GPL Financial Group GPL Partners

October 2018

Your investment freedom-maker

Given that repeated research has found that a diversified portfolio's asset allocation is responsible for the vast majority of its variations in returns over time, it makes much sense for investors to get it right.

       

 

And once investors set an appropriate strategic asset allocation – the targeted exposure to different investment asset classes – they should gain more freedom to concentrate on the other fundamentals of sound investment management.

In a way, the creation and implementation of a portfolio's strategic asset allocation – perhaps using low-cost, indexing-tracking exchange traded funds (ETFs) or their equivalent in unlisted traditional index funds – could be described as a freedom-maker.

With their asset allocation in place – reflecting an investor's goals, tolerance to risk and expectations for returns – they can focus more on such critical issues for investing success as:

  • Personal financial management: This includes such seemingly everyday matters as budgeting, keeping your debts under control (including your mortgage and credit card) and simply managing your personal cash flow. The efficient management of your personal finances may hopefully free up more money to invest.
  • Smarter investor behaviour: Disciplined investors adhering to a strategic asset allocation should be less inclined to chase past performance (switching to investments that outperformed in the recent past), get caught up with the investment herd (who tend to buy when prices are high and sell low), and try to pick tomorrow's investment winners. The list goes on. It's worth setting aside time to think about how to become a more disciplined investor who avoids emotionally-driven investment decisions, taking a long-term perspective.    
  • Portfolio rebalancing: This disciplined strategy involves periodically rebalancing a portfolio back to its strategic asset allocation. Rebalancing should recapture a portfolio's intended risk-and-return characteristics. It is a smart way to periodically respond to movements in markets without being distracted by market “noise” as share prices move up and down.
  • Cost control: High investment costs, including management fees, handicap real returns. And the negative impact of high fees compounds over time. Investors don't only forgo the money paid in high fees but the returns that this money may have earned over the long term.
  • Tax efficiency: Investors can help keep their returns as high as possible in a low-interest environment without taking extra risks by ensuring that their investment taxes are efficiently managed. Be a tax-sensitive investor. Ways to improve tax efficiency can include investing more in concessionally-taxed super and low-turnover ETFs tracking broad sharemarket indices.
  • Retirement drawdowns: Retirees face the task of efficiently drawing down on their retirement savings each year to strike a balance between having a satisfactory lifestyle and making their money last as long as possible. (See A dynamic approach to retiree spending and drawdowns, Smart Investing, September 11.)
  • Estate planning: Your estate planning should aim to ensure that your wealth efficiently passes to beneficiaries in the way that you intend while minimising the possibility of family disputes. Regarding your super, consider whether to nominate preferred beneficiaries or make binding death benefit nominations. Surveys for the 2018 Vanguard/Investment Trends SMSF Report, published earlier this year, confirms that estate planning is among the highest unmet needs for advice among self-managed super funds.

In short, having an appropriate strategic asset allocation in place gives you more freedom to concentrate on other matters under your control, rather than worrying about what's beyond your control. Of course, setting the right asset allocation is at the top of what's under your control.

 

Written by Robin Bowerman
Head of Corporate Affairs at Vanguard.
02 October 2018
vanguardinvestments.com.au

 

A dynamic approach to retiree spending and drawdowns

Here's a critical question for retirees and those nearing retirement: How much are you intending to drawdown and spend each year from your retirement savings?

           

 

Here's a critical question for retirees and those nearing retirement: How much are you intending to drawdown and spend each year from your retirement savings?

Historically-low yields, expected muted portfolio returns and growing life expectancies can make this a particularly challenging question.

Many retirees try to balance the competing priorities of maintaining a relatively consistent level of annual spending while increasing or preserving value of their portfolios to finance future income and perhaps other goals such as bequests.

The recently-published Vanguard research paper, From assets to income: A goals-based approach to retirement spending, proposes that retirees consider a dynamic approach to retirement spending and drawdowns.

This is a hybrid of two popular rules-of-thumb – the dollar-plus-inflation rule and the percentage-of-portfolio rule – designed to allow retirees to spend a higher portion of their returns after good market performance while weathering poor markets without significantly cutting spending.

In summary, this dynamic strategy provides for retirees to set flexible ceilings and floors on withdrawals for their annual spending that reflects the performance of the markets and their unique goals.

Popular rules-of-thumb

It's worth briefly discussing the most popular withdrawal and spending rules and their potential drawbacks:

  • The dollar-plus-inflation rule. This involves setting a dollar amount to withdraw and spend in the first year of retirement and then increasing that amount annually by the rate of inflation.
  • The percentage-of-portfolio rule. This involves withdrawing and spending a set percentage of a portfolio's value each year.

Both rules provide options for retirees to withdraw set percentages or set dollar amounts each year, regardless of how markets are performing.

