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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.

Turbo boost your retirement savings

Once your mortgage and other financial commitments are manageable, it is usually time to put the pedal down on your super. Those prime income years, between age 40 and 50 in particular, should be used constructively. However, the task may not always be easy.

Many couples choose to have children later and as a result, parents’ financial responsibilities can now often extend well into their 50s, even 60s. Furthermore, the earning opportunities for many people over age 50 often begin to decline.

Other factors can also disrupt retirement savings planning include time out of the workforce to raise a family, periods of unemployment or extended illness are but a few.

Is there a logical solution?

Usually, the least painful (and most disciplined) option is to use a superannuation salary sacrifice arrangement. For most employed people on high incomes this can represent a useful and straightforward method of bolstering retirement provisions.

It works like this?

You agree to forego a specified amount of future salary and in return your employer makes additional future super contributions for an equivalent amount. This means your extra long-term saving starts to accrue faster, pay by pay.

“Sacrificing” salary to super is also a tax-effective form of remuneration because if the arrangement is put together correctly, no personal income or fringe benefits tax is payable on the extra amount of contribution. You do need to keep in mind the impact of superannuation contribution limits however we can provide guidance on this issue.

Consider this case study.

Michael is 45 and he and his wife Sarah have been working away at their mortgage for some time. Now they are beginning to see light at the end of the tunnel.

Michael’s employer has been contributing 10% of his $110,000 remuneration package to superannuation ($11,000 per annum). Michael thinks that he may now be able to afford more, but he is not all that happy with the employer’s fund investment options.

He discusses the situation with Sarah and their adviser. Together they agree that Michael should set up a new super fund with a different provider and increase his contribution to 15% of salary, with the additional 5% going into the new fund. Michael’s adviser calculates that the higher returns on the new fund will more than offset any additional fees Michael pays by having two funds.

From the next fortnightly pay, Michael’s pre-tax salary is lower by $211.54 but the amount he actually receives will be lower by only $129.04 (since he will pay $82.50 less personal income tax as well). The $211.54 pre-tax amount was paid directly into Michael’s new super account. This means that his total after-tax super contributions for the next year will be $14,025 net instead of $9,350 and he has been able to select a fund that meets his needs.

Salary sacrifice to super is just one way in which you can enhance your retirement provisions. If you would like more information about the 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.

Strategies to rebuild super after early access

3 STRATEGIES TO REBUILD YOUR SUPER

If you’ve accessed your super early due to COVID, there are a number of strategies that can help you get your super back on track when the time is right. There are three key strategies that could help you boost your retirement savings between now and retirement.

1. Allocate some of your pre-tax salary to super

WHO COULD THIS WORK FOR?

This may be appropriate for those who have sufficient cash flow to divert some of their pre-tax salary to super (before it hits your wallet for spending). It doesn’t need to be a large amount to start and you can further increase the amount that you contribute in the future once things are back on track.

STRATEGY AT A GLANCE

If, and when, the time is right, you may be able to arrange for your employer to contribute some of your future pre-tax salary, wages or bonus directly into your super fund— this is called a salary sacrifice contribution. By making regular additional contributions to super, you’re helping build up your account balance again. Don’t be afraid to start small if it is all you can commit—even small incremental amounts add up over time. The sooner you can start making even small contributions, the better. Salary sacrifice contributions are made from your pre-tax salary which can be a great, disciplined way to save for retirement. Super is also a long term investment, so, the younger you are when you start saving for your retirement, the more time you’ll have to benefit.

INFORMATION TO CONSIDER

Salary sacrifice contributions count towards the concessional contributions cap. Concessional contributions include employer contributions (also known as super guarantee) and personal contributions claimed as a tax deduction. Breaching the cap may lead to additional tax penalties. Also, salary sacrifice contributions are generally taxed at the concessional rate of up to 15% rather than your marginal rate, which could be up to 47% . Depending on your circumstances, this strategy could therefore reduce the tax you pay on your salary and wages by up to 32%. Get started with boosting your super.

2. Make a spouse contribution and receive a tax-offset

WHO COULD THIS WORK FOR?

Members who are in a couple, where one spouse earns less than $40,000 a year and there is capacity to make a super contribution on behalf of a spouse.

STRATEGY AT A GLANCE

If you make an after-tax contribution into your spouse’s super account and they earn less than $40,000 a year, you may be eligible for a tax offset of up to $540. To qualify for the full offset of $540 in a financial year, you need to contribute $3,000 or more into your spouse’s super account and your spouse must earn $37,000 a year or less. A lower tax offset may be available if you contribute less than $3,000 or your spouse earns more than $37,000 a year but less than $40,000. Spouse contributions can be a great way to grow your super as a couple and to be rewarded via a tax offset for saving for retirement.

