Using Your Super to Kick Start Your First Home Deposit

Posted on July 27, 2024 by Arrowroad

Last updated on 6th Jul 2023

The First Home Super Saver (FHSS) scheme allows you to use your superannuation savings to help purchase your first home. This guide explains the eligibility criteria, the process involved, and the benefits of using the FHSS scheme.

Who Can Use the FHSS Scheme?

The FHSS scheme is available to individuals who:

  • Are over 18 years old.
  • Have never owned property in Australia.

If you are planning to buy a home jointly with someone who has previously owned a property, you can still use the scheme, even though your joint owner cannot. The FHSS scheme may also help you support a family member or loved one in achieving their homeownership dream.

The Steps of the FHSS Scheme

  1. Make Voluntary Contributions: Contribute voluntarily to your super fund.
  2. Request an FHSS Determination: Contact the Australian Tax Office (ATO) to determine how much you can withdraw.
  3. Review the Determination: Check the maximum withdrawal amount available to you.
  4. Request a Withdrawal: Apply to the ATO for the withdrawal.
  5. Receive Payment: The ATO will instruct your super fund to release the amount, withhold tax, and pay you the balance.
  6. Use for Home Purchase: Utilize the withdrawn amount to help purchase your first home.
  7. Notify the ATO: Inform the ATO that the withdrawal was used for buying your home.

If the withdrawn amount is not used to buy a first home or is not used within the specified time frame, it must be contributed back into your super fund to avoid penalty tax.

Contributions

Only voluntary contributions can be withdrawn under the FHSS scheme. These include:

  • Salary sacrifice contributions made by your employer.
  • Personal contributions made by you, including those claimed as a tax deduction.

Contributions under the scheme count towards your superannuation contribution caps. Only the first $15,000 of voluntary contributions each year count towards the scheme, up to a lifetime limit of $50,000 (increased from $30,000 on July 1, 2022).

Withdrawals

Withdrawals under the FHSS scheme have been available since July 1, 2018. Before making a withdrawal, apply to the ATO for an FHSS determination to find out your maximum withdrawal amount, including accrued earnings. Then, request the withdrawal from the ATO.

The withdrawal will include:

  • An amount related to concessional contributions (such as employer and deductible contributions) plus earnings.
  • An amount related to non-concessional contributions, which will be tax-free.

The concessional contributions and earnings will be taxed at your marginal tax rate, less a 30% tax offset.

Using Your Withdrawal

After withdrawal, you usually have 12 months to purchase or start constructing your first home. You must live in your home for at least six of the first 12 months. If you do not use the withdrawal to buy a home, you may incur penalty tax but can avoid it by recontributing the amount back into your super fund within the 12-month period.

Tax Benefit

The FHSS scheme offers tax benefits by allowing pre-tax and tax-deductible contributions to your super fund for your deposit. These contributions are taxed at 15%, rather than your marginal tax rate, which may be as high as 47% with the Medicare levy. The 30% offset on withdrawal ensures this saving is not heavily eroded by tax.

Conclusion

The FHSS scheme can significantly boost your retirement savings and help you save for a home deposit with tax benefits. Consult with your financial adviser to navigate the FHSS scheme and maximize your tax savings.

The information contained in this article is general information only. It is not intended to be a recommendation, offer, advice or invitation to purchase, sell or otherwise deal in securities or other investments. Before making any decision in respect to a financial product, you should seek advice from an appropriately qualified professional. We believe that the information contained in this document is accurate. However, we are not specifically licensed to provide tax or legal advice and any information that may relate to you should be confirmed with your tax or legal adviser. 

Posted in Financial Planning, Home Ownership, Mortgage and Loans, Personal Finance, Superannuation, Wealth Building | Tagged , , , , | Comments Off on Using Your Super to Kick Start Your First Home Deposit

Understanding Superannuation Contribution Caps

Posted on July 26, 2024 by Arrowroad

Last updated on 17th Jul 2023

Superannuation is a tax-effective way to save for retirement. However, the amount of contributions you can make to super each year is limited. Any superannuation contributions made in excess of the concessional and non-concessional caps may have a penalty tax applied. Furthermore, there’s the administrative burden of dealing with the excess contributions. So take care with how much you contribute each year.

What is the Concessional Contributions Cap?

Concessional contributions generally include contributions your employer makes for you and contributions you make yourself for which you claim a personal tax deduction. The concessional cap for the 2023/24 financial year is $27,500. You may be able to utilise unused portions of previous years’ concessional contributions caps (starting in 2018/19) if your total superannuation balance was less than $500,000 on June 30, 2023.

