Moominmama's Taxes 2023-24

I also did Moominmama's taxes for this financial year. It only took me about 2 hours to do both as I am very organized :) You can find previous years' reports here. Here is a summary of her tax return for this year:

Her salary was up 4% this year. Gross income was down 9% mainly because we lost money on futures instead of winning, I think.

Total deductions rose by 19%, mainly because of increased interest costs and futures losses, which are included as other deductions. As a result, net income fell 38%.

Gross tax applies the tax bracket rates to taxable income. This was more than offset by franking credits. So, she gets the franking credits refunded as cash and has a negative tax rate. She also had to pay tax installments. As a result, she should get a large refund, estimated near $12k.

If we get refunds as big as predicted here they will almost be enough to pay private school fees for both children for 3/4 of the year! One term's fees is one of the monetary units I now think in :)

Relative Wealth

Take all the bitcoin in the world and divide by the number of people - how much is an equal share? About 0.0025. Similarly, an equal share of the world's mined gold is about 0.8 ounces. Our family of four people has about 400 times its equal share of bitcoin and 50 times its equal share of gold currently. The dollar value of our gold holding is about 1.5 times our bitcoin holding.

Life Insurance and Cash Buffers

This post follows up on EnoughWealth's comments on my previous post on Ramit's Conscious Spending Plan. In that post, I commented that I should have more cash in our offset account, in case I die or something, as otherwise bills might start to bounce (like the bill for tuition for the term for two children... or an AUD 25k capital call from Aura), especially once my salary was stopped. Even though I now have my salary coming into our offset account I am finding I have to shuffle money around quite frequently to able to pay the bills. This is because investments like in Unpopular Ventures are also coming out of this account. We are earning the mortgage rate implicitly on money in the offset account. But as that is less than our top margin rate that we are paying I have been reluctant to just put a lump of tens of thousands in the offset account.

EnoughWealth said that that is the purpose of life insurance. Yes, we both have life insurance attached to our employer superannuation. But getting life insurance paid out could take weeks. Only in 50% of cases is it within 2 weeks. My death cover is AUD 168k. This number seems to be falling as I get older.

So, probably I should hold more cash in our offset account despite the interest cost. I also need to write an "operating manual" and get Moominmama who has no interest in finances to read it... 

I recently learned that I have an above average probability of getting a heart attack for my age (59). I am taking statins now to try to reduce that rate, but who knows how effective that will be.

 

My Aunt's Legacy

My aunt died in 2020. She was single all her life. My father and her did not get on well. They fought each other in court over their mother's will. We wondered who she left her money to. Turns out she set up a foundation with about £5 million in assets. Most of the value came from her house and a company that seems to rent properties. The charities commission in the UK is already investigating the foundation for donating money to things that she didn't specify and maybe benefiting the trustees.... I wonder what happened to the art she inherited that they fought over? Either she had already sold it or she must have given it to someone else. 

One of my cousin's children found out about this charity when they were looking for grants for education, which did fall within one of the approved purposes of the foundation.

Big Moomin vs. Little Moomin

We have now re-invested Big Moomin's portfolio in the two suggested managed funds. At this point, Little Moomin has just over 8% more money than Big Moomin, despite starting investing later and paying 30% tax on gains in his investment bond account.

Further Update on Big Moomin's Account

I recently posted about the returns on the children's portfolios. It looks like it would be complicated to transfer Big Moomin's portfolio to me here in Australia. My brother has taken up my idea of just picking a couple of diversified funds and sticking with them and sent me details of two. These are growth oriented funds that invest in shares in his country and internationally as well as some bonds. The managers have mandates to do whatever they want. There isn't really a stated strategy. These are called "flexible" funds there. One is a few years old and has done well and isn't too correlated with any particular stock index. The other is only just over a year old and also did well in 2023. So, I said, sure, invest in those two funds and see how it goes after a year.

