Hello, and welcome to The Australian's Money Puzzled podcast. I'm James Kirby. Welcome aboard everybody. We have a lot going on all of a sudden. First of all, we have a budget now you might say unexpectedly, that is, the government flip flopped on this, but has finally settled on a date which is March twenty five, not far away.
Keep that in mind, folks. And we have an election, of course, which will come up soon after that in May, and they have already, of course, both sides of Parliament have started handing out the goodies here in terms of election, and there are some really important distinguishing features between the two parties here. In fact, it's in this area of investment and housing, student loans etc. That some of the
real distinction in party policy is emerging. So I think it's going to be very important in the weeks ahead, as in we need to always pay attention to budgets because we can get things, we can get things taken away. Similarly, the same goes for elections, and any investor should be across what's going on to get across what's going on. My guest today is James Gerard from Financial Advisor dot com dot you awai, James.
I'm doing great. Thanks for having me on today, James.
I'm delighted to hear this is a budget. But then I'm one of those sort of strange people who enjoys budgets. I really do. It's a bit like going for a long run. Don't necessarily enjoy it while you're doing it, but afterwards you say that was good. Now I'm really across everything, and for me at least, it's like a reset for the year. I'm just looking at. First of all, the twenty fifth is the date, and that, of course,
by nature will be a pre election budget. It gives the incumbents the ALP chance to show the wide republic where public finances are at and I mean there's raw record of that all the time, but it gives them a chance to actually a moment, if you like, in front of the spotlight, to put their case as to the standings of the broader big picture. But then there's also measures, which is what we are always interested in. What might they do, what might they aspart to do,
what might they promise going into the future. And there's a lot going on. One of the things I want to talk to you. First of all, was about that distinction on terms of what parties are offering. One big distinction is about super, really simple. The Coalition will let you use your SUPER to buy a home. The ALP will not let you do so that's a major distinction between the two parties. I don't want to get too
political in this. It's hard to cover an election without being political, but I don't want to get party political on this. I want to look at it from an investor's point of view. How powerful do you think that tapping super, allowing people to tap super might be, James.
It's really powerful, particularly for people in Sydney, Melbourne, Brisbane where property prices have gone up substantially over the past five years or ten year period, and it's really tough for these younger people in their twenties, thirties, even forties to get into the property market where it's over ten years of the average income to buy the average property, and statistics show that you need to save at least ten years work for savings to be able to get
that first property. So being able to fast track that by fifty thousand dollars per person, So if you're a couple that's one hundred thousand dollars that you can grab from your super account towards a deposit. It'll go a
long way. But then there's the well, what does that mean on the other end, where we're missing out on between fifty to one hundred thousand dollars of capital there that could have been compound in a way earning eight percent nine percent return over thirty forty years until retirement. That means that there'll be less money there for retirement. But then I guess the argument that the way that I would think about it is that it helps you achieve this goal to get into the property market sooner.
You pay down your mortgage sooner because you're off the rental ladder sooner, and then when you're in that sort of five to ten year period before retirement, that's when you can put back extra money because you don't have the mortgage anymore, and that's where you can replenish the fifty thousand plus the returns that you would have had along the way.
I mean, I have to say I'm a reluctant supporter of it for the simple reason that I know a policy wise, it's not a great idea housing should fix housing super should fix SUPER. However, I'm pragmatic. Here's the thing. All the tax breaks in the system for the individual hinge on owing your own home capital gains tax exemption, which is a big CGT exemption for homeowners. You don't get to benefit from that if you don't buy your house.
It goes through all your life right through too. When you retire, you can get the family home is effectively excluded from assessment of access to the pension. So the point I make is that it's not just about buying a house. It's about including yourself and the benefits of the tax system. And I don't think the tax system is going to change, So yes, I think there will be more support than people realize. Important point which I don't see very often covered. If you go in and
look at the actual policy. Yes, you can take fifty thousand dollar of your SUPER towards the home, assuming you have fifty thousand in there. The second thing is you've got to put it back when you sell the house, assuming you sell the house. But that's a proviso in there which hasn't had a lot of attention. So from a policy perspective, it's not quite open the doors and let all the superflow out. It has to be the amount taken out has to be returned in the fullness
of time when you sell the home. We might get some more detail on that in the election. On the other side, then, James, I think the outstanding budget election carrot from the ALP, I think at least is the HEX deal. It's so simple. You just say to someone, if you vote a LP, if you return the government, you get twenty percent off your HEX. I mean, it is just so simple and so clearly a budget giveaway.
