Showing posts with label australia. Show all posts
Showing posts with label australia. Show all posts

Tuesday, August 15, 2023

Lifetime Health Cover Loading

In Australia, if you don't get private health care when you are younger, if you finally do get it you have to pay an extra "loading". I had to pay 36% more and Moominmama 14%. But apparently that is only for ten years. The ten years is up and our premium has been reduced!

Saturday, October 22, 2022

More Factoids from the 2019-2020 Australian Income and Wealth Survey

3.2% of households are in both the top income and top net worth deciles. That means their net worth is above $2.258 million and their annual income is above $235k.

Friday, October 21, 2022

2019-20 Australian Income and Wealth Distribution

 

I didn't notice when the Australian Bureau of Statistics released the 2019-20 data on Australian household income and wealth distribution. I previously reported on the 2015-16 and 2017-18 data.

Mean gross household income was $121k per year in 2019-20 (all $ are Australian Dollars). The median was $93k. These are not adjusted for household size. ABS provides data adjusted for household size in terms of the income a single person would need to achieve the economic well-being of the average household. To adjust these to the required income of a household with 2 adults and 2 children requires multiplying by 2.1. I seriously doubt that adding a child only increases costs by 0.3 of the first adult! 

Mean gross household income in the ACT was $150k and the median $124k.

To be in the top 10% of households requires a gross income of at least $235k. To get information on the breakdown inside the top 10% you have to use their data on the number of households within each of different bands of weekly income. 4.7% of households have an annual income above $312k and another 3% between $260k and $312k. Our gross income was $264k (taxable income), so we just fall within this group and, therefore, in the top 7.7%.

Mean household net worth was $1.04 million and the median was $579k. To be in the top 10% you needed a net worth of $2.26 million. We were at $4.44 million at the end of June 2020. To be in the top 3.9% you needed a net worth of $4 million. So I estimate we were at the edge of the top 3.3%. I guess it makes sense given my age that we higher in the wealth distribution than in the income distribution.

1.2% of households had a net worth above $7 million and 0.6% above $10 million.

There is a lot more data on breakdown of assets etc. which I might report on another time.

To be in the US top 1% by net worth required USD 11 million ($17.75 million) in the same period. A top 1% US household income is around USD 600k and above.

Sunday, August 28, 2022

History of Franking Credits

This year's tax returns include large amounts of franking credits connected to Australian dividends. I almost managed to wipe out Moominmama's tax bill with them. The franking credits are added to income and then deducted from the tax bill. As the corporate tax rate for large companies is 30%, if you are in the 34.5% marginal tax bracket (including the Medicare Levy) like she is, it would seem that franked dividends will slightly increase your tax bill. Say you got a $1,000 dividend including the franking credit. Your tax on the dividend as a whole is $345 and you deduct the $300 franking credit from that, paying $45 in tax on the dividend. The magic of franking credits is that if you have investment deductions like margin interest, you will end up with surplus credits. Let's say you have $500 in margin interest in this example. Then your tax on the net $500 in income is $172.50. After deducting the franking credit from this, you have $127.50 in tax credits, which you can apply against the tax on your salary etc. 

Foreign source income tax offsets work in a similar way. These are tax paid to foreign governments on dividends etc. Finally, there are also Early Stage Venture Capital Limited Partnership tax offsets. If you invest in an ESVCLP you can get a credit worth up to 10% of your investment. This totally offsets tax on other income even without any deductions!

Over time, the amount of franking credits and foreign source income tax offsets we have received has increased, as you would expect, though this year's credits are off the scale:


This doesn't include any tax credits received by our SMSF or any other superannuation fund for that matter.

Thursday, March 31, 2022

Related-Party Asset

I have been trying to invest in a fund on the AngelList venture capital platform. But my SMSF administrator flagged that there might be issues because the fund is organized as a limited partnership. The auditor has now provided the following information:

"A partnership can elect to be taxed as a Limited Liability Company (LLC) in USA or a partnership under the tax law due to the elections that the LLCs make with the US Internal Revenue Office. It is common for such partnerships (US) to be taxed as a company.

To support compliance with SISA/SISR for investments in Limited partnerships we note the following potential scenarios and information for audit purposes:

  1. Where the entity is taxed as an LLC, this supports that the LP should be treated as a company where the members of the Fund are not members of the LP and the investment therefore is considered as an investment in an unrelated entity. This is usually able to be ascertained from the financial report of the LP. 
  2. Where the entity is taxed as an LP, and the members of the fund are not members of the LP, and the investment is in within a limited capital account arrangement. This is usually able to be ascertained from the financial report and the application agreements. 
  3. Where the entity is taxed as an LP, and the members of the fund are members of the LP.

