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An additional 21 great investment quotes

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Introduction

Investing can be frustrating and depressing at times, particularly if you don’t understand how markets work and don’t have the right mindset. The good news is that the basics of investing are timeless, and some have a knack of encapsulating these in a sentence or two that is both insightful and easy to understand. In recent years I’ve written insights highlighting investment quotes that I find particularly useful. Here are some more.

Having a goal and a plan

“Financial peace isn’t the acquisition of stuff. It’s learning to live on less than you make, so you can give money back and have money to invest. You can’t win until you do this.” Dave Ramsey

The only way to be able to build wealth is to save and invest and you can only do this if you spend less than you earn. That is, you have to start with a savings plan.

“Put time on your side. Start saving early and save regularly. Live modestly and don’t touch the money that’s been set aside” Burton G Malkiel

In investing time is your friend and the earlier you start the better. This is the best way to take advantage of the magic of compound interest. The next chart – my favourite – shows the value of $1 invested in various Australian asset classes since 1900 allowing for the reinvestment of any income along the way. That $1 would have grown to just $234 if invested in cash, $866 in bonds but a whopping $529,293 if invested in shares.


Source: Global Financial Data, AMP Capital

While the average share return since 1900 is only double that in bonds, the huge gap in the end result between the two owes to the magic of compounding returns on top of returns. A growth asset like property is similar to shares over long periods in this regard. Short-term share returns bounce all over the place and they can go through lengthy bear markets (shown with arrows on the chart). But the longer the time period you allow to build your savings the easier it is to look through short-term market fluctuations and the greater the time the compounding of higher returns from growth assets has to build on itself.

“If you fail to plan, you plan to fail.” Often attributed to Benjamin Franklin

Having a clear understanding of your investment goals – like saving for a home or retirement or generating income to live on – and a plan to get there is critical. If you don’t have a clear plan you will be subject to all sort of distractions which can blow you a long way from where you want to get with your investments.

The investment cycle

“Bull markets don’t die of old age but of exhaustion.” Anon 

Bear markets are invariably preceded by excess in the economy – over investment, high levels of debt growth, high levels of inflation and tight monetary conditions – and excess in the share market in the form of overvaluation and investor euphoria. It’s this excess which drives exhaustion and hence the end of a bull market, not its age.

“The stock market has predicted 9 of the past 5 recessions.” Paul Samuelson

In the short term the share market moves all over the place with each significant plunge eliciting calls for an impending recession and a deep bear market. But most of the time it’s just noise providing an opportunity for investors before a rebound. For example, over the past 50 years in the US there has been 21 episodes of 10% or greater share market falls, but only seven saw recessions and bear markets.

Risk

“The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. Not only is the mere drop in stock prices not risk, but it is an opportunity.” Li Lu

Risk is often portrayed as market volatility when in reality it’s a whole lot more: the risk of capital loss; the risk of not having enough investment income; the risk of not having enough to last through retirement. It’s also perverse – the risk of capital loss is lowest after a period of high volatility and vice versa.

Contrarian investing

“The day after the market crashed on 19th October 1987, people began to worry that the market was going to crash” Peter Lynch

This is perhaps a bit flippant, but it goes to the heart of crowd psychology and why it’s best to go against the crowd at extremes. When times are good the crowd is relaxed, happy and fully invested. So everyone who wants to buy has. This leaves the market vulnerable to bad news because there is no one left to buy should prices drop. Similarly, after a sharp fall the crowd gets negative, sells their investments to the point that everyone who wants to sell has and so the market sets up for a rally when some good or less bad news comes along. So the point of maximum risk is when most are euphoric, and the point of maximum opportunity is when most are pessimistic.

Pessimism

“It is easier being sceptical, than being right.” Benjamin Disraeli

The human brain evolved in a way that it leaves us hardwired to be on the lookout for risks. So a financial loss is felt more negatively than the beneficial impact of the same sized gain. Consequently, it seems easier to be sceptical and pessimistic. As a result, bad news sells and there seems to be a never-ending stream of warnings regarding the next disaster. But when it comes to investing, succumbing too much to scepticism and pessimism doesn’t pay. Historically, since 1900 shares have had positive returns seven years out of 10 in the US and eight years out of 10 in Australia.

“A pessimist sees the difficulty in every opportunity, an optimist sees the opportunity in every difficulty.” Winston Churchill

This is what stops many investing after big falls – all they see are the reasons the market fell. Not the opportunity it provides.
“Without a saving faith in the future, no one would ever invest at all. To be an investor, you must be a believer in a better tomorrow.” Jason Zweig

If you don’t believe your term deposit is safe, that borrowers will pay back their debts, that companies will see good profits and that properties will earn rents then there is no point in investing.

