GPL Financial Group GPL Partners

October 2020

Lenders are getting tougher on older borrowers

 

Australian banks this month started the largest ever customer contact program in the industry's history.

 

       

The mammoth program involves banks contacting more than 900,000 borrowers who have needed to defer making payments on their loans as a result of the COVID-19 pandemic.

Among them are hundreds of thousands of home loan borrowers around the nation with owner-occupied and investment property mortgages.

The first stage of this contact program coincides with the initial wave of six-month loan payment deferrals coming to an end, and will involve the assessment of around 80,000 mortgages by the end of September.

A further 180,000 customers with deferred mortgages will be contacted before the end of October, and the program will continue as the banks work through their customer lists to determine whether further payment deferrals are required.

In short, lenders are seeking to mitigate their potential loan defaults.

Tighter loan serviceability guidelines

But there's a lot more going on behind the lending scenes than immediately meets the eye.

Some of this is directly related to COVID-19, but there also have been developments that follow recent regulatory updates in responsible lending guidelines.

Following the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, at the end of last year the Australian Securities and Investments Commission updated its guidelines for how it expects lenders to deal with borrowing applications.

Those updates are still filtering through the lending system.

In its detailed guidelines, ASIC outlines that lenders should specifically be noting whether there are “foreseeable reductions” to the amount or frequency of a loan applicant's income.

What the regulator means is that it wants lenders to pay particular attention to older borrower applicants who are at an age where the loan they are seeking would mature beyond their retirement age.

ASIC recommends that lenders should be proactively asking these applicants how they intend to pay off their loan.

“For example, if a consumer is approaching retirement, and will still be making repayments on the credit product after their expected retirement age, you will need to determine whether this event is likely to change their income, and information about the amount that is expected to be available,” ASIC states.

“And, if the income is of a kind that has a known end date which will occur during the term of the loan…you should have regard to the effect that change to income is likely to have on the consumer's overall financial situation.”

These are general lending guidelines, however what's changed in recent months is that some lenders have strengthened their loan serviceability criteria – especially in relation to home loans.

They've done this by instructing their internal loan managers and external mortgage brokers to ask borrowers approaching retirement age to document their actual loan exit strategy, including the age they intend to stop working.

One large bank has recently issued instructions that if a loan applicant is aged over 55 or intends to retire in the next 10 years, their application will need to include:

  1. “At least one co-applicant under the age of 55 or within 10 years of their intended retirement with “sufficient income to service the home loan at drawdown.
  2. “Evidence of financial assets worth at least 100 per cent of the loan limit; or
  3. “Evidence of a plan to downsize an owner-occupied home (with at least $200,000 in available equity at drawdown) once the applicant retires.”

Loan exit strategies to consider

ASIC's responsible lending guidelines state that borrowers should preferably be able to meet their payment obligations from income rather than from the sale of assets.

But the regulator recognises that may not always be possible post retirement, and that asset sales may be required to extinguish a loan.

One important point to note is that most lenders are unlikely to consider the future sale of your principal place of residence as an acceptable loan exit strategy.

However, the intended future sale of an investment property, or being able to gain access to equity in a property through an equity release facility such as a reverse mortgage, are likely to be considered as viable exit plans.

Other assets that lenders will take into account when assessing pre-retirement loan applications are superannuation (if it is sufficient to pay off the loan balance), and investments outside of super such as shares.

On the income level, lenders will consider any plans to continue earning income on a casual of part-time basis, rental income derived from investment property, and dividend income from shares.

The key for those close to retirement who may be contemplating borrowing money for a property or other investment purposes is to be prepared to answer some hard questions during the application process.

Having a well-defined loan exit strategy has become a much more important part of the lending process for older Australians.

 

 

Tony Kaye
Personal Finance Writer
15 September 2020
vanguardinvestments.com.au

 

Estate planning opportunities highlighted with work test changes

 

With the work test changes for over-65s opening up opportunities for recontribution strategies, clients may be able to even up balances and adopt tax strategies for estate planning, particularly once the bring-forward measure is passed, says a technical expert.