If the investment falls into scenario 2 and 3 then the investment would classified as an in-house asset which would mean it needs to be below 5% of the SMSF’s total assets."

It seems that this falls under scenario 3. I just sent AngelList an email to check. The problem is that the minimum investment required, let alone subsequent hoped for appreciation, would take us over the 5% limit. So, it seems it is not really true that you can invest in anything you like through an SMSF. It seems silly to me to treat a fund where I am only investing through the SMSF along with 1500 other investors as a "related-party asset". Probably, I will need to invest in this fund using my own name and pay higher tax than I would through the SMSF.

Tuesday, August 17, 2021

Most People Think They are Financially Average

Well not quite. But people think they are more average financially than they are, on average.

But the strange thing is that most people think they are more intelligent than average. Was just chatting with someone on Twitter who stated that the norm in Australia is to get paid weekly and most people don't own a house. In fact, 67% of homes are owner occupied and getting paid every two weeks is most common. On the other end of the spectrum, my wife thinks our financial situation is "normal", when according to the statistics we are in the top few percent.

Tuesday, August 10, 2021

Local Housing Market is Red Hot

This morning I got a text from a real estate agent offering to send me an updated appraisal of our house's value because "prices are spiking". Then, on the way home from work I noticed a sale board in the neighboring development advertising an upcoming auction. In the corner, a small sticker had been stuck: "sold". When I tried to search for this house online, I found another one in the same development that sold last weekend pre-auction.


P.S. 14 August 2021

The price the second house sold for has now been posted. AUD 900k. That is a 100% increase on the original price, a new neighborhood record. It pushes the estimated value of our house to just over AUD 1 million.

P.P.S. 31 August 2021

Domain are now reporting that the first house (pictured) sold for AUD 976k or 124% above the original price! That would add another 6% to the estimated value of our house.

Wednesday, March 10, 2021

ATO Audit of SMSF Applications


I didn't know that the Australian Taxation Office (ATO) audits applications for new Self Managed Superannuation Funds (SMSF). This guy from the ATO office in Perth phoned me yesterday and asked me a bunch of questions about my responsibilities as a trustee and the purpose of opening the SMSF and whether the admin company had approached me about opening a fund and how I picked them. He also wanted me to lodge my tax returns from 2002-07. I was in the US then and so not resident in Australia. So, I went on MyGov (the Australian government portal) and submitted a "don't need to submit a tax return" notice for each of those years. He sent me now by email an approval letter confirming that I passed the audit. Initially, I thought it was some scam when he left a message on my phone. But I checked the "switchboard phone number" on an ATO website and it checked out and so I phoned him back. The whole thing didn't sound very "professional".

Thursday, January 28, 2021

Treasury Wine Estates Rises Sharply on No News

Treasury (TWE.AX) rose sharply today with no announcement from the company or news in the media. At one point it was up 9%. This was on a day when the market was sharply down. It closed up 5.92%. I added to my position on the basis that my thesis was working out and that this spike would be continued.



Monday, January 25, 2021

Incentives for Charitable Giving in Australia

As there is no estate or inheritance tax in Australia, I think it makes much more sense to give money to charity while you are alive rather than in your will. If I give money in my will, my children will have less but no tax benefit from giving money. If I give while I am alive then I can claim a tax deduction. Or am I wrong?

P.S. 6 February

I thought of an alternative approach. You can write in your will that your children need to make contributions to charity from the money they receive. That way they can take tax deductions instead. The advantage of this is that if you are unsure if you will run out of money in retirement you can direct your children to make donations if you didn't run out of money. The downside is that they may not follow your directions. Maybe there is some trust structure that enforces this. Also, you don't get to see the benefits of your donations.

Thursday, May 21, 2020

Margin Loan Limits

So, Interactive Brokers finally allowed Australian clients to again borrow money. I enabled margin borrowing on both Moominmama's and my account. I was surprised at how low the buying power was. Much, much lower than the standard FAQ suggested. It turns out that retail clients borrowing power is capped at AUD 25k! This is stated in the footnote on that page. This seems crazily low to me. I currently have a loan cap of AUD 500k with Commonwealth Securities. But their margin rates are far higher. If I can show I am a wholesale investor  I could get the cap lifted. If they require individual income of AUD 250k and/or net worth of AUD 2.5 million, that would be tough/impossible to show and would probably need to get an accountant to assess it... So, looks like I should keep more assets with Commonwealth Securities than I was planning on. I'm not planning on borrowing big to buy shares, but having borrowing power is useful.