Update on the Children's Portfolios

I was calling our children Moomin and Baby Moomin on this blog. But the latter is no longer a baby, so let's call them Big and Little Moomin :) My brother reported to me that Big Moomin's portfolio only returned 4% in USD terms in 2023. He put that down to not trading enough because the bank has made it harder to trade on this trust account...  Obviously it's down to being in the wrong things. I have tried to get him to stick with a diversified portfolio. He manages this one and the accounts for two of his children who all inherited money from our mother. The will stated that they couldn't access the money till they were 23 years old. I manage Little Moomin's portfolio, because he was born after my mother died and so wasn't included in the will. My brother and I each contributed from our inheritances to his account. I invested his money in an investment bond with Generation Life. His account returned an estimated pre-tax 14% in AUD terms in 2023.* The target portfolio benchmark made about 10.8% for the year. So, finally, this portfolio outperformed the benchmark after under-performing so far:

The graph also shows how the target portfolio has matched the ASX 200 while experiencing lower volatility over this period.

Anyway, my brother says that he is going to try to transfer the money to me. Initially, he was advised that the money had to stay in his country, where my mother lived, but now apparently he has reason to think otherwise.

* It is estimated, as 30% tax is deducted inside the investment bond. You can reduce this tax eventually if the child "breaks the bond" by adding an additional investment and they are in a lower tax bracket when withdrawing the money.

Moominmama's Manager Made the Whole Thing Up!

So, Moominmama talked to HR about the "voluntary redundancy". They said that there was no restructuring in progress and she would only be considered for voluntary redundancy if she literally volunteered and that basically her manager just made the whole thing up! This sounds like real incompetence or professional malpractice on his part.

Redundancy Package

Moominmama was offered a redundancy package. Seems a bit like an offer you can't refuse. When she asked if she would be fired anyway if she rejected it, her boss told her he couldn't tell her that... We don't know the details of the package yet. Her lower level manager said that as she is only working two days a week it's hard to involve her in projects or for them to take on projects that need her skills because she doesn't work enough. But she wants to take the package and doesn't want to work more days. 

She plans to reduce the daycare days of our almost 4 year old for the second half of this year. After that he should be in full time pre-school. 

I ran a simulation and through the end of 2024 the effect is a reduction in net worth of about AUD35k before considering the value of the package and after considering the likely value of the package it is about even. After that the effect gets progressively larger, but, surprisingly, in the long run (2029 and 2044) net worth is around 2% lower than in the base case. This is in contrast to the scary numbers that we are currently spending AUD 177k per year and my after tax salary is AUD 130k.

I feel like I must have done something wrong in the simulation.

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.

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.

Moominmama's 2021-22 Taxes

I also did Moominmama's taxes for this financial year. The post about last year's taxes is here. Here is a summary of her tax return for this year:

Her salary was up steeply this year, as last year large superannuation contributions were deducted from it. This year, we redirected those to our new SMSF. Australian dividends were up dramatically as I tried to get more investments in her name. Gross income fell by 15% though because of reduced capital gains.

Total deductions rose by 66%, mainly because of the $20k in contributions to the SMSF. As a result, net income fell 32% mainly I think because of the reduced capital gains this year. 

Gross tax applies the tax bracket rates to taxable income. Most of this nominal tax was eliminated by the 208% increase in franking credits. As a result, she should be assessed for only $1.4k in tax. As this is much less than the tax withheld from her salary, I expect she will get a refund of around $4k.

Next Steps

We have now executed a major part of the financial plans I developed in 2018. We deployed almost all the inherited capital - we still have some Ford bonds, which were intended as a short term investment, we have completed the initial set up of the SMSF and set up accounts for our two children. We have a much more diversified portfolio. So, on the investment front it will now be more business as usual going forward. I explored trading and made a little money but haven't got to the stage of setting up a proper system. This is something I will need to revisit very soon. To decide once and for all if that is a direction I want to take. If I do it, it would be in collaboration with some other people I know. The other major thing we haven't done is estate planning. I wanted to get the SMSF done first. So, we should really look at that seriously soon too.

Cancelled Moominmama's Income Protection Insurance

In 2019 I cancelled my own, but didn't know I could cancel Moominmama's. As she is 11 years younger than me, the premia were nowhere near as high yet but going up quickly. Like me, she has a year of sick and annual leave accumulated. It's hard to imagine her being so ill that she's off work for a year but not bad enough that she is still is planning on returning to work. Anyway, we wouldn't suffer any financial hardship if she stopped working. We would just be investing less and we already have more than AUD 5 million in net worth. Again, I still kept the death and disablement insurance, because the premium is not so much, though I'm not sure I should. I also learned more about disablement insurance in the process. In Australia, it turns out that it is a lump sum like life insurance, I didn't realise that.