Psychology

“An investment said to have an 80% chance of success sounds far more attractive than one with a 20% chance of failure. The mind can’t easily recognise that they are the same.” Daniel Kahneman

Beware of tricks that your mind plays on you when investing. Numerous studies show that people suffer from lapses of logic – eg, assuming the current state of the world will continue, being overly confident and assessing the risk of certain events by how they are presented. The key for investors is to be aware of these biases and try to correct them.

Noise

“Stock market news has gone from hard to find (in the 1970s and early 1980s), then easy to find (in the late 1980s), then hard to get away from.” Peter Lynch

The information revolution has given us access to an abundance of information and opinion regarding investment markets. The danger is that it adds to the uncertainty around investing resulting in excessive caution, a short-term focus, a tendency to overreact to news and to focus on things that are of little relevance. The key is to recognise that much of the noise and opinion around investing is ill informed and of little value.

“The ability to focus is a competitive advantage in the world today.” Harvard Business Review

The key in the face of this information and opinion onslaught is to turn down the noise and focus.

“If you can keep your head when all about you are losing theirs…If you can wait and not be tired by waiting… If you can trust yourself when all men doubt you…Yours is the Earth and everything that’s in it.” Rudyard Kipling, If, as quoted by Warren Buffett 

Keeping your head and remaining calm is critical in times of extreme – when the crowd is convinced the path to instant riches has been revealed or when the crowd is convinced that economic disaster is upon us. These periods throw up great temptation to buy when you should be selling and vice versa. But you will only get it right if you keep your head & stay calm.

Forecasting

“I believe that economists put decimal points in their forecasts to show that they have a sense of humour.” William Gillmore Simms

The dismal track record of precise forecasts regarding things like economic growth, share prices and currencies indicates that relying on them when investing can be dangerous. There is often a big difference between getting some forecasts right and making money. Good experts will help illuminate the way and put things in context, so you don’t jump at shadows but don’t over rely on expert forecasts – particularly the grandiose ones.

Having a process

“I am going to reveal the grand secret to getting rich by investing. It’s a simple formula that has worked for Warren Buffett, Carl Icahn and the greatest investment gurus over the years. Ready? Buy low, sell high.” Larry Kudlow

Yep it’s that simple. Or it should be, but many do the exact opposite and buy high after a lengthy period of strong returns convinces people it’s a great investment (but the risks point down), and then sell low after fall in the price of an asset leads people to believe that it’s a bad investment (but that’s when the risks point up). The key to is do the opposite – buy low, sell high and it’s very helpful to have an investment process to do that.

“Three simple rules – pay less, diversify more and be contrarian – will serve almost everyone well.” John Kay

This helps bring the essentials of investing together. They stand to reason: the less you pay for an investment the greater the return potential; just having one or two shares leaves you very exposed should the news turn bad regarding those shares but if you diversify across a range of shares you can reduce the risk of a fall in your overall portfolio; and doing the opposite to the crowd means you can avoid the points of maximum risk in markets when most are fully invested and take advantage of periods of maximum opportunity when most have sold.

“Success consists of going from failure to failure without loss of enthusiasm.” Winston Churchill

As with all things we need to recognise that to learn we need to make mistakes and to be persistent.

Balance

“A calm and modest life brings more happiness than the pursuit of success combined with constant restlessness” Albert Einstein

This applies to life in general, but it also applies to investing – don’t jump around all over the place and keep it simple.

“A man should make all he can, and give all he can.” Nelson Rockefeller

It’s not financially possible for everyone but consider giving a bit away for good causes if you can – and not just for the tax deduction as you will feel good and it will bring good karma.

“The trouble with doing nothing is that you don’t know when you have finished.” Cafe blackboard in Byron Bay

…so it’s always good to do something and investing is something worth doing (and worth doing well)!

Important note: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided.

How are Australia’s states and territories tracking?

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June 2018

  • An end to the fall in mining investment is helping to stabilise growth in Australia’s mining states and territories (WA, Qld and NT to a lesser extent) while a slowing housing sector is starting to act as a drag on NSW and Vic. Tas is benefitting from a lift in population growth and housing “refugee” demand from Sydney and Melbourne. Growth in SA and the ACT has been stable.
  • After years of growth divergences across the states and territories, expect a convergence in growth across the regions over the near-term which means more comparable activity across the nation.

Introduction

The various comparative advantages of Australian states and territories (e.g. tourism in Qld, manufacturing in Vic and SA, mining in WA, QLD and NT and agriculture in SA and TAS) means there are often periods of growth divergences across the country as industries are impacted by different trends at various points in the economic cycle.