When markets are poorly performing, retirees using the dollar-plus-inflation rule face a higher risk of spending more than they can afford and depleting their savings. And when markets are performed strongly, these retirees may spend less than they can afford.

With the percentage-of-portfolio rule, a retiree's spending may significantly fluctuate depending on the changing value of a portfolio. This can make budgeting hard, especially for retirees who spend a high proportion of their income on non-discretionary spending such as food and housing.

Floors and ceilings

With the dynamic spending strategy, annual spending is allowed to fluctuate based on market performance. This involves annually calculating a ceiling (a maximum amount) and a floor (a minimum amount) that spending can fluctuate.

For instance, a retiree might set a ceiling of a 5 per cent increase and a floor of a 2.5 per cent decrease in spending from the previous year.

The ceiling is the maximum amount that you are willing to spend while the floor is minimum amount you can tolerate spending.

Of course, many retirees receive a superannuation pension with a mandatory, aged-based minimum withdrawal rate. A dynamic approach will help such retirees calculate how much to reinvest, if any, each year.

 

Written by Robin Bowerman
Head of Corporate Affairs at Vanguard.
11 September 2018
vanguardinvestments.com.au

 

ATO zones in on hundreds of newly created reserves

ATO deputy commissioner James O’Halloran

         

 

As part of its ongoing compliance focus on the use of reserves by SMSFs, the ATO will be paying close attention to reserves that were created in the last financial year totalling $65 million.

ATO deputy commissioner James O’Halloran said the ATO estimated that there are approximately 1,900 SMSFs with reserves with an average value of $192,000.

“Of these funds, 35 per cent or 690 have not previously reported reserves. To date, new reserve amounts equate to approximately $65 million, with the average value of these new reserve amounts equalling $95,000,” he said.

Mr O’Halloran said the ATO is closely scrutinizing any unexplained increase in new reserves, increases in the balances of existing reserves, or allocation of amounts from a reserve directly into the retirement phase.

“Our work in the coming year will focus on examining new or increased reserves in the 2016–17 income year, where the facts and circumstances indicate the reserve was used as a means of circumventing the 2016 reforms,” he said.

“Where SMSFs implement strategies using reserves designed to circumvent restrictions in the super and income tax legislation, thereby weakening the integrity of these measures, we will consider the potential application of the sole-purpose test under section 62 of the Superannuation Industry (Supervision) Act 1993 (SISA) and Part IVA of the Income Tax Assessment Act 1936,” he said.

Where an SMSF does have reserves, he said the ATO will be looking to see whether they’re being maintained by a trustee in line with the sole-purpose test.

“Section 62 of SISA requires the trustee of an SMSF to ensure the fund is maintained solely for legislated core or ancillary purposes, most commonly the provision of retirement benefits,” he explained.

Before establishing a reserving strategy, Mr O’Halloran said it was important that SMSF professionals and their clients have carefully reviewed the SMSF’s trust deed to ensure it has the ability to create and manage the limited type of reserves identified as being appropriate in an SMSF.

“In any event, where reserves are kept, the trustee must formulate and put in place a strategy for their prudential management. These must be consistent with the entity’s investment strategy and its ability to discharge its liabilities as and when they fall due as required by paragraph 52B(2)(g) of SISA,” he said.

 

Miranda Brownlee
27 September 2018
smsfadviser.com

 

ATO set sights on 27,000 funds in ongoing crackdown

While efforts by tax agents and the ATO has seen a dramatic drop in the number of non-lodgers, 27,000 registered SMSFs that have not lodged since their establishment remain on its radar.

         

 

Speaking at the CA ANZ National SMSF Conference ATO deputy commissioner James O’Halloran said the ATO identified 49,000 SMSF non lodgers at July 2018.

Since then, around 22,000 of these funds have either engaged with the ATO and lodged all overdue SMSF annual returns or decided to exit the system and wind up their fund, said Mr O’Halloran.

“No matter how large a compliance issue may be, if the SMSF and their adviser are genuine in wanting to return their SMSF to complying status, if they engage with us we will work with them to try to find a resolution,” he said.

While there has been a significant drop in the non-lodgement rate, the ATO is still monitoring around 27,000 registered SMSFs that have not lodged since their establishment, he said.

This includes some 8,900 funds that registered in the 2016/17 financial year and have not as yet lodged their 2016/17 return.

While this number is improving, we’re concerned that in some cases, this may be an indicator of illegal early release of funds, said Mr O’Halloran,

“So we will continue to look at funds that have not lodged a return since they registered where we can see that at least one of the members has rolled money out of an APRA super fund account,” he said.

 

Miranda Brownlee
21 September 2018
smsfadviser.com

 

Reverse mortgages: Short-term gain, long-term pain

Residential property has long been a major store of wealth for average Australians.

