Noel News 9 June

Time is your friend,  impulse is your enemy.
Take advantage of compound interest and don’t be captivated by the siren song of the market.

Here we are again. This is our sixth newsletter for the year, and I continue to be astounded at how quickly things are changing. Last time I wrote to you I was pessimistic about the short-term future, and those views have not changed. It is also fascinating  how the COVID-19 crisis, and all its associated damage, is further widening the gap between savvy money managers and those who live for the moment.

The opportunity to withdraw up to $20,000 from superannuation in this financial year and the next is a great example. A friend tells me his 55-year-old house cleaner withdrew $10,000 just to accessorise his motor vehicle, and a car dealer who specialises in cheap used cars tells me the under-$10,000 market is red hot. Think of the long-term implications of this: taking money that was quietly growing in a low-tax area just to get some cash for consumer spending.

But many self-funded retirees, who have spent their life working and saving, are now reaping the rewards. Prestige car dealers tell me they have never been busier, as wealthy retirees use the $50,000 or so no longer needed for an overseas cruise to change their present five-year-old vehicle to a brand-new one.

Rent or Buy

The good news is that wise money managers can still do well. Just this week I was analysing whether it is currently better to rent or buy. Previously, renting was always far cheaper than buying when mortgage repayments, annual maintenance and other outgoings were accounted for, but, for the first time, buying is looking to be no more expensive than renting.

Think about a house worth $500,000 and renting for $500 a week, or $26,000 a year. A person who borrowed the entire purchase price at 2.6% (the rate offered by one of the loans shown at Finder) would have payments of $2,000 a month, or $24,000 a year. It’s virtually line ball. Of course, there are other considerations, such as the amount of deposit needed, and mortgage insurance, but I have no problem with a couple withdrawing a total of $40,000 from their superannuation if that would boost their deposit to at least 20% of the purchase price. This could save $12,000 in mortgage insurance.

So if you are seeking property you do your homework and find a bargain. But remember the key to success in real estate is to buy cheap and add value: follow the principle of getting “the worst house in the best street”.The most important factor in your buying decision should be location – it’s worth paying more for a better location even if the house needs work. And remember, stay away from apartments – you can’t add serious value to them.

Saved by Jobkeeper

On Sunday I was having breakfast, finally, at one of our favourite restaurants in Brisbane. This gave me time to have a good chat to  the owner, and get his feelings on what was happening. Right now, his challenge is not getting customers, but handling those who are busting to come back to eat there. He tells me he was saved by Jobkeeper, and that his restaurant  could not have survived without it. Jobkeeper will cease in four months, unless the government extends it, but my friend tells me that he’s carefully managing his affairs so that he’ll be weaned off Jobkeeper by then.

He also told me about of the struggles, and the long conversations with his bank manager, that were needed to get him through this crisis. He said he was nearly at breaking point. He also told me that if another wave of infections strike, and the lockdowns are required again, he and most people he knows will be shut for good. Let’s do the right thing and responsibly open our communities again as quickly as possible.

Superannuation made Simple

Imagine living in a country, just as beautiful as Australia, but with a flat rate income tax of 15%, no Medicare levy, and capital gains tax of just 10% – you’d think about moving wouldn’t you?

But this fabled low tax promised land is actually in your postcode – it’s the Australian superannuation system.

Whenever I say “super” in a public forum, it has a kryptonite effect: eyes roll, I hear sighs and mumbles of “Too complex”, “Too many rules” and “Too many changes”. And I get it – super does seem daunting and difficult.

But unless you have a complicated financial structure more suited to the über wealthy; saving for, setting up and structuring your super is simple for the vast majority of Aussies.

What was missing was clear, easy to understand language and practical how-to’s for the 99% of us. I saw hard working, diligently saving, intelligent people cut themselves off from one of the most potent, low taxing investment and wealth creation options available because it just seemed to dense a subject to wade into.

It motivated me to write Superannuation Made Simple in the first place. When super is laid out in bite size pieces, you can see the lights go on. Readers tell me it inspired their “aha” moment – to recognise that the regulations around super are designed to work for them – many carrots (and the occasional stick) designed to turbocharge their saving and investment plans, give them a comfortable retirement and take the stress off the pension system.

So as we hurtle towards the end of financial year, I’ve been back in the home office, using the time in lockdown to revise and update Superannuation Made Simple for 2020-2021. If you’re uncertain about the directions of markets, the economy and all the change around us, it’s a really good time to take a deep breath and get to know super as a convenient, low taxing basket to place your savings and investments in.

The printed update is fresh off the presses and is now available on my website, but I know so many of you have jumped onto the Ebook trend and Superannuation Made Simple 2nd Edition for 2020-2021 is now available for all eReaders like Kindle and Apple iBooks as well as in PDF for any computer or device. Because it’s made of bytes, not atoms you can have the ebook in your hands thirty seconds from now and at a 30% discount on the printed item.

So click here to go to the eBook store and I’m sure Superannuation Made Simple will do exactly what it says on the tin – make super simple, give you a pathway to a comfortable retirement and allows you to confidently navigate Australia’s superannuation system to save tax while you’re working and enjoy a comfortable lifestyle when you’re not.

