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Wealth

Five ways to protect your estate

As sure as death and taxes

Need advice? Contact Macarthur Wealth Management for expert financial advice in Parramatta and Sydney wide on (02) 9683 2869. www.macarthurwealth.com.au

It’s a sad but unavoidable fact: one day we are all going to die. You will most likely have clear ideas as to how you would like your hard-earned wealth – your ‘estate’ – to be divided amongst your loved ones or other beneficiaries. However, estate planning is a complex area of law and basic mistakes can see Wills declared invalid, money end up with unintended recipients, or benefits reduced by avoidable tax bills. So how can you avoid making some of these mistakes?

1. Make a Will

Only around half of Australian adults have a valid Will. If you don’t have one, make one. Otherwise your estate will be distributed according to a government formula, and if no beneficiaries can be identified your life’s savings will end up in state government coffers. If you do have a Will make sure you review it regularly and update as required. Just a few of the key events for revising your Will include entering or leaving a marriage or de facto relationship, starting a family, establishing investment vehicles such as companies or trusts, changes to the financial or health status of adult beneficiaries or to add gifts to charities.

2. Appoint an appropriate executor

Administering an estate can be a major undertaking. Ideally you will want an executor who is competent, organised, honest and unbiased. Often this will be a spouse who is also the sole beneficiary, and administration of the estate may be relatively straightforward. But it’s common to also nominate an alternative executor should your spouse die before you. This may be an adult child or other close relative, and not necessarily a beneficiary. Whoever you nominate make sure you tell them that they are a (potential) executor and to provide them with important information such as the location of the original Will, and contact details for your lawyer, accountant and financial planner.

3. Identify assets that may not be dealt with by your Will

Any assets that you jointly own automatically pass to the surviving owner(s) on your death. They are not subject to your Will. If you have provided your super fund with a binding death benefit nomination your death benefit will be paid to the nominated beneficiary. This can be anyone, and not necessarily a beneficiary of your Will. If you nominate your ‘personal legal representative’ (i.e. your executor), the death benefit will be paid to the estate and dealt with according to your Will. If you don’t make a binding nomination the trustees of your super fund are obliged to pay the benefit to your dependents, as defined by superannuation law. This may not coincide with your wishes.

4. Be fair

If someone has reasonable grounds to believe they should receive something from your estate but you have not provided for them in your Will, then they may be able to legally challenge your Will. Legal fees may be paid by the estate, eroding its value, so you’ll want to minimise the chances of the Will being contested. Also be wary of ‘ruling from the grave’, for example by making any gifts dependent on a beneficiary either doing something (marrying a specific person, say), or not doing something.

5. Get expert advice

Estate planning throws up many other traps for the unwary, from paying too much tax on a superannuation death benefit to not making provision for beneficiaries who are unable to adequately manage their own affairs. With so much at stake, it pays to consult your financial planner who can assist you and also make recommendations to specialist estate planning lawyers.

Need advice? Contact Macarthur Wealth Management for expert financial advice in Parramatta and Sydney wide on (02) 9683 2869. www.macarthurwealth.com.au

General Advice Warning

The information provided on this website is general in nature only and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information on this website you should consider the appropriateness of the information having regard to your objectives, financial situation and needs. Before making any decision, it is important for you to consider these matters and to seek appropriate legal, tax, and other professional advice.

Disclaimer

All statements made on this website are made in good faith and we believe they are accurate and reliable. Macarthur Wealth Management does not give any warranty as to the accuracy, reliability or completeness of information that is contained in this website, except in so far as any liability under statute cannot be excluded. Macarthur Wealth Management, its directors, employees and their representatives do not accept any liability for any error or omission on this website or for any resulting loss or damage suffered by the recipient or any other person. Unless otherwise specified, copyright of information provided on this website is owned by Macarthur Wealth Management. You may not alter or modify this information in any way, including the removal of this copyright notice.

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Death, Taxes, and Inheritances, what you need to know.

Need advice? Contact Macarthur Wealth Management for expert financial advice in Parramatta and Sydney wide on (02) 9683 2869. https://www.macarthurwealth.com.au/estate-planning/

More than $3.5 trillion dollars in inherited funds are expected to change hands within Australia during the next 20 years, with Australians enjoying one of the highest inheritance payout rates anywhere in the world. According to investment bank HSBC’s Future of Retirement report,

Australians pass on average $561,000 to their heirs, almost four times the global average of $148,000, with two in every three Australians planning to leave an inheritance.

