While most commentators seem to feel that the 2016-17 Australian Federal Budget was a fairly 'boring' affair, with not many winners and the only losers being very high income Australians, from my point of view it doesn't appear nearly so harmless. As a wage earner, the cuts to company tax rates will have no impact on me. And despite having a salary package just over $100,000 the raising of the threshold for the 37.5% tax bracket from $80,000 to $87,000 won't be of any benefit as my taxable income is less than $80,000 due to making salary sacrifice contributions into my superannuation, and having a small net tax deduction from my geared share portfolio. On the other hand, the cut in the cap on concessional contributions into superannuation from $35,000 (for over 55s) to only $25,000 will mean paying an extra $1,750 or so in income tax each year (32.5% income tax on the extra $10,000 taxable salary, rather than paying 15% tax on it as a salary sacrifice contribution into my retirement savings). To maintain my current level of taxable income I could increase my portfolio loans substantially (to reduce my taxable income by $10,000 via negative gearing into additional shares, I'd have to borrow around $350,000, as the tax deductible loan interest cost is around 6% pa, but this is partially offset by taxable dividend income). However, post-GFC I'm not keen on increasing my gearing beyond it's current levels, so I'll probably just end up paying the extra $1,750 in income tax.
Fortunately the other major changes to superannuation seem to be targeted more accurately at the 'rich', with a sensible lifetime cap on non-concessional (after tax) contributions into superannuation of $500,000, rather than the previous annual cap of $180,000 (which could allow large sums to be poured into the 15% taxed environment of superannuation over time, for those that amount of spare cash flow or investible funds). So far DW and myself have only contributed a few thousand dollars worth of 'after tax' contributions (in order to get the government co-contribution back in the days when it was still available), and we are never likely to have more than $1m of 'spare' cash to pour into our superannuation accounts.
The $1.6m cap on the amount of superannuation that can be moved from 'accumulation' to 'pension' mode is also quite unlikely to ever become an issue for me, even if my superannuation investments do very well. With a current account balance just under $800,000 I would have to be very lucky to reach $1.6m by the time I retire, especially given the reduction in the amount I can 'salary sacrifice' from now on. And if I did manage to accumulate more than $1.6m in retirement savings, earnings would still only be taxed at 15%, rather than the normal marginal income tax rates.
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Showing posts with label budget. Show all posts
Showing posts with label budget. Show all posts
Wednesday, 4 May 2016
Wednesday, 9 May 2012
Australian Federal Budget 2012
Overall the budget looks suspiciously 'creative' and the projected 'budget surplus' fairly optimistic given that budget projections have not ended up being terribly close to reality in previous Labor budgets. In any case, the actual 'surplus' won't be known until after the next Federal election, so I guess the surplus is being manufactured more as a political tool for Labor's re-election campaign than as a genuine economic tool. Even if the small surpluses projected in the budget for forward years does materialise, the amounts will be totally inadequate to cover any meaningful 'stimulus spending' in the event of another GFC impacting Australia down the track.
On a personal level, we'll miss out on all the budget 'goodies' such as the cash handouts to compensate 'working families' for the impact of the carbon tax of cost of living or to help paying education expenses for our kids, as our combined family 'adjusted' taxable income is just over the FTB A cut-off. As far as Centrelink is concerned, any net investment losses are added back in when calculating our 'income'. I'm sorely tempted to liquidate some of my stock investments that are still in the red, and use the proceeds to pay off a large chunk of the corresponding margin loans. It makes no sense to continue to use borrowed funds to invest when the interest rate on the borrowed funds are stuck around 8%-10% and total ROI (dividends and capital gains) is less than 5%. Since the GFC I've been hoping that the eventual post-GFC recovery would boost the Australian stock market (and hence put my geared investments back in the black), but that has started to look unlikely in the medium term, with the ASX200 remaining below 4500 (well below the pre-GFC high of 6800+) despite the 'mining boom' and Australia supposedly having one of the best performing economies in the developed world, post GFC. How this can be when the US stock market is back to pre-GFC levels despite their enormous government deficit and fire-sale housing market is a bit of a mystery to me.
The changes to the tax rates for 2012-13 for low-middle income earners will mean that DW will pay less tax on her part-time salary and her share of the rental property's net income, and the lowered average tax rates applicable to taxable incomes below 80,000 (shown in the graph below) will mean there is even less point for me to use negatively geared stock investments to reduce my taxable income. However, the raised tax-free threshold is nowhere near as generous as it first appears, as most of the effect of raising the tax-free threshold to $18,200 will be offset by phasing out the Low Income Tax Offset. And by raising the bottom two tax rates at the same time as raising the tax-free threshold, the tax savings really only apply to those earning under $80,000 pa. Overall I think the tax changes will mean DW gets an extra $10 a week or so in her pay packet, while I'll be better off by about 6 cents a week!
With the higher ($50,000 vs. $25,000) annual cap on concessionally taxed superannuation contributions (eg. salary sacrifice and SGL amounts) for those over 50 having less than 500,000 in their superannuation account now not scheduled to come into effect until 2014 (assuming it eventually does happen!), next financial year may be a good opportunity to wind back some of my geared stock investments and plan to investment more of my salary via superannuation rather than using after-tax income to make tax-deductible interest payments on investment loans.
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On a personal level, we'll miss out on all the budget 'goodies' such as the cash handouts to compensate 'working families' for the impact of the carbon tax of cost of living or to help paying education expenses for our kids, as our combined family 'adjusted' taxable income is just over the FTB A cut-off. As far as Centrelink is concerned, any net investment losses are added back in when calculating our 'income'. I'm sorely tempted to liquidate some of my stock investments that are still in the red, and use the proceeds to pay off a large chunk of the corresponding margin loans. It makes no sense to continue to use borrowed funds to invest when the interest rate on the borrowed funds are stuck around 8%-10% and total ROI (dividends and capital gains) is less than 5%. Since the GFC I've been hoping that the eventual post-GFC recovery would boost the Australian stock market (and hence put my geared investments back in the black), but that has started to look unlikely in the medium term, with the ASX200 remaining below 4500 (well below the pre-GFC high of 6800+) despite the 'mining boom' and Australia supposedly having one of the best performing economies in the developed world, post GFC. How this can be when the US stock market is back to pre-GFC levels despite their enormous government deficit and fire-sale housing market is a bit of a mystery to me.
The changes to the tax rates for 2012-13 for low-middle income earners will mean that DW will pay less tax on her part-time salary and her share of the rental property's net income, and the lowered average tax rates applicable to taxable incomes below 80,000 (shown in the graph below) will mean there is even less point for me to use negatively geared stock investments to reduce my taxable income. However, the raised tax-free threshold is nowhere near as generous as it first appears, as most of the effect of raising the tax-free threshold to $18,200 will be offset by phasing out the Low Income Tax Offset. And by raising the bottom two tax rates at the same time as raising the tax-free threshold, the tax savings really only apply to those earning under $80,000 pa. Overall I think the tax changes will mean DW gets an extra $10 a week or so in her pay packet, while I'll be better off by about 6 cents a week!
With the higher ($50,000 vs. $25,000) annual cap on concessionally taxed superannuation contributions (eg. salary sacrifice and SGL amounts) for those over 50 having less than 500,000 in their superannuation account now not scheduled to come into effect until 2014 (assuming it eventually does happen!), next financial year may be a good opportunity to wind back some of my geared stock investments and plan to investment more of my salary via superannuation rather than using after-tax income to make tax-deductible interest payments on investment loans.
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Friday, 6 May 2011
Another Labor budget coming to 'redistribute' my wealth
The annual Federal budget for Australia will be announced next week. As usual some of the "nasties" are being leaked beforehand. One that will directly affect me is the proposed reduction in the "discount" applied to up-front payments of university HECS fees. As I always pay my fees in full up-front I usually pay only 80% of the "list price" for my courses. The discount is apparently going to be reduced to only 10% by the Labor government, since its believed that only "rich" students can afford to pay their HECS up-front and benefit from the discount.
At only 10% reduction for paying up-front its hardly worth it. I may as well let the HECS debt accumulate and use the money to pay off some of my other debts that are being charged 8%, 10% or more interest. HECS liabilities only increase by the CPI each year (around 3%), so its a relatively cheap loan.