PS

Actually, I easily qualify as a wholesale investor based on net worth. Turns out, I have 3/4 of our joint household net worth. My immediate thoughts are that this isn't optimal tax-wise and whether it is worth paying an accountant to certify it? On the other hand, borrowing in my name is a good tax move.

Thursday, May 14, 2020

New Investment: Atlantic Pacific Australian Equity Fund

I made an investment in this unlisted hedge fund that is open to retail investors. Our long-term goal is to invest 10.5% of assets in Australia focused hedge funds. At the end of April we only had about 4.7% of financial assets (i.e. not including our house) invested in this category. This investment brings this up to about 7%.

The fund is long-bias equity market hedge fund buys and short sells, Australian listed securities and derivatives. It has performed particularly well in the current crisis:


It didn't perform very well in the previous 5 years, though it has always been good at avoiding downside in the market and so is a potentially good diversifier.

Sunday, December 29, 2019

The Best Portfolio for Australia

The portfolio charts website, I wrote about before, now lets you do analysis using Australian assets, inflation etc! It turns out that the best portfolio for Australia isn't the same as the best for the US... The following table shows the average and standard deviation of real returns, the maximum drawdown, and the safe and permanent withdrawal rates (preserves capital) for a 30 year retirement horizon:

This is based on data since 1970. Based on the permanent withdrawal rate the Ivy Portfolio developed by Meb Faber is best. The 100% Aussie stocks portfolio (TSM) has a slightly higher return, but the lowest permanent withdrawal rate. So, I think Aussie investors should start to think about portfolio design from something similar to the Ivy Portfolio. It's no surprise that I have been a fan of Meb Faber and endowment style portfolios...

Using ETFs, this portfolio recommends putting 20% into each of Australian stocks, international stocks, intermediate term bonds, commodities, and REITs.

Using the build your own portfolio tool you can see what tweaking this beginning portfolio can do. For example, replacing half the commodities allocation with gold and half the bond allocation with extra international stocks, increases the return to 6.1% and the SWR and PWR to 5.2% and 4.4% with almost no increase in drawdowns.

Going to 60% stocks divided equally between Australia and the rest of the world and 10% in each of bonds, gold, commodities, and REITs, is actually quite similar in return profile to the Ivy Portfolio. The key thing is to hedge Australian stocks with international and real assets. This latter portfolio is probably going to tbe basis of my own new target portfolio.


Wednesday, October 30, 2019

Mortgage Refinancing: Reality Check

I met today with a "Premier Relationship Manager" at HSBC. We are going ahead with the mortgage refinancing. They will send a valuer to value our house tomorrow...

So, she first checked whether I could service the loan based on the data I submitted. Based on just my salary of AUD 176k per year and our spending and a AUD 500k loan the answer was no. Given my salary is supposedly in the top 5% or higher, our house value is only a bit above the median price for houses here, and lots of people drive luxury cars etc. and we don't, you'd think this wouldn't be a problem. She said our spending was "very high". Either government income data is too low (but the banks ask for tax returns), or people somehow hide spending from the banks (but the banks ask for bank statements), or what? It's hard to reconcile what I see with the data.



Our net worth is in the top 300,000 or so of households and my income in the top 400,000 of taxpayers according to this official data.

By the way, five plus years ago, when we were looking to buy a house, the banks were willing to lend us much more money. Lending standards really have tightened.

Sunday, August 25, 2019

Understanding Wills and Estate Planning


As we don't yet have a will, I have been reading this book, which is a simple guide to this topic with plenty of examples. I now see that there is more to estate planning in Australia than I thought. There are no inheritance taxes in Australia, so I thought that "estate planning" wasn't a big deal here. But after reading the book I now see that you might want to design things to prevent various scenarios occurring, and yes there are some tax issues, and then there are all the issues of making sure your wishes are carried out.

For example, in the case of my mother, after she lost the ability to make decisions, we ended up being dictated to by the government about how we managed her money etc. We had to sell all her financial assets and reinvest them in an approved way. We had a power of attorney to act on her behalf, but crazily this became invalid when she most needed us to act on her behalf! This was because prior to 2017 apparently you couldn't have an enduring power of attorney in her country. So, it is important to set up an enduring power of attorney.