INFORMATION TO CONSIDER

A spouse contribution counts towards your spouse’s non-concessional contribution cap and must be within this cap to entitle you to the tax offset.

3. Make personal contributions and claim a tax deduction

WHO COULD THIS WORK FOR?

Unlike salary sacrifice contributions, personal contributions can be made with your take home pay or savings. You can do this regularly or wait until the end of financial year which could provide greater flexibility and planning options if you have irregular income or expenses.

STRATEGY AT A GLANCE

You could make a personal contribution and claim a tax deduction for the amount (turning it into a personal deductible contribution). This could help to reduce your assessable income and manage your tax liability. The contribution will generally be taxed in the fund at the concessional rate of up to 15%, instead of your marginal tax rate which could be up to 47%.

Depending on your circumstances, this strategy could result in a tax saving of up to 32% and enable you to increase your super. You could put some or all of these savings towards making even more super contributions in the following year.

INFORMATION TO CONSIDER

These contributions are treated as concessional contributions and count towards your concessional contributions cap. Exceeding your cap may result in additional taxes and penalties.

Need help? Contact us Macarthur Wealth Management for expert financial advice. https://www.macarthurwealth.com.au

We are a Parramatta based financial planning practice, specialising in retirement planning, superannuation and investment advice.

Whether you want to start preparing for retirement or have already done so we can help you implement a personalised financial roadmap.

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.

Retirees’ cash flow drought

While cuts in interest rates are greeted with glee by homebuyers and other borrowers, for the millions of retirees and others who depend on interest payments for their income, falling interest rates can be a disaster. For them, a drop in interest rates from 4% to 3% equates to a 25% drop in income. If rates fall from 2% to 1%, income falls by a massive 50%. Add in even a modest level of inflation, and many retirees are going backwards financially. And while the RBA has indicated it doesn’t want to go down the strange path of negative interest rates, this has happened in several European countries and Japan. Imagine: depositors pay banks a fee to store their money, and borrowers receive interest payments rather than make them.

The idea behind negative interest rates is to encourage lending for productive purposes, and to head off deflation. If prices of goods start to fall, consumers delay spending in anticipation of lower prices in the future, further weakening economic activity. However, negative interest rates carry the risk that depositors will withdraw cash and hide it under the bed or in safes. Aside from the risks of fire and theft, which could lead to a total loss of funds, withdrawal of cash on a large scale could lead to liquidity issues for the banks and less economic stimulus.

What are the alternatives?

 Aside from the term deposits favoured by many retirees, annuities are worth considering. An annuity effectively exchanges an up-front lump sum for regular income payments. They are generally considered to be low risk. However, as an interest-producing investment, returns are low when interest rates are down.

High dividend yielding shares have also been a traditional source of income for retirees, offering not just income but also the prospect of capital growth. However, shares can also fall in value, and the economic uncertainty precipitated by COVID-19 saw many companies cut or cancel their dividends as their profits fell.

Hybrids such as converting shares, preference shares and capital notes have elements of debt and equity investments. Their pricing is usually more stable than ordinary shares, and they pay either a fixed or floating rate of interest, often as a fully-franked dividend, above a particular benchmark, usually the Bank Bill Swap Rate.

For retirees with a less hands-on approach to managing their portfolios, a vast range of managed funds are available that suit all risk tolerance levels, and that can provide regular income.

With interest rates at unprecedented lows, many retirees will have no choice but to dip into their capital to meet their cash flow needs. If the portfolio contains a reasonable allocation to growth assets and depending on market conditions, then capital growth may be sufficient to cover cash withdrawals.

A long-term perspective

In abnormal economic times it’s important to keep some perspective. Economic upheavals are often short term. Retirement, on the other hand, can last for decades.

To make sure your retirement portfolio is set to help you weather a cash flow drought, talk to a financial planner at Macarthur Wealth Management on (02) 9683 2869 or [email protected].

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.

Financial advice is not the same for everyone

Financial planning. That’s for people with lots of
money to invest, isn’t it?

Not necessarily.

Sure, investment planning is an important part of financial planning, but underpinning the whole process of creating wealth in the first place is having a good financial strategy.

For many people that strategy is taking each day as it comes and letting the future look after itself; but in a complex and ever-changing world, isn’t a more active approach a good idea?

Each of us has specific needs and desires, of course, but there are a number of common challenges that we need to think about when developing our financial strategies.

Stage of life

Baby boomers (born 1946-1964) are moving into retirement in droves so Gen X (1965-1976) is taking on the mantle of being the great wealth accumulators. For the most part, this generation has their strategies
in place: pay down the mortgage, contribute to super, maybe buy an investment property, and wait for the kids to leave home.

