May 11, 2022
Grow your nest egg

Your September guide to wealth creation

IN THIS ISSUE: Why too many super contributions could mean extra tax for you - Explaining the income and the assets tests - Why paying tax now is better than incurring expenses later on - Protecting your finances from the unexpected.

Why Too Many Super Contributions Could Mean Extra Tax For You

There are limits on how much you are able to contribute to your super fund each financial year, without having to pay extra tax. These limits are known as 'contribution caps'.

How much you can contribute to your super fund, and whether or not your fund is allowed to accept your contribution may also depend on your age and total overall super balance.

Contribution caps apply to all super funds . If you have more than one super fund, all of your contributions are added up and count towards your caps.

If you exceed these caps, you may need to pay extra tax. You can avoid this by becoming familiar with what your own contribution caps are, and what may apply to you.

 Understanding The Types Of Contributions

There are two types of contributions you (or others) can make into your super fund:

  • Concessional - These contributions come from income that has not yet been taxed. They are also called 'before tax' contributions . Once the concessional contributions are in your super fund, they are taxed at a rate of 15%. You may need to pay extra tax if you exceed the concessional contributions cap.
  • Non-concessional - These contributions come from income that has already been taxed. They are also called 'after tax' contributions. These contributions are not taxed once they are received by your super fund. However, you may need to pay tax on them if you exceed your non­ concessional contributions cap.

Explaining The Income and Assets Tests

Since the time of Paul Keating, our governments have been focused on three foundational pillars for retirement savings in Australia.

These pillars are:

  1. Compulsory Superannuation,
  2. Voluntary Superannuation,and where those are not enough,
  3. The Age Pension

The Age Pension has been around since the first decade of the 1900s and has (for the most part, since its implementation) kicked in from age 65 for a male and age 60 for a female. The age for a female to access the pension increased to age 65 quite some time ago, and more recently, the government started moving the age to access the aged pension from 65 to 67 for everyone.

The pension age will be gradually increased from 65 to 67 years as set out in the table below.

From July 2021 therefore, you will need to be 66 and a half years old to be eligible to access the Age Pension. In two years, that age will increase to 67.

The Age Pension is designed as a backup for those who do not have the resources to fund their own retirement. The way that the government assesses whether or not you are in need of the age pension is through the Income Test and the Assets Test.

The Income Test looks at how much income you earn, and if ii is too much then your eligibility for accessing the Age Pension is reduced. As you earn more, it reduces to the point where you have no pension entitlement at all.

As an example, a married couple of Age Pension age who own their own home can earn up to $320 per fortnight and still receive the full Age Pension. If they were to earn over that $320 however, their combined pension would reduce by 50 cents for each dollar earned over the $320, as per the standard rules.

If you were single, you could earn up to $180 per fortnight without ramifications to your Age Pension, but for every dollar earned over that amount, incur a reduction of 50 cents per dollar.

The Assets Test looks at how much you are in possession of in certain assets. If that amount is over a certain threshold, it starts to reduce your access to the pension until the amount is zero. Using the same example as previously mentioned, a couple who own their own home can have up to $405,000 in assets before it starts to reduce their Age Pension.

When applying both the income and the assets tests, you use the result that gives you the lowest pension. This is why it is important to always plan ahead if you think you will need to be accessing the Age Pension, which is where we can come in to help.

Hiring Someone To Help Manage Your Money

There are some jobs that are DIY-able, and some that require the slightly more skilled touch of a professional. In many cases, investing your money isn't rocket science, and can be done by you.

However, there are some areas where DIY isn't a feasible option when it comes to your money, and might require a little bit of extra help (particularly when it comes to more technical jobs like high-risk investing, tax or superannuation). The stakes in those instances can be much higher. A mistake you make through DIY investing can cost you huge amounts of money.

If you seek the advice of a professional, you can go from an adequate amount of money in your investment to a potentially princely sum (with the right person managing your finances).

But how can you choose the right person for your situation? In many cases, it will depend on what you are looking to get out of it. There are many different ways in which a professional can assist you in looking after your finances.