What is the Non-Concessional Contributions Cap?

Non-concessional contributions (NCCs) generally include your own contributions into super for which you don’t claim a personal tax deduction, as well as contributions made by your spouse. If not managed carefully, excess concessional contributions can also count towards this cap. The general NCCs cap for the 2023/24 financial year is $110,000. Additionally, NCCs can only be made if the balance of your superannuation savings was less than $1.9 million on June 30, 2023.

Some after-tax contributions you make will not count towards the NCCs cap. This includes contributions from personal injury payments and up to $1.705 million (2023/24) contributed under the small business CGT cap. Both of these opportunities can help you increase how much you can get into super.

Bring Forward Two Years of Non-Concessional Contributions

If you want to boost your super and were under age 75 on July 1, 2023, you may be able to ‘bring forward’ the next two years of NCCs and add this to the general cap for the current year to contribute a higher amount. However, remember that doing this caps how much you can contribute across the full three-year period. How much you can bring forward will also depend on how much you already have in super.

Be aware that NCCs must be received by your super fund no later than 28 days following the end of the month in which you turn age 75. Your super fund cannot accept NCCs after this date.

Example

Harold is age 70 and has inherited money from his mother’s estate. He has existing super savings of $400,000. Harold decides to contribute $330,000 to super as an NCC on October 1, 2023. This is done by bringing forward the NCC caps for 2024/25 and 2025/26 into the current year. Consequently, Harold will not be able to contribute further NCCs before July 1, 2026.

The ‘bring forward’ option is triggered as soon as you make NCCs more than the general cap ($110,000 for 2023/24).

Tax on Excess Contributions

If you exceed either of the contribution caps, tax penalties may apply, and you may need to withdraw some amounts. How this works will depend on which cap is breached.

Excess Concessional Contributions

If you exceed your concessional contributions cap, your tax return for that year is amended, and the excess contributions are taxed at your marginal tax rate, less 15% for the tax already deducted in the fund. You are personally liable to pay this tax amount, but you can elect to withdraw up to 85% of the excess contributions from your superannuation account. If the excess is not withdrawn, this amount also counts towards your NCC cap.

Excess Non-Concessional Contributions

The tax rate on excess NCCs is 47% (including Medicare levy). You can avoid this tax by withdrawing the excess NCCs plus associated earnings (as calculated by the ATO). The earnings will be taxed at your marginal tax rate, less 15% for the tax already deducted in the fund.

The information contained in this article is general information only. It is not intended to be a recommendation, offer, advice or invitation to purchase, sell or otherwise deal in securities or other investments. Before making any decision in respect to a financial product, you should seek advice from an appropriately qualified professional. We believe that the information contained in this document is accurate. However, we are not specifically licensed to provide tax or legal advice and any information that may relate to you should be confirmed with your tax or legal adviser. 

Posted in Financial Planning, Retirement Planning, Superannuation, Tax Strategies, Wealth Management | Tagged , , , | Comments Off on Understanding Superannuation Contribution Caps

Understanding the Superannuation Co-Contribution

Posted on July 25, 2024 by Arrowroad

Last updated on 14th Jul 2023

If you are saving for your retirement, the superannuation co-contribution can give you a boost. If you are eligible and make personal contributions to superannuation, the Government may also contribute up to $500 to your super account.

What is the Co-Contribution?

If you earn less than $58,445 in 2023/24, make personal contributions to superannuation, and meet other eligibility criteria, the Government may boost your retirement savings by making an additional contribution on your behalf. The co-contribution is paid at the rate of 50 cents for every eligible $1 you put in, up to a maximum co-contribution of $500. The amount payable depends on your income and the amount you contribute.

Eligibility Criteria

You will be eligible for the superannuation co-contribution in the 2023/24 financial year if:

  • You make personal contributions (after-tax) to a complying superannuation fund.
  • Your income* is less than $58,445.
  • At least 10% of your total income** for the financial year is from eligible employment, carrying on a business, or a combination of the two.
  • You do not hold an eligible temporary resident visa during the financial year.
  • You lodge a tax return for the financial year.
  • You do not exceed your non-concessional contributions cap for the financial year.
  • You have a total superannuation balance on June 30, 2023, of less than $1.9 million.
  • You are under age 71 at the end of the financial year.

*Income for this purpose is your assessable income plus reportable fringe benefits plus reportable employer superannuation contributions (essentially salary sacrificed contributions over the Super Guarantee), less allowable business deductions.

**Total income for this purpose is assessable income plus reportable fringe benefits plus reportable employer superannuation contributions (essentially salary sacrificed contributions over the Super Guarantee).

How Much Co-Contribution is Payable?

