Fixing Margin Loan Interest Rate?

A year ago, I fixed most of my CommSec margin loan at a constant rate for the year ahead. The rate I got was 7.54% compared to a variable rate of 9.4%. I just got an email from CommSec asking whether I want to fix my rate again. The fixed rate is now 9.2%, but the variable rate has only increased to 9.65%. Clearly, I made the right choice to fix my loan, but this doesn't look like a good option going forward. Instead, I will reduce my borrowing probably by selling my gold ETF holdings, or at least some of them, especially if the recent budget CGT measures are passed by Parliament. The Greens hold the balance of power, but they think that nominal gains should be taxed at ordinary income tax rates and that there should be no grandfathering, so they might yet derail things for Labor.

Capital Gains Can Vary Radically Depending on the Currency They Are Measured In!

Our SMSF provider only completed our 2024-25 financial year accounts at the end of April. I check these carefully before signing off and paying the ATO. They have made mistakes in capital gains calculations in the past.

I thought that was the case this time too for our investments in the Fidelity Bitcoin ETF and Defi Technologies. So, I challenged their calculation. Their response was that the numbers were correct if I converted the purchases and sales to Australian Dollars using spot exchange rates on the exact days of the transactions. 

I don't use this method in my own tax accounting, as it is complicated. I just take the gain in USD or CAD and multiply by the exchange rate on 30th June of the tax year in question. I thought this was pretty close. It turns out it's not!

The gain on the bitcoin transaction was USD 19k. I downloaded the exchange rates from Pacific Exchange Rate Service, which I use for all my forex calculations, on each transaction day–there were many purchases–and multiplied the USD amounts by those exchange rates. Then I deducted the sum of all the purchases in AUD from the sale amount in AUD. The capital gain turned out to be AUD 53k! 

This is as if the Australian Dollar to US Dollar exchange rate was 35 cents, when it was never below 60 cents. The reason this happened was that I sold when the exchange rate was only 60 US cents but bought at higher exchange rates. Given the USD gain was not that big relative to the size of the transactions, the difference in exchange rates was levered up into a large AUD gain. I never thought something this extreme was possible. 

The Defi Technologies gains were not as radically different in the two currencies because I made more money on those relative to the size of the transactions. The tax bill for the bitcoin trade of AUD 8k is more than half of the SMSF's annual tax bill of AUD 14.4k.

Australian Commonwealth Budget 2026

The budget speech was tonight, and all of the worst stuff that was leaked in the lead up to the budget appears to be in it. The worst is a minimum 30% tax on capital gains instead of up till now a maximum of 23.5%! Australia now has the most favourable tax treatment of dividends in the world and the least favourable treatment of capital gains. I'm sure Labor is thinking about that discrepancy. They were in 2019. I am exactly the type of person worst hit by this budget–a retiree probably in the 30% tax bracket.

The existing capital gains tax discount served two purposes. One is that taxing gains that are just due to inflation seems unfair (though we do that to interest payments), and the second is that companies already pay corporation tax on the profits they reinvest to generate capital gains. While franked dividends in Australia fully pass on to shareholders a credit for tax already paid, the current CGT regime partially does that. Whether or not replacing that with inflation indexation makes sense, a minimum 30% tax on capital gains seems especially unfair. 

I am already thinking about how to adapt to the new regime. I probably will sell my gold ETF holdings and replace them with futures contracts due to the new minimum 30% capital gains tax. And probably put the futures inside our SMSF for good measure. Freeing up the capital will allow me to reduce debt, contribute to super as much as I can and buy some dividend yielding investment instead.

Our Pershing Square Holdings, 3i, Berkshire Hathaway, Masterworks, and Angellist investments are all less attractive. Should also reconsider our accounts (outside the SMSF) with Colonial First State (CFS Imputation Fund and Acadian Global Long-Short Fund) that distribute capital gains. It doesn't make sense to get rid of all investments likely to have real capital gains. Instead, the expected rate of return needs to be high enough post-tax to hold onto those investments. 

Also, it seems that the 30% minimum CGT will only apply to the gains relative to the investment's value at 1 July 2027. So, there is no rush to make changes. This is going to greatly complicate tax calculations.