 Accountants can assist you in tax planning, filing your tax returns correctly, give advice on investing, help set up trusts and inheritances or potentially assist you with your superannuation funds. There are numerous ways in which an accountant can help you as a business or as an individual - you only need to ask.

A Financial Planner can give you big­ picture advice about your finances, assist you in resolving financial issues and can help you to create a plan that allows you to pay off debt, save or invest.

DIYing your finance management might be monetarily more acceptable to you when it comes to saving. But hiring a professional can be the difference between generating wealth , and simply managing it. Come speak with us if you'd like to learn more about options for your finances.

Why Paying Tax Now Is Better Than Incurring Expenses Later

While the inevitable amount of tax that must be paid by you after filing a tax return can seem like a financial drain to your bank account, paying it by the due date is a better outcome than paying it later. There are outcomes that can occur if you cannot pay on time.

If you do not pay the amount that is owed on time , the Tax Office may:

  • Charge interest on the unpaid amounts of tax that you still owe
  • Contact you soon after the due date
  • Use any future refunds or credits to repay the amounts that you still owe.

To ensure that you avoid incurring additional expenses on top of the tax that you already owe, lodge your activity statements and tax returns on time (even if you can't pay by the due date). This should avoid penalties for late lodgements, which could add to your debt.

Speak with us (your accountant) if there is something preventing you from paying your tax on time (or simply to manage how you can pay the tax owed). We can assist you in managing your tax debt, ensuring that your lodgements are paid on time or simply by approaching the ATO on your behalf.

Protecting Your Finances From The Unexpected

The financial climate of the future is an uncertain and unchanging one that you need to be prepared to face. With the impact of COVID-19 being felt by many businesses and individuals, you need to be ready for the worst-case scenario.

Ensuring that you are financially in a better position to face this uncertainty can be done by you, and potentially with assistance from the government.

A handy tip for ensuring that you are prepared for the worst is if you are in possession of an emergency savings account - by depositing a regular sum of money into a high-interest savings account , you can prepare yourself for any eventuality, without depleting your actual savings.

You could implement the 50/20/30 budget rule in this instance, whereby 50% of what you earn is spent on needs (ie. rent, bills, groceries, car/transport),30% to be spent on wants (ie. clothes, games, etc) and 20% to be saved or put towards debt repayment. In this case, you could dedicate some of the 20% towards your "for emergencies" fund to assist you with unexpected expenses.

If you find yourself in a situation where your emergency funds just won't stretch to cover the amount you require, you can also apply for a " payday loan" , but this should be done with caution. Often they are riddled with terms and conditions that may make it difficult to pay back, and you should investigate and compare payday loans to find what might be suitable for you. You may also need to consider whether it is financially feasible for you to pay back the amount you require.

If you have for example been unable to or restricted from working during the current COVID-19 situation, you may be eligible for government assistance. The Australian government is currently providing individuals and businesses in affected areas with COVID-19 related relief support and assistance. If you are currently experiencing financial hardship as a result of the impact of COVID-19, there are a number of ways in which you can seek help.These could include:

  • The COVID-19 Disaster Relief Payment (currently available for eligible individuals in NSW, Victoria & South Australia) - an emergency lump sum payment to help workers unable to earn an income due to a COVID-19 state public health order. This may involve a lockdown, hotspot or movement restrictions.
  • The Pandemic Leave Disaster Payment (currently available across all states and territories for individuals) - support for individuals who are unable to leave their home for work as a result of self-isolating, currently have COVID-19, or who are caring for someone with COVID-19.
  • State governments are also providing financial assistance to businesses who are experiencing a decline in turnover and are severely being impacted as a result of the current situation, with various relief packages and grants available to small, medium and large businesses.

For more information and eligibility requirements Services Australia provides a comprehensive breakdown of conditions, eligibility and outcomes for the financial assistance.

If you are looking for more money management tips, you can speak with us for advice on your budget finances and tax planning in the future. It's never too early to start.

Should You Be In An Employee Share Scheme?

Known as an employee share purchase plan, share options or equity scheme, employee share schemes are use to attract, retain and motivate employees. Schemes can vary depending on the company (and the terms of the scheme can differ depending on the company) so it is important to consider carefully what the pros and cons are before becoming involved in an employee share scheme.