If your total income is $43,445 or less, the Government may contribute 50 cents for every $1 you contribute, up to a maximum of $500. If your total income is between $43,445 and $58,445, the maximum possible co-contribution is reduced using the following formula:

$500 – [0.03333 x (total income – $43,445)]

If you make non-concessional contributions less than $500, the co-contribution is limited to the lesser of your maximum potential co-contribution and 50% of your contributions made.

The following table indicates the amount of co-contribution based on income levels and personal contributions made.

Total IncomePersonal Contribution$1,000$800$500$200
$43,445 or less$500$400$250$100
$46,445$400$400$250$100
$49,445$300$300$250$100
$52,445$200$200$200$100
$55,445$100$100$100$100
$58,445$0$0$0$0

The Process

Assuming you are eligible, all you need to do is make the personal contribution(s) and lodge a tax return at the end of the financial year. The Tax Office will do the rest. They use the information from your tax return together with contribution details provided by your superannuation fund to determine whether you are eligible for the co-contribution. If you are, the Tax Office will pay the co-contribution directly into your superannuation account.

Most superannuation funds are required to lodge contribution details with the Tax Office by October 31 each year, so assuming you lodge your tax return on time, the co-contribution should arrive in your account within several months. The Tax Office will send you a letter confirming the co-contribution amount and the superannuation fund it has been deposited into.

A Bonus for Deductible Contributions

You can double up on concessions for personal contributions. If eligible, you can claim a tax deduction for personal contributions, and you may also qualify for the co-contribution if additional contributions are made without a deduction claimed.

Superannuation co-contributions may be an attractive option for boosting your retirement savings. Consult your financial adviser to see if it can work for you.

The information contained in this article is general information only. It is not intended to be a recommendation, offer, advice or invitation to purchase, sell or otherwise deal in securities or other investments. Before making any decision in respect to a financial product, you should seek advice from an appropriately qualified professional. We believe that the information contained in this document is accurate. However, we are not specifically licensed to provide tax or legal advice and any information that may relate to you should be confirmed with your tax or legal adviser. 

Posted in Financial Planning, Retirement Planning, Superannuation | Tagged , , , | Comments Off on Understanding the Superannuation Co-Contribution

Choosing Your Superannuation Fund

Posted on July 24, 2024 by Arrowroad

Most employees can choose their preferred superannuation fund to accumulate their retirement savings. If you don’t choose a super fund, your compulsory super contributions will be paid to your employer’s default fund or, in some cases, to a fund that you have previously established and is stapled to you as you change employment.

Who Gets to Choose? You are generally eligible to choose a superannuation fund if you are employed under:

  • A federal award
  • An enterprise agreement or workplace determination made on or after January 1, 2021
  • A notional agreement preserving state award
  • An award or industrial agreement that does not require super contributions

You are also eligible to choose a superannuation fund if you are not employed under any state award or industrial agreement. If you don’t fit into one of these groups, it’s likely that you won’t be able to choose your own superannuation fund. Ask your employer whether you can choose your own superannuation fund.

The Mechanics of Choice There is a process to follow if you wish to choose your preferred superannuation fund:

Your Employer’s Responsibilities:

  • If you are eligible to choose your own superannuation fund, your employer must provide you with a standard choice form within 28 days of commencing employment.
  • The employer will have a default fund for employees who don’t make a choice or who don’t make a valid choice. This default fund must be a MySuper product.

Your Responsibilities:

  • Assuming you are eligible, you can complete the standard choice form to advise your employer of your preferred fund. You will need to provide:
    • The name of the superannuation fund and your membership details
    • The address, Australian Business Number (ABN), and unique superannuation identifier (USI) number of the fund
    • A letter from your super fund confirming that it is a complying fund that can accept contributions from your employer.

If you don’t provide sufficient details to your employer, or the employer cannot contribute to the fund, your compulsory employer contributions will be made to the default fund. If you change your mind on which fund you prefer in the future, you can update details with your employer, but they may only allow one change in any 12-month period.

If You Don’t Choose a Fund If you commence employment on or after November 1, 2021, and don’t choose a super fund when you are eligible to do so, your employer will pay your compulsory super contributions into a ‘stapled’ fund (if you have one). A ‘stapled’ fund is a super fund that follows you around as you change employment. Your employer will need to apply to the Australian Taxation Office (ATO) to determine whether or not you have a stapled fund. If you don’t have a stapled fund (and have not chosen a fund), your compulsory super contributions will be paid into the employer’s default fund.

Although paying super contributions to your stapled fund will prevent you from accumulating multiple accounts over your career, it might not be the best fund for your super.