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.

Restructuring Baby Moomin's Portfolio

About one and a half years ago I opened an account for baby Moomin with Generation Life to invest the money he inherited from my mother. For this calendar year, the account made about 6.6% on a pre-tax basis.* 

 

This wasn't as good as our portfolio, which returned about 12% in Australian Dollar terms. So, I felt that it was time to make some changes. I decided to switch out of the Dimensional World Allocation 50/50 Fund and the PIMCO Australian and Global Bond Funds. I am switching into the Dimensional World Allocation 70/30 and Vanguard Growth Funds, 50% in each. This is my first time investing in a Vanguard fund! The Vanguard fund is better tax optimized, while Dimensional has more of a tilt to value stocks, which are maybe back in favor. This will result in a total portfolio that is 60% stocks, 20% bonds, 10% infrastructure, and 10% hedge funds.

* This assumes that 30% tax was deducted. Actually, the tax was lower due to franking credits and offsets for foreign taxes. The post-tax return was 4.65%.

Income and Tax History

Reading one of ESI Money's millionaire interviews I was inspired to track our income from previous tax returns (all on this blog). While I was at it, I added the tax as well:

Moominmama's income has actually been more consistent. From 2015-16 there was a fall due to taking maternity leaves and a spike last year due to trading income in her account. My income was low at first after we moved to Australia as I didn't have a job and was trying to trade. My tax was actually negative in those years due to franking credit refunds. My income rose to the $50k zone when I got a part-time academic research job and then very steeply when I became a professor. Since then it has drifted slowly upwards.

Masterworks

Masterworks are a fairly new firm offering securitized investments in artworks. They buy paintings by recent and living artists and then sell shares to investors. They charge a 1.5% per annum management fee and plan to charge 20% of profits when an artwork is sold. They also get a markup on the price that they pay, presumably to cover acquisition and offering costs. I am interested in investing a small amount and have scheduled an interview to talk to them. They interview all new clients. One thing that interests me is our family connection to art. My father's family were antique and art dealers before the Second World War in Germany. My brother is an amateur artist who has sold a couple of paintings, I think, and my mother painted as well. But this doesn't give me any particular insight on the financial side of the art market. I'd aim to diversify across the paintings they are offering.

This investment is more equivalent to private equity buyout rather than venture capital. It doesn't make sense for the firm to buy a painting for $10k or $100k by an unknown artist hoping that it will appreciate because they make a separate special purpose vehicle filed with the SEC for each of their offerings. So they are buying paintings at around $2 million or so a piece.

P.S. 25 August

I had my interview today with a representative from Masterworks and was approved to start investing. I learnt that there is a USD10k minimum investment for the primary offerings. I now made my first purchase and have transferred the money using OFX. Based on the spot exchange rate, it cost 1.45%. I tried using my US bank but couldn't work out an online method that works.

Some Updates

Today I met on Zoom the accountant who has agreed to certify me as a wholesale investor. There are two reasons I want this certification. First, Interactive Brokers will only lend me AUD 25k as a retail investor. Second, I want to invest in a new Aura Venture Fund. The accounting firm is Nexia.

Before the Great Financial Crisis I invested in the ill-fated Everest Babcock and Brown fund of hedge funds. We finally got the final payout from this fund last week. In the end we lost AUD 12,348 from this and related investments.

Employees at my university narrowly voted in favor of freezing pay, which was scheduled to rise 2% next month. I won't be surprised if they soon try to get me to retire, though at this stage we don't have a good idea of what will happen to student demand going forward. Clearly, fewer people will want to study abroad for a long time. But one hypothesis is that Australia will rise in preference relative to the US and UK as a destination. Moominmama decided to not go back to work for another 3 months. On the spending side we decided to send Moomin to a private school. He has been going 2 days a week to their pre-school this year (and 2.5 days to the local public school). So, spending on childcare and  education is only going to ramp up....

February 2020 Report

This month the whole family traveled to New Zealand for a week.This was baby Moomin's first international trip. He also started daycare two days a week. Moomintroll started going to free pre-school at the local public school 2.5 days a week and 2 days a week he is going to a private school where we can still get a childcare subsidy from the government.