A multi-speed economy has been a feature of Australia’s economic environment for numerous years. The mining investment boom over 2010-12 transferred labour and investment to Western Australia (WA), Queensland (Qld) and (to a lesser extent) the Northern Territory (NT) from the rest of the country and these regions outperformed the rest of the nation. This changed after the downturn started in mining investment (from 2013) when mining state growth slumped while growth in the large non-mining states of New South Wales (NSW) and Victoria (Vic) lifted as services demand rose and interest rate cuts spurred a housing boom. More recently, slowing home price growth in Sydney and Melbourne, a bottoming in WA growth and an upturn in Tasmania (Tas) is leading to a growth convergence across Australia (see chart below) and should result in more comparable outcomes across the states and territories.

Source: ABS, AMP Capital

Our tracker of state and territory performance (see table below) based on the latest indicators reveals that Vic and ACT are ranked as the best performing state/territory across the various metrics, followed by NSW, with SA and Tas running around the middle of the pack. Qld, the NT and WA are still lagging behind because of the remnants of the mining investment decline.


In this note, we look at key indicators of state and territory performance, as well as the outlook for the medium-term.

The state of the labour market


Source: ABS, AMP Capital

NSW employment growth has been strongest across Australia over the past year, with large gains in healthcare, retail and construction being partly offset by losses in public administration and professional service jobs. But the steadily increasing participation rate has been pressuring the unemployment rate a little higher (although the unemployment rate is still the lowest across all of the states). The labour market is expected to remain solid in NSW, especially in infrastructure-related construction jobs. Qld’s unemployment rate still remains elevated but jobs growth has been good and the state has absorbed the majority of mining-related job losses. Recent federal government funding towards infrastructure projects in Qld will be positive for employment. The SA and Vic labour markets have weathered the closure of car manufacturing and SA may benefit from higher spending on battery technology at the margin. Vic jobs growth has been modest, helped by gains in construction and transport (which are likely to continue) while public administration has also had job losses, along with healthcare. The WA labour market has probably gone through its worst, but strong employment growth is unlikely as mining investment still has further to fall. NT jobs growth remains slow. The ACT labour market is very reliant on government funding and the size of the public sector.

Home Prices

Source: CoreLogic, AMP Capital

The big negative for NSW and Vic will be declining dwelling prices in Sydney and Melbourne and its impact on consumers. Very high new dwelling supply in the two cities (especially for apartments) over recent years, affordability pressures given the run-up in prices and a tightening in lending standards is putting downward pressure on prices. We expect prices in Sydney and Melbourne to fall another 4% this year (predominately focussed in apartment prices), another 5% next year and a modest fall in 2020. Prices in Perth and Darwin look to be bottoming, or close to it, price growth in Brisbane is likely to be modest while Hobart price increases are expected to continue to be solid due to investor (and potentially relocation) demand from the rest of Australia.

Limited upside for consumer spending across regions

The employment and wages outlook are the major drivers for the consumer outlook. Wages growth in WA (+1.5%pa) and NT (+1.1%) are significantly below the rest of Australia (+2%) from the mining investment drag while wages growth across the rest of Australia is clustered around 2% or slightly higher. Better employment growth is needed to lift wages and household spending (the chart below shows that WA retail spending is clearly trailing behind) but it does look like the worst of the wages slump has passed. The next risk is the negative housing wealth effect which will impact NSW and Vic the most.

Source: ABS, AMP Capital

Don’t forget about population growth

Population growth is often overlooked but needs to be considered, given population and productivity growth are the two fundamental drivers of potential economic growth. Australian GDP growth has been much higher compared to our global peers over recent years partly due to strong population growth.

Victorian population growth continues to outpace the rest of the states significantly (see chart below). Part of the flows are from overseas migration but Vic also enjoys strong interstate flows.


Source: ABS, AMP Capital

The strength in underlying population growth in Vic has been an important source of housing demand for the state and in keeping prices from declining too much, particularly over recent periods. In comparison, NSW home price has been declining faster than in Vic. While NSW population growth is also good overall, one negative offset has been interstate outflows (see chart below) which has been accelerating lately. These NSW “refugee” outflows appear to be going towards QLD lately and probably reflect housing affordability pressures in Sydney.


Source: ABS, AMP Capital

Housing affordability pressures do not look like they are easing for now, so NSW is likely to continue to see interstate outflows and Vic inflows may slow and the beneficiaries will be Qld, Tas and SA. Keep in mind that short-term visitors (e.g. those staying for education purposes) mainly reside in Sydney and Melbourne and would not be included in population flows but still add to demand for housing and provide a positive offset to lower prices.