This payout rate is significantly higher than has been the case for previous generations, with higher property prices and ever-increasing retirement savings creating larger and larger estates to be handed from one generation to the next.

Unlike most OECD countries, strictly speaking, there are no inheritance taxes in Australia, so this has also encouraged Australians to hold on to their estates until they pass, rather than distributing assets to the next generation while they’re alive.

The only exception is superannuation

If, for example, a person inherits funds from a loved one’s superannuation account and they are not a dependent, the transfer will trigger a 15 per cent death benefit tax, plus Medicare levy. This can be reduced if the person leaving the funds withdraws the money and places those savings outside superannuation as part of their general estate before they pass.

But given most people don’t know exactly when they will die, this is a rare event.

The only other way of avoiding this death benefit tax is to establish a family trust

However, establishing a family trust can be a complex and expensive option and requires sophisticated legal and tax advice before being implemented. But, as a strategy, it can successfully reduce your tax obligations.

Any asset can be inherited – from property to jewellery, from shares in listed companies to fine art. Even animals can be included in your Will. If you can own it, then it can be passed on to a beneficiary when you die. Receiving an inheritance, though, can be more complex, and professional advice should be obtained regarding how to best manage and invest any funds received.

Regarding any Centrelink entitlements, inherited funds are included for the purpose of the asset test. Therefore, they are subject to the normal deeming regulations and will impact pension entitlements accordingly

For most people, the biggest challenge is to find a way to squeeze these funds into superannuation, where they can be invested within a tax benign environment. And once they are used to support an account-based pension, they will effectively become tax-free in terms of any capital gains or income.

This is where you need to seek professional advice.

The rules governing just when and how much can be contributed to super will vary depending on your age, whether you are still working or not, and how much you already have in super. As estates become larger, it is increasingly important to get good advice to ensure your assets are distributed in line with your wishes.

The simpler and more straightforward your Will, the more likely it is to be successfully implemented. In addition, most advisers encourage clients to put in place a living Will, where, either in writing or via a conversation with your beneficiaries, you outline precisely what your wishes are and the reasons behind them.

By doing this, you are likely to discourage any challenges to your Will – challenges that can be extremely costly. Moreover, given that challenges can be financed by funds held within the estate, the prospect of challenges can in themselves sharply decrease the remaining assets to be distributed.

Effective estate planning can be complicated but the benefits of a well-constructed estate plan, can provide financial certainty and peace of mind for all parties, speak to your adviser about the options available to you.

Need advice? Contact Macarthur Wealth Management for expert financial advice in Parramatta and Sydney wide on (02) 9683 2869. www.macarthurwealth.com.au

General Advice Warning

The information provided on this website is general in nature only and does not constitute personal financial advice. The information has been prepared without considering your personal objectives, financial situation or needs. Before acting on any information on this website you should consider the appropriateness of the information having regard to your objectives, financial situation and needs. Before making any decision, it is important for you to consider these matters and to seek appropriate legal, tax, and other professional advice.

Disclaimer

All statements made on this website are made in good faith and we believe they are accurate and reliable. Macarthur Wealth Management does not give any warranty as to the accuracy, reliability or completeness of information that is contained in this website, except in so far as any liability under statute cannot be excluded. Macarthur Wealth Management, its directors, employees, and their representatives do not accept any liability for any error or omission on this website or for any resulting loss or damage suffered by the recipient or any other person. Unless otherwise specified, copyright of information provided on this website is owned by Macarthur Wealth Management. You may not alter or modify this information in any way, including the removal of this copyright notice.

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Estate planning for your business

It’s not uncommon for business owners to take short, irregular holidays because they don’t have the support to keep their business running without them for a longer break. Aside from taking time off for leisure, have you considered what would happen if you were forced to take six months off work due to a serious illness or injury?

Would the business survive and how would the bills be paid? Or if you were to die, can you be sure that your business partners would give your family a fair deal?

For these reasons, it’s important for all business owners to put in place a properly prepared succession plan. It’s just like a Will for the business, but there is often a wider range of scenarios and considerations involved.

