Noel News 

Thousands of candles can be lighted from a single candle, and the life of the candle will not be shortened. Happiness never decreases by being shared.
BUDDHA

Welcome to another newsletter

I started the last newsletter discussing interest rates and the rise of 50 basis points last Tuesday, taking the cash rate to 2.35%, confirms my opinion that rates are moving upwards. The Reserve Bank wants to get rates at a level which it regards as normal and will keep increasing rates by 50 basis points every month until that target is reached.

Many economists think that 3.35% will be that target but I reckon it’s nearer 4%. So much will depend on inflation, but when you consider that petrol prices will rise this month as the government subsidies are removed, and life in Europe can only get worse as winter draws near, it’s hard to see any quick improvements.

Everybody I speak to is crying out for staff, and a builder friend tells me that timber prices will rise dramatically next year because so many trees that would’ve been felled have destroyed by bushfires. I guess it’s a case of watch this space.

Pensions up!!

There’s good news for pensioners this month with the biggest increase in pension payments for many years starting on 20 September.

Thanks to the good people at My Pension Manager the new rate charts are already available on my website for download, and the pension calculator on the website has been updated with the new rates.

Feel free to go to the Age Pension Calculator on my website and work out for yourself how much more pension you may be entitled to. Note there’s been a slight increase in the cut off points for the assets test due to the pension increases. For example, the cut-off point for a homeowner couple has gone from $915,500 to $935,000. For a single the numbers have risen from $609,250 to $622,250.

Just keep in mind that this is not some extraordinary largess from the government of the day – it’s simply the normal six-monthly indexation adjustment to the rate of the pension due to inflation. Just spare a thought for the renters – the increase in rent assistance is minimal compared to what they are facing in the real world.

During the job summit the ABC rang me to comment on a media release they had received from the Federal Government stating pensioners could now earn $4000 more a year without losing any pension. It’s received no publicity, but remember that income test changes only affect income tested pensioners – they don’t affect asset tested pensioners. A pensioner can now earn $150 a week from business or personal exertion, so these new rules if legislated, will take that to around $230 a week. It would be a great income boost for an income tested pensioner, and could help our huge job shortage.

If you’re at the high end of the asset range but still getting a part pension, take advice about the new lifetime income streams whereby only 60% of whats you invest is counted for the assets test. The combination of the increased age pension, and the income from these new products, can significantly boost retirees’ income. To find out know more talk to you advisor or read the appropriate chapter in my book Retirement Made Simple.

Next month’s Federal Budget

The Federal Budget will be delivered on Tuesday 25 October, which just happens to be the day that we are due to arrive home from Los Angeles. Treasurer Jim Chalmers has already announced that everybody will be expected to make “sacrifices” but we will need to wait till next month to find out what those sacrifices might be.
 
A hot tip is that there will be changes to superannuation, and we are already being softened up by a barrage of articles in the press claiming that the superannuation system is flawed, because people are dying with not all their superannuation spent. The reality is that older people are scared of the high cost of aged care, and want to make sure they keep plenty of cash in their super lest they live longer than their money. That’s just prudence.

Of course, the inference is that we are allowed to have too much in our superannuation accounts. There has also been much publicity about some self-managed funds which have very large assets, even over $100 million, but these are restricted to a very few people, and were created through exceptional circumstances. For example, a person may have started a business many years ago, put the business premises and company shares into their superannuation fund, and over the years built a huge thriving business. But these are legacy issues – the members are mostly old, and the maximum anybody can bequeath to their family inside the superannuation system is around $1.7 million. The rest can be paid only to their beneficiaries personally. In no more than 15 years all the big balances will be no more.

As the rules stand today you must draw a set amount from your pension fund every year based on its balance at the previous 30 June, but there is no requirement to withdraw from your accumulation fund. There is one suggestion that once you reach a certain age, you will be required to draw a set percentage of all your superannuation, not just the pension account. Another suggestion is that the accumulation account will be taxed at 30% per annum instead of its present 15% per annum. This is because 30% is the company tax rate – if they made the rate any higher people would simply withdraw their money from superannuation and hold it in a company. Another view is that any balances over $5 million will be disallowed and people will be required to draw sufficient money from their superannuation to get the balance down to below $5 million.
 
And let us never forget that superannuation itself provides one of the greatest benefits this country has ever had. For the year ending June 2021 superannuation funds paid out a total of $128 billion of which $68 billion represented lump sum payments and $60 billion were pension payments. The large amount of money paid out as lump sum payments was mainly because many people are suspicious of super and cash in their superannuation and put the money in the bank as soon as they retire. There are others who have a mortgage and withdraw their super as a lump sum so they can retire mortgage free. The savings to future welfare bills are incalculable.