It's outrageous almost in its simplicity. But I think for that portion of the population, which by the way is the big portion, right, so the gen X and the millenniums combined are now bigger than boomers for the first time ever, So I think that one may really work as well. Do you think the HEX one will cut through?
I think it will. I'm making an assumption here. I feel that the younger generation will swing political parties. They're less set in their ways election to election, so something like this, which on average will save them about five thousand dollars with that twenty percent of their HEX debt wiped away, is really appealing and Also, the Labor Party have another proposal around that, and that's where they're increased or they're proposing to increase the threshold of mandatory hex repayment.
So currently, if you earn less than fifty four thousand dollars per year, you don't have to pay anything back of your HEX debt. But the Labor Party are proposing to increase that to sixty seven thousand dollars per year. So that means that someone on seventy thousand dollars per year will will save about thirteen hundred per year in
mandatory hex repayment. So that also helps I guess from the cost of living side of things, where people won't be compelled to have to pay this hex stet, that they can earn more money and still have that hexit there accumulate at a low indexation rate every year.
This is one of the things that might happen is that they'll copy each other. I mean there's a lot of that going on. One party announces something and the other party says, yes, we'll do that too, which is a strange sort of mechanism which pushes the parties into
the center. But there are some things they can't copy, so in theory, at least with the HEX at least the Coalition might be able to respond on that, but the ALP is probably never going to be able to respond on allowing you to tap your super for a home deposit because of the importance of the entire supersystem to them, the SGC to them, the industry funds to
them as well, and that is a political point. But folks, I thought it was really important to get up to speed on what was going on around budget and election that we know so far, and we'll take a break and then we look at what also might happen back in a moment. Hello, Welcome back to The Australian's Money Puzzle podcast. I'm James Kirby talking to James Girard of Financial Advisor dot com dot a regular guest on the show,
contributor of course to The Australian's Wealth Section. So what else might we expect anything else going around in your wonderful world of financial planning? Three million dollars tax for super. If they get back in, they're going to bring that back in again, aren't they. They're going to have a second crack at that.
Ye, that's right. That legislation the Division two ninety six legislation has gone through the lower House successfully and it's in the Senate at the moment, and there's a lot of debate. So the Coalition don't really like it. The crossbenches have questions about it, and it hasn't been scheduled for a vote before the election, and it looks unlikely that will go through to a vote before the election.
With the AOP win, that push it to have that go through, which is that extra tax above three million dollars. But if the Coalition win, I'm pretty sure they're going to scrap it because they've been quite vocal in saying that we don't think this is fair, particularly taxing people on unrealized gains in their super account.
Yeah, I need the ALP win. They'll do some sort of deal with they'll hand pick a couple of senators and they'll just make an offer the account refuse. They'll strap it onto something else six basketball courts in your constituency or something like that and make it very attractive. So that's one that there's three million super tax, or to put it more generally, folks, you know our wealth on super is obviously on the agenda. If aop returns
and not on the agenda. Certainly not any shape or form like the one that's proposed with the taxing unrealized gains if the Coalition get back. I saw some other issues around tax relief. It's funny, you know, normally, James, when you have a budget, you've got people putting out pre budget submissions and weeks. But because the government didn't make it clear whether they were or they weren't going to have a budget, I was looking, there's only a
handful of submissions around and you know they're pretty marginal. Really, there isn't this sort of flood of pre budget submissions because people didn't do the work understandably because they didn't know there was going to be a budget. So why would you put a policy team working on a budget if you didn't know what was going to happen. And when they finally announced it, which was this week, the week of Monday, the tenth of March, only eleven days out from the budget, which is unfair I think in
many ways. But there you go. Tax really financial advice put simply, when you go into a financial advisor for the first time, you can't deduct that bill. But if you go in for the tenth time in a row, you can could you explain to people how it works on what could change?
Yes, it's similar to earning an investment property. When you buy an investment property, you cannot deduct the cost of the conveyan to for example. That forms part of what we call the capital base. So when you sell the property, you get to add that back and reduce capital gains tax.
