Welcome to our spring Wealth Management update

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1 Wealth Management Serious about Success Welcome to our spring Wealth Management update This edition covers the following topics: Model portfolio summary Reverse mortgages are they worth it? Coalition policy commitments potential changes to superannuation & taxation Legislated superannuation changes September 2013 Model portfolio summary The model Australian share portfolio returns are as follows: Model Equity Portfolio Historical Return Summary Period Portfolio Return % ASX 200 Accum Index Out / (Under) Performance FY ending 30 June % 22.75% 4.86% FY ending 30 June % 6.71% 7.72% FY ending 30 June % 13.15% 5.83% FY ending 30 June % 11.73% 3.00% FY ending 30 June % 20.14% 13.10% Cumulative since 1 July % 15.61% 24.21% The model portfolio continued to perform well over the year ending 30 June 2013, returning 27.61%. Key outperformers included Ramsay Healthcare, CSL, News Corporation, Crown and Seek. The major underperformer was Newcrest Mining.

2 Wealth Management Spring update 2013 Changes to the model portfolio Key changes made to the model portfolio for FY14 are as follows: Newcrest Mining was removed as at 30 June as the potential for the gold price to fall further has increased with the continued improvement in the US economy and the likely winding back of the controversial Quantitative Easing policy. Newcrest was replaced with Dulux Group (DLX). DLX owns a suite of well know home improvement and construction products (including Dulux, Cabots, Feast Watson, British Paints, Selleys & Parchem). Since being spun off from Orica, DLX has performed strongly. Its recent acquisition of Alesco at a relatively cheap price should provide further operating leverage. Housing activity is likely to benefit from materially lower interest rates and this, coupled with DLX s strong brands, should provide modest growth over the short to medium term. The resource holdings of BHP and RIO have been marginally reduced to reflect rising global supply and a slowdown in the rate of growth from China. Reverse mortgages are they worth it? For many seniors who have only modest retirement savings, their home is their most valuable asset. They are often asset rich but cashflow poor. Reverse mortgages are relatively new products that were introduced to allow seniors (generally at least age 62 or above) to access the equity in their home to help fund their living expenses. How do they work? A homeowner can borrow against the equity in their home to take funds as either a lump sum, regular income stream or a combination of both. The loan is secured by a registered mortgage over the borrower s home. The amount that can be lent is determined by the age of the youngest borrower and the value of the property. Interest is charged at standard commercial rates but, unlike a normal loan, the borrower does not have to repay the loan but instead lets the interest capitalise (accrue and compound over time). Typically on death the house is sold, the accumulated loan (which may have grown substantially) is repaid to the bank and any surplus paid to the beneficiary (often the Estate). Many reverse mortgages are limited in recourse which simply means that if the value of the loan eventually exceeds the value of the property realised on sale, then the lender wears the loss. In addition, the lender cannot force the borrower from the property once the debt exceeds the value of the property. How much can you borrow? The amount that can be lent is determined by the age of the youngest borrower and the value of the property. Typical lending parameters are as follows: Age Loan to value 15% 20% 30% 35% 40% 45% 50% Example Property value 700, , , , , , ,000 Amount borrowed 105, , , , , , ,000 Example John is 72 and Joanne is 70. They live on the Age Pension and have almost exhausted the savings they had built up prior to retirement seven (7) years ago. The Age Pension is not sufficient to cover their living expenses and so they are exploring the option of a reverse mortgage to provide them with sufficient cashflow throughout their retirement. The bank they visited engaged an independent valuer who assessed the property as being worth $700,000. Based on the youngest age, the maximum amount they can borrow is $140,000. 2