In contrast the amount paid in age pensions in the same period was $52.7 billion. That’s far less than the half paid out by super funds. It’s notable that there is a long-term trend of gradual reduction in the proportion of  Australians receiving the age pension. This is due a range of factors but one of the main ones is that today’s retirees have more assets at retirement because of the maturation of our superannuation system.

It is clear that the superannuation system is providing the benefits it was decided to do. It’s time to leave the system alone.

Building wealth and saving tax

People are always asking about the best way to pay less tax. The obvious answer is to combine an investment in growth assets with earning the types of income that receive tax concessions.

Think about it: capital gains tax is the best type of tax to pay, because is not triggered until you dispose of the asset, and, provided you’ve held that asset for over a year, you get a 50% discount on your normal tax rate. Furthermore, death does not trigger CGT. It simply transfers your liability to the beneficiaries, who will also not pay any CGT until they dispose of the asset.

The best type of concessionally taxed income is franking credits from dividends from Australian shares. In the bad old days, dividends suffered double taxation. First the companies paid tax on any profits they made, then shareholders were taxed at their marginal rate when they received the tax-paid profits as dividends.

Fortunately, since 1 July 1987, dividends from companies that have paid Australian company tax carry imputation credits. This allows shareholders to receive credit for the tax paid by any company in which they hold shares, so that they pay tax only on the difference between the company tax already paid and their own tax rate. Dividends that carry imputation credits are called “franked dividends.”

Suppose a company made $1,000,000 profit, paid tax of $300,000, and distributed the after-tax profit of $700,000 in dividends to its shareholders. The $300,000 of tax paid entitles the shareholders to $300,000 in imputation credits. So if you had $140,000 worth of shares in that company, and it paid it you a dividend of $7000, it would include $3000 of franking credits.

Those credits are as good as cash, which means you have to pay tax on them. Yes, even though you received only $7000, you must declare $10,000 ($7000 + $3000) as taxable income. That’s the bad part – now comes the good bit. You also declare $3000 of tax deductions for your franking credits – they offset your tax bill and may reduce it. And if you have more franking credits than you owe in tax, the balance will be refunded to you.

CASE STUDY

Jack and Jill are a couple, each earning around $100,000 a year. Because they are in their late 30s they are choosing to save outside the superannuation system, for fear of lack of access and changes in the rules. They invest $200,000 of their savings into an Australian Index Fund. The All Ordinaries Index has averaged 9% (income and growth combined) for the last 100 years, so for this exercise I will assume that for the next year the fund achieved growth of 5%, and paid income of 4%, fully franked.
 
Because they understand the importance of putting compound interest to work for them, Jack and Jill reinvest all the income. Therefore, after a year their fund should be worth $218,000, made up of $10,000 in growth and $8,000 in reinvested income. That means at the end of the year the capital value has increased by $18,000.
 
Now let’s think about the tax consequences. They intend to keep adding to this fund over the long term, therefore there is no tax each year on the growth because no assets are being cashed in. The dividend of $8000 will carry franking credits of $3430, which means their taxable income will increase to $11,430, made up of $8000 income plus $3430 in franking credits. At their marginal rate of 34.5% (including Medicare) the tax on this will be $3943, but because the franking credits can be used to reduce that, the total tax they will pay on that income is just $513.
 
If we put that all together, we can see that the tax on an investment of $200,000 for two people earning $100,000 each, and which produced a total return of $18,000 for the year, was just $513. How much better can it get?!

Travel insurance for older folk

I’m 82 years of age and it’s almost impossible to get travel insurance for anybody over 80. It’s particularly important to us because we are leaving on 3 October for our trip to America to see our son James, and want some sort of protection in case of some catastrophe occurs which could cost hundreds of thousands of dollars in medical costs.

The good news is that National Seniors have great travel insurance and through them I got a fully comprehensive policy for $1449 after deduction of the 10% discount one gets for being a National Seniors member. My wife Geraldine is fine because she is under 70 and we rely on her Virgin Visa Card which includes travel insurance for under 80’s if you book the tickets on that card.

I hope you have enjoyed the latest edition of Noel News.

Thanks for all your kind comments. Please continue to send feedback through; it’s always appreciated and helps us to improve the newsletter.

And don’t forget you’ll get much more regular communications from me if you follow me on twitter – @NoelWhittaker.

Noel Whittaker