           

 

The home remains the primary assets for the majority of people and the property market – particularly in major cities – has generally been kind for those who were in the market over the past decade or so.

But with the ageing of the population, the percentage of wealth locked up in residential property ($500 billion in home equity is held by people over 65) is both a blessing and a challenge.

According to the last Intergenerational Report in 2015, the number of people in Australia aged between 65 and 84 is forecast to double by 2054 to around 7 million, while the number of people over 85 is expected to more than quadruple.

There is no disputing that owning your own home is a foundational step on the pathway to providing for a comfortable retirement. But the problem is perfectly captured for older Australians with the expression “asset rich but income poor”.

The challenge for many in the post-war, baby boomer generation, is that while the house value may have risen well beyond their expectations, you can't use it to pay for the groceries, house repairs or a car that needs replacing.

Downsizing has its advocates but comes with lifestyle challenges such as forming new friends and community contacts. So it is no surprise that there is considerable interest in developing a viable suite of products to release the equity locked up in the family home.

While the need is obvious, the solution less so, and products like reverse mortgages do not enjoy good reputations. A recent review by ASIC of reverse mortgage products acknowledged that a common view amongst retirees, and even among finance brokers and lenders, tends to be that equity release products take advantage of vulnerable elderly people.

That certainly accords with a personal experience of reverse mortgages courtesy of a family friend who, with her husband, took out a small ($50,000) reverse mortgage against the equity of their mortgage-free home.

It certainly helped provide some short-term cash and lifestyle enjoyment, but after the husband developed cancer and passed away, an early exit condition was triggered resulting in a massive bill that wiped out almost all their household savings, and left the wife wholly dependent on the age pension to live.

The ASIC review of the reverse mortgage market came after government changes in 2012 to strengthen consumer protections, including the provision of a no negative equity guarantee – that is the borrower cannot be required to repay more than the value of the secured property at the end of the loan.

The ASIC report is interesting in that it found reverse mortgages were satisfying the immediate or short-term needs of borrowers, as did the case study above, and often provided for an improved standard of living while letting people “age in place”.

Where ASIC found challenges in the market was with the long-term impacts on the borrower's asset position and, in particular, the impact of the cost of the reverse mortgage products that only became fully understood when potentially the home needed to be sold to provide a bond for entry into an aged care facility.

That was highlighted by many of the borrowers surveyed for the ASIC report who indicated that they had not seriously considered their possible future needs.

Reverse mortgages are complex and expensive products for both the borrower and the product provider, and the ASIC report does a good job at explaining the short-term benefits and the long-term risks and lifestyle implications that comes with it.

The ASIC study tested the impact on the remaining home equity by the age of 84 (the average age of entering into aged care) if interest rates on the loan rises and if property prices grew more slowly than expected.

What the ASIC modelling showed was that 63 per cent of borrowers may end up with less equity than the average upfront cost of aged care ($380,000) for one person by the time they reach 84.

The long-term risk for borrowers is that, because of the impact of compound interest, they may seriously compromise their future retirement lifestyle and ability to afford future expenses such as aged care accommodation, medical treatment and day to day living expenses.

To illustrate the costs over the long-term ASIC says the interest charges on an average loan ($118,000) came with an interest bill of $100,963 over 10 years and $180,269 over 15 years.

One of the major warnings ASIC has for borrowers is the focus on short-term objectives with “limited or no attention” being paid to their possible future needs. The review of loan files ASIC did as part of the report found “approximately 92 per cent of the loan files we reviewed did not record the possible future needs of the borrower in sufficient detail and contained no evidence that the broker or lender had discussed how a loan may affect the borrower's ability to afford future needs”.

The bottom line is that there are no silver bullets that can magically solve the income in retirement question but a clear message from the ASIC report is that you need to carefully balance both today's needs and your likely future requirements.

The ASIC Moneysmart website provides a comprehensive guide to the risks of reverse mortgages.
 

Written by Robin Bowerman
Head of Corporate Affairs at Vanguard.
24 September 2018
vanguardinvestments.com.au

 

ATO updates crypto guidance

The ATO has updated its guidelines on the tax treatment of cryptocurrencies, including issues on exchanging one cryptocurrency for another and record-keeping requirements.

         

 

In an update on the ATO website following its earlier guidance in July, the tax office has advised that if you carry on a business that involves transacting with cryptocurrency, then trading stock rules apply, rather than capital gains tax (CGT) rules.

Further, following 799 pieces of inpidual feedback and submissions, the ATO has provided additional guidance on the practical issues of exchanging one cryptocurrency for another and the record-keeping requirements.

Some of the issues raised included difficulties in keeping records due to high-volume trades or accessing data required for proper record keeping.