I aspire that my children will inherit in real terms at least as much as I inherited from my parents. Of course, we can't guarantee this as who knows what might happen to the economy etc. But we can try to prevent some adverse events happening. An example is if one of us dies and the other gets a new partner. Then they die and the partner inherits everything and decides to give none of the money in their will to our children.  Maybe because they have existing children and rewrite their will to include only them.... This kind of case is mentioned in the book but the solution isn't provided. On p58 it says that the survivor should see a lawyer before remarrying...

I am thinking the solution is to set up a testamentary trust on the death of the first spouse incorporating their share of the total assets. The beneficiaries would be the surviving spouse and the children. The surviving spouse will earn income from the trust during the remainder of their life after which the children will be the sole beneficiaries of the trust. So, clearly, we are going to need to discuss with a lawyer all of this.

Currently, if our nuclear family all died, it would be my mother-in-law who would inherit everything according to Australian law. I can't imagine she would handle that very well and given the large inheritance component from my parents, that hardly seems fair. So, we also need to have contingent inheritors to result in a more reasonable distribution of assets in that extreme case.

We also will need to think about who would be a guardian for our children if we both died. I can't really think of someone here in Australia that we would want to do this and who would agree to it as neither of us have relatives here. But it is something we are going to have to determine.

There are probably lots of things I still haven't considered but I think we are going to need to have rough ideas about all of these before meeting a lawyer. By the way, if anyone can recommend a lawyer that they have used, that would be great!

Sunday, August 04, 2019

Designing a Portfolio for Baby Moomin

I decided that the best provider of investment bonds is Generation Life. This is mainly because they seem to be scandal free, not about to be sold off to an overseas manager, and have lower fees than other providers. Next I needed to pick an investment portfolio from their investment options. I decided on the following rules and criteria:
  1. 50/50 equities/fixed income and alternatives
  2. 50/50 passive and active management
  3. 50/50 Australian and international assets
  4. Pick the best fund from alternatives in each of these niches - focusing on long-term "alpha" and in particular their performance during the Global Financial Crisis and the recent December 2018 mini-crash.
This is the resulting portfolio:

50% Dimensional World Allocation 50/50 Trust. Here I compared a Vanguard balanced fund with this fund. In the long run, DFA have done much better than Vanguard:
Here, Portfolio 1 is a DFA stock fund and Portfolio 3 the Vanguard equivalent. The equity curves are for someone withdrawing 5% per year in retirement. Portfolio 2 is a DFA 60/40 stock/bond portfolio. The difference is stunning. Recently, DFA hasn't done as well as value stocks are out of favor. I am betting on them coming back. If there is a major market correction we might shift this core holding to a more aggressively equity focused fund.

10% Ellerston Australian Market Neutral Fund. Ellerston has done horribly in the past year, but prior to that it did very well for a market neutral fund. It now seems to be rebounding. This fund manager originally managed James Packer's money and then branched out.

10% Magellan Global Fund. This has been one of the best Australia based international equity funds. It did particularly well during the GFC.

10% Magellan Infrastructure Fund. This fund seems better than the other real estate options. It didn't do very well during the GFC, but all the others were worse.

10% Generation Life Tax Effective Australian Share Fund. This fund is managed by Redpoint Investments. The idea is to tilt a bit towards tax effective Australian shares given the high taxes on this investment bond overall. The manager is pretty much an index hugger, but the other options for actively managed Australian shares seem worse.

5% PIMCO Global Bond Fund. PIMCO is the gold standard for actively managed bonds. I decided to split my allocation to PIMCO between international bonds and

5% PIMCO Australian Bond Fund, as Australian bonds have actually done very well recently.

Wednesday, July 31, 2019

Australian Investment/Insurance Bonds


Investment/insurance bonds are an Australian investment vehicle, which is a bit like a superannuation fund but actually is formally a type of life insurance. You make an investment like in a super fund, but instead of earnings being taxed at 15% they are taxed at the corporate income tax rate, which is 30% currently. If you withdraw the money after 10 years, no additional tax is payable. This can be a good idea in two cases:

1. If you are in a high tax bracket so that additional investments are taxed at up to a 47% marginal tax rate and you either have maximized your superannuation contributions or want the flexibility to get the money out before you retire.*

2. You want to invest in your children's name. Investments for children in their name are subject to very high penalty rates of tax in Australia to prevent income-splitting tax dodges. You can invest in a "trust account" in the child's name and avoid these penalty rates but you are liable to pay tax on the earnings.** You can specify a vesting age when the investment bond will be transferred to the child.