 

         

At the end of June, regulations came into force allowing people aged 65 and 66 to make voluntary concessional and non-concessional contributions without meeting the work test, and allow people up to age 75 to receive spouse contributions.

The other measure to allow people aged 65 and 66 to make up to three years of non-concessional contributions under the bring-forward rule is yet to be passed by the Senate.

SuperConcepts SMSF technical specialist Anthony Cullen explained that while the age at which the work test starts to apply has increased to 67, the conditions of release have remained at age 65 which opens up opportunities for recontribution strategies, particularly if the bring-forward measure is passed.

Speaking in a SuperConcepts podcast, Mr Cullen said this may enable clients to even out balances between members which could help them to maximise their transfer balance cap.

“[For example], if you’ve got a couple and let’s say the wife has $2 million and the husband only has $1 million, potentially there’s an opportunity for the wife who reaches age 65 to draw money out of her fund, after meeting that condition of release, and potentially make a contribution to her spouse,” he said.

“By the time they get to the point where they want to start a pension, hopefully both of them are closer to that $1.6 million transfer balance cap.”

Recontribution strategies could also be effective, he said, as an estate planning and “future-proofing” tool.

“The government is always tinkering with superannuation, so we never know what’s going to happen with the law, so if we have an opportunity to take out predominantly taxable components from our fund and then recontribute them as tax-free components, that may provide some future-proofing against legislative changes,” he said.

“From an estate planning point of view, when your money gets to the point where it’s flowing through to your adult children, your adult children will be paying a death tax on the taxable components, and so, if we can change those taxable components while we’re alive to tax-free components that your children will not be paying tax on, then that provides some estate planning opportunities.”

 

 

Miranda Brownlee
25 September 2020
smsfadviser.com

 

How to construct an effective portfolio

 

Portfolio construction is always a popular topic among investors, but as markets become more volatile, the practice of carefully piecing together a jigsaw of investments that weathers both good times and bad is particularly relevant.

 

         

Effective portfolio construction is essential to successful investing, but many investors struggle to understand the underlying concepts, much less put them into practice.

Fortunately, constructing an investment portfolio that suits your needs and delivers your goals is simpler than it sounds.

The first step to effective portfolio construction is simply knowing what you want to achieve.

Every portfolio has a purpose. It might be to fund your retirement or to provide an inheritance for the children. It might be to pay for education or housing.

Understanding your purpose and setting a goal for your portfolio lets you plan for how much you need to invest and how long you have for your savings to grow.

Good portfolio goals are measurable, attainable and based on reasonable assumptions. That means they do not require impracticable savings targets, lucky breaks or unlikely investment outcomes.

Take the example of an investor who needs to save $1 million in today's dollars to comfortably retire and has 40 years of working life left to do it.

If that investor makes a $10,000 deposit today and saves the same inflation-adjusted amount every year for the 40 years, the real required rate of return from the portfolio only needs to be an achievable 4 per cent per year.

The portfolio construction process begins with this kind of plan.

From there, the next decision is to select the assets that will deliver the required 4 per cent return without exposing the investor to needless risk.

There are three main asset classes for investors to consider: equities, fixed income and cash.

There is also a wide range of sub-groups like real estate, infrastructure and commodities, but most diversified investors will have exposure to them through the equities asset class.

Asset classes are best understood by the way they typically perform in terms of risk and return.

Equities, or shares in stock market-listed companies, are characterised by demonstrating the highest historical return of the three, but with an associated higher risk of loss.

Fixed income investments like government and corporate bonds tend to provide lower returns but come with lower risk of losing money.

Finally, cash provides both low return and very low risk and protects you from the risk of being forced to sell other assets, but its value is continually eaten away by inflation.

So how do investors balance the three?

The aim is to find a way to deliver enough return to achieve the goal while minimising the risk of permanently losing capital on the way.

This concept of risk is worth exploring. Many investors conflate risk with volatility but for a regular investor with a defined goal, a better definition of risk is the chance of losing money at the very point you need it.

A period of negative returns in the market – as we are likely to see in the coming years – may not be a risk for someone willing to wait until the market recovers, thereby avoiding selling during the downturn.