3 Serious about Success Outcomes a) Impact on amount borrowed Joanne has the longest statistical life expectancy of years. As they do not pay any interest on the loan, after 17 years the balance outstanding on the loan has grown to $458,603 (assuming an average interest rate of 7.00%p.a. over the term). Yr Principal $ Interest $ 0 140, ,121 10, ,973 10, ,610 11, ,088 12, ,468 13, ,815 14, ,199 15, ,696 16, ,385 17, ,353 18, ,692 20, ,501 21, ,887 23, ,963 25, ,853 26, ,686 28, ,603 30, ,756 33, ,305 35,549 b) How much income can the $140,000 generate and how long will it last if drawn down? Assuming they invested the $140,000 lump sum at 5%p.a., then this would allow them to drawdown an extra $1,005 p.a. over years (Joanne s statistical life expectancy) before the money would run-out. Yr Pension Balance Income generated Pension Payments Capital Reduction 0 140, ,828 6,883 12,054 5, ,392 6,618 12,054 5, ,678 6,340 12,054 5, ,671 6,047 12,054 6, ,357 5,740 12,054 6, ,720 5,417 12,054 6, ,743 5,078 12,054 6, ,409 4,721 12,054 7, ,701 4,345 12,054 7, ,597 3,951 12,054 8, ,080 3,536 12,054 8, ,126 3,101 12,054 8, ,714 2,643 12,054 9, ,821 2,161 12,054 9, ,422 1,655 12,054 10, ,490 1,123 12,054 10, , ,054 11, ,054 4, ,423 38, ,298 40, ,127 43, ,125 46, ,520 50, ,559 54,038 3

4 Wealth Management Spring update 2013 c) Impact on Age Pension The $140,000 lump sum is subject to the Age Pension deeming rates but the total deemed annual income of $4,439 is below the annual income free threshold of $7,176 (combined) so this strategy won t end up impacting upon their pension. d) Impact on Cashflow Status quo With reverse mortgage Age pension $31,688 $31,688 Other income (lump sum drawdown) $nil $12,054 e) Impact on Net Assets Year 17 $31,688 $43,742 Status quo With reverse mortgage House value $700,000 $700,000 Lump sum cash left over $nil $5,000 Loan owed to bank $nil $458,603 Net assets $700,000 $246,397 Conclusion In most instances reverse mortgages should be viewed as a strategy of last resort. This is because interest compounds rapidly if not repaid, and can eventually erode the value of the equity in your family home. Further you are effectively borrowing at the mortgage rate (say 7%p.a. over the long term) to generate an after tax return that will usually be lower than that (unless the borrower is prepared to take a moderately high level of investment risk, which more often than not, they can ill afford to do). A reverse mortgage can also potentially have adverse Centrelink consequences for Age Pension recipients. Alternatives to reverse mortgages There are three (3) main alternatives to reverse mortgages as follows: Selling the family home and buying a cheaper one (Downsizing). The surplus proceeds can then be invested and the income and capital can be drawn down over time. This usually provides the best outcomes where this is possible but the surplus cash amount may still be subject to Centrelink s assets and income test. Selling the family home and renting. This can significantly improve cashflow but can have more adverse Centrelink consequences than downsizing. This is because the sale proceeds can be subject to Centrelink s Income and Assets Test and hence potentially lead to a more significant reduction in the Age Pension. Selling a percentage of the family home to a third party and paying a percentage of rent to that third party. This can be a valid strategy for both the homeowner and the investor when done on commercial terms. Again though, this will have Centrelink consequences as the sale proceeds will potentially be subject to the Income and Assets Test. 4

5 Serious about Success Example: Downsizing the Family Home John and Joanne decide to downsize the family home instead so that they don t have to take out a reverse mortgage on their home. Sources of Funds Sale of Family Home $700,000 Use of Funds Purchase New Family Home $450,000 Purchase/selling costs, say $30,000 Purchase Investment portfolio $220,000 $700,000 a) Impact on Age Pension The $220,000 lump sum is subject to the Age Pension deeming rates but the total deemed annual income of $7,639 is just above the annual income free threshold of $7,176 (combined) so this only reduces the Age Pension by around $9 per fortnight. b) Impact on Cashflow Status quo Downsizing Age pension $31,688 $31,457 Other income (lump sum drawdown) $nil $18,942 $31,688 $50,399 c) Impact on Net Assets Year 17 Status quo Downsizing House value $700,000 $700,000 Investment portfolio $nil $7,857 Loan owed to bank $nil $0 Net assets $700,000 $457,857 d) Conclusion This strategy is superior to the reverse mortgage option as it provides greater cashflow to meet living expenses and minimises the depletion of capital over time. Martin Fowler Partner Moore Stephens Sydney T +61 (0) mjfowler@moorestephens.com.au 5

