Recently, someone asked me for an opinion on an article written by Stockspot on investing in Insurance Bonds.
We all know someone who has decided to retire (at least in part) overseas. It might be Bangkok, Manila or Bali, but the reasons are usually the same - $814 p/f [the single max rate of the age pension as of Dec 2017] goes a lot further in South East Asia than it does in Melbourne, Sydney or Perth.
Of late, I have had a number of requests for Financial Advice from older individuals wondering how the age pension would work if they move overseas. The Federal government made a number changes in the assets test back in January and earmarked changes to the portability of the Age Pension with the announcement in 2016 to slash the amount of time Aussie retirees could spend outside Australia without having their Age Pension payments cut down to 6 weeks.
Fortunately, the change was abandoned and you can still spend 26 weeks overseas without your Age Pension payments reducing.
What Happens after 26 weeks?
After 26 weeks overseas, the majority of people will continue to receive their regular Age Pension payment minus the supplement payments. However, for those who migrated to Australia in their later years, or for those citizens who departed Australia and worked abroad, the amount they receive may be less. The formula Centrelink use in determining how much you will receive is based on the number of years you have lived in Australia, as an Australian resident, between the age of 16 and Age Pension eligibility age. This is known as the Australian Working Life Residency or AWLR.
Essentially you must have resided in Australian for at least 35 years between the age of 16 and Age pension qualification age to receive the full age pension. Note that the requirement is for you have to have resided in Australia, not worked.
If you have resided in Australia for less than 35 years since age 16, then you will receive a proportionate amount. Lets say for example you migrated to Australia at the age of 41 and your age pension qualification age is 66. After 26 weeks abroad, you will receive 5/7ths (25/35) of the full aged pension (which is roughly $581 pf).
For more information, check out the DSS guide or get in touch with our office today.
Personal Income Spending Flowchart
As usual, before reading this post, please read our general advice disclaimer!
If you are like most people, you might be in a quandary on how to prioritise your income. For those who grew up in families that lived paycheck to paycheck, cashflow management was definitely not something taught at home, let alone at school!
When I sit down with my clients and ask them what they are aiming to achieve and what they expect from me, most think about investing in property, shares, super, discretionary trusts and tax planning among other things. While sound investing is an appropriate focus, it should not come at the cost of ignoring essential cash flow management.
For those in survival mode - they simply earn income and pay expenses. The only way to escape this cycle is to earn more and spend less. But earning more and spending less is not enough, you must also engaged in the process of cash flow management.
Real cash flow management involves the understanding of where your money comes from and where it goes, and examining what choices are appropriate to create a life of greater satisfaction. Cash flow management is an active process.
This infographic is designed to help those people who need help in prioritising their spending. While procrastinating on Reddit a few weeks back, I saw a couple of magnificent posts by /u/beached69 and /u/atlasvoid. Inspired by their work, I created the Australian "How to Prioritise your Income Flow Chart.
As always, please read the general advice disclaimer before reading this article.
Crystallising a tax loss by selling an asset is not a problem, but what you do after that could be. For example, wash sales (the quick sale and repurchase of the same asset to crystallise a paper loss) are definitely not allowed. Some countries define in very clear terms what constitutes a wash sale. For example, in the United States you cannot claim a capital loss if the same stock is sold and bought back within 30 days.
Australian tax laws are not quite as clear as that. We do not have a specific 30-day buyback rule; instead, the ATO asks us to interpret the less clear 80-year-old general anti-avoidance provisions in Part IVA of the Income Tax Assessment Act (ITAA) 1936.
You will run foul of the Act if you answer yes to both the following questions:
1. Did you obtain a tax benefit from your activity - a benefit that would not have been available if you had not entered into it?
2. Would it be concluded that you entered into the scheme for the sole or dominant purpose of obtaining a tax benefit?
Of course, people love to interpret things to suit themselves and in the absence of specific guidelines this is exactly what they did. Which meant wash sales became very popular. But when too many people start bending the rules the ATO's antennas go up, and in 2008 it issued tax ruling TR 2008/1, which specifically outlawed arrangements where:
"…in substance there is no significant change in the taxpayer's economic exposure to, or interest in, the asset, or where that exposure or interest may be reinstated by the taxpayer".
