07
Aug 2015

Your questions answered

Your questions answered

Answer by Hudson Adviser Phillip McGann

QUESTION: If someone between the age of 56-60 elects to take a transition to retirement what are the specific criteria that they have to meet for accessing the offset on tax paid on the payments? Can these draw-downs effectively be tax-free under certain circumstances. If so what are these conditions?

 

ADVISER ANSWER

You are asking about the tax treatment of pension payments on a Transition Pension for recipients aged between 56 and 59, which relates to the preservation age which depends on your birth date (see table below).

 

DATE OF BIRTH

PRESERVATION AGE

Before 1 July 1960

55 years

1 July 1960 to 30 June 1961

56 years

1 July 1961 to 30 June 1962

57 years

1 July 1962 to 30 June 1963

58 years

1 July 1963 to 30 June 1964

59 years

After 30 June 1964

60 years

 

NOTE: As of 1 July 2015 the preservation age is 56 when it was 55.

 

To answer your question it is important to understand that everyone has 2 x tax components within their superannuation:

 

1. Tax-free component - this comes from any after-tax contributions and never grows - the earnings on this capital is taxed at super fund rate and the net earnings become part of the taxable amount (next section).

 

2. The taxable component - this is formed by the tax-deductible contributions, including SGC and salary sacrifice, as well as any earnings from the capital within the fund (after tax). Whilst in "super accumulation" phase.

 

For those between ages 56 to 59 the income stream on an allocated pension (transition or otherwise) is added to your taxable income and taxed at your marginal rate.

Rollover from super to pension

To start a transition to retirement strategy, requires a rollover from the Super (Accumulation) fund to an Account Based Pension (often referred to as an Allocated Pension).  At this point the percentage of ‘taxable’ and ‘tax free’ components are locked in percentage terms. 

 

Let me give you an example:

  • Balance of superannuation: $500,000

  • Tax-free component is: $200,000 = 40%                         

  • Taxable component is: $300,000 = 60%                                  

The pension draw-down

The pension can be drawn anywhere between 4% and 10% of the commencing balance in year one. Assuming it is set at the minimum drawing rate of 4% – the draw down would be $20,000 in the first year. Based on the locked in percentage components.

  • $8,000 (40%)  would be tax free

  • $12,000 (60%)  would be taxable in your tax return

The tax treatment

The $12,000 per annum is taxed at your own personal marginal rate, however you get a 15% rebate - ie. $1,800 rebate against any tax you might have to pay. If the rebate exceeds the tax on that income you can offset it against other income tax, however if it exceeds all tax to be paid then you cannot claim a refund of tax (unlike excess franking credits which you can).

 

Once you reach 60 then all the income is tax free. But those tax-free and taxable components are still maintained and in the event of your death, any proceeds going to non-tax-dependants could see 15% tax deducted from the taxable component before going to them. That leads to the importance of some re-contribution strategies to reduce this impost.

Read in full + comments 0 Comments

07
Aug 2015

Mounting medical bills

Mounting medical bills

Written by Hudson Adviser Phillip McGann

Unexpected medical bills can blow a big hole in your budget, however, there are a few tricks that many people are not aware of that can help you reduce, or recoup many of these costs. 

Medicare & Private Health Insurance – ok, I know this will come as no surprise however make sure you keep your receipts and claim everything you can for both Medicare and private health insurance. I would love to know the percentage of claimable expenses that are not claimed. Some service providers now enable you to claim on the spot, which makes life much easier, but if you can’t claim on the spot and you do not have a good filing system, it can be easy to lose receipts or forget to claim. Also, make sure you understand your policy; you could be spending money on items which you could be receiving rebates for such as gym memberships, shoes, glasses, weight loss programs, etc.

 

Medicare Safety Net – if you spend more than $440.80 in any financial year on approved out of hospital services (such as GP visits, x-rays, ultrasounds and blood tests), net of the normal Medicare rebate, then you could be getting a much larger rebate on any additional costs incurred in that financial year. In most cases once you have combined the Medicare Rebate and the Medicare Safety Net the cost incurred by you will be minimal. 

 

What is the trick with the Medicare Safety Net? Well if you are part of a couple or family you must register your family for the safety net. If you are an individual, Medicare will automatically tally up your Medicare claims and if you reach the $440.80 threshold the safety net will kick in, however, as a family you are able to combine all members of the family into the single threshold making it much easier to reach. If you do not register your family for the safety net then each family member will be assessed separately. 

 

PBS Safety Net – if you spend lots of money on medications each year you might consider applying for a PBS Safety Net Card. If you are a concession cardholder, once you spend more than $366 on medication all future PBS medicine in that year will be free. If you are not a concession cardholder, the threshold is $1,453.90 and you will only pay $6.10 for PBS medicine. Similar to the Medicare Safety Net, these thresholds are the same for individuals, couples and families. 