Education Bond Analysis

I've now done some spreadsheet simulations of education bonds. Assuming that our marginal personal tax rate will be 30%, the goal is to pay out fund earnings equal to the 30% tax threshold, which is currently $45k (everything in AUD of course) in each of the three years the children are in university. I assume a nominal fund return of 9% and inflation of 3% per year. I increase the amount saved each year by the rate of inflation. When the children finish university, all the contributions are removed.

For Little My, who is now in school year 1, you need to start by saving $17k in the scheme this year. In the end there will be $241k of contributions. The maximum tax saving over the 3 payout years is $40,600 in total and the management fees incurred over the course of the scheme are $18k. The cost of the management fees is a bit higher than this–about $3-$4k–due to compounding. So, the tax benefit is roughly double the extra cost. However, if Little My earned the equivalent of $18,200 per year–the current tax-free threshold–the tax benefit goes down to $16,500!

For Moomin, who is now in school year 5, you need to start by saving $31,750k in the scheme this year. In the end there will be $282k of contributions. The maximum tax saving over the 3 payout years is $36k in total and the management fees incurred over the course of the scheme are $15,500k. The cost of the management fees is again a bit higher than this due to compounding. So, the tax benefit is roughly double the extra cost. However, if Moomin earned the equivalent of $18,200 per year–the current tax-free threshold–the tax benefit goes down to $14,900.

Here is Little My's analysis:

Of course, if they don't go to uni, but work instead, you pay a whole load of management fees and get into maybe a suboptimal investment for nothing. 

Also, up till now I have assumed that all our income is ordinary income. If instead it is all long-term capital gains–for example from selling gold ETF shares–then the tax benefit is halved and the maximum tax benefit is equal to the management fees. Of course, the 50% capital gains discount might not exist in the future–Labor wants to abolish it. If all our income came from franked dividends, then in the 30% tax bracket we would pay no tax on these anyway and so there would be no tax benefit, just management fees!

P.S. 

It seems unlikely that the two of us would earn more than $270k between us outside of super, but just for completeness, I looked at the case where we are in the 37% tax bracket.  In this case the tax benefit for Little My assuming they don't work and keeping all other assumptions the same, rises to $54k or three times the management fee. But again, if all our income came from capital gains that would only be $27k and if all our income came from franked dividends our tax rate on the grossed up dividend is only 7% after the franking credit or 10% of the net dividend. This means there is only a tax benefit on the first $18.2k paid out for education expenses, which would be negated if Little My worked. So, I don't think I am going to do this.

Education Bonds

I just discovered an investment structure I had never heard of: Education Bonds. These are an Australian investment structure that is similar to investment bonds but with some twists. We have an investment bond in Little My's name at Generation Life. We used it to invest the money he inherited from my mother. 

First, I will describe an investment bond again. It is an investment that pays tax in the fund nominally at 30%. If you hold it for 10 years and then withdraw the money you don't pay any additional tax. If you withdraw it before 10 years you owe tax on the earnings at your regular tax rates but get a 30% tax offset. You can reset the 10 year term by contributing a new investment of more than 125% of the previous year's investment. Why would you want to do that? If your tax rate or a child who you made the beneficiary end up having a tax rate below 30%, you'll pay less tax then if you withdraw the money.

Most of this applies to an education bond too. These are the differences:

1. You can withdraw the contributions without tax or penalty at any time. Only the earnings are locked up for 10 years.

2. You can make a claim to pay for education expenses and withdraw earnings to do so. When you do this, you get the tax paid added onto the amount you withdraw. So, there is no tax in the fund on these withdrawals. This can be done at any time, not just after 10 years.

3. The twist is that the beneficiary whose education you are paying for is liable for tax on the earnings. Children under 18 have very high penalty tax rates (one reason we used an investment bond for Little My). So, beyond the tax-free $416 per year this really wouldn't make sense. Once they turn 18, the regular adult rates apply including the tax free threshold.

4. Here is the really interesting part: You can keep any education bills incurred since you started the education bond and claim them in a later year. So, you could claim school tuition from 2026 in 2036 say!

