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Tuesday, 5 October 2021

Not being allowed to claim a deduction for my business losses in FY 2019 or 2020

I finally was notified of the ATOs decision regarding my application (made at the start of July) for 'discretion' to claim the losses made by my financial planning business in my tax returns for 2020 and 2021. I had hoped that due to Covid-19 'lock-downs' and the general economic conditions I might be allowed to claim deductions for my business expenses in those financial years even though I haven't managed to get any paying clients as yet. Unfortunately the ATO has advised that the ruling would be 'unfavourable'. The person who phoned to let me know the outcome suggested that I might withdraw my application rather than get the official 'unfavourable' response from the ATO. She wouldn't explain exactly why I might want to do that, although she mentioned something about 'not challenging the law' (IMHO applying for the commissioner's discretion is a perfectly normal administrative process, as there is obviously the possibility of discretion being applied within the law, otherwise the ATO would not have a form to apply for a ruling on this matter). It doesn't matter financially to me whether I 'withdraw' my application or get the official 'unfavourable' (ie declined) outcome in writing, so I agreed to just withdraw my application.

Upon reflection I suspect the ATO staffer preferred me withdrawing the application, as this probably means this application doesn't get reported in their KPIs regarding 'resolution time for applications' (taking from 3 July to 5 October is probably a LOT longer than these things are supposed to take - from memory the website said a decision would only take 3-4 weeks...)

This means that I can't claim a deduction for the annual fees paid to my AFSL ($13,800 pa), the membership fees for the FPA and AFA (around $1,000 pa in total), my marketing/advertising costs (around $1,000 pa), or my self-education costs (the master of Financial Planning cost around $14,000 pa) as the degree is a requirement for my financial planning business, but not for my normal full-time 'day job'. All these expenses (around $30,000 pa) will instead 'carry forward' and can only be claimed against any future net income from my financial planning business.

Hopefully with lock-downs in Sydney ending soon I can start making some 'cold calls' in my neighbourhood and possibly arrange free lunchtime seminars for workers in local business, which are common ways for financial planners to find prospective clients. I'd like to 'break even' on my business this financial year (I'll only be paying $7,000 in uni fees this FY as I will have completed the masters degree this semester), but I might not have enough clients to cover the basic expenses until next FY.

By that time I'll have accumulated a large amount of losses 'carried forward' so it may be quite a while before I have to pay any tax on revenue generated by my financial planning business. It would have been nicer to be able to claim the deductions 'up front' against my other salary income, as then I could have the funds invested and earning some income, rather than effectively being an interest-free loan to the taxman.

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Sunday, 3 October 2021

Net Worth: SEP 2021

My monthly NW estimate has been updated in NetWorthShare for the end of September. Chart is in the side-bar.

Stocks and managed fund investments decreased this month, down -$12,244 (-3.74%) to have $315,135 net equity in my geared share portfolios.

Our estimated house price for September (my half) increased by $12,790 (1.30%) to $999,651. The pages where I normally get the average sales price data for our suburb was last updated with the price data for 31 August, so the estimate might be one month behind what my NW calculations normally use. As the Sydney property market is still trending upwards, this might underestimate out house value and my overall NW slightly.

The value of my retirement savings decreased during September due to stock market weakness here and in the US, to $1,490,324 (down -$32,846 or -2.16%). I am hoping to reach (or exceed) the 'transfer balance cap' (currently $1.7m, but likely to rise to $1.8m) by the time I hit 65 years of age and can transfer the TBC amount from my accumulation SMSF account (where the tax rate is 15% on earnings and 10% on realised capital gains) to a Simple Account Based Pension (SABP) where the tax rate will be 0% on both earnings and realised capital gains. Although I plan to still be working past age 65 (either in my current full-time employment, and/or self-employed part-time as a registered Financial Adviser) and will therefore have a normal taxable income stream, I will then also have a tax-free self-funded pension income from my SMSF SABP (there are minimum withdrawal/pension rates applicable to SABP accounts.

A Simple Account Based Pension (SABP) is an income stream that you receive from your SMSF when you reach age 65 or alternatively when you are aged between preservation age and 64 and "Retired".

Age-based minimum pension payments (as a percentage of the SABP balance) apply:

Age <65    4.0%
65 - 74    5.0%
75 - 79    6.0%
80 - 84    7.0%
85 - 89    9.0%
90 - 94   11.0%
95+       14.0%

The idea behind this is that superannuation is concessionally taxed in order to provide a self-funded retirement income stream (and hence reduce demand for the Age Pension) and is not intended as a tax minimisation scheme for accumulating wealth to pass on as part of one's estate.

There were variations to these minimum rates (to 50% or 75% of the normal rates) during times of market volatility due to the GFC, pandemic etc. in FY 2008-09, 2010-11, 2011-12, 2012-13, 2019-20, and 2021-22. The idea being that reduced withdrawal rates would allow self-funded pensioners to preserve some of the SABP during a market down-turn when they may be earning other income from employment.