 

Tax Deduction – if your net medical expenses (after all other refunds) are more than$$5,233 you may be entitled to receive 10% of the excess back at tax time. For those with serious medical bills this can amount to a sizeable refund. Make sure you keep your receipts and when it comes round to tax time tally them up and if you breach the magical $5,233 barrier be sure to include them in your tax return. You might assume that you would never breach this barrier but medical expenses are generally unexpected and if an injury or illness occurs late in the financial year you might miss out on large deductions if you haven’t been keeping your receipts for the rest of the year. You can include the net medical expenses of your spouse or your dependents so long as they are Australian residents for tax purposes. 

 

For all of these rebates there are only specified services that count towards any threshold or that are able to be rebated, it is recommended that you refer to the terms of any private health insurance and the below websites for more information. 
In short, keep all receipts and make sure you claim what you can; it can amount to a serious amount of money.

www.medicareaustralia.gov.au - www.ato.gov.au

Read in full + comments 0 Comments

07
Aug 2015

Real estate goes one up......or does it?

Real estate goes one up......or does it?

Written by a Hudson Adviser

In the age-old debate of Shares versus Real Estate we have always stated that both assets have their advantages and disadvantages, and that at any one time there may be better opportunities in one than the other.

Just to recap, take a look at the below scorecard for shares and real estate:  

 

Scorecard

Characteristic

Shares

Real Estate

Long Term Returns

High

+

High

+

Receipt of Income + Growth

Yes

+

Yes

+

Volatility

High

X

Low

+

Depreciation

Not Applicable

X

Applicable

+

Margin Calls

Yes

X

Not Applicable

+

Loan to Value Ratios

Lower

X

Higher

+

Cost of borrowing

Higher

X

Lower

+

Ability to add value

No

X

Yes

+

Transaction Costs

Low

+

High

X

Liquidity

Liquid

+

Illiquid

X

Franking Credits

Applicable

+

Not Applicable

X

Easy to diversify

Yes

+

No

X

Ongoing expenses

Low

+

High

X

Tenant Issues

Not Applicable

+

Possible

X

Total

8 x Positives / 6 x Negatives

8 x Positives / 6 x Negatives

+= Positive

x= Negative

 

And there we have it....... 8 positives and 6 negatives for each asset class, hence why the Hudson Institute’s philosophy is based around investing in both asset classes - with one asset class likely to be more favourable at any one time. I am not going to go into which asset class we believe is more attractive at present except to say:

  • The underlying fundamentals behind real estate point to strong gains although investors do need to be selective on location and price; and

  • The recent falls in the share market are offering investors the opportunity to invest at a 15% discount to where the market was only a month ago.

However, there is one key characteristic of real estate that I believe gives it the edge over shares. For me, when I believe both assets look equally attractive, I favour real estate for this one reason.

 

The share market is wholly and solely the domain of investors. As such every share purchase and sale decision is typically made within the framework of what will be a good and a bad investment. When an investor sells a stock it is a reasonable bet that they believe the stock is not going to perform well and when an investor buys, it is a reasonable assumption that they believe it will perform well.

 

In a nutshell, share market investing is a zero sum game, whenever you make a purchase decision someone else is making a sale decision – and as such obviously disagrees with your outlook for the stock. As a share market investor you are investing against all the other investors – most of who are full time professionals such as stockbrokers and fund managers with a wealth of information and research at their finger tips. This means that it is very difficult to outperform the market.

 

As an aside, this is a reason I often prefer to use index funds for share market investment, although I will leave the explanation of this for another day. 

 

However, the vast majority of real estate purchases and sale decisions are not based on the investment potential of the asset. 

 

It is a safe bet that whilst homeowners may have given some consideration to the investment potential of their home, the basis for their decision will usually revolve around a number of personal considerations such as:

  • Proximity to their work

  • Where their family and friends live

  • Proximity to transport

  • Quality and convenience of local amenities

  • Proximity to quality schools

  • Affordability, etc

Homeowners will normally consider the current characteristics of a suburb/town rather than the future prospects of each of these characteristics. Most homeowners do not view their home as an investment and as such are not overly concerned about its growth potential. This enables investors to identify where each of these characteristics are likely to improve, and as such where the desirability and hence price of an area is likely to rise.

 

So as an informed investor, if you can identify any demographic trends, proposed developments, infrastructure changes, business expansions etc that will benefit a suburb before they have been priced into the market, it is likely that you will be able to boost your returns.

 

For example, lets say you are aware that a suburb has the following current characteristics but with the following changes planned and/or approved for the next few years:

 

Theme

Current

Expected

Transport

30 min car into city

15 min car into city due to new road works

Transport

No train station

A proposed train station with trains leaving every 10 minutes

Local Employment

Hospital with 200 employees

Expansion of local hospital (expected to employ an additional 150 employees during construction and 100 employees ongoing)

Local Employment

Small shopping precinct

Approved shopping mall expected to generate 400 new jobs (in construction) and 200 jobs ongoing

Park

Minimal and unattractive

Beautification and new facilities planned for the local park

Yields

Average yields of 5%

Yields have risen from 3% 5 years ago to 5% now. Low vacancy rates of 1% plus the above expansions are expected to put further pressure on rents to rise.

