15 per cent impost.

Your personal concessional contribution is included in the assessable income of the recipient superannuation fund, but there is an offsetting tax deduction within the superannuation fund for the premium paid on life cover. This means that the contributions tax cost is reduced to zero via this tax deduction. Your insurance arrangements in super therefore do not carry any costs in addition to the premium paid.

One word of warning

Beware the notice formalities

Personal contributions into superannuation are presumed to be non-deductible (“non-concessional”) contributions, unless you provide the superannuation fund trustee with a notice of intention to claim a tax deduction. If a notice is not provided, and other associated formalities are not completed within the prescribed time periods, no deduction may be claimed for the contribution in question. This means that you need to observe these provisions meticulously and diligently to ensure that you do not lose this valued tax deduction.

Way forward

The insurance in superannuation landscape has changed dramatically with effect from 1 July 2017.  Speak to your financial planner to ensure your life insurance arrangements give you the best possible outcomes.

For more information please speak with our financial advisors at Leenane Templeton Wealth Management.   Call (02) 4926 2300

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For taxation purposes, there are three major types of expenditure property investors should be aware of, all of which are subject to different taxation treatments.

• Expenses that cannot be claimed (e.g. utilities charges, and acquisition and disposal costs).
• Expenses for which immediate deductions can be claimed (e.g. rates, insurance, legal expenses and repairs).
• Expenses for which deduction claims can be made over a number of income years (e.g. borrowing expenses such as stamp duty, title search fees and capital works).

When considering the deductibility of renovations, such as replacing a bathroom, the effective life of the existing structure must also be factored in. Houses are generally depreciated over a period of 40 years (at 2.5% per year), but the residual value of the existing structure is also taken into account.

Example

Tony owns a rental property built 20 years ago, and needs to replace the now obsolete bathroom at a cost of $20,000. The original value of the bathroom was assumed to be $8,000, with the result being depreciation of $4,000 (being 2.5% times 20 years times $8,000), and a residual value of $4,000. As a result, Tony will be able to claim a tax deduction for the $4,000 residual value, plus 2.5% of the renovation cost ($375), for a total deduction of $4,375 this income year.

Timely and quality maintenance of investment properties can provide significant benefits through the improvement of rental yields. However, for taxation purposes, the treatment of these expenses can vary, so it is worth discussing with your accountant or adviser before you commit to expenses.

For more information, contact us at Leenane Tempelton on 02 4926 2300 or email success@leenanetempleton.com.au

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When you are building up your superannuation, you can salary sacrifice and pay no more than 15% tax on your income. The earnings on your growing super are taxed at not more than 15%, rather than up to 49%, and capital gains are taxed at 10% rather than up to 23.5%.

Let’s imagine you decided to invest $10,000 a year for the next ten years. The table shows the comparison between salary sacrificing into super and investing it personally at different tax rates.

If you are on the top tax rate, you will have 89% more saved after ten years. And it gets better over time – after 20 years you would have 122% more! There will be no limits on how much you can have in superannuation and no penalty tax rates.

Once you retire after age 60 you can draw on your super either as a pension or by taking lump sums and it will be tax-free. If you leave it to accumulate, the fund will pay tax as described above. If you convert your super to a pension all income and capital gains are tax-free. You have the freedom in how you manage your retirement savings.

Can it really be this good?

There will be times when superannuation may not be the best solution. For instance, your money is locked away until retirement and there are limits on borrowing to invest.

Superannuation rules limit how much can be contributed tax-effectively to super:

After-tax (undeducted) contributions

• Limited to $180,000 (indexed) per person per year.

Pre-tax contributions

• Limited to $30,000 per year for those aged under 49; and $35,000 per year for people 49 and over.

Over the long term, these rules may actually make super simpler, but in the meantime, it is a good idea to get assistance in stepping through the current maze of rules.

Note: Tax rates include 2% Medicare Levy and 2% Temporary Budget Repair Levy for taxable incomes over $180,000 p.a.

For more information, contact us at Leenane Tempelton on 02 4926 2300 or email success@leenanetempleton.com.au

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So how do managed funds work, what types are available and what are the risks involved?

The Basics
When you invest in a managed fund, you're allocated a number of units based on how much you invest and the current price of each unit. For example, if you invest $5,000 and the unit price at the time is $1, you would own 5000 units.

If the unit price rises to $2, the investment will be worth $10,000 ($2 x 5000 units). Or if the unit price drops to 90 cents, the investment would then be worth $4,500 (90 cents x 5000 units).

The Benefits
Managed funds can be an effective way to make the most of your investment dollars because your contribution is pooled with the money of other investors. This delivers benefits such as:

• Asset diversification. This can help investors achieve a lower level of investment risk across their portfolio. Depending on the particular managed investment, it may invest in shares, property, fixed interest or cash, or a specific combination of these assets.
• Broader investment market access. Some markets, such as international markets, may otherwise be unavailable to you as an individual investor.
• A tailored portfolio. Your investments can be designed to suit your needs, whether you want to gain a regular income or focus on capital growth.
• Professional management of your money. A team of experienced investment managers will be in charge of your money. These managers are responsible for seeking out the best possible returns through careful selection of investments and by monitoring political and economic factors that may affect the performance of particular investment sectors.
• Professional investment administration. Managed funds are convenient for the investor because the manager handles the day-to-day fund administration.

The Returns
Here are two types of returns for managed funds: unit price growth and distribution income.

Unit price growth occurs when the value of the underlying investments in the fund have grown over the period of the investment. This results in an increase in the price of units in the fund.

Income is paid to unit holders when a managed fund makes a distribution. These are payments received during the course of your investment. They consist of the earnings the fund has generated over the period and may include capital gains (from the sale of fund shares or other fund investments) or income (from dividends or interest).

