Australian Federal Budget 2016

The budget released yesterday actually turned out pretty well for me despite some of the leaked stories. In the end the income level at which the 30% superannuation contributions tax start was lowered from $300,000 to $250,000 rather than $180,000 and the cap on concessional (pre-tax) contributions for people over 50 will stay at $35,000 per year. The cap for under 50s is reduced from $30k to $25k. The biggest changes are a lifetime cap on non-concessional (post-tax) contributions of $500k rather than $180k per year. I might just contribute $500k just before retiring, but it's not going to change my plans. Also there is a $1.6 million cap on how much you can transfer into a tax free account after you retire from an accumulation fund. This number seems to be designed to be equal to roughly the maximum contributions allowed under the new rules over a lifetime. Effectively earnings in retirement on earnings in the accumulation phase above the rate of inflation would be taxed....  Currently, I have $385k in Australian super. If I work to age 65 and continue my current rate of contribution I would add $450k in concessional contributions. So, I could certainly add the $500k just before retiring, as long as investment returns are not too spectacular in the interim.

Other news in the budget is that the 37% tax bracket threshold will be raised to $87k p.a. instead of $80k. That would reduced my tax by $315. So, all in all, it was an OK budget.

P.S.

Now I just read that the concessional cap has been lowered to $25k for everyone, regardless of age. So, what I read yesterday was wrong. But this is from 1 July 2017. So, in the next tax year I can keep my current contributions rate and then after that I will have to cut them and I will have a $3,000 tax hike. Of course, if Labor come to power at the election on 2 July this year that might not happen...

There are a lot of changes, which mostly make super more complicated.

Entering the Top Tax Bracket

Only 3% of Australian taxpayers are in the top tax bracket, which starts at $180,000 a year and has a marginal tax rate currently of 49%. And now I'm one of them, I think. IPE just declared a 5.75 cents a share dividend payable next month. I have 100,000 shares and so the dividend is $5,750. And it is a totally unfranked dividend. After this, I'm currently estimating my taxable income for the year at $182k and I'm now expecting to pay $3,000 extra tax at tax time. That also means I'm going to have to pay quarterly tax from now on.

I guess this is a good problem to have, but it feels kind of absurd that I'm now in the top tax bracket. Of course, when I first moved to Australia I wasn't that far from it because it kicked in at $50,000 a year in those days (1996) and my salary was a little higher than that. After "voluntary" super contributions of 7% and some deductions I was out of the zone.

Moominmama's reaction was that I should generate some business expenses to pull my income down. I could buy a nice big computer screen for home use, which I couldn't charge to my employer. It will be half price now I'm in the top tax bracket. I'm already almost maxing out my pre-tax super contributions. But spending money on stuff just to reduce tax is silly.

Superannuation Reform Again?

Changes to superannuation are a perennial topic. If the government does this - lower the threshold for the 30% super contributions tax to $180k income per year and cut the concessional cap to $20k p.a. - I figure I will have to pay almost $7,000 a year more in tax. My taxable income this year looks like being just below $180k but the threshold for the super surcharge adds things like employer super contributions and investment losses to the taxable income amount. It would make most sense to cut the non-concessional cap, which is currently $180k per year, dramatically, as that is the way that wealthy people can get really large amounts of money into the super system, which will be taxed at a zero rate once they retire. But, of course, there is no immediate revenue to be gained by cutting the non-concessional cap. To simplify the system the government could just get rid of the concessional/non-concessional distinction, stop taxing earnings and then have a simple US Roth style system. Much too logical, of course. Actually, the optimal solution, assuming that super will be taxed in some way is to go for the US 401(k)/403(b) approach where there is no tax on contributions or earnings and regular tax on payouts. This gives the the money the best opportunity to increase in value... well under some economic assumptions anyway.

March 2016 Report

Low spending didn't continue into this month... Moominmama (formerly Snork Maiden) is out and about and Moomintroll is in tow. We went to Ikea and spent more than $2,000. Before that, it was a low spending month. Even though everything seems to be cheap in Ikea, it somehow adds up into big numbers :) Costco is also like that and just across the road from Ikea. Yes, we went there too.

Here are our monthly accounts (in AUD):

So, spending was $6,355. The biggest single expenditure was $2,281 at Ikea. Doctors' fees totaled $1245, but we got a total refund from Medicare of $655. The latter is counted as income. Health insurance is $308 a month, BTW. The Australian health care system is a strange mix of public and private care and payments...

We earned $14.2k in salary and other current payments including those Medicare refunds. After taking into account the mortgage payment of $3,541, which shows up as a transfer to the housing account, we saved $4.3k on the current account. We made $3.6k of retirement contributions, and saved a net $1.4k in added housing equity. Net saving was, therefore, $9.3k across the board.

