Saturday 31 July 2021

End of JUL 2021 "12% solution" portfolio changes

For the end of July 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$13,022.59. In addition to the "12% solution" holdings I have A$507.50 invested in the ASIA (Betashares Asia Technology Tigers) ETF. The ASIA ETF has been in a downtrend since Feb, which has resulted in my IG account underperforming relative to 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 +17.8%. My YTD performance is 18.19%. The performance difference is a result of trade timing differences, buy/sell spread, trading costs, not having an exact 60:40 asset allocation (due to rounding down to the nearest tradeable quantity) and the fact the my '12% solution' portfolio is on my IG trading account which also includes some ASIA (Betashares Asia Technology Tigers ETF). There may also be some AUD/USD currency movements affecting my result (reported in AUD terms) compared to the USD returns reported for the '12% solution" model portfolio each month.

So far the "12% solution" trading signals seem to result in market timing that might actually add to long term performance (compared to a simple buy-and-hold with annual rebalancing strategy). For anyone that wanted to invest a significant portion of their financial investments to this strategy I'd suggest tweaking the 60:40 "risk-on":"hedge" ratio to match your personal risk tolerance (eg. a more risk averse investor might want to adjust it to 50:50, while a more risk tolerant investor may move to  70:30 allocation). Once concern is that this is a US-centric model portfolio, so it may underperform in periods when US equities underperform non-US global stock market returns.

Personally I only have 0.42% of my NW invested in my IG trading account used to follow this strategy, so it's performance won't have a material impact on my overall wealth.

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Monday 26 July 2021

Perth Mint Online will be offline next weekend

My monthly automatic transfer of funds into my PMO cash account was processed on the 15th, and my savings plan standing order to buy gold and silver at the start of each month would normally be filled at close of business on the first business day of the month (2nd August for the coming transaction). If there is an outage (unscheduled or for planner maintenance) the T&Cs state that "Any order/orders will be filled by us at the first available opportunity and you accept full responsibility for any losses or damage".

There is a scheduled maintenance to The Perth Mint Depository Online (DOL) platform and Perth Mint websites that will run from 5.00pm AWST (GMT+8) Friday 30 July until 8am Monday 2 August 2021. So my automatic investment *should* happen as normal on Monday afternoon. I'm not too fussed if the transaction does get delayed, as the price could move either up or down, so on average any delay in processing my regular bullion purchases should not make any significant difference.

They'll probably be some conspiracy theorists that decide this is all part of some grand plot to limit sales of physical bullion and/or cover up a shortage of physical metal and/or manipulate the price. ;)

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Thursday 15 July 2021

Checking on adviser commissions I have paid

As a consumer I was only vaguely aware of the extent of the 'commissions' being paid to 'advisers' by financial products I had invested in. I knew they existed, and because I bothered to read the 'fine print' of product PDSs, I also knew that the commission was paid to 'your financial adviser' (if you had one), but that if you didn't have an adviser (for example, if you applied directly to the product manufacturer) they didn't rebate the commissions, but simply kept the extra profit margin.

Eventually, back in 2013, I found out about a new 'commission rebate service' that would at least rebate to me 50% of the trailing/on-going commissions that product providers normally paid to financial advisers (or kept for themselves if there was no adviser 'attached' to an account). Getting half of the fees rebated was better than nothing! A few years later the rebate service introduced a flat $75 'account admin fee', which reduced the rebate to a bit less than half, but it was still good to get a large chunk of the 'trailing commissions' on my financial investment products and insurance policies rebated. Over the years the commissions that were built into the financial products (margin loans, managed funds and personal insurance products) were:

Year       commissions       admin fee      rebated*
2013       $1,197.66           $      0.00      $   598.33
2014       $   937.76           $      0.00      $   468.88
2015       $1,027.10           $      0.00      $   513.55
2016       $1,226.25           $    75.00      $   575.63
2017       $1,223.25           $    75.00      $   574.13
2018       $1,428.08           $    75.00      $   676.54
2019       $1,530.21           $    75.00      $   727.61
2020       $1,605.17           $    75.00      $   765.09
2021       $   309.11           $    75.00      $   117.06

* addendum - in the original version of this post I had accidentally put $596.33 as the amount rebated every year, rather than the actually figures.

Over nine years I had paid $10,484.59 in commissions, and had been rebated $5,106.82. Other product customers that had applied directly (without an adviser) or who had an adviser that didn't rebate part of the commissions, would have been $5,106.82 worse off!