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At only 10% reduction for paying up-front its hardly worth it. I may as well let the HECS debt accumulate and use the money to pay off some of my other debts that are being charged 8%, 10% or more interest. HECS liabilities only increase by the CPI each year (around 3%), so its a relatively cheap loan.
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Friday, 27 August 2010
Australian Budget - where does all the money go? (and come from)
The annual budget announcement often highlights the details of specific changes being made, so much so that the overall budget picture often isn't clear. So I had a look at the top-level figures for the 2009-10 budget and divided the amounts by the current Australian population (around 22.5 million) to get a better feel for the amounts involved:
So where does this money go each year?
What stands out is that most (about half) of government spending goes on caring for the sick (health costs) and elderly / unemployed (social security). And, given increasing health costs and the aging population this will only increase.
It also highlights the massive expense of the planned NBN ($43,000 million) - even though that cost is to be spread out over 5+ years, it is still massive compared to the amount being spent on national infrastructure each year. Although it would be nice to have optical fibre to every suburban house in Australia, I can't see that everyone needs it. NBN seems to be more of a national 'want' than a 'need', especially compared to spending the money on more conventional infrastructure such as roads, rail and port facilities. Many suburban areas already have 'fibre to the node', so running fibre to individual houses should be done privately and at the households expense (user pays). Where there isn't already 'fibre to the node' the government could pay via 'NBN-lite' - for example to rural towns and new suburban land releases.
Defence doesn't seem to be such a huge expense on a per capita basis - although I can't see the value of some big ticket defence items like strike fighters, given the actual tasks our military is involved in (usually ground troops and naval and air transport). The old F-111s, for example, were never used in anger, so a smaller 'deterrent' may have sufficed. In any major conflict I expect we would have to rely on support from our allies - whether we had just a handful of flighters, or a dozen. That will still be true for their planned replacement, the vastly expensive Joint Strike Fighters. So there is probably some room for reallocating funds from defence to infrastructure or education. And, as for the cost-benefit value of our fleet of non-nuclear submarines...
The 2009-10 deficit isn't huge either (as a one-off), but that $2,116 per person translates to about an extra $200 a year revenue required just to service the interest on the debt. No wonder neither party was promising tax cuts in the recent election campaign.
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Budget Revenue (2009-10): Income tax:..................$122,710 million Other revenue:...............$167,901 TOTAL revenue:...............$290,611which works out to be $5,454 income tax per person. This level of government impost doesn't seem too onerous, until you how many Australians aren't wage earners (eg. children, elderly, unemployed/not working). And the total government revenue per person ($12,916) is even higher.
So where does this money go each year?
Budget spending (2009-10): Social security and welfare..$110,994..=..$4,933 pp..=..33% of budget Community services , culture..$12,188.......$542 pp Health........................$51,223.....$2,276 pp.....15% Infrstructure, transport......$13,886.......$617 pp......4% Defence.......................$20,952.......$931 pp......6% Education.....................$35,222.....$1,565 pp.....10% Industry , workforce..........$13,271.......$590 pp General government services...$80,478.....$3,577 pp TOTAL........................$338,214....$15,032 pp Deficit.......................$47,603.....$2,116 pp
What stands out is that most (about half) of government spending goes on caring for the sick (health costs) and elderly / unemployed (social security). And, given increasing health costs and the aging population this will only increase.
It also highlights the massive expense of the planned NBN ($43,000 million) - even though that cost is to be spread out over 5+ years, it is still massive compared to the amount being spent on national infrastructure each year. Although it would be nice to have optical fibre to every suburban house in Australia, I can't see that everyone needs it. NBN seems to be more of a national 'want' than a 'need', especially compared to spending the money on more conventional infrastructure such as roads, rail and port facilities. Many suburban areas already have 'fibre to the node', so running fibre to individual houses should be done privately and at the households expense (user pays). Where there isn't already 'fibre to the node' the government could pay via 'NBN-lite' - for example to rural towns and new suburban land releases.
Defence doesn't seem to be such a huge expense on a per capita basis - although I can't see the value of some big ticket defence items like strike fighters, given the actual tasks our military is involved in (usually ground troops and naval and air transport). The old F-111s, for example, were never used in anger, so a smaller 'deterrent' may have sufficed. In any major conflict I expect we would have to rely on support from our allies - whether we had just a handful of flighters, or a dozen. That will still be true for their planned replacement, the vastly expensive Joint Strike Fighters. So there is probably some room for reallocating funds from defence to infrastructure or education. And, as for the cost-benefit value of our fleet of non-nuclear submarines...
The 2009-10 deficit isn't huge either (as a one-off), but that $2,116 per person translates to about an extra $200 a year revenue required just to service the interest on the debt. No wonder neither party was promising tax cuts in the recent election campaign.
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Friday, 6 August 2010
A comparison of Income and Spending
2millionblog.com recently posted a monthly income and expenses 'snapshot', so I thought I'd compare it with our current budget. I've adjusted the budget figures I recently posted to add back in the superannuation contributions to our net pay, and exclude business, rental and investment items to be comparable to 2millionBlog's figures:
One thing that is very noticeable is that our expense for food, utilities and transportation is almost identical. On the other extreme, we spend twice as much on house payments -- explained by the relative average house prices in Australia compared to the US, and mortgage interest rates. I'm also socking away more into retirement savings - which makes sense given my age and income level. I'm spending considerably more each month on healthcare (due to prescription medicines for DS1, DS2 and myself) and have some university expenses (the Masters course I'm studying part-time) which 2millionBlog doesn't have. In contrast, he had a sizeable vacation payment for a cruise compared to our having no monthly expense or savings for a holiday (as we plan on having a virtually free 'staycation' at my parents' farm).
The other big difference is that $1,350 of the 'saved' amount is actually interest I'm paing each month on my St George Bank investment loan (home equity loan). The payments have to be funded out of my salary income as all the investment income is already earmarked to cover the margin loan interest costs. The theory is that this effectively 'converts' taxable salary income (reduced by the tax deductible investment loan interest) into long-term capital gains (on the investment) that are tax-deferred, and, under current rules, concessionally tax (at half my marginal income tax rate). In practice this is only a *good idea* if the total ROI of my investment (dividends and capital gains) exceeds the interest cost - unfortunately this hasn't been the case over the past decade due to the bear markets of 2000/1 and 2008/9.
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_______________________________2millionBlog__________Enoughwealth Net pay........................4,916.................6,750 Wife's Net pay...................751.................1,667 Total Income...................5,667.................8,417 - Total Expenses...............4,853.................6,917 = Saved..........................814.................1,500 Expenses: House payments.................1,494.................2,817 Food.............................861...................850 Vacation.........................661.....................0 Utilities........................251...................250 Gifts............................112....................30 Charity............................0.....................0 Petcare............................0.....................0 Miscellaneous....................188...................185 Healthcare.......................185...................400 Retirement plans.................850.................2,000 Transportation...................251...................235 Uni fees and texts.................0...................150
One thing that is very noticeable is that our expense for food, utilities and transportation is almost identical. On the other extreme, we spend twice as much on house payments -- explained by the relative average house prices in Australia compared to the US, and mortgage interest rates. I'm also socking away more into retirement savings - which makes sense given my age and income level. I'm spending considerably more each month on healthcare (due to prescription medicines for DS1, DS2 and myself) and have some university expenses (the Masters course I'm studying part-time) which 2millionBlog doesn't have. In contrast, he had a sizeable vacation payment for a cruise compared to our having no monthly expense or savings for a holiday (as we plan on having a virtually free 'staycation' at my parents' farm).
The other big difference is that $1,350 of the 'saved' amount is actually interest I'm paing each month on my St George Bank investment loan (home equity loan). The payments have to be funded out of my salary income as all the investment income is already earmarked to cover the margin loan interest costs. The theory is that this effectively 'converts' taxable salary income (reduced by the tax deductible investment loan interest) into long-term capital gains (on the investment) that are tax-deferred, and, under current rules, concessionally tax (at half my marginal income tax rate). In practice this is only a *good idea* if the total ROI of my investment (dividends and capital gains) exceeds the interest cost - unfortunately this hasn't been the case over the past decade due to the bear markets of 2000/1 and 2008/9.