Stock markets rose strongly this month. The ASX 200 rose 4.73%, the MSCI World Index 7.48%, and the S&P 500 6.78%. The Australian Dollar rose from $US0.7152 to $US0.7676. We gained 2.46% in Australian Dollar terms and 9.96% in US Dollar terms. So we under-performed the  Australian market and outperformed international markets. The best performing investment (in total dollars not RoR) was the Colonial First State Geared Share Fund, which gained $25.8k, followed by Unisuper with $3.2k, and Medibank with $2.8k. I sold my Medibank holding during the month, but Moominmama is keeping hers. The worst performing investment was the Winton Global Alpha fund losing $3.2k. All asset classes apart from commodities gained this month with Australian and U.S. stocks leading the way.

As a result of all this, net worth rose $37k including housing equity ($US103k) to $1.470 million ($US1.128 million).

February 2016 Report

Yes, little Moomin arrived this month and we are now officially Moominpapa, Moominmama, and little Moomintroll. As a result, this turned out to be a fairly low spending month as much of the ante-natal spending came to a halt. Moomintroll is a very big baby (something like the 99th percentile) with a big head (he is a Moomin after all :)). As a result they needed to do a Caesarian operation to get him out of Moominmama. As she needs to recover, I've taken extra time off work (beyond the 2 weeks paternity leave we get officially) to help her.

Here are our monthly accounts (in AUD):

Spending was $5,191. The biggest single expenditure was $1,105 for annual car registration, which includes third party insurance.

We earned $13.8k in salary and other current payments. After taking into account the mortgage payment of $3,550, which shows up as a transfer to the housing account, we saved $5.1k on the current account. We made $3.5k of retirement contributions, and saved a net $1.3k in added housing equity. Net saving was, therefore, $9.9k across the board.

Stock markets fell moderately this month. The ASX 200 fell 1.76%, the MSCI World Index fell 0.63%, and the S&P 500 fell 0.13%. The Australian Dollar rose from $US0.7070 to $US0.7152. We lost 2.47% in Australian Dollar terms and 1.34% in US Dollar terms. So we under-performed both  Australian and international markets. The best performing investment was, unexpectedly, the Colonial First State Global Resources Fund, which gained $2,057, followed by the Winton Global Alpha fund gaining $1.5k. Commodities was the asset class with the best returns this month, followed by real estate, and then U.S. stocks. All other asset classes lost money.

As a result of all this, net worth fell $19k including housing equity (-$US2k) to $1.433 million ($US1.025 million).

January 2016 Report

Here are our monthly accounts (in AUD):


Spending was down but still quite high at $7,770. The biggest single expenditure was an $1,898 payment to the obstetrician.

We earned $15.0k in salary and other current payments. After taking into account the mortgage payment of $3,570, which shows up as a transfer to the housing account, we saved $3.7k on the current account. We made $3.6k of retirement contributions, and saved a net $1.3k in added housing equity. Net saving was, therefore, $8.6k across the board.

Stock markets fell sharply this month. The ASX 200 fell 5.48%, the MSCI World Index fell 6.01%, but the S&P 500 fell 4.96%. The Australian Dollar fell to $US0.7070 from $US0.7285. We lost 4.43% in Australian Dollar terms and 7.25% in US Dollar terms. So we outperformed the Australian market and underperformed international markets, which is a common theme recently. The best performing investment was the Winton Global Alpha fund gaining $3.4k. Medibank gained $2.5k. The only asset class with positive returns this month was, not surprisingly, commodities.

As a result of all this, net worth fell $45k including housing equity (-$US64k) to $1.452 million ($US1.027 million).

Annual Report 2015: Graphs

So here is how the last year looks on a graph in the context of everything since 1996:

The blue line is the sum of the other three. Medium term balance is liquid assets. We reduced these near the beginning of the year when we bought the house and the housing equity line takes off. Then mid-year I lowered the carrying value of our house in line with the local market. After buying the house, liquid assets have been pretty much flat as saving has been low and the financial markets performing weakly. The green line - retirement accounts - was also flat in this period. The net result is that we pretty much went sideways on the blue line too since early in the year.

This marks a clear break from the steep upward trajectory we've been on since late 2011. I got my current job in mid-2011 and then the financial markets performed quite well. At that point our spending wasn't that high yet.

This graph provides a slightly different view, breaking things down according to savings and profits. I don't break down housing equity into the two components as it's not worth it yet... You can see here that current savings (blue line) have been pretty anemic since buying the house, though retirement contributions continue on their merry way. Profits have been flat on both retirement and current accounts. In the long run we have done much better with retirement than with current accounts.

The next graph shows actual monthly non-retirement savings since 1996 and a 12 month moving average:

I have truncated the axis at -$15k but we dissaved $53k in January and $118k in February as we bought the house. As you can see, monthly savings peaked at an average of $10k per month in 2012-13. From March to December this year we only averaged $1,700 per month. I hope saving will be higher than that this year, but it's not going to return to its previous level. First, we are paying off our mortgage, which doesn't count as current saving and, second, Snork Maiden will be on maternity leave. She will get her regular salary till 8 weeks after the expected birth date. Later she will receive the minimum wage for 18 weeks and otherwise not receive anything. I think other baby expenses will be like a "rounding error" by comparison.