With financial planning in the financial advisory fhees pay up front are largely similar to that where we give you advice to invest into something using a certain structure that generally has not been tax deductible in your and your tax return. But if you invest and then you make capital gains you can then claim the cost of that
advice down the track. Well, the changes are that this happened from an ATO tax ruling in around October last year from memory, where the tax officers clarified things and said that, well, we nowadays recognize financial advisors as a creditor to give some tax advice. So if the financial plans cover tax advice, this could be something like salary sacrificing in debt recycling these type of strategies, that portion of the financial plan is tax deductible.
Oh that's just so ridiculous. That is just daft. How on earth are you going to apply that, James? What are you going to do? Take yourself for something and send it into the ETO, and says, for six minutes we talked about tax, and for eight minutes we talked about didn't talk about tax.
Oh yeah, well get this. If I recommend income protection insurance, the part of that plan is tax deductible. But where I talk about life insurance and critical illness insurance, that part is not tax deductible in the tax return.
Oh, this is so stupid. It's so stupid. I don't want to talk about it anymore. Okay, folks, Just so you know, right in principle, first of all, when you go into the initial financial advisor, which is when it costs you the most, and which is where most people have their hurdle of going in for the first time because it's going to cost a lot the first time, that's not tax deductible. On an ongoing basis, what shall we say? Bits of it are more bits are than
there used to be, but still not all. Is that broadly? O?
God, that's fair to say? Yeah? Rule of thumb, you'd be able to claim the vast majority of ongoing financial advice fees. So that's not so much of a concern. It's more the upfront. There's this big calculation that needs to be done around what minutes, what paragraphs deductible not deductible.
What if I walk into you and say, hey, I don't want to talk about anything except tax, and you say, okay, is that one hundred percent tax deductible?
Then it is. Yeah, it is. As long as you go to a financial advisor who's a credited to give you tax advice, which most of them are these days, well then yeah, your whole upfront bill can be tax deductible.
That would seem to be useful piece of information. We don't give advice, but that would seem to be useful information, folks. Okay, in terms of what I've seen around that, we will know a lot more very soon, folks. But because the budget has just been called, because this is only an eleven day run up to it, that's all we can tell you seriously just now. And we have such good questions I want to jump straight chew them from Phil and Evelyn and Lucas and Andrew back in a moment. Hello,
Welcome back to the Australians Money Puzzle podcast. James Kirby here with James Gerard. For the first question. We'll do with promptly because it's from Phil and he says, is the twenty percent reduction on student loans and other empty promise. I have not heard any update on this promise. No, Phil,
no update, but doesn't need to be. They said, basically, in very broad terms, if they're re elected, because it doesn't kick into the next June, they'll take twenty percent off your HEX and they'll also push the threshold at which you must pay hex of what was it, James, From low fifties to high sixties something like that.
Yeah, that's right. From fifty four to sixty seven thousand is the proposed threshold.
Yeah, so Phil, it stands, but it hinges on the government being re elected. Okay. Evelyn says, my husband and I are in our forties and we finally in a financial position to buy our dream home. We would like to pay this home completely in fifteen years. However, in the event we can't do that, can we apply a reverse mortgage on the home after retirement? Okay? Reverse mortgages always an interesting area. This is not advice evivent, but
information only suddenly really starting to steam. I think reverse mortgages. I haven't seen the new numbers, but I've seen the action on the corporate side of the reverse mortgage providers if you like, really starting expand and raise capital and as takeovers going on. There lots happening. But on the simple question about applying a reverse mortgage on your home after you retire, first of all, I'm sure there's nothing blocking you, is there? Legally?
No, there isn't.
Is it a useful strategy for some people?
Some people it has its place, But of course there's a cost, and a very large cost. When it comes to reverse mortgages for starters. The interest rate is higher than what a normal home loan would be. So where a normal home loan is say six six and a half percent, today, reverse mortgages add two percent or more on top of that. And the other thing is that
the interests capitalized. So although you're not making a repayment on that reverse mortgage, which may seem great down the track, if you ever need to sell the house to go into an age care facility and pay a bond, or you want to leave something to your family. There may be a rude shock there because there's a very large bill that will need to be settled if you sell your house down the track. If you have a reverse.
