25
Sep 2015

Insurance - policies to consider

Insurance - policies to consider

Written by Hudson Adviser Michal Park 

Insurance has always been a subject that many wish to avoid, and for many, the absolute importance of having it only hits home when personally touched by some kind of calamity. Mothers (particularly stay at home mothers) are often left uninsured as their contribution to the household is unpaid and thus deemed unworthy of replacing. We all know this is a fallacy. Being the cook, cleaner, taxi service, mediator, entertainer, lunch maker (to name but a few of my roles) for my family, it would have a massive impact if I were struck down by accident or illness. Quite simply, I would need to be replaced so that the daily routine continued to run smoothly and my partner could continue to go about his business. Not only would my paid contribution need to be replaced (my 15 hours part time employment) but also my non-paid contribution (everything else).


According to Salary.com’s “14th Annual Mom’s Salary Survey” the time mothers spend performing “job functions” in the home, would equate to an annual salary of US$118,905 for a stay at home Mum. While working mothers would earn US$70,107 above their regular salary for their mum duties. Insurance available should mothers be unable to perform these roles, that provide minimal disruption to day-to-day and longer-term goals, include trauma and income protection insurance.

Trauma insurance is perfect for individuals like stay at home mums who are unable to qualify for income protection insurance. Trauma insurance (also known as critical illness insurance) will provide a lump sum payment on the diagnosis of a serious medical condition – the big four being cancer, stroke, heart attack and coronary artery bypass grafts. I believe this insurance is an ABSOLUTE MUST for mothers. Having protection like this in place can alleviate financial stress. This was evident for one of our Hudson members who was diagnosed with MS. A mother of three in her early 40's she was employed part time and whilst she didn't take any time off work, she received in excess of $20,000 because she had a trauma insurance policy.

Of course, this insurance isn’t just for mums but also of great importance for all individuals looking to protect themselves and their loved ones. In February last year, one of my Hudson members aged in his early 50’s unfortunately had a heart attack. Luckily, it was the heart attack to have if you’re going to have a heart attack - he recovered quickly and was back at work within eight weeks. He also happened to have an old trauma insurance policy taken out years prior that paid out in excess of $127,000 just eight months later. 

Income protection insurance will replace your income by up to 75% if you are unable to work due to accident or illness. However,
one of the major sticking points regarding eligibility is that individuals must meet the minimum working requirements, which is generally 28 hours per week. For working mothers, this is an insurance worth considering in conjunction with trauma insurance, however, the employment criteria may exclude some (as it does me).

These are just two of many types of insurance to consider for as they say prevention is always better than cure. Read in full + comments 0 Comments

25
Sep 2015

What you should know about your tax return ?

What you should know about your tax return ?

Written by a Hudson Adviser Ivan Fletcher

Every tax paying citizen should know a little bit about the results in their tax return.

This information is the starting point for all investment decisions including super contribution decisions and very relevant to those gearing into growth investments such as property. Most people when asked about their tax, only know whether they had a refund or a bill and if it’s a refund you or your accountant are overnight geniuses. But it really doesn’t tell us anything other than we over or under paid tax during the year. 

So what do you need to be aware of ? 


1. Know what your Taxable Income (TI) is
It is the starting point for all tax considerations.

You will find this in PART A of your tax return at the from of your Electronic Lodgment Declaration and you will also find it on your tax notice from the ATO received after your Tax return has been assessed. 


2. Know What Marginal Tax Rate (MTR) is 
Or alternatively what Income Bracket you are in ?

Some people will calculate their average tax rate which is a fairly useless statistic for investment decisions (more useful for how much tax to pay on your BAS or IAS, but not useful to investment decisions). 

The following table identifies the current tax brackets for Australian Residents. 

** Highest Tax Bracket (> $180,000) includes 2% Budget Repair levy (applies until 30/6/17) 


3. Know how far away you are from the tax bracket below you and also above you ? 

For example if your taxable income is $90,000 you are only $10,000 into the 39.0% tax bracket and only need $10,000 of tax effective investing to lower you into the tax bracket below. 