Implications for investors

Some convergence in growth outcomes across the states and territories over the near-term means that investors should anticipate more comparable outcomes across Australia.

Diana Mousina
Senior Economist
AMP Capital

Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.

Retirement travel: Holiday money saving tips

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Ways to save when your bank balance doesn’t quite match your retirement travel goals.

One of the great perks of life after work is your ability to travel whenever you like, but what do you do when your bank balance doesn’t quite match your retirement travel goals?

Never fear, these five holiday hacks will help you tick off your bucket list and save money while you’re at it.

Smart ways to save money

1. Travel off-peak

It’s great to know that the freedom that comes with being retired can also save you money. From avoiding travelling during school holidays – when flight and accommodation prices are at a premium, to flying outside of peak business travel times (such as Mondays mornings and Friday evenings), to travelling in low or shoulder season – there are serious savings to be made by adopting this strategy. And there’s an added bonus: by avoiding peak times you can enjoy the sights without the crowds too.

2. Use age to your advantage

Being older has its benefits – and one of these is the discounts that come with being a senior. In particular, seniors can often save on train travel and entry to attractions, though you may need to have your seniors card or passport with you to qualify. And even if a seniors/concession/pensioners rate isn’t displayed, be sure to ask if one is available.

3. Eat out at lunch not dinner

Travelling on a budget doesn’t mean you have to miss out on eating out, or going to even the finest restaurants. The trick here is to eat out for lunch, rather than dinner. Restaurant meals are often cheaper at lunchtime, and for even better value, restaurants, especially those in Europe, often offer lunch specials as a set, three course menu (look for prix fixe menus).

4. Utilise the tourist refund scheme

If you’re holidaying outside of Australia, you can claim back the goods and services tax (GST) or wine equalisation tax (WET) paid on items purchased within 60 days of your trip, provided you take them on holiday with you and they meet other key criteria1. This can lead to a substantial saving if you need to upgrade a big-ticket item such as an electronic device like your camera, phone or tablet, or even for a splurge such as a new handbag. For more information, visit the Government’s Tourist Refund Scheme page.

5. Borrow, don’t buy

Depending on where – and when – you’re going, you may need special equipment for your trip. But rather than forking out big dollars, especially if it’s something you’ll only use once, ask around. You may find friends and family are more than happy to loan winter coats, snorkeling gear, travel adapters or even luggage. If you have to buy gear just for your trip, consider second hand rather than new to save.

For more help

If the trip of a lifetime, or even just your next adventure is on the agenda, it may be useful to put in place a saving strategy before you go. AMP Bank has a range of savings accounts and term deposits which can help to make more of your money.

And for more tips on budget friendly travel ideas, check out our articles 7 trips where you’ll pay next to nothing for accommodation, and Top money-saving travel tips from our readers, and for holiday inspiration read Over 50s travel – adventure holidays aren’t just for the young.

5 lessons from a cash only week

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Will paying cash change my spending habits? What I learned when I could only pay with cash for a week.

Firstly, an admission. I never – ever – have cash. I’m that annoying friend who doesn’t have cash to cover her share when spitting bills, that colleague who borrows money to chip into the birthday collection, the parent who gives her kids an IOU for their pocket money.

It’s not that I don’t spend money – believe me, I do – but my life is an endless cycle of direct debits, bank transfers, credit card and PayPal payments, and Tap and Go, with the odd dash to the ATM when actual cash is required – but even then, I’ll only withdraw enough to cover the expense itself.

While living cashless can be inconvenient at times, my rationale is if I don’t have cash, I can’t spend it. Which is, of course, highly dubious, given technology has never made more convenient, or easier, for us to be parted from our hard-earned money. So what lessons can we learn from a cash-only week?

Does cash really burn a hole in your pocket?

I wanted to test my theory to discover if having to pay in cash would actually change my spending habits, so I committed to a cash-only week.

The first question was how much cash to withdraw. The fridge and pantry were stocked, and the bills on direct debit, so I figured I’d only need cash for ‘incidentals’ – but I honestly had no idea how much these would be.

This led to my first lesson: I’m so removed from cash that I’ve lost touch with how much things actually cost. In the end, I withdrew $500 – and couldn’t remember the last time I had that much cash in my wallet.

What I learnt from my cash-only lifestyle

1. I’ve lost touch with what things actually cost

Much in the same way as I didn’t know how much cash to withdraw for the week, when I was faced with some expenses I had no idea how much they would actually cost.

For example, there was a gap payment owing between the cost of the service and my private health insurance when I took my daughter to the dentist and also for an unscheduled trip to the physiotherapist. I honestly had no idea how much these charges would be until the words came out of the receptionist’s mouth. (They turned out to be $70 and $97, respectively, in case you were wondering).