As with a personal Will, what should be included in a good business succession plan can vary from one situation to the next. Here are some key areas that should always be considered:

  • Business structure – in the event of death or retirement, the ownership and control of the business may need to be transferred to the owner’s family or to the surviving business partners. How easily this would occur will often depend on how the business operates, such as through a trust, or a company, or without a separate entity at all.
  • Succession agreements – if something happened to one of the business partners, would that partner’s spouse or children be capable of taking over the control of that share of the business? If the answer is no, then a succession agreement can assist the remaining business partners to carry on operating the business whilst allowing for adequate compensation for the former partner’s family.
  • Managing risk – just like personal insurance, business insurance can provide a variety of types of protection such as temporarily meeting the normal costs of running the business (business expenses cover) or paying for a short-term replacement manager (e.g. trauma or disability cover). A life insurance policy linked to the succession agreement that provides the deceased partner’s family with suitable compensation for the transfer of business ownership to the surviving partners can also be a good idea.
  • Powers of Attorney – many small businesses can’t do much without the authority of the key decision-maker, so a Power of Attorney is integral to the succession planning process. It helps the business to physically operate if the owner is incapacitated through illness or injury.

There is a range of professionals who may need to be involved in setting up a succession plan, including your financial adviser, lawyer, and accountant. Even if you already have a plan in place, make sure you regularly review the agreements and your insurance policies to keep them up to date and reflecting the current value of the business.

Like a Will, don’t leave this to when it’s too late.

Need advice? Contact Macarthur Wealth Management for expert financial advice in Parramatta and Sydney wide on (02) 9683 2869. www.macarthurwealth.com.au

General Advice Warning

The information provided on this website is general in nature only and does not constitute personal financial advice. The information has been prepared without considering your personal objectives, financial situation or needs. Before acting on any information on this website you should consider the appropriateness of the information having regard to your objectives, financial situation and needs. Before making any decision, it is important for you to consider these matters and to seek appropriate legal, tax, and other professional advice.

Disclaimer

All statements made on this website are made in good faith and we believe they are accurate and reliable. Macarthur Wealth Management does not give any warranty as to the accuracy, reliability or completeness of information that is contained in this website, except in so far as any liability under statute cannot be excluded. Macarthur Wealth Management, its directors, employees, and their representatives do not accept any liability for any error or omission on this website or for any resulting loss or damage suffered by the recipient or any other person. Unless otherwise specified, copyright of information provided on this website is owned by Macarthur Wealth Management. You may not alter or modify this information in any way, including the removal of this copyright notice.

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Do you have the right protection for your loan?

Buying a property is one of the biggest investments many people will make in their lives. When it comes to securing a mortgage, many buyers may be so focused on the immediate steps ahead that they don’t consider having the right protections in place first.

Need advice? Contact Macarthur Wealth Management for expert financial advice in Parramatta and Sydney wide on (02) 9683 2869. www.macarthurwealth.com.au

What are the different insurances that can protect a home loan?

Three key types of insurance will protect your mortgage:

  • Lenders mortgage insurance;
  • Mortgage protection insurance;
  • Income protection insurance.

Understanding the different insurances available for your mortgage for further protection is an important part of protecting yourself and your loan if you’re unable to meet repayments.

Lenders mortgage insurance (LMI) is a one-off premium payable if you want to buy a home, but your deposit is less than 20 per cent of the property’s value. LMI protects the lender in the event you’re unable to repay your loan. The premium is added to your total home loan amount, which means you’ll pay more interest over the loan term. While the extra interest is one of the main drawbacks of LMI, it helps people enter the property market sooner.

Mortgage protection insurance protects you if you’re unable to make loan repayments due to serious illness, injury, or death. Each policy is different depending on the insurance provider, but generally provide trauma, death and terminal illness and special injury benefits. These benefits are typically paid in a lump sum.

Income protection insurance can pay up to 85 per cent of your gross income if you’re unable to work due to partial or total disability. The definition of disability and the level of cover provided depends on the insurance policy.

What happens if you don’t get insurance for your mortgage?

If you don’t invest in protecting yourself and your home loan, you could end up in a costly financial situation. So, while the premiums for key insurances may seem like they add up, it far outweighs the risk of being unable to meet your financial obligations or support any dependents if you can’t repay your mortgage. Let’s look at an example.

Sam is 34 and a non-smoker. His home loan is $450,000. Unfortunately, Sam recently had a major fall at work, resulting in a head injury and several broken bones. He is unable to work for several months. With his mortgage protection insurance, he could access his specified injury benefit and receive a lump sum of $8,500. Sam’s income

protection insurance will pay 75 per cent of his salary for six months while he recovers. With these insurances in place, Sam could continue paying his mortgage and meet his living expenses while recovering from his injuries. Without these insurances, he may have had to sell his property and live off his savings.