SO HOW WOULD WE USE TAX INFORMATION IN MAKING INVESTMENT DECISIONS ?

I have used 3 examples below to demonstrate the power of this information.


1. Superannuation 

How much tax do you save if you sacrifice some of your wage to super ?

Using the example of a Taxable income of $90,000, the effective tax rate is 39.0% .
If you sacrifice to super you instead only pay 15% contributions tax (a 24.0% tax saving). 

  • In this scenario a $10,000 sacrifice to super over the year would produce a tax saving of $10,000 x 24.0% = $2,400. 
  • Your taxable income would now be reduced to $80,000 which means that any further sacrifice would produce a slightly lower tax saving. 
  • Any additional salary sacrifice would now only produce a tax saving of 19.5% (34.5% MTR–15% contributions tax). Still a good result, just not as effective as when the taxable income was in the higher tax bracket. Assume an additional sacrifice of $5,000 is made during the year the additional saving would be $5,000 x 19.5% = $975.

2. CGT considerations when selling investments 

When considering whether or not to sell shares (or property) we often get caught up focusing solely on the tax outcome. Consider Bob who has a Share portfolio worth $250,000 with a Gross gain of $100,000 that he would like to cash in and contribute to super, but is wondering if he should wait until next year when he drops to 2 days a week (partial retirement). Currently his taxable income is $120,000, but expects to drop to about $50,000 taxable income next year when he works part time. 


  • Gross Gain is $100,000
  • Taxable gain $50,000 (after 50% discount applied to all holdings held more than 12 months).
  • MTR if sold this year is 39% = $50,000 x 39.0% = Tax of $19,500
  • MTR if sold the following year is spread across two tax brackets as follows :
  • 34.5% for the first $30,000 = $30,000 x 34% = $10,350
  • 39.0% for the remaining $20,000 = $20,000 x 39.0% = $7,800
  • Total Tax $18,150 
  • Net saving in tax by waiting a year is $1,350 which represents approximately 0.5% of the value of the share portfolio ($250,000).

In the above example it would be more prudent to focus on the risk of the share market falling. For example if the share market fell 10% ($25,000) in the next year, waiting a year to save $1,350 in tax no longer seems important. 


3. Assessing the true cost of your investment Property 

The only true way to assess how much profit one has made from an investment property is to assess not only the increase in market value but the cost (in after tax terms) of holding the property each year. This information is available in your tax return also. 

Your tax return will have a schedule for an investment Property which has all the information there for you. It will look something like this. 




How to calculate the True cost of holding this property in the last year?
  1. Identify the Cash flow cost by adding back the non-cash items of depreciation and capital works. In the above example by adding back $3,800 and $4,500 to the tax loss of $20,760 provides a genuine cash flow cost of $12,460.
  2. Calculate the tax refund based on your marginal tax bracket. Assuming a taxable income of $120,000 means the tax refund is based on 39.0% MTR. The refund based on the property gearing is the Tax Loss ($20,760) x MTR (39%) = $8,096.
  3. The true after tax cost (out of your pocket) is then the cash flow cost ($12,460) less the tax refund ($9,096) = $4,364 net loss.

Now that you know the true cost of holding the property it is easier to evaluate the effectiveness of the investment. If this property was worth $500,000 at the start of the year, you would need capital growth of $4,364 to break even (approx 0.9% increase on market value). Any growth above 0.9% would be considered profit. This analysis can be particularly helpful if you are waiting for an investment market to pick up. By assessing the true cost of holding the investment for another year or two, you at least know how much growth you need for such a decision to payoff. 


None of the above investment decisions are possible without a basic understanding of your own taxable income and tax bracket. 


KNOW YOUR TAXABLE INCOME and your MARGINAL TAX RATE
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