Perhaps even more revealing was when I got a regular prescription filled. Despite this being something I buy every 6 weeks, I usually Tap and Go to pay for it so I honestly didn’t know how much it cost.

2. I’m a lot more casual about money than I used to be

Not knowing how much that prescription cost was a lightbulb moment for me. I realised that when I pay using Tap and Go I rarely even bother to check the amount the sales assistant has entered anymore, especially for small payments.

Given it’s easy enough to accidently enter an extra zero, turning the $8.50 into a $850 expense – something I’d rather pick up at the register than later on when I realise I’ve got no money in my account – I’ve decided not to be so cavalier in my attitude to small expenses in the future – especially when paying by card.

3. There are some things you can’t pay cash for

Sometimes cash isn’t king. Despite my best intentions there were things I couldn’t pay for using cash.

Firstly, getting public transport to work required a payment by either Opal card or credit card – there was no option to use cash.

I also had to buy some tickets for my daughter’s upcoming ballet performance and the only way I could do this was online via credit card.

Conclusion: In today’s modern world, living a pure cash-only existence would be very hard.

4. It’s harder to overspend when you’re paying with cash

I’ll admit, I had one fail during the week – a mid-week online clothing update. It cost me $300. While I did cull my online basket down from $500, would I have walked into a shop and spent $300 in cash in a one-off shopping trip? Possibly not.

What this taught me is that it’s much easier to overspend when spending ‘invisible’ money. I justify this by reminding myself how much I hate physically shopping for clothes and telling myself I can return anything that I don’t like or doesn’t fit, (free of charge and for a full refund), but we all know the likelihood of this happening…

Having to physically hand over cash for lunches, snacks and coffees at work strengthened my resolve to bring food from home more often and confirmed my conclusion that I’m more conscious of what I’m spending and less likely to overspend when paying with cash.

5. The cash I had dictated what I did for the week

In my student days I’d withdraw the cash I needed for the week and every dollar would be closely accounted for. If I couldn’t afford to go out with my friends, I’d stay home. This week was a little bit like that.

I made decisions for the week based on the money I had, rather than deciding what I’d like to do, and then working out how to pay for it. I found there was a lot more incentive to regulate my spending when I could see the cash literally disappearing before my eyes.

So, it turns out that my theory was completely wrong:  I’m actually less likely to spend money when I have a wallet full of it, as having cash gives me greater visibility over what I’m actually spending.

Other ways to track your spending

If carrying around a wallet full of cash isn’t practical for you, there are other ways you can get greater visibility over where your money goes. If you’re an AMP customer you can log into My AMP and use our Money Manager tool, which allows you to see your AMP and non-AMP accounts in the one place, with your transactions categorised automatically.

And if you’d like to try a cash-only week (or longer) yourself, it’s useful to keep notes on your experience to help you identify your spending habits and priorities.

Good luck!

Work Expenses – what can you claim on tax?

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With the ATO keeping a close eye on deductions, make sure you’re across what you can and can’t claim.

If you’re claiming back some of the money you’ve spent as part of your job this year, it’s a good idea to ensure you’ve kept the appropriate records that may be required ahead of lodging your tax return.

The Australian Taxation Office (ATO) said recently Aussies needed to keep the necessary records, adding that it would be paying close attention to claims made for certain work-related expenses1.

If you’re not really sure what you should be claiming, here’s a rundown on what you should know.

What is a legitimate deduction?

When completing your tax return for the financial year (1 July 2017 to 30 June 2018), you’re able to claim deductions for some expenses, most of which will be directly related to you earning an income.

The main thing to remember is a work-related expense is only deductible if2:

  • you paid for it and were not reimbursed by your employer
  • it relates to you earning an income and was not for personal use
  • you have a record, such as a receipt.

Note, if the total amount you’re claiming is $300 or less, you generally won’t need receipts, unless your claim relates to car expenses, meal allowances, award transport payments, or travel3.

However, you may be asked to tell the ATO how your claim was worked out and explain why the claim is reasonable, based on the requirements of your occupation.

What if expenses are related to work and personal use?

If your expenses are for both work and personal use, you can only claim a deduction for the work-related portion, which could for instance be 50% of your phone and internet bundle.

Another example is say you go on an overseas study trip, but are taking a holiday at the same time, you wouldn’t be able to claim the entire trip as a work-related expense.

What are some typical examples of things you can claim?

Below are some common examples of tax-deductible work expenses and for more information, including deductions for specific industries and occupations, check out the ATO website.