5. If you withdraw all your contributions and then want to withdraw earnings without valid education bills, the standard investment bond rules apply.

6. The downside is you are limited to the investment options the provider has and an additional administration fee. After all, they have to deal with all these education claims... For Australian Unity this additional fee is 0.7% p.a. 

There are only a few providers and so far Australian Unity seems most attractive. Generation Life don't offer this product.

Basically, this is a way of tax-sheltering some investment income in a similar way to income splitting through a family trust. But it is much more restrictive on investments and possibly has higher fees (our SMSF pays 0.3% p.a.). You are only really going to be directly paying for higher education expenses using this.

For someone in my position, it might make sense after you have maxed out your tax free super pension and you are already above the tax-free bracket of income tax on your non-super earnings, which is true in my case. The problem is that actually trying to reclaim all the children's private school fees during the 3 or so years they are in Uni would push them into the 30% marginal tax bracket, which is probably where I will be myself. If they are working part time they might already use up the tax free allowance (currently AUD 18.2k), which would make the tax savings small. And this is assuming they go to Uni. With these considerations, the 0.7% annual fee, and limited investment options, I am undecided if this is worthwhile.

 

Tax Credit Update

I just updated my tax credits chart to include last year's tax returns and expected tax credits on this year's returns:

This doesn't include tax credits on our Self Managed Superannuation Fund's return. Three sorts of tax credits on both our tax returns are included. The most important are franking (or imputation) credits associated with Australian dividends. When a company pays Australian corporation tax they can pass on a credit for the tax paid to their shareholders. This credit gets added to the shareholders income but can also be subtracted from their tax due.* So, there is no double taxation of dividends in Australia. The second is tax withheld on foreign dividends, which can be claimed against Australian tax, and the third is the Early Stage Venture Capital Partnership credit. You get a tax offset equal to 10% of the amount invested in these partnerships (and the profits are tax free).

There are various reasons for the decline in franking credits since 2021/22.  One fund reorganized and now doesn't pay Australian tax (WCMQ.AX). Tribeca Global Resources (TGF.AX) paid a huge dividend in that year, and so on.

* If your franking credits exceed your tax liability the government sends you the difference! 

Tribeca Global Resources

After several years of disappointing performance, Tribeca Global Resources (TGF.AX) has performed extremely strongly in recent months:

My investment hit a new profit high exceeding the 2022 peak. After previously giving back all the 2022 gains, this strong performance makes me wonder if I should sell now. One reason not to sell is that if I wait my capital gains tax rate should be lower next financial year (it's in my personal name). Also, there is still a big gap between NAV and the share price, which wasn't the case at the 2022 peak. Pre-tax NAV is $3.81 and post-tax $3.34 while the share price is $2.88. Will the gap close? Finally, the fundamentals supporting resources strength don't seem to be changing yet. So, I think I will hold on for now.

FOMO-ing In

I have been saying no to investing in Aura's new venture capital fund when I have been asked. My reason was that I am retiring and don't want to lock capital up. With lower taxes going forward, the negative tax status of Australian venture capital investments isn't so important any more. Also, I am an investor in both their previous funds and the parent company, so that feels risky. Also, I didn't have a current wholesale investor certificate.

But then I saw an email that now is the "last call" before the "first close" and I sent them an email asking if I could invest AUD 100k instead of the usual AUD 250k minimum. They approved right away and I just completed the application form. This is an investment of about 1.5% of net worth, which will be called over several years, so with this lower number it doesn't seem as risky or impose as large cash flow requirements. The fund plans to invest in 25 companies if the target amount is raised. So, this would only be AUD 4k per start-up. At Aura VF 2 I have around AUD 25k exposure to each start-up. And I now have a wholesale certificate again. Also, I have been thinking recently that we can cover our current cash flow requirements with just AUD 1.5 million (8% yield) to AUD 3 million (4% yield) income-oriented investments and invest the other half or more of our net worth in long term growth investments to compensate for inflation and maybe actually grow our net worth. 

But in the end, it's really FOMO.