It's been more than 3 months since we started trying to transfer our mortgage from Commonwealth Bank to HSBC. I went to the HSBC branch again, midmonth. The manager claimed that she had an incorrect email address for me and so I didn't get her message querying various things. They want to reduce the cash out component and the loan term length, both of which I was happy with. 

I also tried to raise our Commonwealth Bank credit card credit limit from AUD 15k to AUD 20k. I was unsuccessful :( I always think it's strange that they don't consider assets or net worth in these applications.

All stock markets fell sharply in response to the Coronavirus pandemic. The Australian Dollar fell from USD 0.6695 to USD 0.6499. The MSCI World Index fell 8.04%, the S&P 500 8.23%, and the ASX 200 7.46%. All these are total returns including dividends. We lost 3.8% in Australian Dollar terms and 6.61% in US Dollar terms. This was the worst monthly investment return ever in terms of absolute Australian Dollars lost (AUD 141k). The target portfolio lost 2.55% in Australian Dollar terms and the HFRI hedge fund index lost 1.67% in US Dollar terms. So, we under-performed these benchmarks though did better than equity indices. Updating the monthly AUD returns chart:

Here is a report on the performance of investments by asset class:

The returns reported here are in currency neutral terms.

Things that worked well this month:

• Strangely, the China Fund was the best performer, gaining USD 4k. I sold it at the right time.
• The TIAA Real Estate Fund rose a tiny bit for the month. Apart from those other gainers were all bonds.
• Though it did lose money, the PSS(AP) superannuation fund was very resilient, only losing 2.1%.

What really didn't work:

• Junkier bonds like Virgin Australia and Tupperware and even Commonwealth Bank hybrids lost big time. Baby bonds generally did OK, though.
• Winton Global Alpha fund fell by 2.86%, providing little diversification benefit.
• Listed hedge funds were crushed, including Pershing Square (down 8.6% for the month), Platinum Capital (-23.3%), Regal (-11.4%), Tribeca Global Resources (-33%), and Cadence Capital (-20.5%). In most cases the stock price has fallen much more than the net asset value. This chart compares the actively managed ETF, PIXX.AX and the closed end fund PMC.AX, which are invested in similar portfolios:

We moved a a bit away from our new long-run asset allocation. The shares of bonds, gold, and real estate rose and all others fell:

On a regular basis, we invest AUD 2k monthly in a set of managed funds, and there are also retirement contributions. Other moves this month:

• We sold USD20k of Tupperware bonds and USD50k of Energy Transfer bonds and bought USD25k of Medallion Financial (MFINL) and USD25k of General Finance (GFNSL) baby bonds (i.e. 1,000 shares of each) and USD50k of Ford and USD25k of Virgin Australia bonds. USD40k of Kinder Morgan bonds matured. So, our corporate bond holdings rose by USD15k. Selling Tupperware was a good move. Buying Virgin Australia was not.
• We also bought 500 more CBAPI.AX Commonwealth Bank hybrid securities (convertible bonds). It wasn't a good idea.
• We bought AUD 50k by selling US Dollars.
• We exercised our rights to buy 50,000 Pengana Private Equity (PE1.AX) shares in the rights issue. The actual transaction will come in March.
• I Sold 2,000 China Fund (CHN) shares after they recovered from the initial coronavirus scare. I expect there to be further implications of coronavirus, though of course I could be wrong. 
• I bought another 2,000 IAU shares (a bit less than 20 ounces of gold). 
• I bought a net 10,000 shares in Tribeca Global Resources Fund (TGF.AX) when the price seemed particularly depressed after one of the companies they lent money to entered US Chapter 11 bankruptcy. Also, one of the two main portfolio managers quit recently. This is now our worst investment ever in terms of dollars lost. We did a tax loss harvesting sale as part of this transaction, buying back shares in our other account. Different people, so not a "wash sale". I was too early.
• I bought 20,000 more shares of Cadence Capital (CDM.AX) another depressed LIC (listed hedge fund). Too early here too.
• I bought 20,000 shares of US Masters Residential Property Fund (URF.AX) - an even more beaten down closed end fund. We previously held this and sold at a small loss before the price really dived.
• I bought 4,957 shares of Platinum Capital (PMC.AX).