Friday, 5 July 2019

Paying less tax under the Liberals

Well, the tax package the NLP government took to the last election has now been passed by both houses, so will become legislation. My local MP sent me a link to this handy tax relief estimator. My actual taxable income is hard to know in advance, as it will depend on how large my tax deductions (interest paid on my margin loans, costs associated with my Ubereats casual work, and my self-education and business expenses relating to starting up my financial planning business) turn out to be, and how much extra income I get from dividends, and how much (if any) income I earn from my business and casual work. And any capital gains (or losses) made on any shares I sell during a particular financial year...

Based on my raw (before any deductions or other income) annual salary, plus bonus, of around $125,000, my tax bill would drop by only $165 (to $36,217 ie. a reduction of only 0.45% in tax) during 2018-19 to 2021-22 FY. The tax cuts for 2022-23 and 2023-24 would increase to $2,565 (a 7.05% reduction in tax), and (assuming Labor doesn't rescind the latter tax cuts) the final stage from 2024-25 onwards would see the tax on $125,000 of taxable income drop by $4,790 (13.16%).

However, my taxable income is usually a lot less than this raw figure, so the initial tax savings will be proportionately larger in the next couple of years. If my taxable income was $90,000 the initial tax rate changes would save me $1,215 in tax (a reduction in tax paid of 5.3%), which is equivalent to a fairly hefty pay rise.

And then, if my business becomes profitable in a few years time, the latter tax cuts that benefit higher income levels more will be just getting phased in. So, if my taxable income reached $200,000 by 2024-25 the tax saving would be worth $11,640 (a reduction of 17.3% in the amount of tax due).

The prospect of significant reductions in income tax for higher income earners from 2022 (and even more from 2024) means that it will be a good tax strategy to realize any capital losses in the next couple of years, and postpone selling any assets that will realize significant capital gains until the final stage of tax cuts has been implemented. Assuming it all goes ahead as planned...

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Thursday, 4 July 2019

Invested in 'start up' company Adviser Ratings via crowd funding

Last time I invested in a company pre-listing was a US ISP start-up 'Global Entrepreneurs Network' (GEN) last century. Despite being a dot-com company prior to the dot-com boom-bust in the late 1990s, that company managed to run out of money and go bust (actually it appears it was acquired by SAGE, but the original public investors didn't end up with any equity) before it reached IPO/listing stage.

It was a bit disappointing (especially as I could have invested in listed companies such as Microsoft or Apple instead - and could have made a lot of money) but not unexpected with those sort of high risk 'blue sky' investments. On the other hand, if a pre-IPO investment works out, you can potentially make a considerable profit.

After twenty years I've finally decided to risk another small investment in a 'start up' company - this time I've invested $4,215 via crowdfunding to 'invest' (aka speculate) in buying150 shares in the new financial adviser rating company called 'Adviser Ratings' (not as imaginative a company name as Alphabet, but at least its truth-in-labelling). There is a considerable demand for reliable financial advice in Australia (and the UK and US), and considerable difficulty for consumers in knowing which advisers are good and which aren't (for example, some of the shonkiest advisers exposed during the Hayne RC had high profiles, and appeared to be highly regarded 'experts'). So a 'trip adviser' style consumer rating system for financial advisers would seem to have considerable potential.

Also, being a software based company with (apparently) some revenue streams already (one of the big risks is whether or not these revenues do turn out to be 'sticky' and ongoing as expected), and the  potential to replicate its business model in the UK and possibly the US (although I've no idea what existing/potential competitors might be doing a similar thing in those markets) it could scale up at minimal cost, and grow revenue. Whether this actually happens or the shares end up worthless is the risk you take when making such 'blue sky' investments.

Anyhow, its an interesting investment opportunity, and fits in with knowledge of the financial advice industry (one of the old cliches of share investing is to pick companies that produce products you know about and consume yourself - whether it is a winning strategy is dubious - just think of all the people that used VHS tapes in the 80s!). And if the company never 'lists' and the shares end up worthless I can afford to loose the $4,215 (I lost a lot more when I invested in Agribusinesses Timbercorp and Rewards!). If anyone is interested in investing, you can use this link (which will utilize my referral code, and I'd end up getting 30% of the 6% fee that birchal charges for the crowdfunding). The crowdingfund share 'float' for Adviser Ratings has already passed its minimum funding target (raising $350K) so it looks like this tranche of shares will be issued.