Key Features – What to Look for in a Super Fund Superannuation funds offer a range of different features. It is important to compare funds and choose one that best suits your needs. Some key aspects to consider include:

  • Insurance Cover: Many superannuation funds offer death, disablement, and income protection insurance. Compare premiums and cover levels between funds carefully.
  • Investment Options/Performance: The range and selection of investment options can vary widely. Past performance is not a guarantee of future performance, but consistent poor performance relative to similar funds may indicate issues.
  • Fees and Charges: Seemingly small differences in ongoing fees can significantly impact returns over time. Choose a fund that provides the features you desire at the lowest cost.
  • Fund Services: Look for useful member websites, client service centres, education services, and other member benefits. Ensure you’re not paying for services you don’t need.
  • Fund Flexibility: Ensure your chosen superannuation fund can grow with you from working life into retirement, and consider the flexibility to move seamlessly from accumulation to pension phase.

YourSuper Comparison Tool The YourSuper comparison tool is available on the ATO website or via your ATO online account. The tool helps consumers compare MySuper products (and trustee-directed products from August 2023) in terms of fees and returns. Use it to choose the most suitable superannuation product.

Your Options While you may have the option to choose a superannuation fund, you don’t need to move if you are happy with your existing fund. However, it is important to seek advice and do research to ensure you have made an informed decision.

The information contained in this article is general information only. It is not intended to be a recommendation, offer, advice or invitation to purchase, sell or otherwise deal in securities or other investments. Before making any decision in respect to a financial product, you should seek advice from an appropriately qualified professional. We believe that the information contained in this document is accurate. However, we are not specifically licensed to provide tax or legal advice and any information that may relate to you should be confirmed with your tax or legal adviser. 

Posted in Financial Planning, Retirement Planning, Superannuation, Wealth Management | Tagged , , , | Comments Off on Choosing Your Superannuation Fund

Understanding Eligible Spouse Contributions

Posted on July 23, 2024 by Arrowroad

Last updated on 6th Jul 2023

Information The article below can be used on your website or for your next client newsletter or marketing campaign. You can download the article above and then copy and paste it into your preferred format using your company’s style guide.

What are eligible spouse contributions? Eligible spouse contributions provide an option to help balance superannuation savings between spouses. But what exactly are they, and how can they benefit you?

An eligible spouse contribution is a superannuation contribution made on behalf of your spouse. Certain rules govern when these contributions can be made and who qualifies as an ‘eligible spouse’. Contributions must be received by the super fund no later than 28 days after the end of the month in which the receiving spouse turns 75. Contributions cannot be accepted by the fund after this deadline. The spouse making the contribution can be of any age.

To claim a tax offset for the contribution, both you and your spouse must be Australian residents when the contribution is made. An eligible spouse includes a legal spouse and a de facto spouse (including same-sex couples) but excludes couples living separately and apart on a permanent basis.

Tax implications Spouse contributions are counted towards the non-concessional contributions (NCC) cap of the receiving spouse and form part of the tax-free component. The contributions are preserved until the receiving spouse meets a condition of release, such as retirement on or after the preservation age or permanent incapacity. No tax applies to the amounts withdrawn when they become accessible.

The contributing spouse may be entitled to claim a non-refundable tax offset if the receiving spouse has income below certain thresholds. The receiving spouse’s assessable income, reportable fringe benefits, and reportable employer superannuation contributions must be less than $40,000. The maximum offset is $540, calculated at 18% on up to $3,000 of spouse contributions, but reduced by $1 for every $1 by which the total assessable income exceeds $37,000. No offset is payable when income reaches $40,000.

Example Jack makes a spouse contribution of $5,000 on behalf of his wife Jill (age 58). Jill’s assessable income plus reportable fringe benefits and reportable employer superannuation contributions for the financial year total $38,200. Jack is entitled to a spouse contribution tax offset of $324 (i.e., [$3,000 – ($38,200 – $37,000)] x 18%).

Who are they appropriate for? Making a spouse contribution is an effective option to help build retirement savings in the names of both members of a couple. This can allow each person to have flexibility in retirement and maximise retirement incomes, while also creating potential tax benefits.

Besides the tax offset benefit, building superannuation savings using spouse contributions may help provide tax advantages on earnings and withdrawals.

To find out if eligible spouse contributions are the right option for you, see us today!

The information contained in this article is general information only. It is not intended to be a recommendation, offer, advice or invitation to purchase, sell or otherwise deal in securities or other investments. Before making any decision in respect to a financial product, you should seek advice from an appropriately qualified professional. We believe that the information contained in this document is accurate. However, we are not specifically licensed to provide tax or legal advice and any information that may relate to you should be confirmed with your tax or legal adviser. 