  • Vehicle and travel expenses (which generally won’t include travel between work and home)
  • Clothing, laundry and dry-cleaning expenses (which typically only applies if you wear occupation-specific clothing or a uniform)
  • Home office expenses (such as computer, phone and internet costs, but only the proportion that relates to work and not your own personal use)
  • Self-education expenses relevant to your job (such as course fees, textbooks and journals)
  • Tools and equipment (such as sunscreen and sunglasses if you work outside, or laptop and relevant software if you work in an office)
  • Other deductions (which might include things like union fees).

Meanwhile, remember there are other things outside of work that you may be able to claim, such as personal super contributions, interest, dividend and other investment-related income deductions, as well as gifts and donations to deductible gift recipients.

Is there any help to make tax time easier?

You can use the myDeductions tool in the ATO app to save a record of your deductions throughout the financial year, which you can upload when you do your tax return or provide to your tax agent, who may be able to provide you with additional tips if your tax situation is a bit more complex.

To ensure you’ve got all the relevant information you need ahead of filing your tax return, check out the ATO’s tax time checklist. And, keep in mind, if you’re lodging your own tax return, you have until 31 October 2018 to lodge it, or potentially longer if you’re using a registered tax agent.

 

1 ATO media release – Australians on notice to keep their receipts
2 ATO – Deductions you can claim
3 ATO – Work related expenses Rules for written evidence to substantiate deductions

How to build equity in your home and use it to invest

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Whether you’re looking to renovate, invest or pay off something big, home equity can be a valuable resource when it’s used correctly.

The equity in your property can be a valuable resource, as it may allow you to secure finance to achieve your goals, whether they be investment or lifestyle oriented.

If it’s something you’ve been thinking about, here are some pointers—the most important being if you borrow against your property and can’t make the repayments, you may lose your home in the process.

What is equity and how is it calculated?

Home equity refers to the current market value of your home—which won’t necessarily be the price you purchased it for—minus the amount still owing on your home loan.

To give you an example, say your home is valued at $800,000 and you still owe $300,000 on it, you’ll have $500,000 of equity.

Keep in mind that as the market value of your property can go up or down, so too can the equity you have in it rise and fall.

Meanwhile, to find out how much equity you have currently, you can organise a property valuation through various banks, lenders and independent agents.

Also note, even if you do have equity in your home, this doesn’t mean you can automatically borrow against it. Your lender will look at additional factors, such as your age, income, debt levels, the property’s location and whether you have any children.

What do people use home equity for?

The equity in your home can be used to secure finance for a variety of things.

As you’re effectively increasing the amount you owe to your lender and using your home as security for your borrowing, it is wise however to think about the long-term impact of taking on added debt.

For instance, you might be looking to access money to invest in another property or shares, undertake renovations, or pay for other big ticket items.

Borrowing money to pay for holidays or things that depreciate in value will come with greater risk.

Ways to grow your home equity

The equity in your home can increase a few different ways.

  • You can add to the value of your property by renovating and improving your home’s street appeal. The key here however is to avoid over-capitalising, which is when the cost of renovations outweigh the value added to your home in the process.
  • If your property is in a high-growth area or you’ve owned it for a number of years, the property may appreciate in value without you doing anything. However, depending on property market variables, the reverse could also happen.
  • Another way to increase the equity in your home is by reducing the size of your home loan, which you can do a number of ways.

What to consider first

Before you use your home equity to take on an additional loan, or a bigger one than what you have currently, there are a number of questions worth asking yourself, including:

  • What are you using your home equity for and is it a wise investment decision?
  • How much will your repayments to your lender increase by?
  • Will you need to extend the term of your loan?
  • Have you accounted for a possible rise in interest rates?
  • Do you have a household budget in place to accommodate for additional costs?
  • Can you access equity in your property via your current lender or will you need to refinance?
  • If you do swap lenders, have you thought about break costs, application costs—establishment, legal and valuation fees, stamp duty, and when lender’s mortgage insurance may apply?

Further information

Accessing the equity in your home could help you to achieve your goals. However, it’s important to stick to a workable budget and be committed to making your repayments on time.

Speaking to your financial adviser could go a long way in simplifying the process. And, if you don’t have an adviser you can find one using our online locator or by giving us a call on 9851 0300.

Watch out for tax scams.

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Watch out for tax scams

by Paul Clitheroe

 

 

The end of the financial year will likely bring the usual wave of scams. Here’s what to look for.

The federal budget is behind us, and amid the celebrations over tax cuts (around $500 annually for low to middle income earners if proposals are legislated), now is the time to be mindful of scammers pretending to be from government bodies – especially the Australian Taxation Office (ATO). In some cases, scam victims have lost close to $1 million dollars.