That's ATO speak for no wash sales. But a specific timeframe was not defined. Just don't do it "within a short period".
Where the ruling did provide clearer definition was in banning the following arrangements:
- Claiming a tax benefit from selling an asset a short time before buying it back, or buying the same asset a short time before you sell it.
- Entering into a repurchase agreement with another party (including family members). That is, an agreement to sell it now and buy it back later for a predetermined price.
- Transfers between yourself and a company or trust in which you have an interest, in order to achieve the same economic benefit.
- Using derivatives or financial instruments to achieve the same result.
Avoiding penalties
A breach of the Act carries penalties of up to 50 per cent of the tax avoided. Penalties also extend to promoters of these arrangements.
In assessing your activity the ATO will consider your intent. If it can be shown the dominant purpose of your buying and selling was to turn a paper loss into a tax-usable loss, then you are in trouble. This does not cover the simple act of selling and then declaring the loss. Nor do you breach the Act if you buy and sell two different companies within a short time frame, even if they are in a similar line of business. Selling Rio and buying BHP is OK.
As usual, before reading this post, please read our general advice disclaimer!
As a rule of thumb, a home is no longer your main residence once you stop living in it. However, in some circumstances, you can choose to have a property treated as your main residence (i.e. principle place of residence (PPOR)).
When you can make this choice
This choice needs to be made only for the income year that the potential CGT event happens to the property – for example, the year that you sell the property.
If you own two properties:
- the property that you can choose to treat as your main residence after you no longer live in it
- the property you actually lived in during that period
you make the choice for the financial year of the sale of the first of those properties.
If you make this choice, you cannot treat any other dwelling as your main residence for that period (except for a limited time if you are changing main residences). If you do not use it to produce income (for example, you leave it vacant) you can treat the property as your main residence for an unlimited period after you stop living in it.
If you use the home to produce income (for example, you rent it out) you can choose to treat it as your main residence for up to six years after you cease living in it. If, as a result of you making this choice, the dwelling is fully exempt, the home first used to produce income rule does not apply. Note that the 6 years commences the moment you start advertising that the property is available to rent.
If the property is rented for more than 6 years, the ‘home first used to produce income’ rule usually applies, which means you are taken to have acquired the property at its market value at the time you first used it to produce income – see Using your home to produce income.
If you are absent more than once during the period you own the home, the six year maximum period that you can treat it as your main residence while you use it to produce income applies separately to each period of absence.
Note: If you are considering this information for your own personal circumstances, we recommend you contact a Financial Tax Advisor or Financial Adviser Perth
It is actually possible to use your Superannuation to pay for the out of pocket costs for IVF.
Index outperforms most Australian active funds - except small caps (2006-2016)
General Advice Disclaimer - Please read!
The S&P Dow Jones Indices has been the quasi-scorekeeper of the ongoing debate on active investing versus passive debate. While the report will not end the debate on active versus passive investing in Australia, the report makes a meaningful contribution by examining market segments in which one strategy works better than the other.
There is nothing new about the index versus active debate. It has been a contentious subject for decades, and there are few powerful believers on both sides, with the vast majority of market participants falling somewhere in between.
Australian Active vs Index Year end 2016 [10 year annualised performance]
The Score Card- Index outperformance
In the report above, the S&P 200 index outperformed 74% of active funds over a 10 year period. In fact, the only sector that the index underperformed its active counterparts was in the small & mid-cap category. In fact, the level of under-performance by the index is significant over the 10 year annualised returns with the difference of 1.96% (index) to 5.90 (active)
In my experience, most investors think that the purpose of a financial advisor is to find someone that will choose the highest performing funds or stocks, or even the ability to pick market tops and bottoms in order to help clients time entries into the market. At the end of the day, a financial adviser should be advising on an appropriate asset allocation strategy that creates the highest probability of matching your financial goals with market risk and time horizons. If you are only paying for Alpha (out performance) to your financial advisor then perhaps you need to think again.
Source: http://www.spindices.com/documents/spiva/spiva-australia-year-end-2016.pdf
These are the basics of running your financial life.