NOTE: This is NOT a recommendation to invest in this company - do you own research and make up your own mind!

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Wednesday, 3 July 2019

MFinPlan progress

I was relieved that I managed to end up getting a Credit grade for last semester's subject 'Commercial Law' with a mark of 66%. As I had only gotten marks just over 65% for the assessment tasks during term, I had gone into the exam expecting to either just Pass the course or maybe get a Credit. Law was certainly not one of my favourite subjects! I've now completed 1/4 of the Masters degree in Financial Planning, and will be nearly half-way through by the end of the year.

My previous two subject results had been a Distinction and a High Distinction, so I'm just on track for the annual "Dean's Letter" this year (which requires a Distinction average and taking at least four subjects) and to remain on track to make the cut-off for consideration for a 'with Distinction' degree (must have a Distinction average overall i.e. GPA >=6.0) and to a have any shot at getting an academic medal (to get that I'd have to end up in the 'top 2%' of the graduating cohort, which would probably require getting mostly HDs from here on).

This semester I'm doing the subject 'Investment Planning', which should be a lot more enjoyable, although it seems to cover a lot of stuff that I'm already familiar with:
Module 1 - Investment environment
Module 2 - Risk and return
Module 3 - Investing in shares
Module 4 - Alternative investment
Module 5 - Investing in fixed income securities
Module 6 - Investment administration
Module 7 - The investment planning model and client profile
Module 8 - Investment objectives and returns
Module 9 - Management of risk
Module 10  - Investment strategy
Module 11 - Investment selection
Module 12 - Portfolio construction and management

This semester I need to make sure I also finish off the two 'specialist' courses (Margin Lending and SMSFs) that I'm enrolled in at the International Institute of Technology (I'm nearly finished, aside from the 'role play' video submissions and the final assessment quizes), and I also need to try to get a couple of the modules completed towards the Advanced Diploma in Financial Planning that I'm also enrolled in.

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Monday, 1 July 2019

Net Worth: June 2019

The positive performance of the Australian and global share markets during June resulted in my geared share portfolio gaining $22,317 (10.34%) and my superannuation savings rising by $40,058 (3.88%). I don't have new sales data for calculating our house price estimate this month, but the overall Sydney property market data showed practically no change in average prices during June, suggesting that the market has 'bottomed out' in response to the RBA lowering interest rates (which flowed on to home mortgage interest rates) and the election result ruling out the proposed changes to negative gearing that had been Labor policy. While most pundits don't expect a strong rebound in house prices during the remainder of 2019, I don't expect out home price estimate to be a major drag on my NW during the financial year (and may even have modest gains during 2020).

My NW estimate $2,336,288 rose $62,606 (2.75%) during June and has recovered to be within $2,500 of my previous all-time-high (in August 2018). While dropping interest rates suggest that the economy is weak (a negative for the prospects of the stock market), on the other hand they make dividends more attractive relative to bond yields, which may support stock prices. Hopefully the tax cut legislation will be passed this week, which should provide some economic stimulus during the latter part of 2019, and should help bolster consumer sentiment despite the ongoing lack of any significant real wage growth.

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Monday, 24 June 2019

FASEA exam done and dusted - hopefully I passed

I did the FASEA Financial Adviser exam on Sunday (I didn't want to take a day off work). I can't say anything detailed about the contents of the exam as that would be 'misconduct' (we were basically sworn to secrecy). The exam was 3-1/4 hours long, but it was possible to get the 70Qs done within the time limit (I actually finished about 12 mins early and decided to leave before the final 10 min 'lock in' period), so there wasn't really much time pressure. Most of the questions were related to 1 page 'case study' descriptions, very similar to the practice exam Qs provided by FASEA. A few other Qs were just a multiple choice of table of T/F values to fill in relating to one key definition or series of statements. The short answer questions were OK, but it was sometimes hard to work out exactly which two key points they were expecting to be included in the response. The exam format was all described in the instructions provided to candidates when you registered for the exam, so nothing 'secret' about that.

Overall I *think* I passed (requires a minimum of 65%) the exam, but if I didn't then I will need to do a LOT more reading before sitting the exam again - the bits I was uncertain about were either things I haven't done yet for my initial registration (eg. taxation advice) or were related to how the AFSL compliance team would handle breaches by one of their authorised reps (as a rep I'm more concerned with knowing what I need to do to be compliant with the rules, not what the actions/penalties would apply when the rules are breached). This seemed more appropriate to AFLS management or compliance staff, not particularly relevant to 'front line' financial planners.

