The Australian Reports on Superannuation Fund Performance for the 2024 Calendar Year

The Australian reports on the best performing super funds for 2024. They focus on lifecycle, balanced, and sustainable options. I am sure there is some retail super option invested in international shares that did better than these. How did we do? I compute our SMSF returns pre-tax, while super funds report post-tax results. But anyway, our SMSF gained 34.1%! Estimated pre-tax numbers for Unisuper and PSS(AP) balanced options were 14.3% and 13.4%, respectively.

Went Over the Transfer Balance Cap

Intramonth, I've blasted through the transfer balance cap. This is the limit of AUD 1.9 million that you can transfer from an Australian superannuation account into a tax free pension when you retire or reach 65 years old. I'm now nearer AUD 2 million. The important thing is that when you exceed this limit you can no longer make "non-concessional" (post-tax) contributions to superannuation. However, I can continue to make recontributions to superannuation from my transition to retirement pension until the end of June this year. This is because this rule depends on your balance at the beginning of the current financial year, which in Australia starts at the beginning of July. But if I do stay over the AUD 1.9 million level on 30 June this year, I won't be able to make non-concessional contributions to my account next financial year. Instead, I will make them to Moominmama's account.

P.S. 20 January

The Australian is reporting today that the transfer balance cap is likely to be raised to AUD 2 million next July.

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.

Transition to Retirement

I am thinking of setting up a transition to retirement pension (TTR pension). This allows you to receive regular payouts from your superannuation once you reach the age of 60 even though you are still working. I will be 60 years old in about 6 weeks time! There are lots of strategies this can be used. In my case, I am thinking to continue working full time at least for the next year and to recontribute all the payout to superannuation as non-concessional contributions (post-tax contributions). This has two advantages: 

1. It will convert money that was contributed as concessional contributions (at the 15% or 30% contributions tax rate) and earned as investment returns into non-concessional contributions. If my children inherit some of my superannuation when they are past the age of 18 they then won't need to pay tax on this part of the payout. The "death tax" is only on concessional contributions and fund earnings.
2. Once I hit the transfer balance cap, of currently $1.9 million, I can contribute the money to my wife's superannuation instead. I am currently at $1.7 million and she is at $800k. So, there is still a lot of unused capacity there. 

When you retire or reach age 65 you can transfer money up to the transfer balance cap into a zero taxed pension account. Money over the limit stays in an accumulation account where earnings are taxed at 15% (10% for long term CGT). The TTR pension does not affect the calculation of the transfer balance cap unless you are still holding it at age 65 when it becomes a regular tax free pension account.

My Unisuper account is close to 100% concessional contributions and earnings. So, I would start with that and transfer $600k to a pension account and pay out 10% of it each year, which is the maximum withdrawal rate. You have to leave some money in the accumulation account to receive new contributions... But actually 60% of my SuperGuardian account is also concessional contributions and earnings, and so it would make sense to transfer $400k from that into a TTR pension account too. So I would be withdrawing $100k per year and recontributing. The reason I wouldn't withdraw the maximum annual non-concessional contribution level of $110k is because my employer contributes more than the allowed cap on concessional contributions each year and the excess becomes non-concessional contributions.*

The downside to recontributing to my wife's superannuation is that I could make those contributions from non-superannuation money resulting in getting even more money into super. After all, even if you have more than $1.9 million in super, the amount above the limit is concessionally taxed compared to non-super investments.** But right now I am not making those contributions. Instead, I have been building up a pile of cash offsetting our mortgage. This is partly to reduce our interest bill but also part of a plan to buy a more expensive house in the future. So, as long as I was planning on saving to buy a house, I wouldn't make non-concessional contributions to her account.

Anyway, I sent an email to Unisuper yesterday expressing my interest in TTR pensions and asking what the next step is. 

Originally, I planned on switching to half time work when I reached 60 years old, but I seem to have fallen victim to the one more year syndrome. Seems silly to sacrifice $120k in pre-tax salary and superannuation just to have a bit easier time in the teaching half of my year. Also, my university is enacting a major cost-cutting exercise that likely will see more than 500 jobs cut in total. Academic jobs will not be cut till next year. They are not putting in a voluntary redundancy scheme. But I figure that if I am made redundant then I will get a bigger payout if I am still working full time. I could be wrong about that.

* That's why my Unisuper account isn't 100% concessional contributions and earnings.

** The government plans to tax superannuation in excess of a $3 million threshold at higher rates that include unrealised capital gains. But I think the senate will not pass that legislation and we are still a long way from the $3 million level.

Should You Keep Your Superannuation in Accumulation Mode?

The accepted wisdom is that as soon as you retire in Australia and are over 60 years old, or as soon as you hit 65 years old even if you are still working you should shift your superannuation from accumulation to pension mode. You can transfer up to $1.9 million per fund member into pension mode currently. Investments in pension mode have zero tax. This is in comparison to 15% tax in accumulation mode with a 1/3 reduction for long-term capital gains.

But what if you have a lot of investments outside of superannuation? These are highly taxed and so doesn't it make sense to run these investments down first to reduce your overall tax? In pension mode there are required minimum withdrawals each year. If you don't spend that money it is simply added to your highly taxed non-super investments. So, despite not having to pay tax on your money in super, you are transferring more and more money out of super into your taxable accounts. Does it make sense to wait till you have spent your non-super investments?

I ran a simulation in my long-term projection spreadsheet. This isn't a Monte Carlo simulation. I just assume my historical average rate of return over the last 20 years applies into the future. I assume that I retire at age 65 and convert my super to a pension and Moominmama converts her super to a pension at age 60. She stops working when I do. I also assume that the tax rate on investments outside super is 20% of returns (without any attempt to define realised and unrealised gains) and in super in accumulation mode is 12.5%. Both are probably at the high end of what might actually happen. But the contrast with zero tax in pension mode, makes pension mode more attractive relative to accumulation mode. The simulation runs to 2050.

I also run a simulation where all our super stays in accumulation mode. This no pension scenario has 8% more assets in 2050 than the pension scenario.

This modelling is still not that realistic. I assume that all our superannuation can be moved to pension mode, even if we exceed the $1.9 million threshold. Also, we are likely to make more non-concessional contributions to Moominmama's account before 2029 and I assume we don't. I'm think that these tweaks won't change the fundamental result. We would have to have a lot less non-super investments to change the conclusions.

Trip to Sunshine Coast

As Ramit's Conscious Spending Plan says that we aren't doing enough "guilt-free spending", I booked a trip to Queensland for when the weather will be colder here 😀. Took under 2 hours to decide on location, book an apartment, book flights, and book a car. Pretty efficient I think. Total bill for a family of four: AUD 5,350. I think those are all the additional costs compared to doing similar activities based at home on a staycation. Not sure I am "guilt-free", though! Now we could have picked cheaper options throughout. But we got an apartment on the beachfront with a sea view and a swimming pool, a car that will definitely fit our luggage and extra legroom on the flight (front row) at convenient times. We got the cheapest available price on Jetstar on the way back.

One interesting thing is that I thought about using my Qantas Frequent Flyer points, but my 160k points were only worth about AUD 1,000. Apparently, they are worth more for international flights, so I kept them for now. Will probably find I'm not allowed to use them when I next try to book an international flight.

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!

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.

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.

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.

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.

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.

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".

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.

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.

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.

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.

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.

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.