Beware scams posing as ASIC

If previous years are anything to go by, the end of the financial year will bring the inevitable wave of scams. Money watchdog the Australians Securities and Investment Commission (ASIC) for instance, has recently warned about crims posing as ASIC representatives asking victims to pay bogus fees. They often make contact via email, accompanied by an invoice that infects your computer with malware if you click the link.

Protect yourself by looking for warning signs that show an email isn’t from ASIC at all. The clues include requests to make a payment in order to receive a refund, or if the email asks directly for your credit card or bank details.

Dodgy emails seeming to come from the ATO

More worrying, the ATO has recently advised that scammers are leaving voicemail messages on their victims’ phones, threatening the recipient with arrest due to an unpaid tax debt or suspected tax evasion. It can be scary stuff for those on the receiving end.

Scammers are also sending fake emails asking for completion of a ‘tax refund review’ form to allow recipients to receive a refund. Apparently, the form asks for online banking details, credit card numbers (and even credit limits) as well as your personal address. The ATO is warning not to click on or save any attachments as they may download malicious malware. Above all, do not disclose the personal information the form is requesting.

Scam victims can pay dearly

Not surprisingly, many people are taken in by these scams, and in previous years up to 48,000 people have reported coming across these scams between the peak tax-time months of July and October.

Hundreds of Australians have collectively handed over millions of dollars to scammers with one victim losing $900,000 borrowed from friends and family. Others have handed over personal details such as tax file numbers, which can lead to identity theft.

Protect yourself – and your money

In many cases, scam emails are easily spotted. Hover your computer’s mouse over the email address of the sender and it will show the true source. Have a close look through the email, and you’ll typically find that scam messages are poorly written with some pretty obvious spelling mistakes. The email may ask you to click what appears to be a link to the ATO website but when you hold the mouse over the link, it won’t have the official ato.gov.au address.

If you are unsure if a phone call or voicemail is from the tax man, call the ATO on 1800 008 540. Better still, contact your financial adviser before 30 June to connect with a reputable accountant or tax adviser, who could be a valued source of reassurance if you find yourself crossing paths with a scammer.

 

Paul Clitheroe is Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.

 

 

Enhancing retirement outcomes using downsizer contributions

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Enhancing retirement outcomes using downsizer contributions

 

Legislation to make superannuation downsizer contributions (downsizer contributions)

has now passed enabling individuals who are 65 or over to contribute proceeds from the

sale of one eligible property to superannuation without needing to satisfy the work test.

The new rules provide more flexibility for retirees to fund their retirement using capital

released from their homes. From 1 July 2018, retirees can make downsizer contributions

and use the contributions to access superannuation retirement income products (subject

to their transfer balance caps).

 

Downsizer contributions are also exempt from the concessional and non-concessional

contribution rules and provide scope for retirees in different situations to enhance their

retirement outcomes.

 

This article will examine the rules around making downsizer contributions.

 

Eligibility

For a contribution to be a downsizer contribution, the following conditions will need to

be met:

  • At the time of the contribution, the individual is 65 or over (there is no upper age limit)
  • The contribution is in relation to the sale of an eligible property (see below) that the

individual or their spouse owned just prior to the sale, and where the contract of

sale was entered into on or after 1 July 2018 (there is no requirement to purchase

another property)

  • The total amount of downsizer contributions in respect of an eligible property does not

exceed the capital proceeds, or $300,000 per individual

  • The contribution is made within 90 days after the change in ownership of the property

(usually the settlement date) unless the Commissioner has allowed a longer period; and

  • The contribution is made using the approved form.

Cap on the amount of downsizer contributions

The amount of downsizer contributions is not governed by an individual’s concessional or

non-concessional caps (or their total super balance) and can be made in addition to these

contributions. However, the amount that can be contributed is capped at the lesser of:

  • $300,000 for each individual; and
  • the capital proceeds received (before any mortgage repayments).

For example, if a couple received $600,000 from the sale of an eligible property, they can

each contribute up to $300,000 as a downsizer contribution. If their property was sold

for $500,000 instead, the most they could contribute is $500,000 between them up to

$300,000 for each person (the combination does not matter) i.e. each could contribute

$250,000 or have one person contribute $300,000 and the other $200,000.

Importantly, downsizer contributions are not deductible and cannot be made in respect

of a second property regardless of how much was contributed for the first.

Although contributions can only be made in respect of one eligible property, multiple

contributions can be made for that property (to different superannuation funds for example)

if it is made within the above cap and timeframe (90 days).