But even after going through the process of finding and arranging for the commission rebate 'adviser', I still paid $5,467.77 for the following "services" (as listed in the annual Fee Disclosure Statements):

1. Getting a portion of commissions received by xxxxxx as your Broker for the products
2. Member account maintenance as requested and required.

At least I was getting something in exchange for the trailing commissions being charged - a lot of consumers had 'advisers' receiving trailing commissions that they had never even met (I remember my father, an airline pilot, complained once that there was an 'adviser' in Tasmania listed on his insurance policies, and he'd never had any communication at all with that 'adviser'), or who provided no ongoing service.

Prior to the Royal Commission revealing the extent to which Australian customers had been paying 'fees for no service' the existing regulations (requiring an annual Fee Disclosure Statement) were supposed to protect consumers by making them aware of the fees and commissions being paid. Except that, as in my case, if you had bought a product direct from the manufacturer you still paid the fees and commissions. And most advisers didn't rebate much (if any) the commissions paid to them.

Last year one of the reforms introduced due to the findings of the Royal Commission was that trailing commissions were banned for financial products, with the exception of life products (personal insurance policies). That is why the total commissions for 2021 dropped to only $309.11.

I have received correspondence for the non-life product companies stating that commissions had been turned off, and that the 'cost saving' would be passed on to me (the consumer) via lower costs (eg. lower margin interest rates, lower managed fund management fees etc.). Whether or not the benefit of eliminating commissions has been fully passed on to consumers is hard to know (I'd guess not, but I can't be bothered trying to work out how much has actually been passed on to me out of last year's reduction in commissions).

As I got registered as a financial planner (adviser) in late 2018 I could have filled in some forms to 'change adviser' to myself. I probably should have done so, as I would have received 80% of the commissions (my AFLS/broker group retains 20% of any fees and commissions I receive as their Authorised Representative). However, the amount after tax wasn't huge, and I would have probably needed to worry about providing myself with an annual 'Fee Disclosure Statement' (:

Now, that I'm (hopefully) about to get my first few paying clients as a financial adviser (and will need to process annual Fee Disclosure Statements etc), I may as well send in a 'change of adviser' form for my life insurance (Income Protection) policy, so that I will get 80% of the annual $310 trailing commission, rather than just 50%.

ps. Advisers (and insurance brokers) used to get 80% of the first year insurance premium, and then a 20% trailing commission. This was slowly reduced to 70%/20% in 2019, and 60%/20% from 2020 onwards. This lower commission regime for life products is one of the reasons (the others are the FASEA exam, the increased educational and CPD requirements and increased administrative burden of regulatory requirements) that many financial advisers/insurance brokers are leaving the 'industry'. There is also 10% GST added to all fees and commissions, and some 'clawback' provisions around the first year premium commission (if the policy is cancelled or cover amount reduced in the first few years).

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Wednesday 7 July 2021

The difficulties with getting concessional superannuation contributions exactly 'right'

I've tried to contribute the maximum amount allowed as a concessionally taxed contribution in my superannuation each year. For the last few years that was $25,000 pa, but this FY it has been increased by 10% in line with CPI increases since the decision to regularly index was legislated.

As I had setup a 'salary sacrifice' arrangement to make additional employer contributions in exchange for a reduction in take-home pay, I didn't bother changing this when they introduced tax deductibility of contributions for employees. I had expected to wind up pretty close to the $25,000 'cap' for last FY, as I was expecting a small pay rise in Feb when my employer does their annual salary reviews (it turned out that this year was 0% increase), and aside from the normal SGL contributions my employer also makes some 'additional voluntary' contributions to reimburse part of the superannuation fund admin fees, and to pay for the standard amount of life, TPD and IP insurance offered as part of our superannuation plan (this is this reason why I currently have employer contributions going into the company's super scheme, while most of my super is sitting in our SMSF - the extra cost of having two super funds is more than offset by the benefit of the 'free' insurance cover).

Since the FY has ended I was able to log in to the superannuation fund online platform and check all the contributions made during the FY. All the expected contributions add up to a few hundred dollars over the $25,000 cap, which is fine as I would only have to pay extra tax equivalent to the difference between the concessional 15% tax charged on concessional contributions and my marginal tax rate. The excess is then reclassified as being a non-concessional contribution, but as I make hardly any non-concessional contributions I am well below the $100,000 annual limit for non-concessional super contributions.