But if another investor needs the money and has to sell at lower prices, that becomes a permanent loss of capital – the definition of risk.

This risk of permanent loss is why younger people can comfortably take more risk in their investments – and thus aim for a higher return – than someone nearer retirement.

A 35-year-old has at least 30 years of earning income ahead of them, allowing market downturns to run their course. Their income covers their living expenses, so they don't need to withdraw investments at depressed prices, and they even get more assets for every dollar they invest during the downturn. This means they can lean towards equities which offer higher returns at higher risk.

Someone in their 50s has 15 years left of income to recover losses and might choose to take slightly less risk in their investments by reducing their equity holdings.

A retired person has no easy way to add to their investments so if they are forced to withdraw at depressed prices, they suffer permanent loss. In retirement, an even more conservative portfolio might be suitable.

For all investors, constructing a diversified portfolio spread across the three asset classes is the best way to reduce the risk of permanently losing money.

Asset allocation is a surprisingly powerful tool.

Repeated studies show that the vast majority of variability in portfolio returns is explained by asset allocation rather than stock selection or market timing.

So, by simply selecting an asset class mix that suits your risk and return needs – and then buying a widely diversified bundle of investments matching that mix – most of the work of portfolio construction is done with no need to worry about individual investments at all.

Contrast this kind of steady, planned, top-down approach with the bottom-up, investment-collecting approach many investors take.

By buying individual stocks and funds without giving thought to the overall portfolio construction, investors are introducing unnecessary risk to their investments and crimping potential returns.

Portfolios built this way often show concentration in an industry or sector and are prone to being buffeted by volatility and attempts at market timing.

A well-constructed portfolio should also diversify by holding assets across a variety of countries, sectors and industries. Investors may even want to consider a mix of investment styles by holding active managers alongside index funds.

By holding hundreds or thousands of individual securities, the chances of any one of them affecting total returns is minimised.

The next factor to consider is fees. One of the best predictors of the future performance of an investment is the fee it charges. Some find it surprising, but the cheaper the fee, the better the performance. This is because the less you pay in costs, the more of an investment's return you get to keep.

Minimising costs is a crucial part of portfolio construction.

And finally, once the portfolio is in place, the critical trick is to stay the course.

Too many investors have been provoked by market swings to buy and sell at the wrong time, driven by fear or impulse.

A disciplined, long-term approach – rebalancing from time to time to stay within a chosen asset allocation and adjusting the risk profile as you age – gives you the best chance of achieving your goal.

 

Robin Bowerman
Head of Corporate Affairs at Vanguard
vanguardinvestments.com.au

 

Investment preferences of the young

 

As a new wave of investors enter the Australian share market, new trends begin to emerge.

 

         

ASX recently published its annual investor study which this year surveyed over 5,000 investors on their investment preferences and priorities. The study provides a fascinating insight into the evolution of our investment markets and how investor behaviour is changing over time.

One of the key findings this year is that there's been a marked shift in who is investing. Long perceived as the domain of older folks, investing (particularly in listed investments) have seen a growing uptake from younger Australians.

Younger investors (25 and under) now account for 10 per cent of total current investors and 27 per cent of intending investors (those who plan to begin investing in the next year).

But age is not the only aspect that sets younger investors apart. Investment preferences also differ to those of older investors, notably that younger investors favour ETFs and are more inclined to seek information from a variety of sources, including social media.

ETFs

ETFs are particularly popular with younger investors who may not have as much capital as their older peers. ETFs therefore provide an easy, low-cost option that provides diversification benefits in just one trade.

The growing number of different ETF offerings on the market serves as a timely reminder for younger investors to truly understand the product before purchasing. In the world of ETFs, there is an increasing choice of “flavours” from the plain vanilla to outright exotic, many often niche and attention-grabbing.

Examples of exotic ETFs include those that have been constructed around a very specific theme, such as cryptocurrency ETFs, robotics ETFs and physical gold ETFs. While certainly topical and exciting, these exotic or thematic ETFs often come with higher risk and less diversification benefits than their vanilla counterparts, and their risks should be well researched.