How do you know which mortgage insurance to get?

Many mortgage holders have insurances attached to their superannuation or health insurance providers, so be sure to double-check the cover you already have before applying for any additional extra cover.

If you’d like to speak with someone independent of your mortgage application process, the Australian Government offers an assistance service. Contact the National Debt Helpline on 1800 007 007 to speak with a financial counsellor about protecting your mortgage. Additional services are available for small business owners, farmers, or people in regional areas.

Alternatively, speak to your financial adviser to be sure you protect your loan and your financial security.

Need advice? Contact Macarthur Wealth Management for expert financial advice in Parramatta and Sydney wide on (02) 9683 2869. www.macarthurwealth.com.au

General Advice Warning

The information provided on this website is general in nature only and does not constitute personal financial advice. The information has been prepared without considering your personal objectives, financial situation or needs. Before acting on any information on this website you should consider the appropriateness of the information having regard to your objectives, financial situation and needs. Before making any decision, it is important for you to consider these matters and to seek appropriate legal, tax, and other professional advice.

Disclaimer

All statements made on this website are made in good faith and we believe they are accurate and reliable. Macarthur Wealth Management does not give any warranty as to the accuracy, reliability or completeness of information that is contained in this website, except in so far as any liability under statute cannot be excluded. Macarthur Wealth Management, its directors, employees, and their representatives do not accept any liability for any error or omission on this website or for any resulting loss or damage suffered by the recipient or any other person. Unless otherwise specified, copyright of information provided on this website is owned by Macarthur Wealth Management. You may not alter or modify this information in any way, including the removal of this copyright notice.

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Simple money mistakes – and how to fix them!

The world is constantly dangling temptations before our eyes, and it’s never been easier to buy stuff, even if we don’t have the money. The upshot is that we are all susceptible to making some basic financial errors. Individually, these mistakes can be small. Added together, they can really hold us back from financial success.

Need advice? Contact Macarthur Wealth Management for expert financial advice in Parramatta and Sydney wide on (02) 9683 2869. www.macarthurwealth.com.au

Adding up the little things

Take one simple example. It’s easy to spend $15 on lunch from a café. But make your own and you could easily save over $10 per day. Multiply that by your working days and you could be saving over $2,000 a year!

How about the great clothing trap? Every year Australian’s throw away huge amounts of clothing that has never been worn, or only worn a few times. Then there’s food. The average household throws away over $1,000 worth each year.

Add in other impulse purchases and it’s easy to fritter away many thousands of dollars on unnecessary or impulse purchases each year.

Big savings

Other common (and often bigger) money mistakes arise from our poor use of debt:

  • If you don’t pay off your credit card balance in full during the interest-free period, you could be digging yourself a debt hole that can be very hard to get out of.
  • If your impulse buys rely on the use of ‘buy now pay later’ services, it’s a sign that you probably can’t afford them.
  • Borrowing to buy things that immediately fall in value, such as a new car, is another quick way to blow some big dollars.
  • Even when buying an appreciating asset, such as a home, purchasing above your needs can leave you struggling to meet repayments, adversely impacting your financial position.

Finding a purpose

For many people, just being aware of these money mistakes is enough for them to avoid the traps. For others, the instant gratification of the purchase or the pleasure in zipping down the road in a flash new car can make it hard to adopt new habits. But what if there was a clear, long-term reward for suppressing the desire for instant gratification? This is a personal choice, but could be a big overseas trip, upgrading your home or simply achieving financial independence.

Setting some clear goals can make it much easier to forgo that focaccia and flat white in favour of a homemade (and just as delicious) sandwich. How many DIY lunches equal a week on a Greek island? Tick them off on a chart so you can visually track your progress.

Or each time you suppress the urge to buy something you desire but really don’t need, give yourself a mental pat on the back. You’ve just brought forward the day when you can buy that new house or work becomes optional. Again, charting your progress can help you see what you’re achieving and help you maintain your motivation.

So have a think about your financial habits and see how many fit into the basic categories of financial mistakes – spending too much, not saving enough, and making poor use of debt. Then work out the goals that are important enough for you to ditch the bad habits and develop good ones.

You might be surprised by just how much some simple changes can contribute to your financial success.