The fact that the exam was 'open book' in terms of having access to pdfs of the relevant Acts was really quite unhelpful - if you didn't know the answer to a particular question, there was no way you'd have enough time to review the relevant Act to find the answer. The few times I tried looking up a relevant key phrase to simply double check on an answer I had no luck finding the relevant passage out of the thousands of pages of legislation! If you knew exactly which section of an Act to look up, you'd probably already know the answer!

Anyhow, fingers crossed that I passed the exam, as its not something that I want to have to do again (or pay another $500+ for the privilege!). Time to get on studying for my next Masters degree subject (investment analysis), and finishing off the couple of 'specialist' modules (SMSFs and Margin Lending) that I've almost completed. Then I need to get stuck into doing the Advanced DFP course I enrolled in last December (and haven't started yet)...

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Friday, 21 June 2019

SMH had a silly article about to earn $1m and pay no income tax

Apparently the SMH sub-editors have no qualms about using click-bait headlines such as "How a millionaire pays no income tax".

The article has some interesting facts about typical amounts deducted, drawn from ATO data on 2016/17 tax returns. But the main lead of the article is about the mythical 'Tony' who has a $1m income but pays no income tax. It turns out this hypothetical example is based on a) him making a $50K deductible contribution into super (of course these days the amount has reduced to $25K), and also making a whopping $850K charitable donation.

I suspect that most readers lured by the heading weren't expecting an article about how to pay no tax by giving all your earnings away as a charitable donation! ;)

Of more interest (but unexplained in the article) was the factino that the average amount claimed by those earning more than $1m income on 'managing tax affairs' was $607,201. It would be interesting to see if that much money was actually being spent on an arms-length basis.

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Wednesday, 19 June 2019

How much do Australian Financial Planners make?

From ATO data for 2016/17 available via a SMH article the following breakdown of 'Financial Planner' taxable income by tax bracket:

2.69% earned up to $18,200 (537 people) - average income: $13,785
7.27% earned in range $18,201 - $37,000 (1,453 people) - average income: $32,320
38.91% earned in range $37,001 - $87,000 (7,775 people) - average income: $68,848
35.55% earned in range $87,001 - $180,000 (7,102) people) - average income: $130,107
15.58% earned over $180,000 (3,113 people) - average income: $409,680

Overall, about half the 'financial planner' taxpayers had a taxable income under $87,000, and roughly 15% had a taxable income above $180,000.

Average full-time taxable income for this job category is $132,694

And the total number of taxpayers with title 'Financial Planner' was 19,980 - this probably is lower than than the actual number of financial planners, as some registered planners (like me) may have multiple jobs and the job title reported is for their main source of income.

Taxable Income      # people    % of FP    % /w PHC    % w/ NGP    % w/ HD    avg HD
$0 - $18,200          537        2.69%      74%         21%         22%       $25,184
$18,201 - $37,000   1,453        7.27%      72%         13%         27%       $24,449
$37,001 - $87,000   7,775       38.91%      79%         17%         29%       $25,568
$87,001 - $180,000  7,102       35.55%      94%         18%         11%       $15,525
over $180,000       3,113       15.58%      99%         20%          3%       $13,735

PHC = private health cover
NGP = negatively geared property
HD = HECS debt

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Tuesday, 4 June 2019

The impact of the FASEA changes on accountant's 'SMSF advice'

One of the quirks of the Australian financial advice sector was that accountants had been able to offer financial advice limited to SMSFs in isolation. This made a sort of sense, as accounting clients would often seek guidance from their existing accountants when thinking about setting up an SMSF. And, after all, accountants had much higher educational and professional standards than the typical 'financial adviser', so they felt they were perfectly capable of giving advice with regards to SMSFs.

However, with the move towards 'Best Interests Duty' meaning that financial advice has to take into account the entire situation of a client, it no longer makes sense (or is appropriate) to give advice on how to setup a SMSF without taking into account the client's overall financial situation, goals, and other financial needs such as insurance, investing outside of superannuation, and the actual  investment allocations once the SMSF is setup.

Before 30 June 2016, accountants were permitted to provide advice on setting up and winding up an SMSF (and other product-related advice) under the so-called ‘accountants’ exemption’, which has now been repealed. Therefore, if accountants want to continue to offer 'advice' regarding SMSF they need to get registered as a financial adviser, and meet the educational requirements - including the new FASEA exam.