Although ETFs are favoured by younger investors, they are still a very much sought-after investment product among all investors, particularly those seeking diversification. Australian Securities Exchange data shows more than $1.6 billion of new capital flowed into ASX-listed ETFs in June, bookmarking one of the strongest periods on record for the local sector and taking total assets under management to around $65.5 billion.

Herd momentum

While the internet provides instant access to a wealth of general investment advice and information, it is not always prudent to follow them all.

18 per cent of younger investors surveyed by ASX use social media as an information source, with many turning to online groups or forums for stock picking tips and investment guidance.

ASIC has warned of the potential danger in heeding unlicensed advice found online that does not take into account the investor's risk tolerance, sophistication or product understanding. Many inexperienced retail traders are being swept up in what has been coined as ‘herd momentum': buying into popular shares or penny stocks because everyone else is.

Penny stocks are public shares of small listed companies often outside of the ASX300 and traded at a low price. These shares are generally seen as speculative or high-risk investments because of their volatile earnings and valuations, and little guarantee for returns.

The surge in retail trading activity has shone a light on the risks of day trading, leading ASIC to caution inexperienced investors against market timing and seeking investment advice online from unlicensed sources.

Tune out the noise

Getting started with investing is a great first step in itself, but it's worth understanding that trading is not the same as investing. Following the crowd by jumping into the market to capture short term market opportunities without a plan is highly risky. It can also mean you end up with little diversification and a collection of assets that have been accumulated over time without regard to how they fit together as a portfolio.

The key to successful investing is to set realistic goals, stick to your plan and tune out the noise, no matter what the market is doing or what your peers are saying.

 

 

Written by Robin Bowerman
Head of Corporate Affairs at Vanguard.
15 September 2020
vanguardinvestments.com.au

 

Temporary home office expenses shortcut extended again

 

The 80 cents per hour work-from-home deduction method has now been extended for a further three months to the end of the year.

 

         

The temporary shortcut method for calculating home office expenses has now been extended to 31 December 2020, after it was due to expire at the end of September.

Taxpayers have been able to apply the 80 cents per hour method since March, after the ATO introduced the temporary method in light of COVID-19 restrictions forcing many workers to adopt remote working practices.

The extension comes as most workers in metropolitan Melbourne continue to be barred from returning to their workplace as the Victorian government works through its reopening roadmap.

The ATO’s updated Practical Compliance Guideline 2020/3 notes that the 31 December end date will be revisited and may be further extended.

Tax &  Super Australia tax counsel John Jeffreys welcomed the extension but urged taxpayers to ensure they were not accidentally double dipping on other working-from-home expenses.

“Employees working from home should note that if they use the ATO’s shortcut method for home office expenses, they can’t claim other home office-related items, such as technology, desks, monitors and chairs. It’s a one or the other approach. Some may be mistaken about this,” Mr Jeffreys said.

“Finally, when the ATO outlined its shortcut method, it noted that taxpayers should keep adequate records — diary notes, timesheets or rosters — to substantiate work.

“It’s unlikely the ATO would audit this, but it’s worth employees having this evidence just in case. It could be that significantly higher claim by an employee compared to benchmark claims for same hours worked would be a red flag to the ATO.”

The temporary shortcut method will continue to be supplementary to the 52 cents fixed rate method and the actual cost method of calculating running expenses, with taxpayers able to choose the appropriate method for their circumstances.

View the ATO’s updated PCG 2020/3 here.

 

 

Jotham Lian 
30 September 2020
accountantsdaily.com.au

JobKeeper extension – changes implemented

 

The legislative instrument implementing the changes to the JobKeeper scheme over the extended period was registered on 15 September 2020.

 

       

In brief

  • The legislative instrument implementing the Government’s changes to the JobKeeper scheme was registered on 15 September 2020
  • Entities are now required to reassess their decline in turnover over two set periods
  • There are two tier payment rates for JobKeeper based on an 80 hour work/actively engaged test over a specified 28-day period

The extension of JobKeeper applies to qualifying entities in respect of their eligible employees and business participants. The changes in the Rules build more flexibility into the JobKeeper scheme recognising that circumstances can change quickly. Thus, there is the requirement to reassess an entity's actual decline in turnover for two set periods and a two-tiered payment based on hours of work or engagement.