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Wednesday, 30 June 2010
Budget Challenge 2010-11
I used to spend less than $50,000 a year on our family 'living expenses' - managing to save the rest of my salary via salary sacrifice into superannuation and paying interest on my margin loan investment borrowings. However, I haven't been following a strict budget for the past couple of years, and despite having more salary coming into my bank account each month (due to the reduced cap on annual salary sacrifice into superannuation) I seem to be running short of cash each month. That probably party due to the interest rate on my margin loans increasing substantially while the dividend income has dropped, but I suspect I'm also overspending on 'discretionary' items each month. Plus some basic costs (such as utilities) have risen faster than income recently.
So, I've decided to challenge myself to stick to a formal budget during the 2010/11 financial year, which starts tomorrow (1 July). Aside from only spending according to 'the plan', the only big change will be to cut out my spending on junk food and slash my consumption of diet coke - both of which will fit in with my other goal of losing weight and sticking to a healthy diet.
My monthly budget for 2010/11 is as follows:
INCOME
Net salary income............$4750
EXPENSES
Homeloan and childcare..[1]..$1300
Margin loan repayments..[2]..$ 850
Margin loan var interest[3]..$ 190
Savings plan deposits........$ 200
Petrol.......................$ 150
Car running costs............$ 85
Grocery shopping etc.........$ 850
Medical and dental...........$ 400
Rates/water/electric/mob ph..$ 250
Uni fees and textbooks.......$ 150
Computer expenses............$ 65
Gifts........................$ 30
Income insurance.............$ 80
Misc.........................$ 150
Notes:
[1] DW contributes an equal amount towards childcare costs and mortgage costs (interest only on home on rental property loans) and our rental income covers the balance on the monthly mortgage costs.
[2] I want to pay off some of my margin loan principal during the year which will offset the capitalised interest prepayment next June.
[3] I fix most of my margin loan balance each year and pre-pay 12 months worth of interest each June, so this amount is for the monthly interest on the remaing variable loan balance.
[4] Piano and Judo lessons, school costs etc.
Excluding the margin loan interest and repayments, and the savings plan deposits, the 'living expenses' part of this budget comes to $3,510 a month, or $42,120 pa. Adding in DWs homeloan and childcare monthly contribution of $1,300 brings our total household 'living expenses' budget up to $4.810 a month, or $57,720 a year. I'll track the actual monthly expenses against this budget and see how things go - I suspect I've forgotten a few 'ad hoc' items and that some categories will be hard to keep within budget. I may look into using Mint's free budget software to track my data, otherwise I'll use my old Quicken application. Hopefully this year's annual salary review will provide some slack.
So, I've decided to challenge myself to stick to a formal budget during the 2010/11 financial year, which starts tomorrow (1 July). Aside from only spending according to 'the plan', the only big change will be to cut out my spending on junk food and slash my consumption of diet coke - both of which will fit in with my other goal of losing weight and sticking to a healthy diet.
My monthly budget for 2010/11 is as follows:
INCOME
Net salary income............$4750
EXPENSES
Homeloan and childcare..[1]..$1300
Margin loan repayments..[2]..$ 850
Margin loan var interest[3]..$ 190
Savings plan deposits........$ 200
Petrol.......................$ 150
Car running costs............$ 85
Grocery shopping etc.........$ 850
Medical and dental...........$ 400
Rates/water/electric/mob ph..$ 250
Uni fees and textbooks.......$ 150
Computer expenses............$ 65
Gifts........................$ 30
Income insurance.............$ 80
Misc.........................$ 150
Notes:
[1] DW contributes an equal amount towards childcare costs and mortgage costs (interest only on home on rental property loans) and our rental income covers the balance on the monthly mortgage costs.
[2] I want to pay off some of my margin loan principal during the year which will offset the capitalised interest prepayment next June.
[3] I fix most of my margin loan balance each year and pre-pay 12 months worth of interest each June, so this amount is for the monthly interest on the remaing variable loan balance.
[4] Piano and Judo lessons, school costs etc.
Excluding the margin loan interest and repayments, and the savings plan deposits, the 'living expenses' part of this budget comes to $3,510 a month, or $42,120 pa. Adding in DWs homeloan and childcare monthly contribution of $1,300 brings our total household 'living expenses' budget up to $4.810 a month, or $57,720 a year. I'll track the actual monthly expenses against this budget and see how things go - I suspect I've forgotten a few 'ad hoc' items and that some categories will be hard to keep within budget. I may look into using Mint's free budget software to track my data, otherwise I'll use my old Quicken application. Hopefully this year's annual salary review will provide some slack.
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Sunday, 23 May 2010
Time for a household budget review
My employer reviews salaries across the board every year in June, just prior to the start of the new financial year on 1 July. Due to the GFC salaries were frozen last year, and there had been a minimal 2% "cost of living" rise the year before. So I'm hoping that since the Australian economy is now doing quite well (around 3%+ GDP growth) we should see a rise of 4% or more this year. As soon as the salary decision is known I can start updating our budget worksheet for the next twelve months. Some expenses (such as electricity) are increasing much faster than the CPI, so even a reasonably generous pay rise won't result in any surplus to invest or spend.
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Sunday, 2 May 2010
Australian Tax Reform more of a Whimper than a Bang
On the good side, it appears that a lot of the major tax changes that would detrimental to my situation (and should be attractive to a socialist government) ended up not happening (yet - there's always the budget after the next election). Apparently no changes to how capital gains are taxed, negative gearing remains unchanged, and a tax cut for superannuation contributions by low-income workers rather than a flat "concession" for superannuation contributions.
On the bad side, it appears that this "tax reform" isn't as major/significant/revolutionary as Mr Rudd had been intimating for the past couple of years -- there seems to be a definite gap between what Labor promises and what it actually delivers. And from the brief highlights I've read about so far it appears that many of the changes are being "phased in" over such a long time scale that the effects will be minimal for many workers. An example is the headline grabbing "boost" to superannuation SGL rate from 9% of salary to 12% of salary. Even though older workers (who started work well before universal superannuation was implemented) would benefit the most from this change, by not introducing it until 2019 many of these workers will have retired before it comes into effect. Then again, raising the SGL age limit to 75 fits a vision where workers are expected to work well beyond 65 if they are fit and healthy and don't have enough super saved up to retire at 65.
On the plus side, the increase in the contribution cap to $50,000pa for workers aged over 50 with less than $500,000 in super means I will be able to salary sacrifice more into super (though not quite as much as before the last round of superannuation changes were introduced by Labor). The $500 government superannuation contribution for low-income workers (up to $37,000 income apparently) may also be of benefit to DW (working part-time) and DS1 (who earns a few thousand each year from busking and makes superannuation contributions). I won't know for sure until the May budget comes out a week from Tuesday and I can read the fine print.
Probably the worst aspect of this "tax reform" program is that the changes will be introduced over the next decade, and due to political reality (several election campaigns, shifts in the balance of power, and possibly a couple of changes of government) nothing that is currently "planned" will necessarily become reality. In terms of being able to make long term financial plans that are "tax effective", the devil you know is infinitely preferable to the devil you don't know.
On the bad side, it appears that this "tax reform" isn't as major/significant/revolutionary as Mr Rudd had been intimating for the past couple of years -- there seems to be a definite gap between what Labor promises and what it actually delivers. And from the brief highlights I've read about so far it appears that many of the changes are being "phased in" over such a long time scale that the effects will be minimal for many workers. An example is the headline grabbing "boost" to superannuation SGL rate from 9% of salary to 12% of salary. Even though older workers (who started work well before universal superannuation was implemented) would benefit the most from this change, by not introducing it until 2019 many of these workers will have retired before it comes into effect. Then again, raising the SGL age limit to 75 fits a vision where workers are expected to work well beyond 65 if they are fit and healthy and don't have enough super saved up to retire at 65.
On the plus side, the increase in the contribution cap to $50,000pa for workers aged over 50 with less than $500,000 in super means I will be able to salary sacrifice more into super (though not quite as much as before the last round of superannuation changes were introduced by Labor). The $500 government superannuation contribution for low-income workers (up to $37,000 income apparently) may also be of benefit to DW (working part-time) and DS1 (who earns a few thousand each year from busking and makes superannuation contributions). I won't know for sure until the May budget comes out a week from Tuesday and I can read the fine print.
