Lowered my Mortgage Rate

I read in the Australian Financial Review that having an offset facility usually means that the mortgage interest rate that you are paying is higher and that this gap is biggest at the Commonwealth Bank, where we have our mortgage and offset account. The article said that the gap could be as big as 1.91%! I don't remember this being explained to me when we got our mortgage and offset account though I did discuss with the salesperson whether we should get an offset account. 

I have wondered why our mortgage rate was so high and tried to move our mortgage to HSBC to get a lower rate. They just continually ran me around and nothing ever happened. So, I gave up on that.

So, I phoned the bank and he told me that I should phone regularly to "review my discounts", which I have never done. Basically, there is a seniority discount - the longer you are with the bank the more the discount. So the standard rate for the offset account is actually 6.3%. I was paying 5.4%. He increased the discount from 0.9% to 2.29%, lowering my mortgage rate to 4.01%. If I switched to the no frills product cited in the AFR he could only give me a 0.2% discount off the 5.53% standard rate. 

I estimate the gain in net worth at the end of the mortgage, assuming we don't pay off the mortgage any faster, is AUD 271k at 6% inflation and AUD 188k at 3% future inflation. The saved interest is in the ballpark of AUD 90k. It feels weird to earn that much for about an hour's work.

August 2022 Report

August was a mixed month. The MSCI World Index (USD gross) lost by 3.64% and the S&P 500 lost 4.08% in USD terms, but the ASX 200 gained 1.43% in AUD terms. All these are total returns including dividends. The Australian Dollar fell from USD 0.6968 to USD 0.6855 but it rose against the Pound from one Pound buying AUD 1.7430 to AUD 1.6958. We gained 0.25% in Australian Dollar terms but lost 1.38% in US Dollar terms. The target portfolio lost 0.71% in Australian Dollar terms and the HFRI hedge fund index rose 0.50% in US Dollar terms. So, we out-performed three benchmarks and under-performed two.

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

The asset class returns are in currency neutral returns as the rate of return on gross assets. I have added in the contributions of leverage and other costs and the Australian Dollar to the AUD net worth return.

Hedge funds were the biggest contributor to performance followed by futures, which had the strongest return. US stocks were the worst performer followed by gold and rest of the world stocks.

Things that worked well this month:

• Pershing Square Holdings was the best performer (AUD 11k) followed by Aspect Diversified Futures (10k) and Winton Global Alpha (8k).
  

What really didn't work:

• Australian Dollar Futures lost AUD 7k.
  

The investment performance statistics for the last five years are: 

The first three rows are our unadjusted performance numbers in US and Australian dollar terms. The following four lines compare performance against each of the three indices over the last 60 months. The final three rows report the performance of the three indices themselves. We show the desired asymmetric capture and positive alpha against the ASX200 but not against the hedge fund index nor the MSCI. Compared to the ASX200, our rate of return has only been 0.6% lower, but our volatility has been 5% lower. We are performing 2% per annum worse than the average hedge fund levered 1.7 times.

We moved a bit away from our target allocation. Our actual allocation currently looks like this:

About 70% of our portfolio is in what are often considered to be alternative assets: real estate, art, hedge funds, private equity, gold, and futures. A lot of these are listed investments or investments with daily, monthly, or quarterly liquidity, so our portfolio is not as illiquid as you might think.

We receive employer contributions to superannuation every two weeks. We are now contributing USD 10k each quarter to Unpopular Ventures Rolling Fund and less frequently there will be capital calls from Aura Venture Fund II. In addition we made the following investment moves this month:

• I bought AUD 75k of units in the Aspect Diversified Futures Fund (Class A). This cash came from the redemption of Pershing Square Tontine Holdings. 
• I sold AUD 25k of the First Choice Wholesale version of this fund and bought units of First Sentier Developing Companies instead.
  
• I switched about USD 17k from the TIAA Real Estate Fund to the TIAA Social Choice Fund (a balanced fund).
• I traded 10k shares of Regal Funds (RF1.AX) a couple of times.
  
• I invested USD 2.5k in a start-up offered by the Unpopular Ventures syndicate. 
• I sold 12.5k shares of WAM Leaders (WLE.AX) to fund venture capital investments.
• I sold 3k shares of Ruffer Investment Company (RICA.L) for the same purpose. 
• We received the payout from the sale of Lured.
  

Transfer to HSBC Australia Didn't Work

I transferred USD 1,000 from Interactive Brokers to the HSBC Everyday Global Account. I was surprised to find that they converted it to Australian Dollars. I am confused about whether I did something wrong or not. I posted a question about it in the mobile chat and the app said it was still learning and didn't understand and a consultant would get back to me.

P.S. 30Aug22

So, the consultant explained that first you have to add the US Dollar "product" to your account before you can transfer US Dollars to your account. I now applied and was approved.

Even if I get this working properly this is a slow method of converting currency. First I need to transfer money to IB, then wait before I am allowed to withdraw it again, then wait while the transfer to HSBC happens, then do another transfer. Of course, we could simply have lots of US Dollars lying around at HSBC just in case, but there is an interest cost to doing that... So all this might be too much hassle.

For September's investment in Unpopular Ventures, I'm planning to sell some shares at IB and then transfer US Dollars to HSBC and see how it goes.

P.P.S. 30Aug22 

So now I know when you get the 2% cashback on debit card purchases. You need to deposit at least $2,000 a month into the account. That is a tremendous rate of return compared to passing that spending money through our offset account - about 5 times the rate of return. So, I am going to get Moominmama's salary deposited to this account in future. I'm not sure about opening one myself as I have a lot lower rate of spending on a debit/credit card.

 

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.

Moominpapa's 2021-22 Taxes

This year, I've prepared our tax returns earlier than usual as I have already received all the required information. 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. 

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

A big chunk of foreign source income is from the distribution from Aspect Diversified Futures Fund.  As a result, I am moving that holding into the SMSF. Net capital gain is zero due mainly to some strategic sales ton generate losses. I am carrying forward $99k in capital losses, which is double what was brought forward from last year.

In total, gross income grew 8%.

Deductions fell 47% because last year they included the loss on Virgin Australia bonds. Most deductions are interest including the $14k in other deductions.

Net income rose as a result by 26%.

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 (none this year as there were no capital calls from Aura) are all deducted from gross tax to arrive at the tax assessment. 

Estimated assessed tax rose 47%.

I estimate that I will pay 28% of net income in tax. Tax was withheld on my salary at an average rate of 31%. I already paid $6,546 in tax installments and so estimate that I need to pay an additional $2,829 in tax.

Reduced Our Health Insurance Premium

 

Inspired by Jessica Irvine's article on health insurance in the Sydney Morning Herald (I get her weekly newsletter), I phoned BUPA a couple of times and reduced our monthly health insurance premium from AUD 596 to about AUD 530. I switched the hospital coverage from gold (which we wanted when Moominmama was pregnant) to silver advanced (which is probably still too much coverage) and the extras from Budget Extras to Freedom 50. I think we should probably just drop the extras but Moominmama seems to think we'll use it. I'll monitor after a year or two and see if we are getting our money's worth. I estimate that the extra tax we would have to pay if we didn't have private health insurance is about AUD 370 a month. Moominmama likes private health insurance (and private schools etc.) whereas I don't get the point, really.