Nevertheless, the changes do not affect any entitlements payable under the original JobKeeper scheme prior to 27 September 2020. Similarly, the changes to do not provide the opportunity for entities to change any elections they have previously made under the JobKeeper scheme.

Reassessing decline in turnover

For an entity to continue to receive the JobKeeper payments over the extended period, the entity must satisfy the actual decline in turnover test (section 8B of the Rules):

  • if the JobKeeper fortnight begins before 4 January 2021 – the test must be satisfied for the quarter ending on 30 September 2020
  • if the JobKeeper fortnight begins from 4 January 2021 onwards – the test must be satisfied for the quarter ending 31 December 2020.

This mean entities on JobKeeper do not have to satisfy the actual decline in turnover test for both the September quarter and December quarter to be able to receive payments for the JobKeeper fortnights beginning 4 January 2021. Furthermore, according to the explanatory statement to the Rules, an entity that drops out of the JobKeeper scheme after 28 September 2020 and then requalifies in the next period, does not need to notify the Commissioner again that it elects to participate in the scheme.

Actual decline in turnover test

The actual decline in turnover test applies the same thresholds for the original decline in turnover test (i.e. the percentage decline for the quarter must be equal to or greater than 30% for entities with $1 billion or less aggregated turnover and 50% for entities with over $1 billion aggregated turnover) but uses current GST turnover rather than projected GST turnover. According to the explanatory statement, it does not matter for the purposes of the new test whether the entity was required to use a different percentage in applying the original decline in turnover test at an earlier time (e.g. because it applied the original test in the previous income year).

Entities can still use the Commissioner's alternative decline in turnover test (for specified situations where using the 2019 period as a comparison is not appropriate) and the modified decline in turnover test (for group structures with employer entities) in assessing whether they qualify for the JobKeeper scheme – current GST turnover is to be used in place of the projected GST turnover.

New participants

Entities that have not previously participated in the JobKeeper scheme are required to satisfy both the original decline in turnover test and the new decline in turnover test. However, the Rules have modified the original decline in turnover test to give entities the choice to compare the 'projected GST turnover' of:

  • a calendar month that ends after 30 September 2020 and before 1 January 2021, or
  • the quarter ending 31 December 2020

with a relevant comparison period.

This extension of the testing period ensures that JobKeeper can still be accessed by entities that first experience a significant decline in turnover during the December quarter.

Two tiered payment rate

The Rules sets out two tiers of payment rates for eligible employees and business participants which have not changed from the Government's announcement. To recap:

  • Higher rate:
    • 28/9/2020 – 3/1/2021 – $1,200
    • 4/1/2021 – 28/3/2021 – $1,000
  • Lower rate:
    • 28/9/2020 – 3/1/2021 – $750
    • 4/1/2021 – 28/3/2021 – $650.

However, whether an individual is eligible for the higher rate depends on whether the individual worked or was actively engaged for 80 hours or more for a reference period. Otherwise, the individual is eligible for the lower rate.

Reference period means for (section 4A):

  • an eligible employee – 28-day period at the end of the most recent pay cycle for the employee that ended before 1 March 2020 or 1 July 2020
  • the eligible business participant – the month of February 2020

Entities applying the 80 hour test for:

  • Eligible employees – take into account hours of work, paid leave and paid public holidays
  • Eligible business participant – work out the time spent 'actively engaged in the business' and the individual must provide:
    • a written declaration (approved form) to the entity to confirm the 80 hours
    • if the entity is a sole trader, a notification via the business monthly declaration

If the standard reference period is not suitable, the Commissioner has made a determination, to provide an alternative reference period for the 80 hour test for particular employees.

Employers already on JobKeeper and are eligible for the first extension period can notify the ATO whether their eligible employees are on the higher rate or lower rate in their business monthly declaration in November 2020.

The ATO has allowed employers until 31 October 2020 to meet the wage condition for all employees on JobKeeper for JobKeeper fortnights starting on 28 September and 12 October 2020.

 

 

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