Generationally, it’s millennials (1977-1995) who face the greatest challenges in developing a financial strategy. Younger millennials are just embarking on careers and the focus is, understandably, on having a good time.

Many feel priced out of the housing market, and while the ‘gig’ economy promises greater work flexibility, this comes with reduced job security and often no employer superannuation contributions. Then there’s the challenge of balancing starting a family with establishing a career.
All up there’s a lot to plan for.

Gender

The path to income equality is a slow and frustrating one. In general, over their working lives, women continue to earn significantly less than men. This is largely due to time out of the workforce to look after children.
However, progress is being made, and an increasing number of women are earning more than their partners.

Having Dad take time off to look after the kids then becomes a viable financial strategy. On top of that, the gig economy, and technology in general, is opening up more opportunities for stay-at-home parents to earn a decent income.

Relationship breakdown

Sadly, many long-term relationships and marriages end, and the emotional and financial costs can be high. This isn’t an issue that anyone wants to think about, but is obviously a trigger for developing a new financial strategy. This is particularly important when children are involved, and
expert help will likely be needed.

Inheritance

More wealth is being transferred from older to younger generations than ever before, and thanks to superannuation, this trend can only grow.

Receiving an inheritance is often the event that leads many people to seek financial advice. While the focus may be on creating an investment plan, this is an ideal time to look at the broader financial strategy to make the most of any inheritance.

Never too soon to start

The upshot is that pretty much everyone can benefit from having a financial plan. It doesn’t need to be complicated and you can get the ball rolling yourself. A simple savings plan or paying off credit card debt can be good places start. But to make the most of your situation it’s a good idea to talk to a financial adviser.

A qualified adviser can help you understand our complex financial environment and what you need to know to work out the likely outcomes of different strategies.

Ready to take control of your finances? Give us a call and let’s chat. https://www.macarthurwealth.com.au/contact/

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.

US ELECTION UPDATE

There’s never a dull moment when it comes to us politics and particularly during a presidential race. Regardless of your political persuasion or whether you think us politics doesn’t affect you, The US remains the world’s superpower and US politics and policy can have a significant impact on investment markets.

Right now, less than 10 days out from the election, it’s important to understand how markets may be impacted or react to the result. Much of the share market rally over the last 3-4 weeks can largely be explained by the market’s acceptance that a Democrat / Biden clean sweep (ie. House, Senate, President), as indicated by the polls and betting odds, would usher in a huge stimulus package, lead to less adversarial foreign policy, and give the elected government sufficient power to “get things done”.

However, the polls and betting odds look eerily like they did leading into the 2016 US election with Clinton leading Trump. The difference this time is that we have Covid-19 and President Trump as the 1st term incumbent. Long term history shows that 1st term Presidents generally get a 2nd term and recent history shows that election polls can be well and truly off. As 2016 showed, President Trump didn’t win the popular vote, but he did win the Electoral College which means key swing states are likely to come into play this time around too.

Putting that aside, this is what we know:

• US equity markets generally go up after a Presidential election.
• Republican policy is generally more Wall Street (ie. share market) friendly.
• President Trump, if re-elected, will continue to operate on the same platform he has for the last 4 years – ie. smaller government, lower taxes, pro-US policies.
• Joe Biden, if elected, will increase taxes, support a very large stimulus package, and support pro-environmental policies.
• Both the Democrats and the Republicans are anti-China, but Democrats support continued globalisation whilst Republicans under Trump prefer less globalisation.
• Republicans prefer a faster re-opening of the US economy whilst Democrats prefer a slower re-opening.
• A President Trump re-election will likely result in both a US equity market and US dollar rise, with a faster short-term recovery in the economy.
• A Biden win could see the US equity market rise (under a huge stimulus package) or fall (under the burden of rising taxes) and likely continued to downward pressure on the US dollar, with a slower short term recovery in the economy.

There are a lot of variables and a lot of unknowns for the market to digest. The following is key to note:

• Markets won’t like a delayed result – ie. the result could take some time to obtain given the number of postal votes. In addition, if the result is tight, it’s likely either side will request a recount.
• Markets won’t like a messy result – ie. a result whereby Trump or Biden win with very small majority or no majority in the Senate. Believe it or not, a Democrat House and Senate with Trump retaining the Presidency is actually possible!
• Markets will like a decisive result – ie. a clear election win for either side will see market volatility subside.
• Markets will like a clean result – ie. a Biden or Trump victory with either clean sweep of the House and Senate, or at the very least, a clear majority in the Senate.

The election is 4th November Australia time (3rd November US time). It will make for an interesting week with a Melbourne cup with no spectators and a Reserve Bank of Australia meeting which is likely to see the bank cut the cash rate to 0.1% and launch a large bond buying program (Quantitative easing).

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