Need advice? Contact Macarthur Wealth Management for expert financial advice in Parramatta and Sydney wide on (02) 9683 2869. www.macarthurwealth.com.au

General Advice Warning

The information provided on this website is general in nature only and does not constitute personal financial advice. The information has been prepared without considering your personal objectives, financial situation or needs. Before acting on any information on this website you should consider the appropriateness of the information having regard to your objectives, financial situation and needs. Before making any decision, it is important for you to consider these matters and to seek appropriate legal, tax, and other professional advice.

Disclaimer

All statements made on this website are made in good faith and we believe they are accurate and reliable. Macarthur Wealth Management does not give any warranty as to the accuracy, reliability or completeness of information that is contained in this website, except in so far as any liability under statute cannot be excluded. Macarthur Wealth Management, its directors, employees, and their representatives do not accept any liability for any error or omission on this website or for any resulting loss or damage suffered by the recipient or any other person. Unless otherwise specified, copyright of information provided on this website is owned by Macarthur Wealth Management. You may not alter or modify this information in any way, including the removal of this copyright notice.

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An important conversation

None of us likes to consider our own mortality. For our older loved ones, it’s an even more confronting topic and difficult to discuss.

When Lindsay became ill, his family’s priority was to support him through his treatment and keep him positive and as comfortable as possible.

Typical of his generation, Lindsay had always been very private, never sharing personal information – not even with his nearest and dearest. After he passed away, it dawned on the family that nobody knew whether Lindsay would have preferred cremation or burial. At such an emotionally charged time, the question caused quite a dispute.

As parents, we aim to have open dialogue with our children over issues like drugs, sex, etc. But as our parents age, difficult discussions around medical arrangements, Wills, money, etc, are usually put off until something occurs to trigger the talk. Often, by then it’s too late, which is why it’s so important to communicate while you still can.

Once Lindsay’s funeral was over, the family faced more complex questions: did Lindsay have a Will? Was there any insurance? What investments and assets did he have?

Trying to locate Lindsay’s paperwork and make sense of his finances became a nightmare.

If only someone had asked him…

What should you talk to your parents about?

If you think about all those things you’d rather not discuss you’re off to a good start.

Before the conversation, consider:

•             Finances, assets, investments, accounts, insurance policies, etc

•             Will. Is it current and where is it kept? Who is the executor?

•             Medical. Medications and power of attorney

•             Funeral preferences

•             Aged care arrangements, family home, care facilities

•             Location of important documents

•             Usernames and passwords for online accounts

•             Contact details for doctor, financial adviser, trustees, power of attorney, solicitor, executor, etc.

During the conversation

• Extend an invitation: invite your loved one to express their feelings and articulate their wants. Present the discussion to making their life more manageable. Stress that you’re not taking over, but that you care and that they are in control.

• Present an example: use examples of challenges faced by others, explaining that you hope to avoid the same situation. Tell them you’d like to help them organise their paperwork to provide peace of mind and a plan for their future.

• Support independence: point out that you’re not reducing their independence but ensuring they maintain their independence as long as possible.

• Don’t judge: as your loved one opens up, listen respectfully and without judgement. Encourage discussion around their choices so you can understand and help implement them.

Carefully consider your approach. These are sensitive topics; introduce them gently and tactfully. It may be helpful to involve their executor, financial adviser or accountant.

Finally, just when you think your job is done, have the same discussion with your children, only in reverse. Be clear about what you want and why you’re talking to them.

Children don’t want to think about your mortality any more than you do. They’ll think you’re overreacting and probably won’t thank you for the information – not right now anyway. But that’s the nature of kids.

The main thing is that when your time comes, they’ll realise you’ve saved them a lot of heartache.

Need help? Contact us Macarthur Wealth Management for expert financial advice in Parramatta and Sydney wide. (02) 9683 2869. www.macarthurwealth.com.au

General Advice Warning

The information provided on this website is general in nature only and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information on this website you should consider the appropriateness of the information having regard to your objectives, financial situation and needs. Before making any decision, it is important for you to consider these matters and to seek appropriate legal, tax, and other professional advice.

Disclaimer

All statements made on this website are made in good faith and we believe they are accurate and reliable. Macarthur Wealth Management does not give any warranty as to the accuracy, reliability or completeness of information that is contained in this website, except in so far as any liability under statute cannot be excluded. Macarthur Wealth Management, its directors, employees and their representatives do not accept any liability for any error or omission on this website or for any resulting loss or damage suffered by the recipient or any other person. Unless otherwise specified, copyright of information provided on this website is owned by Macarthur Wealth Management. You may not alter or modify this information in any way, including the removal of this copyright notice.