Probably the worst aspect of this "tax reform" program is that the changes will be introduced over the next decade, and due to political reality (several election campaigns, shifts in the balance of power, and possibly a couple of changes of government) nothing that is currently "planned" will necessarily become reality. In terms of being able to make long term financial plans that are "tax effective", the devil you know is infinitely preferable to the devil you don't know.
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Friday, 30 April 2010
Henry Tax Review and Reform of the Australian Tax System
The long-awaited Henry Tax Review Report will be made public on Sunday. The government has been sitting on the report for a long while, and the release is just in time to feed into this year's pre-election budget. The government has already hinted that this year's budget will cut tax for "most" middle-income "working families", so I'm guessing all the revenue raising possibilities contained within the Henry Report will have been thoroughly examined. It will be interesting to see what the report contains, and which bit the Labor government chooses to adopt -- especially in the near term (I expect any costly or difficult reform will be "phased in" over enough time to leave it as a problem for Mr Rudd's successor). My guesses as to what end up as policy based on the report:
* resource tax - this seems a no-brainer given the high profit margins currently enjoyed by the big miners due to the resource boom
* superannuation changes - I will be pleasantly surprised if Labor doesn't fiddle with the superannuation laws. The most obvious way to get some more revenue from the "rich" will be to eliminate the recently introduced tax-free status for superannuation income during the pension phase. Self-funded retirees are too "rich" for most of them to be Labor voters, so Mr Rudd will be happy to tax them more. The revenue will probably be used to increase the tax benefits of superannuation for low-income workers. Apparently a flat 15% tax on super contributions isn't "fair" as high-income workers get a bigger "benefit" -- conveniently forgetting that the bigger benefit is due to paying a much higher rate of tax in the first place.
* capital gains - I suspect the 50% tax rate "discount" applied to long-term capital gains will be removed or reduced. And I doubt the cost-base indexation it replaced won't be brought back in, unless it is also introduced for savings account interest (ie. only savings account interest above the CPI is taxed). That would fit in with the rumours about making savings for low-income workers more attractive.
* negative gearing - I doubt this will be axed (it had too much impact on housing investment last time changes were attempted under Keating), but it may be "quarantined" ie. Interest costs are only deductible against income (rent) from the same investment type. They already have similar rules relating to different types of capital gains.
I'm sure there will be lots of surprises in the Henry report and the May budget. But I'm not expecting them to be pleasant ones for this middle-income "working family" -- "tax effective" investments are likely to come under serious attack.
* resource tax - this seems a no-brainer given the high profit margins currently enjoyed by the big miners due to the resource boom
* superannuation changes - I will be pleasantly surprised if Labor doesn't fiddle with the superannuation laws. The most obvious way to get some more revenue from the "rich" will be to eliminate the recently introduced tax-free status for superannuation income during the pension phase. Self-funded retirees are too "rich" for most of them to be Labor voters, so Mr Rudd will be happy to tax them more. The revenue will probably be used to increase the tax benefits of superannuation for low-income workers. Apparently a flat 15% tax on super contributions isn't "fair" as high-income workers get a bigger "benefit" -- conveniently forgetting that the bigger benefit is due to paying a much higher rate of tax in the first place.
* capital gains - I suspect the 50% tax rate "discount" applied to long-term capital gains will be removed or reduced. And I doubt the cost-base indexation it replaced won't be brought back in, unless it is also introduced for savings account interest (ie. only savings account interest above the CPI is taxed). That would fit in with the rumours about making savings for low-income workers more attractive.
* negative gearing - I doubt this will be axed (it had too much impact on housing investment last time changes were attempted under Keating), but it may be "quarantined" ie. Interest costs are only deductible against income (rent) from the same investment type. They already have similar rules relating to different types of capital gains.
I'm sure there will be lots of surprises in the Henry report and the May budget. But I'm not expecting them to be pleasant ones for this middle-income "working family" -- "tax effective" investments are likely to come under serious attack.
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Wednesday, 9 December 2009
Mini Budget for 2010
I completed my online enrolment for the MAstron course yesterday, so I now know exactly what the course fees will be ($850 per semester, due in Mar and Aug) for 2010. I won't do a full budget for 2010 as I expect my overall income and expenses will be similar to the past couple of years, and most of my income and expenses are ticking over nicely on 'autopilot'. However, there is some room to make savings in some areas (such as grocery shopping) and I need to reign in my impulse/discretionary spending and also budget for my uni expenses. I spent an hour checking through my monthly credit card statements for the past 12 months and came up with the following 'mini budget' (credit card charges only) for next year:
This year the 'other' category included irregular household expenses such as car servicing and registration etc. as well as miscellaneous 'big ticket' items such as the new pool fencing, a garden play set, and 200 sq metres of stone cladding (bought because it was on clearance sale, and destined for the holiday house I intend to building on my parent's lakeside farm in the next couple of years). For 2010 I'm only budgeting for an 'other' amount that covers the essentials (car rego & insurance etc) and assuming I won't make any unplanned purchases.
Although this budget doesn't include any of my regular expenses that are not charged to my credit card - such as home loan repayments, investment loan interest charges, retirement savings etc. - those items don't vary much, are out of my control, and are covered by the balance of my salary income, rent and dividend income. The variable (and mostly discretionary) items all get charged to my credit card (and paid off in full each month), so, provided I stick to my CC mini budget, my overall finances should remain on track.
(all amounts are monthly)
Item ............ budget '10... prev 12 mo avg .. comments
Petrol: ......... __$140.00 ... __$115.40 ....... The last 6 months have averaged closer to $140
Shopping:........ $1,400.00 ... $1,366.78 ....... I intent to trim this expenditure as much as possible
Medical:......... __$400.00 ... __$406.76 ....... If there are only routine expenses this may be 50% lower
Rates/Utilities:. __$220.00 ... __$219.18 ....... I intend to offset any price rises with reduced water/elec use
Books:........... ___$30.00 ... ___$28.07 ....... A small item that we seem to end up spending on each month
Uni study:....... __$200.00 ... ____$5.42 ....... Only had application expenses this year. Budget for fees and textbooks
Computer:........ ___$65.00 ... ___$65.76 ....... Tends to be large, irregular expenses. Need to watch this doesn't blow out.
Gifts:........... ___$25.00 ... ___$25.30 .......
Income insurance: ___$75.00 ... ___$70.46 ....... Monthly charge is currently $75.71
Hobbies:......... __$150.00 ... __$169.68 ....... Should come in under budget if I avoid impulse purchases
Other:........... __$150.00 ... $1,319.39 ....... See below
Annual total:.... $34260.00 ... $45506.26
This year the 'other' category included irregular household expenses such as car servicing and registration etc. as well as miscellaneous 'big ticket' items such as the new pool fencing, a garden play set, and 200 sq metres of stone cladding (bought because it was on clearance sale, and destined for the holiday house I intend to building on my parent's lakeside farm in the next couple of years). For 2010 I'm only budgeting for an 'other' amount that covers the essentials (car rego & insurance etc) and assuming I won't make any unplanned purchases.
Although this budget doesn't include any of my regular expenses that are not charged to my credit card - such as home loan repayments, investment loan interest charges, retirement savings etc. - those items don't vary much, are out of my control, and are covered by the balance of my salary income, rent and dividend income. The variable (and mostly discretionary) items all get charged to my credit card (and paid off in full each month), so, provided I stick to my CC mini budget, my overall finances should remain on track.
Subscribe to Enough Wealth. Copyright 2006-2009
Tuesday, 1 December 2009
Budgeting for the new year
Yesterday I received the official letter from JCU offering me a place in the MAstron course next year, and today I sent in the acceptance form and completed the eCAF (electronic Commonwealth Assistance Form) which is required prior to enrollment.