Employee share schemes are designed so that you can receive or buy shares in the company that you work for. Often those shares are available to you at a discounted rate from what is currently the market price. Employee share schemes are a great way to reward or remunerate employees for their work. They also incentivise employees to stay with your company for longer and share in its success

There are different ways of paying for shares, such as:

  • salary sacrifice 
  • over a set period of time (such as for 6 months)
  • dividends received on shares
  • a loan from your employer, or as a full payment upfront.

You may be able to receive shares as a performance bonus or as remuneration instead of a higher salary. In a large company, this may come as "ordinary shares" which give an equity investment, but in a smaller company, you may only receive dividends. In this instance, a dividend is the distribution of some of a company's earnings to a class of its shareholders, as determined by the company's board of directors.

Each share scheme is different, so look at the terms and conditions of the offer. Check:

  • When it is that you can buy or sell the shares
  • If you will receive dividend payments
  • What happens to your shares if you leave the company, and
  • What the tax benefits are.

If you are a part of a self-managed super fund, there is a whole list of conditions that may prevent you from transferring any shares that you possess into the SMSF. You may need to speak with your provider or with us to determine whether or not you are able to do so.

When it comes to employee share schemes, the benefits and disadvantages of being a part of one will depend on the company that you are employed by. An employee of a company whose shares are performing well may find that being involved in an employee share scheme might be better for them overall than an employee in a company with lower-performing shares.

What Makes Discretionary Trusts Popular?

In 2016, there were a reported 850,000 trusts in Australia with assets totalling more than $3 trillion. It's predicted that by 2022, there could be more than a million trusts in play. So what makes a discretionary trust so popular? As a structuring and investment vehicle in Australia, discretionary trusts are extremely popular, and for good reason.

Those who choose to set up this type of trust are able to allow those who manage the trust to choose who can benefit from the trust and how much money they can receive.

This means that the amount of money that a beneficiary receives under a discretionary trust is not a fixed amount - the trustee determines the amount received from the trust every year. 

A discretionary trust can last for up to 80 years (and in South Australia, they can last indefinitely). It allows a person to hold onto their assets without being the legal owner of the property (providing them with asset protection), while also granting beneficiaries an income stream that can be useful for dependent beneficiaries or those unable to manage their assets.

No two discretionary or family trusts are the same. After all, every business and every family is different. Trusts offer significant asset protection and tax management options, and these benefits make them an attractive business structure .

If you're looking for a means through which to distribute your assets or wealth , a discretionary trust may be the right choice for you. Come speak with us to discover if it's our recommendation, and for our advice and help in setting one up.

Investing In Property? Here's What You Should Look Out For

With so many investment options and opportunities that can seem complicated and jargon-laden around, investing in a house or property can seem like a simple and less at-risk choice. It is however important to understand how investing in property works to decide if it is the right investment option for you. There can be many hidden pitfalls and traps, so it's important to have an understanding of what might be in store. 

Investing in property may seem like less of a risk than other investment options, as there is less likelihood of the volatility associated with shares or other investments. However, your investment property's value can be affected by a number of factors, including market conditions, land development and the perceived long-term value of the property. This can also determine how much rental income that you may receive from the property (if you choose to rent it), the capital growth that you might gain (if you choose to sell) and how interest rates for the property might fluctuate.

Unlike other investment options, an investment property is a physical asset. Shares, dividends and other less tangible assets, while more flexible, do not quite have the same presence. However, you won't be able to simply sell a part of the house if you encounter financial difficulties like you can with some stocks or shares, and if the house remains vacant, it can end up costing you in the meanwhile.

It is also important to ensure that you are still maintaining a diversified portfolio with regard to your investments. Don't put all of your eggs into one basket. If you're going to invest, reduce your risk by spreading it across multiple markets.

In some instances, you may be able to use your SMSF to assist in purchasing your investment property. You may need to speak with your provider to find out if it is possible for you to do so.

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Financial Advisors Bendigo Country Road at Dawn Lead Advisory Group
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