Mortgage, and you by definition, we'll be selling your house down the track. If you have a reverse mortgage.
That's right. Well, some of the providers say that we're not going to force you to sell this in your lifetime, and that's probably why there's only a limited number of reverse mortgages providers because they need to wait a long time before they get their money back on paper. They're accumulating all this interest against you or your house. But they say, we're not going to force you to sell. We can wait for you to move to an age care facility or pass away and then we'll settle out
our debt. Then when we force you to sell the property.
Or alternatively, it's either as you say, in effect, and this is really pragmatic, folks. If not a touch prosaic means the amount you have in retirement for edge care shrinks, or should you be so lucky as to never go through that particular phase, the amount you're going to give as an inheritance, it's going to shrink because the reverse mortgage provider has to get their money back. And as you say, James, the really crucial thing, isn't it in
reverse mortgage is exact. The interest is being capitalized all the time, and that can really rack up as years go by. So someone said, oh, you know the house is worth whatever. The house is worth half a million, the house is worth a million, and you know the loan is only X. But that loan is building all the time as they capitalize the interest. And that's what
you're saying. Shocks people when they find out after ten years that what the percentage of the home proceeds that they won't get gets bigger and bigger.
Touching on another part of Evelyn's question with regards to is it better to pay off the mortgage completely when they retire. Over the years, I've advised a few people where they've maintained their home loan into retirement, so to be clear that they've stopped working, but they still have a residual mortgage, you know, say two hundred three hundred thousand dollars. They do have sufficient funds, usually in superinuation,
to pull that out and pay down the mortgage. But then it's an ongoing question to say, well, what's the interest rate on my home loan versus what's the tax free return that I'm getting inside of my superfund? And is it better for me to keep more capital in my superfund which might be generating seven or eight percent return, and use some of that interest to pay down my mortgage, which depending on the time, at the moment, it's more beneficial to take money out of super to pay down
the mortgage because interest rates are so high. But cast your mind back three or four years ago when Homeland interest rates were two percent.
I remember people on the show seeing the complete opposite, James. So there are periods where it makes sense and those periods for it doesn't make sense.
Correct.
Yeah, And at the moment, rits are so relatively high. Keep that in mind. Thank you very much for that. Even I hoped that was useful to you. But for simple answer, yes, you can apply a reverse mortgage on the whole after retirement. And is it better to pay off the mortgage completely. It depends on your particular case and stage. We're with rates, and at the moment we've got pretty high rates. Okay, Lucas.
Lucas says my wife started a sole trader speech pathology business eight months ago and we're now looking to transition to a proprietary limited company. What should we consider when deciding if we should be both directors or beneficial owners? Are their tax advantages to having it solely in her name versus both of us?
Very particular question, more of business tax question. But if you could, perhaps to all the Lucases in the world give abroad commentary on that.
I can, so the general comments I would make there is that if you're in a relationship to partners who are married, consider one person being the quote unquote risky person. That person should be the one that if the worst case happens and bankruptcy was to occur, that's limited to one spouse. So obviously that spouse you don't want it to have all the assets. So then you have the other spouse, who we call the assets spouse. So you have one that wears the hat of being the director
of the business or the businesses. And then you have the other spouse who sits as the trustee of the family trust, who owns the family home in their name. And this isn't rocket science. This is what builders have done for the past fifu and.
The one who's allowed go bankropt is obviously not the one that is the trustee of the superint blah blah blah. I mean, yeah, very obvious stuff there, but hey, not everyone knows it, not everyone is familiar with it. But there is always that guiding principle. Obviously. That's because there is usefulness in a duel, and you can stack certain things towards one side of the jewel when you need to, so you get the broad drift there, Lucas, I'm sure, okay.
Question from Sandy, could you deal with annuities on the show? On the face of it, they appear to just give your money back to you. Well, not quite unless you can access more old age pension. They are worthless, Sandy. Oh, let's rewind the tape there. Annuities not very common, however, in principle terribly attractive. Who would not like to be able to buy a product which would give you a guaranteed return for the rest of your life if that
product was really good? In principle, who wouldn't In practice, All sorts of issues around annuities traditionally but continually revisited by the market because people want them to work, and there's also some specific advantages of having annuities in the age pension system Centralink. Could you talk to Sandy a little about that one, James.