“As part of our research, we discovered low-cost software solutions that would be able to both record each cryptocurrency transaction (including cryptocurrency to cryptocurrency transactions) and convert the value of the proceeds into Australian dollars,” said the ATO in response.

“The software can take information directly from the exchange or a digital wallet and do the calculations, which helps alleviate the issues with recording trades and accessing data.”

According to the tax office, where you exchange one cryptocurrency for another cryptocurrency, you dispose of one CGT asset and acquire another CGT asset.

Taxpayers must compare the CGT cost base of the cryptocurrency item disposed of with the market value of the new cryptocurrency item obtained for all exchange transactions.

The ATO will continue to monitor community feedback and provide updates on new and emerging cryptocurrency risks.

 

Tax&Compliance Reporter
18 September 2018
accountantsdaily.com.au

 

What a financial adviser can add to your portfolio’s returns.

         

 

A 16 year study by Vanguard (latest report from July 2018) has found that this figure is about 3% net. 

This is over and above what might be generated by non-planner assisted investment activity.  This means that even for small investors, a financial planner will not only pay for themselves but provide the professionalism to navigate the confusion, performance and peace of mind you might not get elsewhere or if you were doing the job yourself.

A recent example:  An investor was using three stock brokers and each one thought the others were managing issues such as tax.  When a financial planner was engaged it was realised this investor had lost around $200,000 over a number of years.  This investor only has a modest portfolio.

 

Source:  Peter Graham
PlannerWeb

‘Huge’ professional risk in SG delays, big four firm warns

With single touch payroll making it easier for the ATO to identify unpaid SG, telling clients to wait for the SG amnesty could be a risky move impacting their professional obligations, warns a big four accounting firm.

         

 

With single touch payroll making it easier for the ATO to identify unpaid SG, telling clients to wait for the SG amnesty could be a risky move impacting their professional obligations, warns a big four accounting firm.

Speaking at a recent conference, PwC director of private clients Liz Westover said while there has been a lot of commentary suggesting that employers should hold off on declaring any unpaid SG obligations until the SG amnesty is passed by Parliament, there are significant risks with this.

Under the proposed SG amnesty, an employer that has an SG shortfall amount in any period from 1 July 1992 up to 31 March 2018 has the ability to claim tax deductions in respect of SG charge payments made and contributions that offset the SG charge to the extent that the charge relates to the SG shortfall. In addition, the administrative component to the SG charge will not apply.

The SG amnesty was meant to apply from 24 May but is yet to be passed as law.

Up until mid last year, Ms Westover said the ATO had a view where if an employer identified that they had made a mistake, they would take a practical compliance approach.

“They would let you quite simply catch up. They would say ‘just make the contributions to super and throw in a bit of interest to compensate for the shortfall’,” Ms Westover told delegates at the CA ANZ National SMSF conference.

“The problem was that, legally speaking, there is no wriggle room for the ATO to be able to apply that approach and so they changed their view and they started having a more hard-line approach around how SG was actually imposed.”

This means that any employer putting their hand up is going to be subject to all of the consequences, she said, including the SG charge, Part 7 penalties which can be up to 200 per cent of the amount of the SG charge and general interest charge where the SG charge or Part 7 penalties are not paid by the due date.

With the SG amnesty not yet passed as law, a lot of employers are wondering what to do, she said.

“[My view is] that I think you have an obligation to pay SG. I think you should be putting your hand up now and declaring yourself to the tax office now,” said Ms Westover.

The worst case scenario, she explained, is that the law applies as it does now and given the fact that the employer has put their hand up and gone to the ATO and admitted the mistake, the likelihood of getting those penalties remitted is high.

“If you get reported to the ATO by an employee, on the other hand, and that instigates audit proceedings, you're going to get the book thrown at you. That means all those implications plus penalties and there is no chance of the amnesty,” she said.

“[Also], if you identify a problem and you decide to wait, how does that impact your professional obligations? If you know that your client has not met their SG obligations and you are not reporting it to the ATO because you are waiting for this amnesty, then there could be a problem around your professional obligations.”

Ms Westover also warned that it’s very easy for the ATO and employees to identify unpaid super.

“This is why I think there is a huge risk in waiting at the moment. With single touch payroll coming up, where a lot of reporting is going to be made directly to the tax office, the tax office is going to be able to identify pretty quickly what's been reported to them as contributions,” she said.

“It is going to be a lot easier for the tax office and employees to start identifying when super guarantee is not being paid. If you wait to see if this amnesty goes through and in the meantime, audit activity is initiated against you as an employer, you do not get to use the amnesty and all the provisions that come with it.”

“I think there is a lot of merit and going to the tax office now and as James said it will be considered a voluntary disclosure, and the chance of being able to remit the penalties is pretty high.”

 

Miranda Brownlee
24 September 2018
smsfadviser.com