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The greatest challenges facing future retirees

Need help? Contact Macarthur Wealth Management for expert financial advice in Parramatta and Sydney wide. (02) 9683 2869. www.macarthurwealth.com.au

Most working Australians aspire to the idea that they’ll reach a point where they can retire debt-free and with enough money in their superannuation fund. – perhaps supplemented by the age pension – to provide them with a comfortable standard of living in retirement. For many that remains a reasonable aspiration, but a growing range of challenges mean that retirement goals that could easily be achieved a few years ago look like being harder to achieve in the future.

Losing interest?

One of the greatest challenges facing future retirees (and current ones) is the fall in interest rates. Retirees have long relied on term deposits and annuities to provide steady, low risk income. However, an investor who has seen term deposit interest rates fall from, say, 3% to 0.3% has experienced a 90% fall in income. This is driving many investors to look for higher yielding assets such as shares, though it needs to be kept in mind that pursuing this yield means taking on more risk.

Eating the nest egg

The federal government’s COVID-19 Superannuation Early Release Scheme saw 4.9 million applications to withdraw a total of $36.4 billion from super accounts. Many young people withdrew their full balance and will have a hard time playing catch up, even if it will be decades before they retire.

House and home

More retirees are hitting retirement with an outstanding mortgage. In times of low interest rates this isn’t necessarily a bad thing. In fact, the wise use of debt can enhance your financial position at retirement. But if (or when) interest rates rise to historically ‘normal’ levels, anyone without a sound strategy for addressing the situation could see their financial position weaken.

Also of concern is the number of retirees who rent their homes. Even a modest home provides a high level of financial security that is unavailable to the non-homeowner. Single women are over-represented in the non-homeowner category and women are, in general, less well served by

our superannuation system than men. The gender pay gap and time taken out of the workforce to raise families see women retire with 47% less super than men.

Aging and health

Australians are living longer than ever before, with women outliving men by five years. However, those extra years may not come with good health, so aside from funding

an extended normal retirement, retirees will also need to prepare for the cost of in-home or residential aged care.

Australia’s demographic time bomb will see an increasing number of non-working older Australians become dependent on a smaller number of younger Australians to make stuff, provide services and generate the tax revenue needed to run a country. Pressure is likely to mount on retirees to contribute more to the cost of the services

they require. That could be through increases to the age pension age, or greater use of home equity funding, such as reverse mortgages.

Don’t delay

An investor’s most valuable asset is time, and it’s never too early to start planning your retirement. You should also review any plans that may be out of date.

While some of these challenges may seem daunting, there are viable strategies for addressing each one. So don’t delay. Your licensed financial planner will be able to assess your situation and help you develop a strategy to thrive in retirement.

Need help? Contact Macarthur Wealth Management for expert financial advice in Parramatta and Sydney wide. (02) 9683 2869. www.macarthurwealth.com.au

General Advice Warning

The information provided on this website is general in nature only and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information on this website you should consider the appropriateness of the information having regard to your objectives, financial situation and needs. Before making any decision, it is important for you to consider these matters and to seek appropriate legal, tax, and other professional advice.

Disclaimer

All statements made on this website are made in good faith and we believe they are accurate and reliable. Macarthur Wealth Management does not give any warranty as to the accuracy, reliability or completeness of information that is contained in this website, except in so far as any liability under statute cannot be excluded. Macarthur Wealth Management, its directors, employees and their representatives do not accept any liability for any error or omission on this website or for any resulting loss or damage suffered by the recipient or any other person. Unless otherwise specified, copyright of information provided on this website is owned by Macarthur Wealth Management. You may not alter or modify this information in any way, including the removal of this copyright notice.

Interest rates –accentuating the negative

Need advice? Contact Macarthur Wealth Management for expert financial advice in Parramatta and Sydney wide on (02) 9683 2869. www.macarthurwealth.com.au

So, it’s just a normal day.

You walk into the bank, deposit some money. And the teller asks you to pay them interest.

Keeping your cool, you ask why.

And the teller apologetically explains: “Oh we’ve got negative interest rates.”

Right now, we’re living in a world where some countries have ‘negative interest rates.’ That means, that instead of rewarding customers for depositing money, a bank (or a central bank) will charge them interest. In financial terms, that’s the world turned upside down.

So how did we get here?