Yeah, I've advised someone in the past twelve months with regards to taking Now it's an annuity and it's not something which I would go to as my first preference. I'd rather people put into a high interest.
Why is it your default position not to go to them?
Because you're involving a company that you're giving your money to on the hope that they're going to keep paying you a monthly return on that.
But it's a promise, isn't it. It's a problem hop.
Yeah, it's a promise, but if that company faces financial difficulties and ensure We're in a highly regulated society in Australia with the financial services system, but there is a very small chance that annuity provider evaporates and so does your your capital if that's the case. And the other reason is that when I break down annuities and look at the underlying rates of return, so how can they pay you this monthly benefit? What interest are they effectively
paying you on the capital that you give them? It's always and I say always less than term deposit rates because there's a company involved. They're there to make a profit, they have overheads, So you're complicating the way that you're managing you're your money when you use an annuity. So that's why my default position is just keep it simple, keep it in a high interest bank account, keep it in a term deposit. You'll end up with more interest
with less risk. However, they do have their place, and that's usually where you're on the fringe of eligibility for the age pension, where you have little level of assets that means that you're not going to get a pension, or you want to increase your part pension and you hit it on the head. There's an asset test benefit there where not the whole value of the annuity, only
part of it gets counted towards the asset test. So it can be better in those situations if center link is important to you to on one hand take a lower return from the anuities, but then on the other hand, get a higher age pension benefit.
So the annuities have some place in terms of pension access, don't they they're exempted, are they to some degree?
Is that they used to be exempted, but then it's changed, so depending on age and circumstances, it's roughly fifty to three quarters of it can be exempt from the age pension there, so yeah, it can help those people who are just outside of the eligibility threshold for the age pension due to their level of assets.
Due to their high level of assets.
High level of assets.
Yeah, okay, we won't try and put a number on that, but very broadly it would be something what four hundred thousand, six hundred thousand that range.
Yeah, it's a bit of a four hundred thousand for there's all these different situations. If you're a couple, a homeowner, if you want the full pension, it was a circle for I think it's actually a bit high now for the indexation, maybe four hundred and eighty thousand from memory. So if you have more than that and you want to get the full pension, you don't want to keep the part pension, well then have it a look at
an annuity. But you just need to break it down and understand what you're getting when you put your money into an annuity.
Because the pension is so valuable. It's just so valuable if you think about it, Let's say there was no pensions, but you wanted to get twenty nine thousand a year as a single individual, Then how much would you have to have in savings or investments to get that. That's the way to look at it. You know, it's at least half a million. That is fine. Pension or access to it is so precious and it's such a serious part of your design of your own retirement plans, folks,
it really is. And if you're lucky enough that it doesn't matter to you, that's all fine, and we might have all aspire to that, But many people, the majority of people, actually will have access to some level of pension, and you can manage that opera down depending on how cleverly and astrutely you manage your own affairs and annuities could be part of that. Now, final question from Andrew. Perhaps it was you that was talking about in species transfers. I can't remember.
Potentially I can't recall either, but Andrew asked the idea of in specie transfers was briefly mentioned on The Money Puzzle a few times over the past few years. It'd be good to know more about it on the show with the right guests. You're the right guest, Jen, I'm the right guest. Here we go. In particular, I'm curious
if there's any age restrictions around it. Could someone in their forties transfer of basket of CBA shares into Super slash self managed Super or are their trigger points at sixty sixty five or sixty seven years of age?
This a great question, you know, it's a really good question, Andrew, thank you very much for that. So in special transfer, as folks, just to remember you have something outside Super. Right, you've got one hundred grands worth of come Work Bank shares because you were really lucky because you've bought them for very little many years ago, but you didn't have them in Super. You want to put them in Super. You can move them in, but you have to do
it at the market rate. And when you do it at the market rate across, then that's coded in specie transfer. Is that broadly correct? Is there anything? Is your age in any way relevant to this exercise? Ever?
It is the reason is that when you do in specie transfers, they are a relatively simple exercise. You just pick up the ownership of your shares, your CBA shares and your personal name and then you drop them into your super fund. And the way that you do that is an off market transfer form and it takes a couple of weeks to process it. There's minimal fees involved with that. It's really just dealing with the share registry to process that change.