Preparing for June 30

June 30 is rapidly approaching, which means it is time to seek advice about ways to save tax. This has been a most unusual financial year, and your income may be way down. If that’s the case, it may be valuable to postpone personal concessional deductible contributions to superannuation, or repairs and maintenance on investment properties, until a year when your earnings put you in a higher tax bracket, when the deduction would give you a higher refund.

If you have some shares with a capital gain, and some with a capital loss, take advice about whether to sell both before 30 June to offset the gain against the loss. Also, if there is likely to be some CGT payable, if you are in a lower tax bracket this year, the CGT may be charged at a lesser rate.

Making superannuation contributions up to your maximum cap of $25,000 a year is a no-brainer. Once you have reached that cap, consider making a contribution for your spouse. If they earn less than $37,000 this financial year you may even get a tax offset as a bonus. Get advice on your particular circumstances, as this tax offset is unlikely to be a better option than making a deductible contribution for yourself. To qualify for the spouse contribution tax offset of $540 all you need to do is make a $3,000 non-concessional contribution, on their behalf. Your spouse may also like to consider making a non-deductible super contribution for themselves of $1,000, if they are eligible for a $500 government co-contribution.

A re-contribution strategy is worthwhile if you have access to superannuation, and are still eligible to make contributions. You could withdraw up to $300,000 tax-free, and re-contribute it as a non-concessional contribution, on which there would be no entry tax. By doing this you would convert a large chunk of the taxable component of your fund to non-taxable, and so alleviate substantial taxes for your inheritors if you died suddenly, and your superannuation went to a non-dependent.

Don’t forget the strategy of splitting your superannuation with your spouse. To be eligible, the receiving spouse must be under 65 and, if over preservation age, not retired. Where the receiving spouse turns 65 during the year of the split, you need to act before their birthday.  The transfer must be completed by 30 June.

As long as the contributing member has a sufficient account balance, the amount that can be split is the lesser of 85% of that year’s concessional contribution or $25,000. This means that, if the contributing spouse has made a $25,000 contribution, the maximum split would be 85% or $21,250.

Take advice if you are under 65 and nearing retirement, because apart from the downsizing contribution, it may be your last chance to boost your superannuation. You could still use the bring-forward rule, which will allow you to contribute $300,000 as a non-concessional contribution, and so move funds to an area where tax will be zero once you start to draw a pension from your fund.

If you are in pension mode now, keep in mind that the minimum drawdown requirements have been halved for this financial year and next. Therefore, provided your budget allows it, you may wish to reduce the minimum pension you have been drawing, and so keep more money in superannuation.

And Finally

I know how much you enjoy the jokes at the end of the newsletter – but what follows is so important I thought I must share it with you. This is the present state of the world airline industry – and it doesn’t include Singapore, Chinese, Air Asia. When you read this you can see why I fear that overseas travel is a long way away yet.

Virgin fired more than 3,000 people including 600 Pilots.

Virgin Australia filed for Bankruptcy.

Air Mauritius goes into Administration.

South African Airways Bankrupt.

Finnair returns 12 planes and lays off 2,400 people.

YOU grounds 22 planes and fires 4,100 people.

Ryanair grounds 113 planes and gets rid of 900 pilots for the moment, 450 more in the coming months.

Norwegian completely stops its long-haul activity!!!  The 787s are returned to the lessors.

SAS returns 14 planes and fires 520 pilots… The Scandinavian states are studying a plan to liquidate Norwegian and SAS to rebuild a new company from their ashes.

Etihad cancels 18 orders for A350, grounds 10 A380 and 10 Boeing 787. Lays off 720 staff.

Emirates grounds 38 A380s and cancels all orders for the Boeing 777x (150 aircraft, the largest order for this type). They “invite” all employees over 56 to retire

Wizard returns 32 A320s and lays off 1,200 people, including 200 pilots, another wave of 430 layoffs planned in the coming months.  Remaining employees will see their wages reduced by 30%.
IAG (British Airways parent company) abandons the takeover of Air Europa (and will pay Eur40 million compensation for that).

IAG (Iberia) grounds 56 planes.

IAG (British Airways) grounds 34 planes. Everyone over 58 to retire.

Luxair reduces its fleet by 50% (and associated redundancies)

CSA abolishes its long-haul sector and keeps only 5 medium-haul aircraft.

Euro wings goes into Bankruptcy

Brussels Airline reduces its fleet by 50% (and associated redundancies).

Lufthansa plans to ground 72 aircraft (in two instalments).

Hop is studying the possibility of reducing fleet and staff by 50%.

Additional info:

Currently, 60 new aircraft stored at Airbus with no buyers in sight (order cancellations) including 18 A350s.

They forecast a minimum of 8,000 grounded planes by September.  With an average of 5.8 crews per plane (medium and long haul combined), that would make more than 90,000 unemployed pilots worldwide.

Then there is the supply chain.

The Air Transport Industry is on Life Support !

I hope you have enjoyed the latest edition of Noel News.

Thanks for all your kind comments. Please continue to send feedback through; it’s always appreciated and helps us to improve the newsletter.

And don’t forget you’ll get much more regular communications from me if you follow me on twitter – @NoelWhittaker.

Noel Whittaker