The GFC hangover and COVID-19

Broadly speaking, negative interest rates are engineered by governments and central banks as a way of getting life into a chronically spluttering economy. If it costs you money to put your money in the banks (or it costs banks money to park their funds with the Government) there’s more incentive for individuals to spend it on housing, at the shops, or on holidays. And for banks to invest it in areas that also foster more economic activity and employment – like lending to business.

There’s no coincidence we’re talking about negative interest rates in 2021. They were part of a suite of measures used by some countries to try and get out of the economic slump caused by the Global Financial Crisis back in 2008/09. The economic shock administered by COVID-19 has brought them back into fashion – countries as advanced as Japan, Switzerland and Sweden have jumped on the negative interest rate train.

Australia stays positive

So, what do negative rates mean for you? The good news is that they’re not really happening in Australia. At least not yet. And they probably won’t.

Back in November 2020, the Reserve Bank of Australia (RBA) Governor Dr Philip Lowe said: “There has been no change to the Board’s view that there is little to be gained from lowering the policy rate into negative territory.”

Given that the Australian economy has picked up sharply since then – house prices and employment numbers are on the upswing – there seems less need for negative interest rates in Australia than most other countries.

Different folks

But, while not negative, interest rates in Australia are still at historic lows – and could stay that way till around 2024 according to Dr Lowe and his team at the RBA. This has implications for everyone – but different implications depending on whether you’re a saver or a borrower.

  • If you’re a saver or retired, low interest rates make it harder to earn the income you used to from products like Cash Management Trusts and Term Deposits. You might find you are considering investing in riskier assets, like shares, to try to make up that income.
  • If you have large debts – like a mortgage – your interest payments are likely significantly lower. And if you’re looking to borrow, it’s possible you can borrow more money, because your repayments will likely to be much lower.

What goes down must come up

As mentioned earlier, these low interest rates are a symptom of a global economy trying to get itself going again. They’re not normal (though they might feel like the new normal). That means it could make sense to get good advice about how to handle this economic trend – to look out a bit longer than the next three years.

Here’s how good advice could help:

  • Savers: A financial planner can help you find sources of extra income without taking on too much risk to do it.
  • Borrowers: Some expert advice could help you ensure you don’t overcommit when it comes to borrowing. As the popular US financial planning radio star Dave Ramsey puts it, “A lower interest rate doesn’t make a debt go away.”

Low and negative rates are likely to be with us for some time. But for Australian savers, borrowers and investors, it’s important to look beyond the obvious, front page economic headlines.

After all, the COVID crisis is just a year old – and already people are talking about a potential post-COVID boom. Things go down – and up again – and down again. Just like interest rates.

Need advice? Contact Macarthur Wealth Management for expert financial advice in Parramatta and Sydney wide on (02) 9683 2869. www.macarthurwealth.com.au

General Advice Warning

The information provided on this website is general in nature only and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information on this website you should consider the appropriateness of the information having regard to your objectives, financial situation and needs. Before making any decision, it is important for you to consider these matters and to seek appropriate legal, tax, and other professional advice.

Disclaimer

All statements made on this website are made in good faith and we believe they are accurate and reliable. Macarthur Wealth Management does not give any warranty as to the accuracy, reliability or completeness of information that is contained in this website, except in so far as any liability under statute cannot be excluded. Macarthur Wealth Management, its directors, employees and their representatives do not accept any liability for any error or omission on this website or for any resulting loss or damage suffered by the recipient or any other person. Unless otherwise specified, copyright of information provided on this website is owned by Macarthur Wealth Management. You may not alter or modify this information in any way, including the removal of this copyright notice.

Opportunities for last minute tax planning

Need help? Contact us Macarthur Wealth Management for expert financial advice in Parramatta and Sydney wide. (02) 9683 2869. https://www.macarthurwealth.com.au

June provides some opportunities for some last-minute tax planning. Some of the opportunities worth considering are:

Maximise superannuation contributions
This year the maximum deductible contribution to superannuation is $25,000. This figure includes any SG amount plus salary sacrifice. If you are below this figure, you can make a contribution to super and claim it as a tax
deduction. This is available for people up to age 74 (must meet “work test” if over 65). Note, this figure moves to $27,500 next financial year.

There are also catch-up facilities to make contributions in excess of $25,000 per annum. If you have not maxed out $25,000 in the last 3 years and your super balance is less than $500,000, you may be able to put a maximum of
$75,000 into super and claim a deduction. This is a really good opportunity to try and catch up on the years you could not maximise contributions.