Posted in Financial Planning, Life Events, Superannuation, Wealth Building, Wealth Management, Women's Empowerment | Tagged , , , | Comments Off on Understanding Eligible Spouse Contributions

Self-Managed Superannuation Funds (SMSFs): Are They Right for You?

Posted on July 22, 2024 by Arrowroad

Self-managed superannuation funds (SMSFs), or DIY funds, have been a growing sector in the superannuation market. With over 606,000 funds and more than $855 billion in assets, SMSFs continue to gain popularity. Here are some compelling reasons why SMSFs are attractive, but remember, SMSFs are not suitable for everyone. Consult your financial planner to determine if an SMSF is the right choice for you.

1. Family Inclusion

SMSFs allow up to six people, often family members, to be members of the same fund. This can simplify the management of superannuation assets and estate planning, catering to the needs of each family member within one flexible superannuation fund.

2. Control and Flexibility

SMSFs offer significant control and flexibility. As a trustee, you have the freedom to choose investments, tax strategies, and estate planning measures that suit your needs, within the superannuation rules. Specialist companies can handle administration and accounting tasks, allowing you to focus on tailoring your investment strategy with professional advice.

3. Cost-Effectiveness

While cost savings may not be the primary driver for starting an SMSF, they can be achieved. The extent of savings depends on the types of investments, fund operation, and fund balance. Although there are unavoidable costs, such as establishing the trust deed and the annual SMSF levy, managing an SMSF can become more cost-effective as fund assets grow.

4. Broad Investment Choice

SMSFs offer almost limitless investment options compared to traditional superannuation funds. You can invest in direct equities, property, overseas assets, and alternative investments like artwork or antiques, provided they align with the fund’s investment strategy and meet the sole purpose test for retirement benefits.

5. Taxation Efficiency

The taxation efficiency of SMSFs is a significant attraction. Benefits include the ability to use imputation credits to reduce the fund’s tax liability, a maximum of 10% tax on capital gains in the accumulation phase, and no tax on capital gains in the pension phase. Additionally, SMSFs can facilitate tax-effective estate planning strategies.

6. Estate Planning Opportunities

SMSFs provide unmatched flexibility for tailored estate planning strategies, which is crucial for family needs. However, careful planning and specialist advice are essential to implement these strategies correctly and avoid potential pitfalls.

7. Enjoyment and Engagement

Many people find enjoyment in managing their SMSF. Whether you are accumulating super for retirement or are already retired, being involved in the administration of your fund can be an engaging and enjoyable activity.

Conclusion

While SMSFs offer numerous benefits, including control, flexibility, cost savings, broad investment choices, taxation efficiency, and estate planning opportunities, they require a significant commitment. Ensure you have the capacity and willingness to manage an SMSF effectively. Consult with your financial planner to explore whether an SMSF is the right option for you.

The information contained in this article is general information only. It is not intended to be a recommendation, offer, advice or invitation to purchase, sell or otherwise deal in securities or other investments. Before making any decision in respect to a financial product, you should seek advice from an appropriately qualified professional. We believe that the information contained in this document is accurate. However, we are not specifically licensed to provide tax or legal advice and any information that may relate to you should be confirmed with your tax or legal adviser. 

Posted in Financial Planning, Retirement Planning, Self Managed Super Funds, Superannuation | Tagged , , , | Comments Off on Self-Managed Superannuation Funds (SMSFs): Are They Right for You?

Ensuring Your Superannuation Benefits End Up with the Right Beneficiaries

Posted on July 21, 2024 by Arrowroad

You might not think about estate planning if you are young and have not accumulated much wealth or if most of your assets are jointly owned with your spouse. However, what about your superannuation? The death benefit payable from your superannuation fund may be substantial, especially if your fund provides insurance upon your death.

Typically, the trustees of the superannuation fund decide who receives your money and how much each beneficiary gets. This can lead to disputes, particularly if you have ex-spouses, children from other relationships, or if your family relationships are not harmonious.

Since your super is likely to be your biggest asset after your house, ensuring an orderly distribution can save your family a lot of grief. Don’t leave the outcomes to chance.

Binding Death Benefit Nomination

If your superannuation fund allows, you can put in place a binding death benefit nomination. This allows you to decide who will be a beneficiary instead of leaving the decision to the trustee. You can nominate:

  • A current spouse
  • Your children (including step and adopted children)
  • A person who is financially dependent upon you or living in an interdependency relationship with you
  • Your estate

Nominating one or more of your dependants directly instead of your estate may allow them to receive the money more quickly and with less potential for disputes. If you nominate your estate or in case the trustees choose to pay your estate, it is also generally wise to include instructions on distributing your super in your will.