My mother's will specifies that each of her grandchildren will get £25k when they are 23 y.o. My brother and I are interpreting that as investing £25k now. We set up trust accounts for his children below 23 and my son in Falafeland where he lives and my mother lived. But then on 26 June this year our second child was born. It seems I haven't mentioned this on this blog before! My brother and I agreed to also invest £25k for him.

I began to explore setting up an Australian trust for him. An Australian will can set up a "testamentary trust" in the name of a child or grandchild etc. The income on that inherited money won't be subject to the penalty rates. The twist is that the money for our newborn son is my hands now. If I just set up a trust for him I will have a battle with the ATO to claim that the penalty rates don't apply. I talked to a lawyer on the phone and she said she needs to do research on whether we can set up a testamentary trust now. This would be a lot of upfront expense and then there is the hassle of running the trust and investing on its behalf and submitting annual tax returns etc. So, I am skeptical that this is going to work and if it does it would be a lot of hassle, I think. Also a trust must pay out all its earnings every year. So our son will need a bank account to receive them and this will be an income stream that his brother won't be getting.

An investment bond seems like a simpler option and is very similar to our first child's trust account In Falafeland, which doesn't pay distributions and is taxed at 25%. The 30% tax rate seems high, but there is a trick. If you make an additional investment that is greater than 125% of the previous year's investment then the bond resets to year 1 of the 10 year period. As the previous year's additional investment could be zero this is not hard. When that happens if the child withdraws money from the bond the money is taxable at their tax rate but they get a 30% non-refundable tax offset somewhat like a franking credit. But this will only reduce your tax if currently you earned less than AUD37k per year, which is below the full time minimum wage.*** But a 23 year old might earn that little if they were doing graduate study, for example.

There are six providers according to Macquarie:
The first three have all been very controversial and the first two are in the process of selling their life insurance businesses to offshore firms. AMP has the lowest management fees and Australian Unity the highest of the first 4. Centuria's PDS is really not transparent. Generation Life has index fund options which would be cheaper than any of the other providers' options. Generation Life is a specialist investment bond provider. So, I am going to look at this one in more detail. I am also following up with Unisuper, whose website mentions investment bonds.

* Investment bonds don't get a long-term capital gains tax discount. So, they aren't as effective if your not in the top bracket.

** Income children earn from labor/their own entrepreneurship isn't subject to the penalty rates and neither is inherited money in a testamentary trust. Trust accounts don't work for us as the children must get the money from them at age 18.

*** It's crazy that the minimum wage is already taxed at a marginal 32.5% + Medicare Levy.

Friday, July 12, 2019

Distribution of Income and Wealth in Australia in 2017-18


The latest survey results have been released by ABS. To be in the top 1% in Australia you need to have a household net worth of about AUD 7.5 million (USD 5.25 million). We're in the top 4% according to the data. The mean household has a net worth of AUD 1.022 million and the median AUD 559k.

We're also in roughly the top 4% by household income if we'd earned 2018-19 income in 2017-18... Median household earns AUD 1,700 per week (AUD 88k per year) and mean 2,242 (AUD 117k). Of course, households with children average a lot more than this as the data include pensioners, students, singles etc. These data don't let you compute the income of the top 1% directly.

Wednesday, April 24, 2019

Updated Post on Labor's Tax Increase Proposals

I had forgotten about one of Labor's proposals to increase tax. Limiting tax free pensions to $75k per year. I've now added it to the list. It's number 13.

P.S.
Another one - limiting deductions ofr tax advice to $3,000 per year. Now 14 proposals on the list.

Tuesday, April 23, 2019

Save 4% on Transferring Money to Australia


My brother is planning sending me my share of the proceeds of selling my mother's apartment. If we sent the money in Falafeland currency to our account at Commonwealth Bank in Australia we would lose around 5% of the value relative to the exchange rate on the forex market (representative rate). The spread between their buying and selling rates is around 10%. This is just crazy. I can think of another word that starts with "cr". I checked the rates of other Australian banks. HSBC and Macquarie are better, but not that much better.

My brother got a quote from his bank in Falafeland to convert the money to Australian Dollars and then send to Australia. The cost is about 1% relative to the representative rate. Online, I found that TorFX is recommended for such transfers. I now have a quote from them which is about 1.2%. So, we will go with the Falafeland National Bank.

You can get much, much better rates by trading in the forex market yourself using a broker like Interactive Brokers. But I can only hold currency in AUD, USD, GBP, and EUR at IB. So, I can't make a conversion from Falafeland money to AUD.