What about investment performance? This graph compares our "accumulation index" or "total return index" to the market indices since the depths of the financial crisis stock market crash in March 2009:

As you can see, our performance is very closely linked to the Australian stock market. For a few years we lagged behind the market, but more recently we have outperformed it and now have about the same gain as the ASX 200 since the GFC. In the meanwhile, international markets have performed more strongly, at least until the last few months.

2015 Accounts: US Dollar Edition

Here are the 2015 accounts in US Dollars. The main differences are:

• Smaller numbers for earning and spending due to the difference in value of the two currencies.
• Negative investment income of -$US 32k due to foreign exchange loss of -$US 98k.
• As a result almost flat net worth for the year.

2015 Annual Accounts

This is our annual account - the sum of each of the monthly accounts I've posted - in Australian Dollars. First a reminder about how these accounts are laid out: Current account is all non-retirement account and housing account income and spending. Then the other two are fairly self-explanatory.

We earned $197k after tax in salary, business related refunds, medical payment refunds, tax refunds etc. We earned (including unrealised capital gains) $37k on non-retirement account investments. $10k of the latter was just due to the fall in the Australian Dollar. The investment number is pre-tax. Total after tax income was $233k. We spent $151k but only $92k of that was "core spending". So, I always regard business expenses that are refunded as non-core, but also some one-off things. The biggest of these was stamp duty for buying our house of $27.8k and then $13.5k of gardening. So, that is 2/3 of the non-core expenditure. Then there were moving and settlement costs.

$7.5k of the investment income was tax credits. These increased our after tax "other income" but are also counted as part of the pre-tax investment income. So, they have to deducted to get things to add up tot he change in net worth. Then there was $1k of excess contributions I made to superannuation (not by choice) that had to be withdrawn... Finally, we transferred $194k in down-payment, mortgage payments, and some building work to the housing account. The change in current net worth, was therefore -$119k. Looking at just saving from non-investment income, we saved $148k.

The retirement account is a bit simpler. We made $41k in after tax contributions and the value rose by an estimated additional $67k in pre tax returns. $7k was the estimated tax on that and so the increase in net worth was $100k. Taxes are just estimated because all we get to see is the after tax returns.

Finally the housing account. We spent $19.5k on mostly mortgage interest. We saved about $4k in mortgage interest by keeping money in our offset account. Actually that $4k was part of our "current investment return". So we have to deduct the notional spending here to balance the books. I estimate our house is worth $10k more than we paid for it based on a recent sale in our neighbourhood. So that is an investment gain. We transferred the $194k into our housing account. So housing equity rose $181k with $171k of it being transfer of savings from our current account.

In total, net worth rose $163k, of which $63k was savings from retirement contributions and saving from current earnings. 

2015 Outcome and 2016 Forecast

Last year I forecast that net worth would optimistically reach $A1.65 million and pessimistically fall to $A1.15 million by the end of 2015. The US Dollar range was $US1.33 million to $US800k. The result for this year turned out at $A1.50 million (USD 1.09 million). We were in the upper part of the range for both currencies though we were flat in US Dollar terms.

The Australian stockmarket didn't perform that well again, the Australian Dollar fell to 73 US Cents and we spent an even higher amount including moving house and preparing for a baby. Therefore, the result was below the most optimistic projection. I'm actually surprised how well we did do given all that!

So, now is time to forecast for 2016. The optimistic projection is $A1.7 million or USD 1.2 million assuming the Australian Dollar only declines to 70 US Cents. This assumes that Snork Maiden doesn't return to work till 2017.

The most pessimistic scenario is that the stock market falls by 20%, the value of our house falls to $A700k, and the Australian Dollar falls to 60 US cents. In that case, I estimate our net worth would be $A1.25 million or USD 750k.

December 2015 Monthly Report

Here are our monthly accounts (in AUD):

We spent even more money than last month - $21k in total. And this doesn't include our mortgage or amounts I have accounted as investment in our property which totaled another $7.8k (see "transfer to housing". $13.5k of the spending was on gardening, which, fairly arbitrarily, I deemed didn't improve the value of our property and so was accounted for as spending. So, core, non-mortgage spending not counting this once-off number was $7.6k.

We earned $25.3k in salary and other current payments, which was high this month as it was a three paycheck month and I received a big business travel refund for travel I made several months ago. Because of the large transfer to the housing account we dissaved $3.7k on the current account. We made $4.2k of retirement contributions, and saved a net $5.7k in added housing equity. Net saving was, therefore, $6.2k across the board.

Stock markets were more volatile this month. The ASX 200 rose 2.73%, the MSCI World Index fell  1.76%, but the S&P 500 fell 1.58%. The Australian Dollar rose to $US0.7285 from $US0.7233. We gained 1.55% in Australian Dollar terms and 2.28% in US Dollar terms. So we underperformed the Australian market and outperformed international markets strongly. The best performing investment was the CFS Geared Share Fund, which gained $26.8k. Nothing else came close. Commodities did not do well with the Winton Global Alpha fund losing $1.2k.

As a result of all this, net worth rose $A24k including housing equity (+$US25k) to $1.498 million ($US1.092 million).

An annual report is coming soon.