Key Considerations

  1. Validity: The nomination needs to be made in the correct format to be valid. Check the details with your superannuation fund.
  2. Renewal: Ensure the nomination stays up to date. Many funds require you to renew the nomination at least every three years.
  3. Self-Managed Super Fund (SMSF): If you have your own SMSF, considering a binding death benefit nomination is still important to avoid family disputes.

Why It Matters

A binding death benefit nomination allows you to make a clear decision about who should receive your superannuation benefits. This clarity can help prevent disputes among family members and ensure that your superannuation benefits are distributed according to your wishes.

Final Thoughts

Your superannuation is an important asset, and planning for its distribution is crucial. Make sure your binding death benefit nomination is valid and up to date to ensure your beneficiaries receive the benefits you intend for them. Speak with your superannuation fund to confirm the correct process and keep your nomination current.

The information contained in this article is general information only. It is not intended to be a recommendation, offer, advice or invitation to purchase, sell or otherwise deal in securities or other investments. Before making any decision in respect to a financial product, you should seek advice from an appropriately qualified professional. We believe that the information contained in this document is accurate. However, we are not specifically licensed to provide tax or legal advice and any information that may relate to you should be confirmed with your tax or legal adviser. 

Posted in Estate Planning, Family Law, Financial Planning, Investment Strartegies, Superannuation | Tagged , , | Comments Off on Ensuring Your Superannuation Benefits End Up with the Right Beneficiaries

Understanding Downsizer Contributions

Posted on July 20, 2024 by Arrowroad

Last updated on 6th Jul 2023

The downsizer rules may allow you to get more money into the tax-effective super environment when you sell your home. Be careful though, you need to plan (preferably before you sell your home) to make the most of this opportunity. Despite the name, you don’t need to buy another home to be eligible to make a downsizer contribution.

If you’re 55 and older and meet the eligibility requirements, you might be able to contribute up to $300,000 of proceeds from the sale of your home to super. If you have a spouse, your spouse might also be able to contribute up to $300,000. There is no upper age limit for making a downsizer contribution, and they are not limited by your total super balance.

When the rules were introduced, the youngest age at which a person could make a downsizer contribution was 65. This minimum age was reduced to 60 from July 1, 2022, and then again to 55 for downsizer contributions made on or after January 1, 2023.

Eligibility Requirements The following requirements must be met to make a downsizer contribution:

  • You must be age 55 or older at the time the contribution is made.
  • You must qualify for a full or partial capital gains tax (CGT) main residence exemption on the sale of the property.
  • You (or your spouse or former spouse) must have owned the home (or land it is situated on) for 10 years or more prior to the disposal.
  • The property being sold must be located in Australia and not be a caravan, houseboat, or mobile home.
  • The contribution must be made to super within 90 days of the settlement date of the property’s sale.
  • A downsizer contribution must not have been made previously in relation to another property.
  • The contribution must be equal to all or part of the capital proceeds from the sale of an interest in a dwelling held by you or your spouse.
  • You must provide the super fund with a downsizer contribution form either before or at the time the contribution is made.
  • The contribution cannot exceed the downsizer contribution cap.

If you purchased your home before September 20, 1985 (i.e., before CGT was introduced), you can still make a downsizer contribution if you would have qualified for a full or partial main residence exemption but for the pre-September 20, 1985, acquisition date (as long as all the other eligibility requirements are also met).

Downsizer contributions are not tax-deductible.

Downsizer Cap and Limit Downsizer contributions for an individual cannot exceed $300,000. Members of a couple, if eligible, can make downsizer contributions from the proceeds of the same property up to the $300,000 limit. The downsizer contributions in relation to a single home are limited to the sum received by both the homeowner and their spouse from that one contract of sale.

Making the Contribution The downsizer contribution must be made within 90 days of the property’s settlement date. If you choose to make the contribution a downsizer contribution, it must be identified as such in the form approved by your super fund. This notification must be provided to your fund at or before the time the contribution is made.

Importantly, downsizer contributions are preserved and cannot be accessed until you meet a condition of release (e.g., reaching age 65 or retirement on or after your preservation age). Downsizer contributions will be counted in your total superannuation balance, which may impact your ability to make future super contributions. Any Centrelink entitlements you receive might also be impacted when you sell your home.