You would think that if the accountants that had previously been offering 'financial advice' with regards to SMSFs had been acting in the client's "best interests" by taking into account their holistic financial situation and needs when advising about establishing an SMSF, then passing the FASEA exam would not be particularly challenging. But apparently not so - a recent poll by SMSFAdviser indicated that only 25% of respondents planned to 'meet the new requirements and continue to give advice' (some of the respondents would have been registered financial planners, so this probably overstates the percentage of accountants that will 'upgrade' in order to be able to continue offer SMSF advice). While 23.3% of respondents said they would be unaffected by the new requirements (i.e. they don't provide any financial advice in conjunction with their accounting services), a whopping 29.7% intend to stop giving advice, and a further 22% were planning to retire by 2024 or leave the industry.

Overall, it looks like the changes will result in a much smaller cohort of accountants offering financial advice to their clients, which suggests there may be an increase in referrals of accounting clients to financial planners when they are in need of personal financial advice. Those accountants that do choose to 'upgrade' in order to be able to offer financial advice will be able to offer a more holistic service to their clients. Whether or not it makes economic sense is another matter... there is a lot of admin required when providing financial advice (eg. product comparisons and a written SOA) that isn't involved when 'only' providing accounting services.

On the other had, there has recently been a significant flow of clients away from SMSFs and into low-cost industry superannuation funds - which might indicate that some clients of accountants had been placed into SMSFs when it wasn't really appropriate for them. So perhaps the repeal of the 'accountants' exemption' was long overdue.

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Monday, 3 June 2019

Net Worth: May 2019

"Sell in May and go away" - one of the old stock market sayings that hadn't been reliable in recent years, but certainly would have been worth heeding towards the end of May 2019. My overall net worth declined by $39,729 (-1.72%) during May, which isn't much fun considering it is around half my annual after-tax salary, or the equivalent of my total expected start-up/running costs for my financial planning business for two years! The decline in the stock markets saw my geared share portfolio decline by -$8,310 (-3.71%) and my retirement savings decline by -$18,695 (-1.78%). While the rate of decline in the Sydney housing market appears to be slowing, our estimated house price was down by -$12,956 (-1.75%), the size of the drop being partly due to no sales data being available last month (so this was essentially two months of price change in one hit). The election result and the likely cut in interest rates by the RBA will hopefully put a floor under Sydney house prices.

The ongoing trade war between the US-China is expanding to include Europe and Mexico (Trump seems to think Tariffs are a multi-purpose blunt instrument to beat everyone into submission) is starting to look like it could bring an end to the US economic growth cycle just as the global economy is quite anemic. So in the current situation it doesn't look like the rest of 2019 is going to be particularly kind to my net worth situation.

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Its fashionable to denigrate the rich

I recently posted about the criticism that had been leveled at some French billionaires when they gave generously to the Notre Dame restoration campaign. It seems that rather than being seen as altruistic, charitable giving by 'the rich' is nowadays often derided as being either a) pretentious ("see how much I can afford to give"), b) meaningless ("oh well, they can afford it, can't they?"), or c) evidence of the 1% problem ("no-one should have that much money!").

An article in today's SMH showed a similar vein of disdain when reporting that a charity fund-raiser had 'only' raised $3m for a worthy cause: "But before we send out the cheer squad, let's be real - that's chump change when the room is collectively worth around $25 billion."

Now, while $3m is only 0.012% of the net worth of the participants, that isn't actually too small an amount for a one-off fund-raising event. Just consider, an 'average' Sydney home-owner that doesn't have too large a mortgage will have a net worth of at least $1m. So this sort of giving is equivalent to an 'average Joe' making a $120 donation when the Red Cross or Salvos come knocking at their door, or spending $120 at a silent auction at a school Fete. This wouldn't be a huge amount, but it is still well north of the usual $10 or $20 amount (or less) people often give to charity at one time (indeed, the median charitable donations annual total for Australian taxpayers is only $200 or so). So I'm not sure that describing this quanta (0.012% of NW) of giving as 'chump change' would be warranted when talking about the average person. So why deride similar levels of giving by 'the rich'?

Criticizing people for philanthropy doesn't seem either nice nor productive - it is more likely to make them not bother to turn up at fund-raisers than to make them donate more. In any case, this particular article seemed to be motivated by the reporter not being invited to attend the event.

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