The JCU website indicates that the two courses I'll enrol in for 2010 are each 0.25 EFTSL (equivalent full-time study load) and are both "Band 4" (which determines how much Commonwealth sponsored students have to pay). However I'm still not 100% certain what I'll have to pay in 2010 for these courses, as the JCU site only lists the cost per EFTSL for Bands 1, 2, 3 and for those subjects classed as 'national priority' subjects for 2010 (science, math and engineering). I strongly suspect (since the MAstron course is run by the Dept of Engineering and Science) that these Band 4 subjects are included the 'national priorty' category, which means that the lowest cost per EFTSL will be applied. I intend to pay the course fees in full before the 'census date', which will mean I get an additional 20% discount. I think that the subject fees will end up around $850 each.
This month I'll prepare a detailed household budget for 2010 that includes paying the course fees in full each term, and I'd like to start tracking my financial data again in Quicken from the start of next year - my 'one off' expenses have been excessive for the past few months, and need to be brought under control.
I'll also need to carefully budget my time next year so I can get good results in my uni subjects - my previous study method of leaving assignments until they were almost due and only studying for exams the night before produced 'mixed' results. I've been browsing through the Study Hacks blog and there are a few tips that I'll give a go. So, this week I'm studying how to study ;)
The JCU website indicates that the two courses I'll enrol in for 2010 are each 0.25 EFTSL (equivalent full-time study load) and are both "Band 4" (which determines how much Commonwealth sponsored students have to pay). However I'm still not 100% certain what I'll have to pay in 2010 for these courses, as the JCU site only lists the cost per EFTSL for Bands 1, 2, 3 and for those subjects classed as 'national priority' subjects for 2010 (science, math and engineering). I strongly suspect (since the MAstron course is run by the Dept of Engineering and Science) that these Band 4 subjects are included the 'national priorty' category, which means that the lowest cost per EFTSL will be applied. I intend to pay the course fees in full before the 'census date', which will mean I get an additional 20% discount. I think that the subject fees will end up around $850 each.
This month I'll prepare a detailed household budget for 2010 that includes paying the course fees in full each term, and I'd like to start tracking my financial data again in Quicken from the start of next year - my 'one off' expenses have been excessive for the past few months, and need to be brought under control.
I'll also need to carefully budget my time next year so I can get good results in my uni subjects - my previous study method of leaving assignments until they were almost due and only studying for exams the night before produced 'mixed' results. I've been browsing through the Study Hacks blog and there are a few tips that I'll give a go. So, this week I'm studying how to study ;)
Subscribe to Enough Wealth. Copyright 2006-2009
Wednesday, 6 May 2009
Revised my retirement projections
It looks like the Australian Labor government will slash the superannuation tax deduction available to "high" income earners in next week's budget. The rumour currently doing the rounds (it's an Australian tradition for the government to leak the budget bad news in the weeks leading up to budget night, so that only the good news items come as a surprise) is that the current $50K cap for salary sacrifice superannuation contributions (which get taxed at 15% rather than the tax-payers marginal tax rate) will be slashed to $25K for under 50s, and the $100K cap available for over 50s until 2012 (that was introduced as part of the "simpler super" reforms of the previous Liberal government) will be replaced by a $50K cap for over 50s. We'll have to wait for the May budget next Tuesday night to find out details such as whether or not these caps will be CPI-indexed.
There haven't been any rumours regarding the reintroduction of tax of superannuation pension payments, but I wouldn't be surprised if a Labor government introduces a progressive tax scale to superannuation pension payments in the future.
Anyhow, with the drop in value of my superannuation account since 2007, a lower expectation for investment returns in future (I'm now using 8% ROI for "high growth" investment option over the long-term, rather than 11%), and the rumoured changes to contribution limits, I decided to do some new projections of my likely superannuation accumulation until retirement age (65) and possible self-funded pension income to age 90.
According to my current projections, provided I work until 65 and make the maximum allowed salary sacrifice contributions, I should be able to self-fund a pension equivalent to my current gross salary ($85K) until age 90. IF my SMSF investments achieve an average 8% total ROI and inflation averages 3%.
I haven't bothered doing a Monte Carlo simulation of possible outcomes as I already know that a few years of below-average returns, or a lower average ROI, would slash the pension rate I could sustain until 90. Perhaps I'll get lucky and not live as long as my Paternal Grandparents (94). In reality I will attempt to compensate for periods of poor returns by "topping up" my SMSF account balance by making additional "after-tax" contributions.
I should still be able to achieve a comfortable retirement by making the maximum pre-tax contributions allowed under the proposed changes, but it will increase the risk of us suffering a drop in living standard during retirement if I have any unexpected set-backs (such as a lengthy period of unemployment). It's also unfortunate timing for us in that the $25K cap will only apply to me over the next three years (until I reach 50), which corresponds with the period before DS2 starts school. Aside from paying 15% more tax (30% marginal tax rate, rather than 15% superannuation contribution tax) on the extra $25K of taxable income (about $3,750), this change will probably also mean that we are no longer eligible for child care benefit payments or child care tax rebate (we currently get back about half of the $80 a day we pay for DS2's long day care), and that DW will no longer get any Family Tax Benefit payments (despite getting very little net income from working two days a week after taking into account the cost of day care). Total cost of this change to us will probably be around $8K pa - which seems rather harsh for a 'working family' with close to average household income.
It is also rumoured that the budget will disallow tax deductions for "hobby farm" losses against other income sources. As a partner in my parent's alpaca stud, this change would increase my annual tax bill by an extra $1K or so...
Despite a likely "horror budget" (from my point of view), it appears that the government is planning to run "temporary" budget deficits for the next 5 or 6 years. Unfortunately no one seems to have told the treasurer that the economic cycle is typically that long - so the NEXT recession is likely to put Australia into a permanent budget deficit. Since Australia is likely to change government after 2-3 terms anyhow, this probably doesn't worry the Prime Minister and Treasurer too much.
It will be interesting to see what impact an increase in the aged pension has on the projected long-term budget balance and required tax rate (as % of GDP), given the aging population and higher average unemployment rate likely for the decade or two. Perhaps We won't get an updated intergenerational report in this year's budget papers.
There haven't been any rumours regarding the reintroduction of tax of superannuation pension payments, but I wouldn't be surprised if a Labor government introduces a progressive tax scale to superannuation pension payments in the future.
Anyhow, with the drop in value of my superannuation account since 2007, a lower expectation for investment returns in future (I'm now using 8% ROI for "high growth" investment option over the long-term, rather than 11%), and the rumoured changes to contribution limits, I decided to do some new projections of my likely superannuation accumulation until retirement age (65) and possible self-funded pension income to age 90.
According to my current projections, provided I work until 65 and make the maximum allowed salary sacrifice contributions, I should be able to self-fund a pension equivalent to my current gross salary ($85K) until age 90. IF my SMSF investments achieve an average 8% total ROI and inflation averages 3%.
I haven't bothered doing a Monte Carlo simulation of possible outcomes as I already know that a few years of below-average returns, or a lower average ROI, would slash the pension rate I could sustain until 90. Perhaps I'll get lucky and not live as long as my Paternal Grandparents (94). In reality I will attempt to compensate for periods of poor returns by "topping up" my SMSF account balance by making additional "after-tax" contributions.
I should still be able to achieve a comfortable retirement by making the maximum pre-tax contributions allowed under the proposed changes, but it will increase the risk of us suffering a drop in living standard during retirement if I have any unexpected set-backs (such as a lengthy period of unemployment). It's also unfortunate timing for us in that the $25K cap will only apply to me over the next three years (until I reach 50), which corresponds with the period before DS2 starts school. Aside from paying 15% more tax (30% marginal tax rate, rather than 15% superannuation contribution tax) on the extra $25K of taxable income (about $3,750), this change will probably also mean that we are no longer eligible for child care benefit payments or child care tax rebate (we currently get back about half of the $80 a day we pay for DS2's long day care), and that DW will no longer get any Family Tax Benefit payments (despite getting very little net income from working two days a week after taking into account the cost of day care). Total cost of this change to us will probably be around $8K pa - which seems rather harsh for a 'working family' with close to average household income.
It is also rumoured that the budget will disallow tax deductions for "hobby farm" losses against other income sources. As a partner in my parent's alpaca stud, this change would increase my annual tax bill by an extra $1K or so...