Potential Benefits of Making a Downsizer Contribution Making a downsizer contribution can have several benefits, including:

  • Building up your retirement savings.
  • No tax is payable when a downsizer contribution is made to your super fund.
  • Downsizer contributions generally add to the tax-free component of your super fund.
  • Downsizer contributions do not count towards your concessional or non-concessional contributions caps, leaving them available for other contributions.
  • No upper age limit on when you can make a downsizer contribution.
  • Your total superannuation balance does not limit your ability to make a downsizer contribution.
  • A maximum tax rate of 15% is generally paid on investment earnings in the accumulation phase of super and transition to retirement pensions, as opposed to your marginal tax rate outside of super.
  • When your funds are transferred into the retirement phase pension, there is no tax on earnings within the fund.
  • Income payments made to you are tax-free once you reach age 60 (from a taxed fund).

The amount of funds that can be transferred into a retirement phase pension is limited by your transfer balance cap.

The rules relating to downsizer contributions can be complicated. There are strict eligibility requirements and time frames for contributing.

See us today to determine whether downsizer contributions are right for you!

The information contained in this article is general information only. It is not intended to be a recommendation, offer, advice or invitation to purchase, sell or otherwise deal in securities or other investments. Before making any decision in respect to a financial product, you should seek advice from an appropriately qualified professional. We believe that the information contained in this document is accurate. However, we are not specifically licensed to provide tax or legal advice and any information that may relate to you should be confirmed with your tax or legal adviser. 

Posted in Financial Planning, Home Ownership, Retirement Planning, Superannuation, Wealth Management | Tagged , , , | Comments Off on Understanding Downsizer Contributions

Understanding Bonds

Posted on July 18, 2024 by Arrowroad

A bond is simply a loan between two parties. Bonds, also called fixed interest investments, provide you with an income return as well as diversification when combined with growth investments like shares and property. They are debt investments that pay the holder of the bond a fixed rate of income.

What is a Bond?

A person who buys a bond is the lender of money at a fixed rate of interest. The borrower is the organisation that issues the bonds. Issuers are usually government bodies or large corporations. They can also be issued by overseas borrowers, such as non-Australian governments or corporates, and these are called international bonds.

Organisations issue bonds as one way of financing operations. For example, the Australian government may issue bonds to fund road projects. The income return paid by the bond will depend on the credit quality of the borrower. Generally, corporate bonds provide lower security than government bonds and therefore offer higher levels of income return to compensate the borrower (investor) for the higher level of risk.

Key Terms Related to Bonds

Face Value: The price at which a bond is issued. This is also the amount that will be repaid at maturity, which is the date when the original capital investment is returned.

Coupon: The income return paid either quarterly, semi-annually, or annually to the investor.

Maturity: The date when the bond’s face value is repaid to the investor.

Yield: The return on the bond based on its current price.

Example

On 1 July 2018, the Australian Government issued a 6-year bond with a face value of $1000 and a coupon of 5 percent.

  • On 1 July 2024, the investor will be paid back the bond’s face value of $1000.
  • The investor receives a coupon of $60 each year (5% of $1000).

The cash flow for this bond is illustrated below:

  • Initially, the investor pays $1000 to buy the bond.
  • For each of the next five years, they will receive a coupon of $60.
  • At maturity in the 6th year, the investor will receive the $60 coupon as well as the return of their initial investment (face value) and receive a total of $1060.

How Do Bonds Work?

A bond’s price may change when it is traded on an exchange, but its face value, coupon, and maturity always remain the same. Any change in price will also change a bond’s yield.

For example:

  • A bond with a face value of $1000 and a coupon of 6 percent (or $60) has a yield of 6 percent. This is determined by dividing $60 by $1000.
  • If the price of the bond rises to $1200, investors would still receive a coupon of $60, pushing its yield down to 5 percent ($60/$1200).
  • If the bond’s price falls to $600, the yield would rise to 10 percent ($60/$600).

This explains why a bond’s yield falls when its price rises, and why its yield rises when its price falls. It also explains why a bond investor who sells prior to the maturity of the bond may experience a loss on the capital value of their investment if long-term interest rates rise. Conversely, they may sell at a gain if long-term interest rates fall.

The information contained in this article is general information only. It is not intended to be a recommendation, offer, advice or invitation to purchase, sell or otherwise deal in securities or other investments. Before making any decision in respect to a financial product, you should seek advice from an appropriately qualified professional. We believe that the information contained in this document is accurate. However, we are not specifically licensed to provide tax or legal advice and any information that may relate to you should be confirmed with your tax or legal adviser. 

Posted in Financial Literacy, Financial Planning, Investment Strartegies, Wealth Management | Tagged , , | Comments Off on Understanding Bonds

Understanding Managed Funds

Posted on July 17, 2024 by Arrowroad

Managed fund structures are widely used by investors. This article explains what they are, how they work, and outlines key advantages and disadvantages.

