My net worth as at 30 September decreased by another -$55,428 (-5.77%) during the month to $904,990 (AUD), due to the large losses in my geared equity investments (especially the 5% drop on the last day of the month!) and a drop in the valuations of our real estate investments and retirement account. The estimated valuation of my share of our real estate assets decreased by -$17,359 (-2.05%). The balance of my half of the mortgage increased by -$1,455 to -$366,839 as we continue to redraw some of our advance payments to cover the interest payments while DW is working part-time (until DS2 starts school in a couple of years). The recent cut in official interest rate by the RBA hasn't flowed on to a reduction in existing variable home loan interest rates. There is widespread speculation that the RBA may cut rates by another 0.5% at their next monthly meeting [since I wrote this post on 1 Oct the RBA has cut rates by 1%], but this probably won't be passed on in full by the banks due to the spike in overnight interbank cash rates due to the ongoing "credit crunch". Fortunately we have around half of our property loans at a fixed rate for the next 3-4 years, so we've avoided the full impact of increased home loan rates. But a cut in the interest rate on the variable component of our home loans would make life easier.
I've avoided any margin calls on my leveraged stock accounts so far during this bear market, but my margin utilisation is now over 90%. Continued market declines would force me to sell off some stocks and park the proceeds in a cash management account. Although I have a small amount of cash available at call, I can't reduce my margin loan balances at this time as I have fixed and prepaid the interest for this financial year.
The balance of my retirement account also decreased substantially this month, by -$8,293 (-2.81%) to $286,507, as it's now invested about 98% in the Vanguard Lifestages "High Growth" fund which is allocated mostly to domestic and international equities. I've now finished re contributing (via salary sacrifice) the $34,000 of undeducted, non-preserved contributions that I had withdrawn last year, so my ongoing salary sacrifice will start to boost my retirement account balance from now on.
The employer contributions of my salary sacrifice amounts for Feb, May and June were only processed in the last week of June, and therefore didn't appear as a deposit in our SMSF bank account until the start of the new financial year (July). I finally managed to get advice on this timing issue from the tax office (they had mislaid the private ruling application I had lodged on 30 June), and the news wasn't good. The delay in the processing of my employer's (tax-deducted) contributions means that my total "concessional" contribution for the 2007-8 financial year was well below the $50,000 cap, and the remainder will be counted this financial year (based on the date the deposits appeared in our SMSF bank account). As I've already made arrangements for close to the maximum $50K in concessional contributions to be made this financial year (SGL and salary sacrifice), I could easily exceed the "cap" if my employer processed all the contributions in a timely manner this year - resulting in an extra tax liability of 30% on the "excess" contributions! As I'm only saving around 15% in marginal tax rate via salary sacrifice this is very bad - not only am I tying up the sacrificed salary in my superannuation account for 15 years (until retirement), I could end up paying MORE tax! The possible "solutions" to this timing issue are all rather unpleasant:
1. Hope for the best, and if my employer contributions are processed on time this financial year I could end up owing a 30% tax penalty on around $8,000 of "excess" contributions = potential cost of $2,400.
2. Reduce my salary sacrifice for the remainder of 2008-9 so that the total "concessional" contributions can't exceed the $50,000 cap. This would increase my taxable income by around $8,000 and also impact family tax benefit calculations = potential cost of approx. $1,200+
3. Ask the payroll department to make sure the last 3 months worth of salary sacrifice aren't processed until the last week of June 2009, so they don't hit our SMSF bank account until next financial year. This will avoid any tax penalties, but will only defer the problem for another 12 months. I would have to continue finessing the timing of employer contributions indefinitely (until the concessional contribution cap is increased, or I decide to reduce my salary sacrifice in future). There is also the risk that despite making arrangements regarding the timing of employer contributions, they might be deposited before the end of the financial year.
At the moment I'm going with option #3, and will probably then reduce my salary sacrifice arrangements for the following financial year - changes to the way family tax benefit treats sacrificed salary (ie. will include it in "assessable" income calculations, even though it isn't part of "taxable" income) will lessen the cost of doing so in 2009-10. (Assuming the tax rules don't change before then!).
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