However, for some weird reason one month my employer had paid three lots of the normal bi-monthly SGL contribution, which made my excess CC another $500 or so higher. What is worse is that they had a late monthly payment arrive in the super fund accounts in early July 2020 in addition to the normal contribution towards the end of July, and then this June the monthly payment was deposited exactly on 30 June. This meant that last FY I received 13 'monthly' SGL and salary sacrifice contributions, which added another couple of thousand dollars worth of 'excess concessional contributions'. This will mean I'll probably have to pay an extra $500 or so tax. But since they appear to have made an extra bi-monthly deposit I'm not too upset (although I suspect this 'extra' payment has something to do with the how they calculate the bi-monthly payments, and not really anything 'extra'). They also have already been contributing 10% SGL since 2018 instead of the required 9.5% (which only increased to 10% from 1 July). I just wish the 'monthly' contributions were deposited on a more regular schedule so it was possible to make a more accurate calculation of how much the annual concessional contributions total will be before the end of the FY has passed and it is too late to make any adjustments.

I'm actually an employee-appointed representative on the company superannuation committee, so I had mentioned the difficulty in working out how much 'spare' CC cap was left at the end of the FY (so one could make a 'top up' contribution and claim a tax deduction for it, to exactly meet the cap amount. The super fund rep told me to check the online transactions in late June to work out what the total contributions were -- but since the final contribution was only credited at close of business on 30 June that would have been too late to make any voluntary contribution anyhow!

I'm going to leave my current salary sacrifice arrangement in place for this FY - due to the increase in the CC cap I should have plenty of 'cap space' left next June (especially as they won't be able to squeeze in a 13th monthly contribution now that they are completely up to date), and I should be able to calculate the 'cap space' in the last week of June and work out how much I can deposit as a voluntary tax deductible super contribution to just hit the CC cap.

Aside from the concessional contributions I might also make a $100,000 non-concessional contribution into my Qsuper account, as I want roughly that amount (or more) in the QSuper account so I transfer it into their lifetime annuity product when I retire. Once my total super balance (TSB) exceeds the $1.7m TSB cap I won't be able to make any further non-concessional contributions into super (except if I make a 'downsize contribution' of up to $300K if/when we sell our home). Fortunately you can still make concessional contributions (SGL and salary sacrifice) after you reach the TBC.

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Saturday 3 July 2021

Applying for the Tax Commissioner's Discretion

Normally you can't claim a loss (tax deduction) for a business that is only a hobby or lifestyle choice. Even if it has business-like characteristics, if it is unlikely to ever make a profit AND doesn't have a significant commercial purpose you can't offset the loss against your other income. In that situation you can only defer the loss until you make a profit from the business (at which time the carried forward losses can be offset against the profits to reduce the tax liability).

If you're a sole trader or an individual partner in a partnership, and you meet at least ONE of the non-commercial losses requirements ( the four 'standard tests'), you can offset your business losses against other assessable income (such as salary or investment income) in the same income year.

The non-commercial business loss requirements if you have income under $250,000 are:

1. your assessable business income is at least $20,000 in the income year, OR

2. your business has produced a profit in three out of the past five years (including the current year), OR

3. your business uses, or has an interest in, real property worth at least $500,000, and that property is used on a continuing basis in a business activity (this excludes your private residence and adjacent land), OR

4. your business uses certain other assets (excluding motor vehicles) worth at least $100,000 on a continuing basis.

Since my financial planning business hasn't generated any income yet, has not yet broken even or made a profit, and is run from a home-office, it doesn't pass any of the four 'standard tests' yet. So normally I would simply have to carry forward the losses until eventually the business makes more than $20,000 income. My original business plan had projected getting my first client in year 1 (2018/19), and then have enough clients during FY 2019/20 to 'break even'. Due to Covid-19 and repeated lockdowns I have yet to sign up my first paying client. Business costs have included paying $1,150 each month as an Authorised Representative of my dealer broker (and remain registered as a financial adviser), paying annual membership fee to the Financial Planning Association, paying university fees for the Master of Financial Planning degree I'm undertaking to meet the new FASEA educational requirements, and paying small amounts for marketing (my business website, and a couple of magazine ads). Overall, the annual business expenses were approximately:

2018-19: $25,095

2019-20: $29,271

2020-21: $25,637

and projected expenses for the current FY:

2021-22: $22,245 (slightly lower as I finish my uni degree this year, but will upgrade from student to full membership of the Association of Financial Advisers). At this stage I'm expecting to sign up my first paying clients during 2021-22, although the amount of income will depend on the number and nature of the clients.

I'm a bit behind in lodging my annual tax returns, so it would be nice to claim a deduction for these expenses, but I normally wouldn't be able to claim a deduction as I haven't meet any one of the four 'standard tests'.