And the inspecie part is that you transfer at the price on the day or at the market price.
Correct. Yeah, yeah, from memory there might be a little bit of flexibility, so I feel like there's a window there. So from memory it is maybe like twenty or twenty eight days where you could choose the price that you pick it up, but somewhere between on the day or days around it that you get to pick the price, but you basically pick it up, you move it into the super fund. Now age comes into it because when you move that investment from your personal name into the superfund,
that's a contribution to your superfund. And so we need to take into account the concessional contribution cap, the non concessional contribution cap, and of course these things are dictated
by age. But in short, as long as you're under age seventy five, it's relatively straightforward to be able to pick up assets and put that into SUPER if that amount is less than three hundred and sixty thousand, because the annual cap that you can put into SUPER with your after tax money which includes these in specie transfers,
is one hundred and twenty thousand. And you can use these things called the bring forward provision while you're under the age of seventy five to then two future years in which is three hundred and sixty thousand.
Just to make it really complicated, are the concessional rules irrelevant here?
They're not irrelevant. If you wanted to put in a bit more than three hundred and sixty thousand, well, then you could also put part of or you could classify part of that in specie transfer as a concessional.
Could you classify a certain section of it as concessional and the next section is non concessional?
Absolutely? Yeah, So if you wanted to maximize your thirty thousand concessional contribution cap, you could definitely do that, and then the rest you could do as non concessional. So usually people be working with their tax accountant or their financial advisor to firstly identify what assets to transfer, why
is that a good idea? And then the next part is how do we account for that with regards to the contribution into the superfund with that in specie transfer, will it be concessional or non concessional or mix of both.
Okay, so there you are. I think Andrew that would answer it for you. And the course then eventually with James's alluding to, is that there's a point which you're limited in what you can contribute because you might be retired. But it was seemed to me that it wasn't an issue for you. The main age restriction is to make sure you have the time to get their money in.
And if the amount you want to put in is more than you're allowed in a single year, then what you would do is you would start to string them together, and you're allowed to put three years worth together. That's called the carry forward provisions. Thank you my pleasure, James. And look, one thing when you're speaking about the budget earlier I forgot to raise was you told me a
little while ago. Remember you used to go every single year to Canberra and there used to be like lockdown facility, lockdown, lock up, lock up facility.
I think the listen will be interested to hear that that process and whether that still happens now unfortunately.
I mean, some people think it's great that it doesn't happen, but after COVID. In COVID, of course, sadly they realize you don't have to fly everybody up to Canberra, and you don't have to put them all up in hotels, and you don't have to allow them all to meet after the budget and have a big night out in Canberra where you have the busiest Tuesday night in Canberra of the year. And consequently, what happened in COVID was
they started to do lock ups in the cities. You could do it in Melbourne, you could do it in Canberra, Brisbane, wherever you want. But more recently than really only the mostly just the Canberra bureaus and maybe TV or whatever
go to Canberra. But it's no longer necessary for everyone to go to Canberra, and unfortunately we all have our own individual lockups now, which are interesting, but not quite as interesting as it used to be when you had hundredths of financial journalists all in Canberra who rarely met each other. So it was a great, great social occasion in its day, not quite as social now as it used to be. So there you are Okay, hey, thanks for all your questions and thanks for getting James to
bring me up to speed on all that. With the lock up. Our guys in it, I imagine Will be told probably told you yesterday hey, by the way, there's a lockup in in eleven days and probably gulped because they've got to get a huge facility ready and it has to be you know, closed off, you can't call a friend, etc. Has to be secure. Treasury officials have to come in and they pace up and down just like your examiner. Have you ever had an old fashioned
exam where the examiner walked up and down. The treasure officials walk up and down. Just in case you're up to anything that's most unusual set up in the budget, but there you are. It is what it is, and they were happy to report it to you. And we'll have a budget special also. Of course I do the budget every year with Will Hamilton and I will do with this year with him too. That's coming up. Okay. Thank you for your emails, Keep them rolling the Money
Puzzle at the Australian dot com dot au. Thanks to Leah Sam mcglue for producing the show, and thanks most of all to James Gerard Financial advisor dot com dot au. Talk to you again, James.
Thank you, see you next time. The Charter of FOM