Despite a likely "horror budget" (from my point of view), it appears that the government is planning to run "temporary" budget deficits for the next 5 or 6 years. Unfortunately no one seems to have told the treasurer that the economic cycle is typically that long - so the NEXT recession is likely to put Australia into a permanent budget deficit. Since Australia is likely to change government after 2-3 terms anyhow, this probably doesn't worry the Prime Minister and Treasurer too much.
It will be interesting to see what impact an increase in the aged pension has on the projected long-term budget balance and required tax rate (as % of GDP), given the aging population and higher average unemployment rate likely for the decade or two. Perhaps We won't get an updated intergenerational report in this year's budget papers.
Subscribe to Enough Wealth. Copyright 2006-2008
Sunday, 3 August 2008
A look at our household electricity costs
While I was filing away our utility bills I decided to tabulate the last five years worth of electricity bills to see how things had changed. As expected, the cost of electricity has been increasing each year, and has gone up by around 25% over the past four years. I expect future increases to be even more substantial, given the rising cost of fossil fuels (most of NSW electricity generation is coal-fired power stations).
What was unexpected was the massive increase in our daily energy use in the past two years. It probably shouldn't have come as a shock, as we would have started using a lot more electricity running the clothes dryer and hot water system after DS2 was born two years ago. Hopefully we can reduce our electricity use a bit over the coming year!
On the other hand, our electricity is costing less than $5 per day to run computers, electric piano, TV, CD player, hot water system, electric lights, reverse cycle air-conditioner/heater, cooking equipment etc. for a family of four, so it's pretty good value for money.
I wonder if it would be worthwhile hedging the cost our energy use (petrol and electricity) for the next 10-20 years by buying some oil CFDs?
What was unexpected was the massive increase in our daily energy use in the past two years. It probably shouldn't have come as a shock, as we would have started using a lot more electricity running the clothes dryer and hot water system after DS2 was born two years ago. Hopefully we can reduce our electricity use a bit over the coming year!
Financial | Total | Annual | Daily | Cost
Year ____ | MWhr_ | Cost__ | kWhr_ | c/kWhr
===========================================
2003-2004 | 12.33 | $1,134 | 34.25 | _9.20
2004-2005 | 10.62 | $__997 | 29.50 | _9.40
2005-2006 | 10.44 | $1,072 | 29.00 | 10.30
2006-2007 | 12.24 | $1,286 | 34.00 | 10.50
2007-2008 | 14.85 | $1,713 | 41.25 | 11.54
Financial | Total | Annual | Daily | Cost
Year ____ | MWhr_ | Cost__ | kWhr_ | c/kWhr
===========================================
2003-2004 | 12.33 | $1,134 | 34.25 | _9.20
2004-2005 | 10.62 | $__997 | 29.50 | _9.40
2005-2006 | 10.44 | $1,072 | 29.00 | 10.30
2006-2007 | 12.24 | $1,286 | 34.00 | 10.50
2007-2008 | 14.85 | $1,713 | 41.25 | 11.54
On the other hand, our electricity is costing less than $5 per day to run computers, electric piano, TV, CD player, hot water system, electric lights, reverse cycle air-conditioner/heater, cooking equipment etc. for a family of four, so it's pretty good value for money.
I wonder if it would be worthwhile hedging the cost our energy use (petrol and electricity) for the next 10-20 years by buying some oil CFDs?
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Tuesday, 13 May 2008
Horror budget?
Most commentators seem to think that the Australia Budget announced this evening was quite good. The Labor government has apparently delivered on it's election promises, has socked a large part of the surplus into various "Funds" ear-marked for future spending, and has moved to close some "tax loop-holes" and reducing benefits for the well-paid.
However, I found the budget to be more obscure than usual, and haven't as yet worked out what the impact will be on our finances and plans for next financial year. There were many announcements such as new income limits for Family tax benefit B and child care rebate eligibility that might, or might not, have a big impact on us. While at first glance it would seem that the income limits won't affect us (I've seen figures of $150,000 highest income earner limit for Family Tax Benefit B and $110,000 combined income limit for the 50% child care rebate), there were other changes that may apply. For example, there was mention that amounts salary sacrificed into superannuation will now be counted as part of your "income". This could mean that DW's "grossed up" income will be too high to be eligible for the Family Tax Benefit next financial year, even while she's only working a couple of days a week.
It would be nice to think that the increase in child care rebate from 30% to 50% may offset this by making it more worthwhile for DW to work an extra day each week. However, we were never able to claim the child care rebate for DS1 (even though it was costing $75 a day at the only centre close to our workplace that had a vacancy) because the child care was only "registered" and not "approved". Chances are that whatever Child Care centre we can find for DS2 to attend two days a week later this year (after we return from our holiday) will turn out to not be an "approved" centre either. Even if we can find an "approved" centre with a vacancy, the new $110,000 household income limit may preclude us from getting a rebate due to the new way of calculating "income" - apparently tax deductions against rental and dividend income won't be counted when working out "income". This will mean that even though we are negatively geared (overall) into property and shares (and therefore have LESS cashflow than our take-home pay would indicate), the gross value of rent, dividends and superannuation contributions would be included when working out our eligibility for the Child Care rebate.
This may be yet another reason for reducing my level of gearing in the new financial year (the main one is that the interest rate on my margin loans has increased so much in that past year that it's now doubtful that total ROI on the geared investment will exceed the borrowing cost). There's no point borrowing to increase my stock portfolio if it simply boosts my "income" to a level that costs us other benefits.
Overall, I shouldn't be surprised that a Labor budget that delivers a $21 billion surplus might well end up costing my "working family" several thousand dollars a year.
However, I found the budget to be more obscure than usual, and haven't as yet worked out what the impact will be on our finances and plans for next financial year. There were many announcements such as new income limits for Family tax benefit B and child care rebate eligibility that might, or might not, have a big impact on us. While at first glance it would seem that the income limits won't affect us (I've seen figures of $150,000 highest income earner limit for Family Tax Benefit B and $110,000 combined income limit for the 50% child care rebate), there were other changes that may apply. For example, there was mention that amounts salary sacrificed into superannuation will now be counted as part of your "income". This could mean that DW's "grossed up" income will be too high to be eligible for the Family Tax Benefit next financial year, even while she's only working a couple of days a week.
It would be nice to think that the increase in child care rebate from 30% to 50% may offset this by making it more worthwhile for DW to work an extra day each week. However, we were never able to claim the child care rebate for DS1 (even though it was costing $75 a day at the only centre close to our workplace that had a vacancy) because the child care was only "registered" and not "approved". Chances are that whatever Child Care centre we can find for DS2 to attend two days a week later this year (after we return from our holiday) will turn out to not be an "approved" centre either. Even if we can find an "approved" centre with a vacancy, the new $110,000 household income limit may preclude us from getting a rebate due to the new way of calculating "income" - apparently tax deductions against rental and dividend income won't be counted when working out "income". This will mean that even though we are negatively geared (overall) into property and shares (and therefore have LESS cashflow than our take-home pay would indicate), the gross value of rent, dividends and superannuation contributions would be included when working out our eligibility for the Child Care rebate.
This may be yet another reason for reducing my level of gearing in the new financial year (the main one is that the interest rate on my margin loans has increased so much in that past year that it's now doubtful that total ROI on the geared investment will exceed the borrowing cost). There's no point borrowing to increase my stock portfolio if it simply boosts my "income" to a level that costs us other benefits.
Overall, I shouldn't be surprised that a Labor budget that delivers a $21 billion surplus might well end up costing my "working family" several thousand dollars a year.
Subscribe to Enough Wealth. Copyright 2006-2008
Saturday, 3 May 2008
Australian budget predictions
The Australian annual federal budget is due out on 13 May, and some "leaks" of the less popular announcements have started to trickle out. The tax cuts promised by both parties prior to last year's election look likely to be introduced without any changes. There had been talk of replacing straight tax rate changes with making government superannuation contributions (with an option to "opt-out" for those that want/need the extra cash in hand), but it appears that this won't happen. Perhaps the previously announced tax cut "intentions" for future years will be re framed as planned increases in superannuation funding. When the previous Labor government introduced compulsory superannuation the intention had been to ramp up towards 15% of salary, rather than the current 9%.