However, if you are a sole trader and have income under $250,000 you can apply for the tax "commissioner's discretion" to allow the losses from the business activity to be offset against your other income. There are only two reasons for obtaining the discretion:

1. the business activity has commenced and has a standard lead-time before it can pass one of the four standard tests or produce a taxable profit. But this normally only applies where an inherent characteristic of the business prevents making a profit - for example the time taken after planting a new vineyard due to the nature of grape growing. It does NOT include situations starting out small or building up a client base. So no chance of my business qualifying on this basis.

2. special circumstances such as drought, flood, bushfire or other circumstance outside your control that have prevented the activity from passing one of the four tests. This is where I *might* be able to get the commissioner's discretion, due to the impact of Covid-19 preventing me from producing a tax profit as yet.

So, I've applied for the tax commissioner's discretion regarding non-commercial business losses for 2018-19, 2019-20, 2020-21, and 2021-22. We'll see what he/she decides.

I also have to lodge a backlog of annual BAS (business activity statements), which should at least provide a refund of GST paid on inputs (the fees paid to my dealer broker, ads etc.) as I have had no business outputs (SOAs) subject to GST.

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Thursday 1 July 2021

Net Worth: JUN 2021

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

Stocks and managed fund investments increased this month, up $10,941 (+3.20%) to have  $352,394 net equity in my geared share portfolios. This is similar to what is was back in 2007 before the GFC, but I have much lower gearing nowadays.

Our estimated house price for May (my half) increased by $24,875 (2.69%) to $949,902. This increase seems to confirm that last month's sudden jump was actually indicative of the strong property market in Sydney, rather than being an aberration.

The value of my retirement savings rose during June, to $1,454,487 (up $36,609 or 2.58%). I'm on track to reach the 'transfer balance cap' (maximum amount that can be moved from 'accumulation' to 'retirement' phase) before I hit 65 (when I'll be able to make the transfer without retiring). The TBC is currently $1.7m (increased in line with CPI on 1 July).

The value of my precious metals declined slightly during June, to $23,457 (down $920 or -3.77%).

Overall, my estimated NW reached $3,079,203 by the end of June - up by a healthy $71,776 (2.39%).

I continue to include the value of the 'other real restate' at cost in my NW calculation, but the lake house is likely to have increased from $337,000 to around $676,725 since I 'bought' it from my parents, and the value of the off-the-plan unit is likely to have increased from the purchase cost of $1m + $40,452 stamp duty, to $1,160,695 - but I'll wait until I get an official valuation done when the unit construction is completed in 2023 before I start tracking changes in the unit's value as part of my NW estimate.

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End of JUN 2021 "12% solution" portfolio changes

For the end of June the emailed trading signal is to invest 60% in QQQ and 40% in TLT. As this is a change in allocation from last month, it requires selling off both SPY and JNK and buying 60% QQQ and 40% TLT. When the market is open (Thursday night my time) my monthly trades will therefore be:

SELL SPY : SPDR S&P 500 Index Fund 

SELL JNK : SPDR Barclays High_yield Corporate Bond Fund

BUY QQQ : Powershares Nasdaq-100 Index Fund

BUY TLT : iShares 20+ Year Long-Term Treasury Bond Fund

My current account balance is A$12,164.40 and aside from the "12% solution" holdings I still have A$581.50 of the ASIA ETF, so the actual investment amounts for this month will be around A$6950 (60%) QQQ and A$4600 (40%) TLT, but the exact amount trading will be rounded down to the nearest whole number quantity of the ETFs.

According to the monthly newsletter, the 2020 performance for this model was +40.6% and for 2021 YTD performance is now +13.7%. My YTD performance is only 10.43% due to a combination of timing differences, buy/sell spread, trading costs, not having an exact 60:40 asset allocation (due to rounding down to the nearest tradeable quantity) and the fact the my '12% solution' portfolio is on my IG trading account which also includes some ASIA (Betashares Asia Technology Tigers ETF).

I didn't get around to closing out my positions and shutting down the IG account before the end of June (Australian FY end), so I'll probably keep doing these monthly trades for another 12 months and see how things go. It's really not cost effective to do the required monthly trades with such a small portfolio using the IG trading platform. To do this properly would require either a larger financial committment (say a portfolio amount of $100,000+) or else find a trading platform that has suitable ETFs available to trade and $0 trade fees and no account keeping fee. Doing monthly trades also means any capital gains will be taxed at my marginal tax rate (you only get the 50% CGT discount for assets held for more than 12 months), so this would probably also be something better done inside an SMSF where the tax rate applied to short term capital gains is the same as long term capital gains, as is only 10%.

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