Growth

Flat for the past 5 years

High

So here we have a suburb that looks attractive from an investment perspective - high yields, low vacancy rates and many different growth drivers – however, many of these elements may have skipped the attention of most homeowners. If these characteristics haven’t yet been factored into the price, as an informed investor you may have just identified a suburb with above average growth potential.

 

In addition to the lack of research most homeowners conduct, also consider the difference between the research your average real estate investor conducts compared with the average stockbroker or fund manager. By being diligent in your research you should not only be able to outperform the average homeowners returns, you should also be able to outperform many of the investors.

 

So whilst our viewpoint remains that both shares and real estate are the best long-term investment assets, there is one characteristic of real estate that gives it an edge. The key therefore, is to take advantage of this edge.

 

If you would like to discuss which cities, suburbs and properties are likely to outperform based on our research schedule an appointment with your Hudson adviser.

 

Footnote – Within the share market, the majority of investors place too much emphasis on short term issues and short term price movements. Hence why the market is often so volatile and why it tends to over shoot both on the way up and on the way down. This can give the calm and reasoned investor an advantage over the crowd following majority, so long as you adhere to the Warren Buffet adage “be fearful when others are greedy and greedy when others are fearful”.

 

So perhaps, the two assets are again back to level pegging …

 

Updated Scorecard

Characteristic

Real Estate

Shares

Ability to outperform

Yes – by researching reasons for growth

+

Yes – by buying when others are fearfully selling

+

Total

9 x Positives and 6 x Negatives

9 x Positives and 6 x Negatives

The point to take away is, that you can outperform in both shares and real estate so long as you act on the advantages you have over others - research your property purchases and buy shares when the market is fearfully selling.

Read in full + comments 0 Comments

Do you have a
'Dear Adviser' question?

Ask a question
Get in touch with Hudson and one of our advisers may be able to answer your question.

Ask our advisers now

Issues by month/year

Special Edition

May-2017-(C)

June-2017-(C)

June-2016-(C)

Insurance

February-2017-(C)

February-2016-(C)

December-2017-(C)

August-2016-(C)

2020-10-19

2020-09-25

2020-08-28

2020-07-31

2020-07-23

2020-07-03

2020-05-29

2020-05-01

2020-03-27

2020-02-28

2020-01-31

2019-12-20

2019-11-29

2019-10-25

2019-09-27

2019-08-30

2019-07-31

2019-06-28

2019-05-31

2019-04-30

2019-03-29

2019-03-01

2019-02-28

2018-12-21

2018-11-30

2018-10-26

2018-09-28

2018-08-31

2018-07-27

2018-06-29

2018-05-25

2018-04-27

2018-03-30

2018-02-23

2018-01-26

2017-12-15

2017-11-24

2017-10-27

2017-09-29

2017-08-25

2017-07-28

2017-06-30

2017-05-26

2017-04-28

2017-03-31

2017-02-24

2017-02-16

2017-01-27

2016-12-16

2016-11-30

2016-11-18

2016-11-11

2016-11-04

2016-10-28

2016-10-21

2016-10-14

2016-10-07

2016-09-30

2016-09-23

2016-09-16

2016-09-09

2016-09-02

2016-08-26

2016-08-19

2016-08-12

2016-08-05

2016-07-29

2016-07-22

2016-07-15

2016-07-08

2016-07-01

2016-06-24

2016-06-17

2016-06-10

2016-06-03

2016-05-27

2016-05-20

2016-05-13

2016-05-06

2016-04-29

2016-04-22

2016-04-15

2016-04-08

2016-04-01

2016-03-25

2016-03-18

2016-03-11

2016-03-04

2016-02-26

2016-02-19

2016-02-12

2016-02-05

2016-01-29

2015-12-04

2015-11-27

2015-11-20

2015-11-13

2015-11-06

2015-10-30

2015-10-16

2015-10-09

2015-10-02

2015-09-25

2015-09-18

2015-09-11

2015-09-04

2015-08-28

2015-08-21

2015-08-14

2015-08-07

2015-07-31

2015-07-24

2015-07-17

2015-07-10

2015-07-03

2015-06-26

2015-06-19

2015-06-12

2015-06-05

2015-06-02

2015-05-29

2015-05-22

2015-05-15

2015-05-08

2015-05-01

2015-04-17

2015-04-10

2015-04-03

2015-03-27

2015-03-20

2015-03-13

2015-03-06

2015-02-27

2015-02-20

2015-02-13

2015-01-30

Topics


Search all issues

Enjoy reading the Hudson Report?

Let us know your views on our news.

Contact Hudson Online