Eligible property

For the property to be an eligible property, it must be located in Australia and cannot be a

caravan, houseboat or mobile home. In addition:

  • The property must have been owned by the individual, their spouse or their former spouse

for 10 continuous years just before the sale of the property. This means the 10-year period

is still met where ownership changes between spouses (e.g. relationship breakdown

or death of a spouse) during the period.

 

The 10-year period is calculated from theday the ownership commenced to the day it ceased (usually the settlement dates). There are certain events that do not ‘break’ the continuous 10-year period

including where:

–– a property was vacant because it was destroyed or knocked down and a new home

built; or

–– a substitute property was purchased and owned for less than 10 years because the

former property was compulsorily acquired. However, the former property had to have

been initially acquired at least 10 years prior to the sale of the substitute property.

Note that all conditions of section 118-47(1) of the Income Tax Assessment Act 1997

(ITAA97) need to be met in relation to the purchase of the substitute property, including

the requirement that the substitute property was purchased within a year after the end

of the financial year that the former property was compulsorily acquired.

and;

  • The individual must satisfy all requirements (apart from the fact that their spouse

owned the property) to qualify for a full or a part main residence capital gains tax (CGT)

exemption for that property. The property does not need to be the individual’s main

residence for the entire 10-year period or at the time of sale. It also does not need to be

owned by both members of a couple for each of them to make downsizer contributions.

For properties acquired before 20 September 1985 (pre-CGT asset), this requirement is still

met if the individual would have qualified for a full or part main residence CGT exemption

had the property been a CGT asset (it was not an investment property for the entire time

it was owned).

 

If you have questions or are considering downsizing, please contact your planner on 03 9851 0300

 

How your assets will be distributed if you don’t have a Will

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How your assets will be distributed if you don’t have a Will

 

Most of us accept that a valid Will is essential to determine how your estate is dealt with when you die. Your Will can appoint a family member or trusted friend to administer your estate, nominate guardians for young children, determine who will benefit, and create trusts to protect assets and safeguard vulnerable beneficiaries.

Without a Will, the administration and finalisation of your estate could be left to somebody you would not wish to involve, and the distribution of your assets will be pre-determined by legislation – an unfortunate outcome for a family who is already grieving.

 

Changes to intestacy laws

The Administration and Probate and Other Acts Amendment (Succession and Related Matters) Act 2017 (Vic) has brought about various changes to estate and succession laws.

Of interest to those readers who keep putting off preparing a Will, are the reforms affecting how your estate will be distributed when you die without one. Whilst the laws aim to promote fairness for family members left behind by a person who dies without a Will, they are a timely reminder of the restrictive formula that applies when distributing an intestate estate.

Essentially, the legislation decides who gets what from your estate, unless a disgruntled family member contests the proposed distribution. In such cases, the application fuels conflict within the family, adds to the emotional turmoil and potentially depletes estate assets. Even more reason to get that Will prepared now!

 

Distribution of an intestate estate

Essentially, the reforms improve the position of a partner (spouse or de facto) of a deceased intestate person. The following summarises how statutory distribution will apply for partners of an intestate person who dies on or after 1 November 2017.

 

One partner and no children

The partner takes the whole of the estate – this is unchanged from the previous position.

 

One surviving partner and a child or children also of that partner

Previously where there was a child or children of the deceased and surviving partner, the partner would take the personal chattels, a legacy of $100,000, and one-third of the balance of the estate. The remaining two-thirds of the estate would be distributed equally between the surviving child or children. This was problematic in that it could leave the partner and remaining family with little financial security.

The statutory-imposed division of the estate would mean that, frequently the family home would need to be sold to provide the share allocated for the child or children of the relationship, even though they were the children of the deceased and his or her partner. Such circumstances would cause unnecessary upheaval and distress.

The laws now provide that when a person dies intestate leaving one partner and a child or children also of that partner, the partner will take the whole estate (unless there is more than one partner or a child or children of the deceased who is not also a child of the partner – see below).

 

One surviving partner and a child or children not of that partner

In this case a statutory legacy (currently $451,909) applies. If the estate is worth equal to or less than the statutory legacy, the partner will inherit the residuary estate. If, however, the estate value exceeds the statutory legacy, the distribution is:

 the partner receives the personal chattels, the statutory legacy amount (and any interest if applicable) and half of the balance of the residuary estate; and

 the children of the deceased share equally in the remaining half of the residuary estate.

 

Multiple partners – with or without children

If the deceased leaves multiple partners with or without children, the distribution of the estate is in accordance with complex and restrictive provisions and may also necessitate an application for a distribution order.

 

No partners – children

The estate is divided equally between a surviving child or children. If a child of the deceased has died, then that child’s share will be taken by his or her surviving child and if more than one, equally.