The value of my precious metals (gold and silver proof coin collection) decreased slightly during September, to $24,151 (down -$336 or -1.37%). My unallocated precious metal holdings with the Perth Mint online depository are included in the geared share portfolio net value.

Overall, my estimated NW decreased slightly to $3,137,043 by the end of September - down by -$32,363 (-1.02%).

Although I'm not currently tracking any change in valuation of my 'lake house' or the off-the-plan apartment that is currently being constructed, the strong real estate market in Sydney and NSW should have boosted the value of these properties above their 'cost base' (so the $1,377,952 value listed under 'Other Real Estate' is probably a considerable understatement). Once the investment apartment construction is complete in early 2023 (and I have mortgage payments, expenses and rental income impacting my cash flow) I will start tracking changes in the estimated value of the apartment compared to the initial valuation I will get when applying for the mortgage (hopefully the mooted changes to lending ratios don't prevent me from getting the required mortgage for settlement of the property). I won't track changes in the valuation of the 'lake house' as I intend to hold onto this indefinitely and leave it to my sons as part of my estate.

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Friday, 1 October 2021

End of SEP 2021 "12% solution" portfolio changes

For the end of September the emailed trading signal is to invest 60% in QQQ and 40% in TLT. As this is the same allocation as last month, I don't need to do any trades this month, which will help reduce trading costs.

My current IG trading account balance is A$12,613.65. In addition to the "12% solution" holdings I have A$489.00 invested in the ASIA (Betashares Asia Technology Tigers) ETF which results in my IG account not tracking perfectly the "12% solution" benchmark.

According to the monthly newsletter, the 2020 performance for this model was +40.6% and for 2021 YTD performance is now +15.1%. My YTD performance is 14.48%.

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Tuesday, 28 September 2021

Australia getting back to 'Covid normal'

After keeping close to 'zero Covid' for the first half of 2021, and therefore not worrying too much about the slow rollout of Covid vaccines compared to some other parts of the developed world (eg. UK, Europe, USA and Canada), the two most populous states (NSW and VIC) suffered a rapid spike in Covid-19 cases in the past couple of months due to the more contagious 'delta' variant getting loose in the general population.

Fortunately relatively strict 'lock-down' provisions have managed to keep the daily infection numbers (and hence the rate of hospitalisations and deaths) reasonably low while the vaccination roll-out ramped up with a new sense of urgency (and some extra supplies of Pfizer vaccine for the younger cohorts where side-effects from AZ vaccine were more likely to outweigh the benefit of vaccination - at least until the chance of catching Covid increased dramatically).

At the start of the latest outbreak there was a media outcry regarding the slow pace of vaccination in Australia compared to European countries and US states. For example on 'Planet America' a few weeks ago they were comparing Australian vaccination rates to those in the US, and our most vaccinated states (NSW, VIC  and ACT) would have been close to the very bottom of the ranking of US states.

But there has been a remarkable decrease in 'vaccine hesitancy' in NSW and VIC (and the ACT) as the delta variant saw daily cases climb into the hundreds (in NSW and VIC) and a daily death toll which included some younger age groups.

We have now reached the stage that NSW and VIC have a greater percentage of their adult population having had their first vaccination that any of the US states (85.7% 'first dose' in NSW, 77.9% 'first dose' in Victoria, compared with 77.5% having at least one dose in the most vaccinated US state, Vermont), and even in terms of being fully vaccinated NSW is already on par with the 12th most fully vaccinated US States (60.45% in NSW, 60.40% in Washington State). and Victoria is on par with the 40th most fully vaccinated US State (47.72% in Victoria, 47.60% in Missouri).

Within a couple of weeks both NSW and Victoria will have a greater percentage of their adult population fully vaccinated than any state in the US, and current 'lock-down' restrictions will be eased substantially by mid-October, and back to 'Covid normal' by mid-November.

Based on current rates of vaccination, both Sydney and Melbourne (and Canberra) could see 90%+ of the adult population fully vaccinated by Christmas. It seems unlikely that any state in the US will end up with much more than 80% fully vaccinated - probably due to a combination of cost (vaccination is completely free in Australia) and the natural 'vaccination hesitancy' rates being amplified by politically inspired 'anti-vaxxer' movements being more prevalent in the US than in Australia.

While there have been a few snafus in Australia's handling of the pandemic (such as the early outbreaks in aged care facilities and cruise ships, and the latter delta variant outbreaks that managed to spread from quarantined international travelers into the general population), and some false economy regarding initial vaccine order quantities (in hind-sight, ordering enough of every prospective vaccine for the entire Australian population and then donating the surplus as foreign aid would have been a lot more cost effective than ordering smaller quantities of several vaccine offerings spread over a longer time frame, given the huge economic cost of protracted 'lock-downs') our handling of the pandemic overall seems to have been reasonably effective (probably made a lot easier being an island continent). The ultimate final per capita death toll from Covid-19 in Australia will probably end up being one of the lowest in any of the OECD countries.

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