What is a Managed Fund? A managed fund is a professionally managed investment portfolio that pools the money of multiple investors. A fund manager is appointed to manage the fund, including the selection of underlying investments and maintaining client records. By pooling money with other investors, you may gain access to investments not normally available if you invested directly, or enable you to achieve a greater level of diversification. The managed fund structure allows for professional management of your money.

Units in a Managed Fund: When you invest money into a managed fund, you receive ‘units’ in that fund. The number of units you receive is calculated based on the amount of money you invest divided by the unit price on that day. For this reason, managed funds are also often called “unit trusts.” The unit price may increase or decrease in line with the value of the underlying investments.

Investment Options: The fund manager may offer a range of investment options that you can choose from. Each option has different investment goals, timeframes, and risk profiles. Some managed funds provide a diversified allocation to asset classes based on a risk level. For example:

  • A ‘balanced’ fund invests approximately half of the portfolio in growth assets (shares and property) with the remainder in more defensive assets (cash and fixed interest).
  • A ‘conservative’ fund invests predominantly in secure investments like fixed interest (bonds) and cash with a smaller proportion in growth assets.

Other funds might invest in a specific type of asset, such as Australian shares, international shares, property, or cash. Different investment styles, such as value or growth investing, may be used to manage the portfolios.

Choosing the Right Option: When investing in a managed fund, you need to choose the options best suited to your personal preferences and financial goals. Considerations include:

  • Your risk profile
  • Your investment time horizon
  • Your need for diversification across asset classes
  • Your preference for investing in a specific investment or asset class

The Product Disclosure Statement provides you with important information about the investment options to help determine their suitability for your circumstances.

Investment Returns and Taxation: The underlying assets of the managed fund produce income returns (including interest, rental return, realised capital gains, and dividends) and/or capital growth. The fund manager deducts fees and expenses from the income return, and the remainder is distributed to investors (unit holders). This income is included in the investor’s tax return and taxed at their marginal tax rate. Franking credits, if derived, are passed onto investors and can help reduce tax payable.

If units are sold, this may create a capital gain or loss depending on how unit prices have changed since investment. If a capital gain is realised on units held for more than 12 months, a 50% capital gains tax discount will apply unless the units are owned by a company.

Benefits of Managed Funds: Managed funds offer several advantages that allow you to select options that suit your specific needs and objectives, including:

  • Diversification: Provides a diversified portfolio across a range of asset classes and securities.
  • Wide Choice of Investments: Access to various asset classes and diversified portfolios.
  • Specialists: Access to specialist investments and investment styles.
  • Tailored Portfolio: The ability to choose specialist managed funds (e.g., infrastructure, emerging markets, small caps).
  • Professional Management: Managed by a team of professional investment managers responsible for investment selection, review, and monitoring, including risk management.
  • Active Performance: Potential to outperform the index through active management.
  • Low Participation Required: Requires a low level of participation and time involvement compared to direct investing.
  • Regular Investments: Allows regular investments, which can assist with a “dollar cost averaging” approach and/or a regular savings plan.
  • Tax Statements: Provides tax statements to assist with completing your tax returns.

Disadvantages and Risks of Managed Funds: Managed funds also come with several risks and disadvantages:

  • Market Risk: The performance is affected by the assets and securities invested in. Growth assets like shares and property offer higher returns but come with higher risk.
  • Limited Control: You have no control over individual investments that are bought and sold.
  • Tax Management: No control over the timing of asset sales and purchases, affecting capital gains tax outcomes.
  • Capital Gains in Distributions: Distributions may include a return of capital, which can be less tax-effective.
  • Limited Transparency: Limited transparency of the underlying portfolio and investments, often reported with a lag.
  • Higher Fees: Can have high management and administration fees and buy-sell spreads.
  • Currency Risk: Movements in international currencies can influence the value of international assets.
  • Gearing Risk: Some managed funds may borrow funds to increase potential returns, which can magnify both gains and losses.

The information contained in this article is general information only. It is not intended to be a recommendation, offer, advice or invitation to purchase, sell or otherwise deal in securities or other investments. Before making any decision in respect to a financial product, you should seek advice from an appropriately qualified professional. We believe that the information contained in this document is accurate. However, we are not specifically licensed to provide tax or legal advice and any information that may relate to you should be confirmed with your tax or legal adviser. 

Posted in Financial Literacy, Financial Planning, Investment Strartegies, Personal Finance, Wealth Management | Tagged , , | Comments Off on Understanding Managed Funds