Most managed funds will give you the option of receiving your distributions as cash to your bank account, or re-investing them within the fund.

The Risks
There is a simple rule about risk which generally holds true for all investments: the higher the possible return, the greater the risk of loss over the short term. However, if you plan to invest over the long term, these risks can be reduced, even for more volatile investments such as shares.

For this reason, funds with a higher exposure to growth assets such as shares and property are best suited to those who are looking to invest for strong returns over longer time periods (greater than seven years) and who are prepared to experience short-term volatility along the way.

Funds with a higher exposure to more conservative investment types, such as Australian fixed interest, mortgages and cash, are less volatile but generally deliver lower returns.

Diversification can reduce the risk. By investing across a range of asset classes that experience good performance at different times, the higher returns you receive from one type of investment can help to offset lower or negative returns from another.

Investing in managed funds requires a medium-to-long term investment horizon, particularly those that include growth assets. Switching investments or redeeming the investment before this time elapses can result in you receiving less back than you originally invested.

The Performance
Try not to focus too much on past performance figures. Naturally, a fund’s track record is important but you do need to be careful. Simply because a fund has performed well in the past, does not guarantee it will do so in the future. This is where the quality of the management team and understanding how the fund invests is crucial, as different investment styles tend to perform differently across the economic cycle. If you would like to learn more about managed funds, give us a call.

For more information, contact us at Leenane Tempelton on 02 4926 2300 or email success@leenanetempleton.com.au

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With Australians marrying later in life and staying married for longer, the median age of divorce has risen over the last 20 years. It now stands at around 44 years for males and 42 years for females. Couples who remain together into their 50s experience a lower divorce rate than younger age groups, but even so this age group still represents around 30% of all permanent splits. While divorce carries a heavy emotional burden at any age, the financial stakes for older divorcees can be greater, and the prospect of starting over more daunting than for younger people.

The over 50s have often accumulated significant wealth. They tend to be focused on that final sprint to retirement, maximising super contributions before putting their feet up and commencing a superannuation pension. Retirement may also entail downsizing a home or a move to the coast or the bush. At all points along this path through later life, the financial consequences of divorce are substantial. Given the major upheaval created by this event it’s critical to obtain professional financial advice right from the start. This will help to ensure the smooth separation of finances and a reduction in any unnecessary emotional pain. This doesn’t just apply to the end of formal marriages; the issues are largely the same when de facto relationships come to an end.

The checklist At the end of a marriage or long-term relationship some issues require immediate attention while others can be left until a bit later. Urgent items include: Resolving living arrangements and ensuring access to funds for daily expenses. Establishing individual bank accounts and giving new bank details to employers. Securing an adequate income and working out a budget. Changing life insurance and superannuation death benefit beneficiaries. Revising wills and powers of attorney. If dependent children are in the picture, their living arrangements and financial needs must be taken care of. If property is held in a partner’s name, legal action may be required to prevent it from being sold prior to a property settlement.

Once these pressing issues are addressed attention can be given to: Dealing with the family home – will it be retained, by whom and for how much? How will superannuation balances be split? How will the division of personal property be managed, taking into account both the financial and personal aspects of this difficult task? In the case of a family business, will the business relationship continue? Conflict or cooperation Many couples manage their divorces cooperatively. For others it is a time of rejection, blame and conflict. But, even if a divorce can’t be amicable, it can often be handled in a mutually respectful way. Minimising the involvement of lawyers will help to avoid substantial legal costs, preferably to the benefit of both parties.

The next chapter Many late-life divorcees will re-partner and establish happy new relationships. The financial aspects of re-partnering are many and complex, and even with the best of intentions, poor decisions, or even a failure to act, can have major financial consequences. For others, remaining single will prove more attractive. Either way, when life slips into a new and stable pattern, it’s time once again to seek out expert advice. We will be here if you need us.

For more information, contact us at Leenane Tempelton on 02 4926 2300 or email success@leenanetempleton.com.au

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Life gets so busy and the months soon roll into years when suddenly you find that your finances are off track and you’re nowhere near achieving your goals. Instead of thinking it’s all too hard take a few moments to review the following tips. If you need a hand to implement your plans, we’re here to help.

Set your goals using the S.M.A.R.T. principle:

• Specific: What exactly do you want and how are you going to do?
• Measureable: If it can’t be measured, you can’t manage it.
• Attainable: Can it be achieved in your situation?
• Realistic: Is the goal beyond your capacity?
• Timeline: How long will it take to achieve the goal?

Learn from The Richest Man in Babylon
The foundation of this time-honoured book is to pay the most important person first – you! Preferably save at least 10% of your earnings, more if you can.

Manage your debt
Not all debt is bad, so make sure you know the difference. Debt that helps you improve an asset or increase an income is smart. 

It’s time, not timing
It is impossible to know when it’s the “right time” to invest. Start now and invest regularly to benefit from market ups and the downs.

Spread it around
Invest your money in a variety of assets. This will help to reduce the risk and increase the benefits .

Be patient
Try not to focus on daily financial reports. Worrying as your investments seesaw is not conducive to smart money management. Invest well and for the long term.

But stay focused
Regular reviews, say half-yearly, are a good idea. Revisiting results after a set timeframe reduces knee-jerk reactions that you may regret later.

Don’t become a statistic
Fraudsters are getting smarter. If you are promised something that seems too good to be true, it probably is. Always check with us before investing.

Refer to a professional
Managing money is an emotionally-charged exercise. A skilled financial planner will help to reduce your stress, so you can relax and enjoy the whole experience. If you need a hand, give us a call.

For more information, contact us at Leenane Tempelton on 02 4926 2300 or email success@leenanetempleton.com.au

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