I'm guessing that there will be some extra funding for retirement savings - perhaps an increase in the government co-contribution. Last year the Liberal government made a "one off" doubling of the co-contribution (from $1,500 to $3,000, for those people who made a $1,000 undeducted contribution and had taxable income below the $28,000 threshold). Perhaps the maximum co-contribution amount will be raised to $3,000 and the threshold increased (from around $58,000). It would be nice if they also made the threshold calculation easier to understand (and printed it on your tax assessment notice).
The pre-budget leaks have mainly been regarding "means testing" of some government handouts. For example, the $5,000 "baby bonus" and the "family tax benefit (B)" will probably no longer be paid out where the family income is too high (a figure of $250,000 was mentioned). We wouldn't be affected by such a high cut-off threshold, but I'm not too impressed by the idea.
Although there's no need to provide government handouts to high-income individuals (or families), the cost of gathering and compiling the data required to means test ALL payments, just to eliminate a tiny fraction of the total number or recipients is often not cost-effective. In the worst-case it could end up like the family tax benefit (A) situation, where a family has to estimate it's assessable income (which is different to both total income and taxable income) for the next financial year, and is then penalised if the estimate proves to be inaccurate and they've been paid too much during the year.
There have already been announcements regarding increases in tax on alcohol and tobacco, and it will be interesting to see what current "middle class welfare" programs are cut in order to meet the government's target of a 1.5% of GDP surplus.
There will probably be some funding announcements relating to climate change initiatives - probably wind, solar, and tidal energy generating research and commercialisation funds (they need another catchy "future fund" hollow log to store future surpluses). Of course there's no chance of any funding or support for nuclear power generation in Australia from a Labor government.
Although Labor had railed against "bracket creep" while in opposition, they are now down-playing the idea of using future budget surpluses to reduce income tax rates. They have also gone very quiet about automatically indexing tax thresholds.
There will be more federal funding for education, such as the "one computer per student" program. The effectiveness of this will depend, as always, on how willing and able the state governments are to pay for the required infrastructure, support and training that such federal initiatives create.
Copyright Enough Wealth 2008
I'm guessing that there will be some extra funding for retirement savings - perhaps an increase in the government co-contribution. Last year the Liberal government made a "one off" doubling of the co-contribution (from $1,500 to $3,000, for those people who made a $1,000 undeducted contribution and had taxable income below the $28,000 threshold). Perhaps the maximum co-contribution amount will be raised to $3,000 and the threshold increased (from around $58,000). It would be nice if they also made the threshold calculation easier to understand (and printed it on your tax assessment notice).
The pre-budget leaks have mainly been regarding "means testing" of some government handouts. For example, the $5,000 "baby bonus" and the "family tax benefit (B)" will probably no longer be paid out where the family income is too high (a figure of $250,000 was mentioned). We wouldn't be affected by such a high cut-off threshold, but I'm not too impressed by the idea.
Although there's no need to provide government handouts to high-income individuals (or families), the cost of gathering and compiling the data required to means test ALL payments, just to eliminate a tiny fraction of the total number or recipients is often not cost-effective. In the worst-case it could end up like the family tax benefit (A) situation, where a family has to estimate it's assessable income (which is different to both total income and taxable income) for the next financial year, and is then penalised if the estimate proves to be inaccurate and they've been paid too much during the year.
There have already been announcements regarding increases in tax on alcohol and tobacco, and it will be interesting to see what current "middle class welfare" programs are cut in order to meet the government's target of a 1.5% of GDP surplus.
There will probably be some funding announcements relating to climate change initiatives - probably wind, solar, and tidal energy generating research and commercialisation funds (they need another catchy "future fund" hollow log to store future surpluses). Of course there's no chance of any funding or support for nuclear power generation in Australia from a Labor government.
Although Labor had railed against "bracket creep" while in opposition, they are now down-playing the idea of using future budget surpluses to reduce income tax rates. They have also gone very quiet about automatically indexing tax thresholds.
There will be more federal funding for education, such as the "one computer per student" program. The effectiveness of this will depend, as always, on how willing and able the state governments are to pay for the required infrastructure, support and training that such federal initiatives create.
Copyright Enough Wealth 2008
Friday, 7 March 2008
Budget Review
As I've previously posted, I don't normally budget these days as most things are running on "autopilot". Even our grocery shopping doesn't vary much from week-to-week. However, since I want to start tracking my expenses fully in Quicken, I've decided to do a rough budget in order to work out what categories I need to setup and use that will be meaningful to me.
This budget is somewhat unusual in that I only count "my half" of our rental property income and home and rental property loan expenses. The rental income almost covers the rental property expenses, and the difference (negative gearing) is counted as "investment" as it's tied to the eventual capital gain we expect to make on the rental property. I also ignore the interest costs of my margin loans, on the assumption that the dividend income from theses investments more-or-less covers this cost (any shortfall tends to come out of realised capital gains).
By excluding the investment income and expenses that net out to zero, my overall budget therefore corresponds to how my income is being allocated for everyday expenses:
It should also be noted that the "children" category only covers incidental expenses such as school fees, music lessons, and sports fees. The kid's clothes and food expenses are just absorbed within the general "food" category.
The housing cost is largely the repayments on our home loan, so some of this should really be allocated to the "investments" category.
I'll setup these eleven categories in Quicken and use them for my initial budget for tracking purposes. I'll setup another category ("portfolio") to lump together all the dividend income, capital gains/losses and margin loan interest expenses.
Copyright Enough Wealth 2007
This budget is somewhat unusual in that I only count "my half" of our rental property income and home and rental property loan expenses. The rental income almost covers the rental property expenses, and the difference (negative gearing) is counted as "investment" as it's tied to the eventual capital gain we expect to make on the rental property. I also ignore the interest costs of my margin loans, on the assumption that the dividend income from theses investments more-or-less covers this cost (any shortfall tends to come out of realised capital gains).
By excluding the investment income and expenses that net out to zero, my overall budget therefore corresponds to how my income is being allocated for everyday expenses:
housing_________________31.6%
retirement savings______22.8%
income tax_______________9.3%
food_____________________7.8%
transport________________6.3%
healthcare_______________5.4%
self-education___________4.4%
investments______________3.9%
children_________________3.9%
unallocated______________3.0%
entertainment____________1.5%
total__________________100.0%
It should also be noted that the "children" category only covers incidental expenses such as school fees, music lessons, and sports fees. The kid's clothes and food expenses are just absorbed within the general "food" category.
The housing cost is largely the repayments on our home loan, so some of this should really be allocated to the "investments" category.
I'll setup these eleven categories in Quicken and use them for my initial budget for tracking purposes. I'll setup another category ("portfolio") to lump together all the dividend income, capital gains/losses and margin loan interest expenses.
Copyright Enough Wealth 2007
Tuesday, 26 February 2008
Boredom based budgeting
Last century I used to use Quicken to track my expenses and income down to the cent, but I haven't done so for about ten years (although one of my goals for 2008 is to start doing it again, mainly to make my tax returns a bit easier to complete). That meant that I was able to get an accurate view of a year's income and expenses and make a pretty accurate budget for the following year. However, these days I manage without having any formal budget (at least I haven't written one down on paper for years) as everything is running more or less on autopilot, I have sufficient sources of funds available to manage any peaks and troughs in income or expenses, and I know my overall spending for the year will be won't throw out my savings plan.
How do I know that my spending will be in control, without using any budget? By living a very boring, predictable lifestyle (some would say, contented and stable). I have relatively fixed expenses on rates, utilities, travel etc. and we tend to eat the same things for breakfast and lunch (I bring lunch from home, although DW tends to eat out a bit more often), and randomly cycle through a selection of fairly simple home-cooked meals for dinner. For entertainment I generally watch free-to-air TV, browse the web, or read investment books from the local library (or while browsing in a book store). We also spend some time gardening, or travelling to the local parks and beaches, and I don't have a lot of free time anyhow since I'm busy with the kids and doing some part-time study by distance education. Of course this only works because we don't make any 'spur of the moment' purchases, and we don't spend anything on restaurants, movies etc. and don't do much (any) "entertaining" such as dinner parties. It also helps that I'd previously accumulated a whole lot of "toys" (camera, video, telescope, scuba gear, skis, mountain bike etc.) over many, many years, so that I now have a garage packed full of "stuff" to play with whenever the mood strikes (and I have any spare time!). Since I don't even have any room to store more "stuff" if I did buy it, it's quite easy to just go window shopping and ignore any pangs of temptation to buy a new shiny, plaything.