6 Wealth Management Spring update 2013 Coalition policy commitments potential changes to superannuation and taxation Superannuation 1. Superannuation Guarantee Contributions Current Superannuation Guarantee rate of 9.25% will remain frozen until FY2016. This means the planned SG increase to 12% will be delayed by a further two years to FY Concessional Contribution Caps The level of contribution caps will be reviewed when the Budget position returns to surplus. 3. Superannuation Incentives for Low Income Earners The current Low Income Superannuation Contribution of up to $500 provided to low income earners will be removed. 4. Superannuation Co-contributions The thresholds and level of payment under the current Super Co-contributions scheme will be reviewed when the Budget position returns to surplus. 5. Minimum Pension Payments Review of the minimum pension payment levels will be conducted in view of current financial market conditions to ensure that they are adequate and appropriate. 6. Implement Process For Excess Contributions Breaches Develop a process to address breaches of the contribution caps that result from unintentional mistakes made by the member, employer or superannuation fund. 7. Streamline Small Business Super Reporting Small businesses can report super payments to a superannuation clearing house, to be established, via the Australian Taxation Office. Currently, the super payments are submitted to Medicare, which manages the government s clearing house. Taxation 1. Abolish Carbon Tax & Minerals Resource Rent Tax (MRRT) The MRRT and carbon tax to be abolished but the current income tax cuts and the current Social Security pension and benefit payment increases (that compensate for the increased cost of living resulting from the carbon tax) will be retained. 2. Company Tax Reduction The current company tax rate of 30% is to be reduced by 1.5% to 28.5% from 1/07/ Fringe Benefit Tax on Car Benefit Labor s proposal to remove the statutory formula method for calculating the FBT value of employer provided car benefit will be reversed. Dorothy Yip Technical Services Moore Stephens Sydney T +61 (0) dyip@moorestephens.com.au 6

7 Serious about Success Legislated superannuation changes since our winter newsletter Recently legislated Since our Winter 2013 Newsletter, proposed superannuation changes that have since been legislated include (but not limited to): Concessional contribution caps Concessional contributions include contributions for which the individual or an employer is allowed a tax deduction. This includes the 9% compulsory SG payments, salary sacrifice contributions and personal contributions for which an individual is entitled to claim a tax deduction (usually where less than 10% of an individual s assessable income plus reportable fringe benefits for the income year came from being an employee). The concessional contribution caps are as follows: Age FY12/13 FY13/14 FY14/15 Under 50 $25,000 $25,000 $25,000** $25,000 $25,000 $35, $25,000 $35,000 $35,000 **subject to indexation Reduction to super tax concession for higher income earners From 1 July 2012, a reduction to the concession on super contributions will apply for those with an income of $300,000 or more per annum. Currently, concessional contributions are taxed at 15%. For affected clients, concessional contributions will be taxed at 30%. This has now been legislated to apply retrospectively from 1 July Owen Nix Paraplanner Moore Stephens Sydney +61 (0) onix@moorestephens.com.au Not yet legislated Budget proposals that are yet to be legislated include: Taxable pension income above $100,000 p.a. One budget proposal was to tax superannuation pension income at a rate of 15% once earnings had exceeded $100,000 per annum, per member. No legislation has been passed and this change had a proposed start date of 1 July Deeming account based pension for Centrelink s income test Currently, account based pensions are assessed under Centrelink s Income Test as the amount of income received per annum over the deductible amount. The deductible amount is the value of the pension at commencement, divided by the life expectancy at the point of commencement. Essentially the income that is assessed is seen as being the amount in excess of the return of capital over the life of the pension. The budget proposal was to assess account based pensions in the same manner as other financial assets such as shares, cash and term deposits and have the value of the asset subject to deeming rates. No legislation has been passed and this change was proposed to commence from 1 July

8 Contact us For more information please do not hesitate to contact one of the following members of our Wealth Management team: Charlie Viola Director Martin Fowler Director Haris Argeetes Manager James Totonjian Adviser Moore Stephens Sydney Level 15, 135 King Street Sydney NSW 2000 T +61 (0) F +61 (0) sydney@moorestephens.com.au The information provided is not personal advice. It does not take into account the investment objectives, financial situations or needs of any particular investor and should not be relied upon as advice. While the information is provided in good faith and believed to be accurate and reliable at the date of preparation, we will not be held liable for any losses arising from reliance thereon. We recommend investors consult their personal financial adviser to discuss suitability and application to their individual circumstances. Articles represent the opinion of the authors and may not necessarily be representative of the views of Moore Stephens generally. Liability limited by a scheme approved under Professional Standards Legislation. * Moore Stephens Queensland and Moore Stephens Gold Coast are separate and independent firms. Moore Stephens is a network of independent firms which are independent members of Moore Stephens International Limited members in principal cities throughout the world.

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