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.

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! 

ASA Podcasts

Two of the partners of ASA who managed the Diversified Property Fund we are invested in have been on podcasts recently. Here are the links for Chris Aylward and Tim Slattery.

How Well Did Your Super Fund Do in 2025?

The Australian reports on superannuation funds' performance for calendar year 2025. Neither of our employer funds - Unisuper and PSS(AP) - made the top ten. Unisuper Balanced is in the top 10 for the last 10 years. The average return for 2025 was between 8.8% and 9.3% depending on the source. I assume this is for accumulation funds. I estimate that Unisuper made 7.8% pre-tax or around 6.8% post-tax. PSS(AP) made 10.5% or 9.2% post-tax. On the other hand, our SMSF returned -6.1% pre-tax :( This is mostly because of its outperformance in 2024 (34.0%) and cryptocurrency coming back down to Earth in 2025.

Wholesale Investor Certification

As part of participating in the Aura Group capital raise, I had to get a new wholesale investor certificate. You have to do this every 2 years to remain current. There are two main ways to qualify: Show you have more than AUD 250k in income per year in the last two years or show you have more than AUD 2.5 million in net worth. You need an accountant to certify this. The test is on an individual not household basis. I am using the net worth approach.

I was certified in 2020, but when I tried to renew in 2022, the accountant I used said I didn't qualify, as she wouldn't count my superannuation including my SMSF towards the amount as I was under 60. This didn't stop me from continuing to meet capital calls for my existing Australian venture capital investments. 

Now I meet the required level with or without superannuation. I also argued that I am receiving a TTR pension from each of my superannuation accounts and am over 60 and about to retire. Anyway, I qualified. It cost AUD 550. 

It is much easier to qualify as an accredited investor in the US. You only need USD 1 million net worth and you don't need an accountant to prove it, so it is free. A couple can qualify with just USD 1 million between them. However, primary residences are excluded, which is not the case in Australia. Moominmama qualifies as an accredited investor for our investments via Angellist and the Unpopular Ventures syndicate. 

No-Brainer Retirement Contribution

In Australia, if you are between the ages of 60 and 67 and you are retired, you can make concessional retirement contributions even if you aren't working at all.* Why would you want to do that?

A concessional contribution is one you can deduct from your income on your tax return. However, the superannuation fund does have to pay 15% tax on the contribution. If your marginal income tax rate is in the 16% bracket–18% including the Medicare Levy–or above, you will save on total tax paid. For example, if you have a paid-off investment property, you might be earning $30k a year in rent. If you make a $12k contribution to super, you will wipe out your income tax bill. Obviously, this saves a lot more tax if you are in a higher income tax bracket.

Now here is the no-brainer bit. As you are retired, if you want, you can turn around the next day and take the money out of super again! 

Maybe you need the money. But even if you don't need it now, unless you stop your existing tax free pension account and start a new one, which is a hassle, earnings will be taxed at 15% in super, vs. the 0% rate you have engineered outside super. If you've already hit the transfer balance cap, then you won't be able to make your tax free pension account any bigger.

Assuming I retire later this year, I am planning to make a concessional retirement contribution to top my concessional contributions for the year up to $30k. As I will probably be in the 30% tax bracket this tax year, the savings will be worthwhile. But I probably won't take it out again right away, unless I have already hit the transfer balance cap.

* After age 67 you need to meet the "work test" to make concessional contributions. You can continue to make concessional contributions even if you have more than $2 million in superannuation. You can't make non-concessional contributions after you reach that level.

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.  

Fixed My Margin Loan Rate Again

 

The Reserve Bank of Australia Building

Same as last year, I just fixed my margin loan rate for the next financial year. The variable rate offered by CommSec was 9.4% and the fixed rate for one year is 7.54%. The Reserve Bank would need to cut interest rates by an average of 1.86% over the year for the variable rate to be better. The current RBA cash rate is 3.85%. Under the assumption that they cut in a straight line, even if they cut rates to zero by June 2026 the fixed rate is better. The only way the variable rate would be better is if they frontload a very significant cut of say 1.5% and then end up with a cut of 2.5% or so in total at the end of the year. I don't see them frontloading to that degree given history. Anyway, we will see if I was right...

What it Takes to be in the Top 1% in Australia

Interesting article in the AFR on what it takes to be in the top 1% in Australia currently by both income and wealth. You can go to the free article to see lots of charts, so I won't post them here.

To be in the top 1% by income, you need a household income of AUD 532k. The top 5% is above AUD 306k. The top 10% starts at AUD 235k. I predict that our taxable income will be AUD 263k for this tax year. So we fall within the top 10%.

The wealth data are also broken down by age group. For the 41-64 age bracket the top 1% starts at AUD 7.7 million, while the top 5% starts at AUD 3.8 million. At AUD 7.4 million we are just outside the top 1%. Our average adult age is 55. The top 1% for 65+ starts from AUD 10.9 million!

There are also breakdowns by type of asset. The top 5% by home equity for our age band starts at AUD 1.42 million. So we are well below that. The top 25% is AUD 650k and above. We are within the top 25%.

A top 1% household superannuation balance is one of more than AUD 2 million. We are definitely in the top 1% by this criterion. Moominpapa alone has almost 1.9 million and Moominmama more than 900k. The top 1% of individuals starts at 1.4 million.

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.