Copyright Enough Wealth 2007
How do I know that my spending will be in control, without using any budget? By living a very boring, predictable lifestyle (some would say, contented and stable). I have relatively fixed expenses on rates, utilities, travel etc. and we tend to eat the same things for breakfast and lunch (I bring lunch from home, although DW tends to eat out a bit more often), and randomly cycle through a selection of fairly simple home-cooked meals for dinner. For entertainment I generally watch free-to-air TV, browse the web, or read investment books from the local library (or while browsing in a book store). We also spend some time gardening, or travelling to the local parks and beaches, and I don't have a lot of free time anyhow since I'm busy with the kids and doing some part-time study by distance education. Of course this only works because we don't make any 'spur of the moment' purchases, and we don't spend anything on restaurants, movies etc. and don't do much (any) "entertaining" such as dinner parties. It also helps that I'd previously accumulated a whole lot of "toys" (camera, video, telescope, scuba gear, skis, mountain bike etc.) over many, many years, so that I now have a garage packed full of "stuff" to play with whenever the mood strikes (and I have any spare time!). Since I don't even have any room to store more "stuff" if I did buy it, it's quite easy to just go window shopping and ignore any pangs of temptation to buy a new shiny, plaything.
Copyright Enough Wealth 2007
Wednesday, 2 January 2008
Paying Bills
We all have bills to pay. Most are regular and some happen infrequently. The important thing is to have the money budgeted to pay them, and to pay them on time.
I don't use a precise budget - although many years ago I went through the process of recording all my regular expenses for a year and working out a detailed budget, these days I know what my normal total monthly spend will be, and get enough salary deposited into my credit union account to cover the expenses. The rest of my salary has been 'sacrificed' and gets paid into my retirement account as an additional employer contribution.
I used to pay nearly all my bills via phone or internet using my main credit card account in order to get rewards points which I redeemed for a credit onto my credit card account. As I always pay my credit card balance off in full each month, this was a better method of bill payment than cash or cheque. Unfortunately recent changes by the Australian competition authority meant that some bill payments made by credit card now attract an additional fee from the biller, making it not worthwhile paying those bill using a credit card. So, these days I now pay some bills using my credit card, but others now have to be paid directly from my credit union account using BPay.
I still get my bills sent via mail, as email isn't 100% reliable. I've also had many different email accounts over the years, some of which are no longer in use, so getting bills via email would be a nuisance when I change email accounts. (For this reason I also opt for getting dividend advice sent via mail rather than electronically). I cross as paid any bills setup from automatic payment (by direct debit) and file them away. Those that require payment are stored in my briefcase in order of due date, so I can flick through the bills once a week and pay them via phone or BPay during my lunch break.
If there is an occasional unexpected bill (such a for root canal dental work or a medical checkup) I can transfer some extra cash from my online savings account into my main credit union account to cover the extra amount that month. I don't maintain an 'emergency fund' as such, as I have a significant amount of cash invested online that was borrowed at 0% via a CC balance transfer offer, so I can always draw on that and repay it by liquidating some of my stock or mutual fund investments if needs be.
Copyright Enough Wealth 2007
I don't use a precise budget - although many years ago I went through the process of recording all my regular expenses for a year and working out a detailed budget, these days I know what my normal total monthly spend will be, and get enough salary deposited into my credit union account to cover the expenses. The rest of my salary has been 'sacrificed' and gets paid into my retirement account as an additional employer contribution.
I used to pay nearly all my bills via phone or internet using my main credit card account in order to get rewards points which I redeemed for a credit onto my credit card account. As I always pay my credit card balance off in full each month, this was a better method of bill payment than cash or cheque. Unfortunately recent changes by the Australian competition authority meant that some bill payments made by credit card now attract an additional fee from the biller, making it not worthwhile paying those bill using a credit card. So, these days I now pay some bills using my credit card, but others now have to be paid directly from my credit union account using BPay.
I still get my bills sent via mail, as email isn't 100% reliable. I've also had many different email accounts over the years, some of which are no longer in use, so getting bills via email would be a nuisance when I change email accounts. (For this reason I also opt for getting dividend advice sent via mail rather than electronically). I cross as paid any bills setup from automatic payment (by direct debit) and file them away. Those that require payment are stored in my briefcase in order of due date, so I can flick through the bills once a week and pay them via phone or BPay during my lunch break.
If there is an occasional unexpected bill (such a for root canal dental work or a medical checkup) I can transfer some extra cash from my online savings account into my main credit union account to cover the extra amount that month. I don't maintain an 'emergency fund' as such, as I have a significant amount of cash invested online that was borrowed at 0% via a CC balance transfer offer, so I can always draw on that and repay it by liquidating some of my stock or mutual fund investments if needs be.
Copyright Enough Wealth 2007
Monday, 1 October 2007
Saving for a European Vacation
We would like to take an extended overseas holiday late next year - perhaps 6 weeks driving around Germany, England, Wales and Ireland staying at B&Bs or motels. We would like to arrive home before DS2 turns two next September, as this would allow him to get the cheaper "infants" airfare. DS1 will be 8 yo next year, so he should benefit from the experience and be able to remember the highlights (especially with the help of digital photos and video!). I'm just not sure whether to go for 6 weeks or just for 3-4 weeks (we can always go again in a few years time when DS2 is old enough to benefit as well). Also, With young kids six weeks away from home may end up too stressful for all of us. I've invited my parents to come along, as we can share the car hire costs and they can help with supervising the kids (and mum can provide some translation in Germany - mein Deutch ist sehr schelcht).
I've done a rough budget for the trip and figure I need to save $750 each fortnight into an ING online savings account to have enough funds put aside for a six week trip ready by next August. I'm not including this account in my monthly net worth updates as it will all be gone again once we've been on vacation, so it would just be a short term "blip". My rough budget for the holiday is:
I'll need to get more accurate figures later this year when we make a final decision on our itinerary and start making bookings. As everything except the airfares is proportional to the length of the holiday, a three week vacation would be roughly half the cost of doing a six-week "grand tour". If we do decide on the shorter holiday I'll leave the balance of the funds sitting in the ING account and use it to fund our next European vacation in a couple of years.
I also have to check into the need for travel insurance - I think we might be able to emergency hospital treatment in the UK under the NHS (under an agreement between the Australian and UK governments). And in any case my parents would have the biggest risk of needing medical care while travelling, and I don't think they can get affordable coverage as they are both in their 70's.
Copyright Enough Wealth 2007
I've done a rough budget for the trip and figure I need to save $750 each fortnight into an ING online savings account to have enough funds put aside for a six week trip ready by next August. I'm not including this account in my monthly net worth updates as it will all be gone again once we've been on vacation, so it would just be a short term "blip". My rough budget for the holiday is:
Airfares - Aus/Europe return
2 adults: $4,000.00
1 child: $1,500.00
1 infant: $ 500.00
Car hire (7 seater van)
40 days @ $70/day = $2,800.00
Petrol
40 x 100 km ~ 400L @ $2.00/L $ 800.00
Motels/B&Bs
40 x 2 rooms x $50/night = $4,000.00
Entry Fees
Heritage passes etc. $1,000.00
Food & Beverages (mostly self-cater in motels)
40 x 4 x $25/day $4,000.00
TOTAL $18,600.00
+ miscellaneous 10% $1,860.00
Holiday budget $20,500.00
Savings Plan $750 x 28 = $21,000.00
I'll need to get more accurate figures later this year when we make a final decision on our itinerary and start making bookings. As everything except the airfares is proportional to the length of the holiday, a three week vacation would be roughly half the cost of doing a six-week "grand tour". If we do decide on the shorter holiday I'll leave the balance of the funds sitting in the ING account and use it to fund our next European vacation in a couple of years.
I also have to check into the need for travel insurance - I think we might be able to emergency hospital treatment in the UK under the NHS (under an agreement between the Australian and UK governments). And in any case my parents would have the biggest risk of needing medical care while travelling, and I don't think they can get affordable coverage as they are both in their 70's.
Copyright Enough Wealth 2007
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