New Thoughts on Keeping Superannuation in Accumulation Mode

A year ago, I wrote a post about whether you should initially keep your superannuation in accumulation mode when you retire. I thought that if you don't need to spend the money in your superannuation accounts right away, it doesn't make sense to pay out that money to sit in regular taxed investments. But I missed one key point. Dividends from what Americans call "taxable accounts" are taxable whether you spend them or not, but capital gains are only taxed if you sell. The more capital gains you realise, the higher tax bracket you are going to be in. Unless you are lucky enough to be able to live on dividends from the "taxable accounts" alone, you are going to have to realise capital gains if you don't have a superannuation pension. 

In my case, I might be able to stay in the 16% tax bracket if I don't need to realize capital gains. So, with tax free superannuation, I will pay very little tax. If I kept my superannuation in accumulation mode, I would be paying an average of 12.5% tax on earnings in superannuation and I would have to realise $80k of capital gains in "taxable accounts" instead of receiving a superannuation pension. That would push a lot of my earnings into the 30% tax bracket.* So, I am planning to put my superannuation accounts into tax-free pension mode and pay out the minimum distribution of 4% a year until I am 65.

With my wife still earning around $45k a year in salary for now, I might not need to do much in the way of realising capital gains outside superannuation.

What about just spending the redundancy payment for the first couple of years? Some of that is going to go into superannuation and the rest will sit in our offset account. The more we spend it, the more mortgage interest we are going to have to pay. Despite that, it might actually make sense to spend that first, but psychologically I prefer a big cash buffer, low mortgage interest, and a steady pension coming in. I can just set and forget the pension from Unisuper.

* Of course, long-term capital gains are only taxed at half the headline tax rate, so the effective marginal rate would be 16% including the Medicare levy.  

2024-25 Taxes

Here is a summary of my 2024-25 Australian tax return (all numbers in Australian dollars):

You can find previous years here. Our expected tax refunds will be lower than last year. In my case, I used up all the carried over capital losses and so have a net capital gain for the first time in a long time. Deductions were down due to reducing margin interest paid. As a result, net income rose 10%. Still below the magic $250k level needed for wholesale investor status based on income. My tax due rose by 14%. As a result my expected tax refund is down to just $610.

Here is a summary of Moominmama's tax return:

She too had a big increase in net capital gain and other investment income. Gross income rose 34% as a result. Deductions only rose by 2% and so taxable income almost doubled! Franking (tax already paid by Australian companies that is stapled to dividends) and foreign tax credits still more than offset the more than tripled gross tax bill and so tax due is still negative but only a quarter of last year's number. So, the expected tax refund is down steeply, but still nearly $8k.

I am still collecting tax statements for our self-managed super fund. It will be a long time till its tax return is submitted by our administrator, SuperGuardian. 

Sold My Shares Rather Than Receive a Dividend!

WCM Global Quality just announced that they expect to pay a $1.73 per share unfranked dividend. I only bought shares in my name this year. My 4.250 shares would receive a $7,300 dividend taxed at my marginal rate of 47%! Instead, I sold the shares for a capital gain of just under $800, which as it is a short-term gain will be taxed at the same rate. I didn't reckon on this being such a tax inefficient investment. I am keeping Moominmama's shares for now. It would make more sense to sell her more recently acquired shares. But her older shares, even after the long-term capital gains tax discount would be more costly to sell than to keep.

I am putting the proceeds into the First Sentier Imputation Fund. This is a case where I used the target allocation to tell me what to invest in. According to it, I need more large cap Australian stocks... 

Another Perspective on the UK Pension

Here is another way of looking at the UK pension, which I have applied to contribute to. Our net worth not counting our house is about AUD 6 million. Using the 4% rule, we could withdraw AUD 240k per year. Currently, our spending is below that, which is why I have been thinking about retirement. The pension would add almost AUD 20k per year to that.* And the contributions would only be around 1/2% of the 6 million.

* This depends on how much tax we end up paying in retirement. Based on last year's tax return, if I stopped working I would earn AUD 56k p.a. So, my marginal tax rate would be 32%, which would apply to this additional income. That seems like a really high rate at such a nominally low income.