Bring forward deductions
If you are paying income protection premiums on a monthly basis, you may want to consider paying 12 months in advance this month. This effectively brings forward your deduction, it may also save you money, as annual
premiums usually save around 10%.

The same theory works if you have an investment property loan. You may be able to prepay the interest for 12 months in advance to bring forward the deduction.

General Advice Warning

The information provided on this website is general in nature only and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information on this website you should consider the appropriateness of the information having regard to your objectives, financial situation and needs. Before making any decision, it is important for you to consider these matters and to seek appropriate legal, tax, and other professional advice.

Disclaimer

All statements made on this website are made in good faith and we believe they are accurate and reliable. Macarthur Wealth Management does not give any warranty as to the accuracy, reliability or completeness of information that is contained in this website, except in so far as any liability under statute cannot be excluded. Macarthur Wealth Management, its directors, employees and their representatives do not accept any liability for any error or omission on this website or for any resulting loss or damage suffered by the recipient or any other person. Unless otherwise specified, copyright of information provided on this website is owned by Macarthur Wealth Management. You may not alter or modify this information in any way, including the removal of this copyright notice.

The magic of franking credits in your portfolio

 A franking credit is a tax credit allocated to the shareholder. The tax credit can offset the tax that is due on the dividend.

It’s obvious that investors select investments based on the rate of return they can earn on their funds. For share investments, the rate of return has two components:

1.  Sell the share for gain – assume you purchase 100 shares at $20 each. If you later sold the shares for $40 each you have made a gain of $20 per share. The total gain is $2,000 ($20 for each share) on the original 100 shares;

2.  Earn a return through a dividend. A dividend is a share of company earnings paid to the shareholder. If your share pays a $1.50 on each of your 100 shares, you’ll earn $150.

Keep in mind that your rate of return should be based on the dollars you keep after taxes have been paid. One way to reduce the tax you pay on dividends is by using franking credits.

How do they work?

Franking credits are a tool used by investors to reduce or eliminate the taxation of dividends. Australian companies that pay dividends to shareholders can be subject to double taxation. The earnings are taxed to the corporation at 30%. If earnings are then paid to shareholders in the form of dividends, they are taxed again at the individual’s personal tax rate.

A franking credit is a tax credit allocated to the shareholder. The tax credit can offset the tax that is due on the dividend.

Assume you receive a $100 dividend and your tax rate is 34.5%. The company has already paid 30% tax on its profit. A franking credit of $30 ($100 x 30%) would reduce your tax liability leaving only 4.5% of the dividend income taxable.

That example applies if the dividend is fully taxed or “fully franked”.

A partially franked dividend means that the tax credit covers only a portion of the taxable dividend payment. However, even a partially franked dividend increases your rate of return.

Assume that the franking credit only covers $20 of the $30 in tax. You’re still ahead because you’ve earned $100 – $10 in taxes, or $90.

Reinvesting + Compounding

If you are able to earn more dividend income after tax and reinvest that income, you can also benefit from compounding. Compounding is defined as earning “interest on interest”.

Assume that you’re able to invest the full $100 dividend, rather than just $90. With compounding, that extra $10 in dividends will earn a return. Over time, reinvesting more dividends can greatly increase your total earnings.

Speak to us about how franking credits can benefit your portfolio. If you would like more information about your options, contact Macarthur Wealth Management on (02) 9683 2869 or [email protected] to talk you through your options.

Need help? Contact Macarthur Wealth Management for expert financial advice in Parramatta and Sydney wide. https://www.macarthurwealth.com.au

General Advice Warning

The information provided is general in nature only and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information on this website you should consider the appropriateness of the information having regard to your objectives, financial situation and needs. Before making any decision, it is important for you to consider these matters and to seek appropriate legal, tax, and other professional advice.

Disclaimer

All statements made on this website are made in good faith and we believe they are accurate and reliable. Macarthur Wealth Management does not give any warranty as to the accuracy, reliability or completeness of information that is contained in this website, except in so far as any liability under statute cannot be excluded. Macarthur Wealth Management, its directors, employees and their representatives do not accept any liability for any error or omission on this website or for any resulting loss or damage suffered by the recipient or any other person. Unless otherwise specified, copyright of information provided on this website is owned by Macarthur Wealth Management. You may not alter or modify this information in any way, including the removal of this copyright notice.

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