Australian Government Spending

When you get your notice of assessment from the Australian Taxation Office when they have processed your tax return, they send you statement of how the government spends your taxes, which they quaintly call a receipt:

I was a bit surprised by how little interest they are paying. Only a 2.3% average rate of interest and 3.8% of the budget.

Note that this tax total doesn't include the Medicare Levy, which was another $4,411 tax that I paid.

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 :)

Moominpapa's Taxes 2023-24

I did our taxes earlier this year as Aura sent me a tax statement earlier than in previous years. Here is a summary of my taxes. You can find previous year's taxes here. To make things clearer, I reclassify a few items compared to the actual tax form (such as foreign source income deductions). Of course, everything is in Australian Dollars. 

Overall, gross income fell 6%, while deductions rose 5%, resulting in a fall in net income of 8%.

On the income side, Australian dividends, franked distributions from managed funds, and foreign source income were all down strongly. Tribeca Global Resources paid a much smaller dividend this year, some of my other share holdings were reduced slightly to make new investments, and I didn't get dividends from Fortescue (sold) or Pendal (acquired). I also reduced my holding of 3i (III.L) and so got reduced foreign source income.

My salary still dominates my income sources but again only increased by 3%. Net capital gain is zero due to carryover losses from last year. I am carrying forward $41k in capital losses to next year. Rising interest rates increased deductions, while charitable giving was up 33% after falling last year.

Gross tax is computed by applying the rates in the tax table to the net income. In Australia, you don't enter the tax due in your tax return, but I like to compute it so that I know how big or small my refund will likely be. Franking credits (from Australian dividends), foreign tax paid, and the Early Stage Venture Capital (ESVCLP) offset are all deducted from gross tax to arrive at the tax assessment. ESVCLP was up due to more capital calls from Aura.

Estimated assessed tax fell because of the reduced net income and larger offsets this year.

I estimate that I will pay 24% of net income in tax. Tax was withheld on my salary at an average rate of 32%. I already paid $7,996 in tax installments and so estimate that I should get a refund of $16,942! Let's see.

Moominmama's Taxes 2022-23

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 only 3% this year. Gross income was down 2%, though there were some big fluctuations across categories. Australian dividends rose quite strongly, which is something of a trend...

Total deductions rose by 46%, mainly because of increased interest costs. As a result, net income fell 27%. 

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. As a result, she should get a large refund.

Moominpapa's 2022-23 Taxes

This year, I've prepared our tax returns just before the deadline. Here is a summary of my taxes. Last year's taxes are here. To make things clearer, I reclassify a few items compared to the actual tax form. Of course, everything is in Australian Dollars. 

Overall, gross income and deductions barely changed from last year, falling by 1% each.

On the income side, Australian dividends and franked distributions from managed funds are again up strongly. My salary still dominates my income sources but again only increased by 3%. 

Other income sources are down strongly, partly because I shifted the assets, which produced these returns into the SMSF. Net capital gain is zero due mainly to some strategic sales to generate losses. I am carrying forward $93k in capital losses.

Deductions fell 47% because last year they included the loss on Virgin Australia bonds. I redistributed deductions a bit to match the size of different holdings. This resulted in some big changes in the individual categories. Didn't plan on charity falling that much...

Gross tax is computed by applying the rates in the tax table to the net income. In Australia, you don't enter the tax due in your tax return, but I like to compute it so that I know how big or small my refund will be.

Franking credits (from Australian dividends), foreign tax paid, and the Early Stage Venture Capital (ESVCLP) offset are all deducted from gross tax to arrive at the tax assessment. 

Estimated assessed tax fell because of the larger offsets this year.

I estimate that I will pay 25% of net income in tax. Tax was withheld on my salary at an average rate of 32%. I already paid $7,782 in tax installments and so estimate that I should get a refund of $8,701.

Moominmama Actually Had Negative Tax for 2021-22

Not sure why the calculation I posted here showed positive tax, but both the ATO and my own calculation show that Moominmama's tax assessment was -$127 for 2021-22. That's kind of like the holy grail or something :)

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.