What is a reasonable investment return for a long term portfolio today?
It is important to be realistic in thinking about what return to expect from your investments, be they investment property, a share portfolio or your Superannuation. A key question for investors is what should be your objective over the medium to long term, particularly if you don’t want to take excessive risk which puts your capital at significant risk. Many people have in mind something like 10% p.a., though few investors achieve that over the long term. The ASX/Russell Long Term Investing report does show Australian shares and Australian residential property have returned close to 10% p.a., before tax, over the 20 years to the end of 2013, though whether that can be sustained is open to question.
Australia’s sovereign wealth fund, known as the Future Fund, has a target return of inflation plus 4.5% p.a. With Australia’s inflation rate averaging a little under 3.0% p.a. over the past decade this suggests they are aiming for a gross return of around 7.5%, unless inflation increases or decreases significantly. While this may not sound too spectacular, it’s not easy to achieve in a world where returns on lower risk assets, like Cash, Term Deposits and high quality Bonds, are below 3.0%. Perhaps the good news is that even a more modest 7.2% p.a. each year will double your sum invested over a 10 year period (before any tax) so it is not necessary to take undue risk or expect consistent double digit returns to grow your wealth.
Superannuation Contribution Caps to apply next financial year: 2015-16
The ATO has released the super thresholds which are to apply to the 2015/16 financial year, assuming the Federal Government does not unexpectedly legislate any changes. The contributions cap for concessional and non-concessional contributions will remain the same as in 2014-15. That is, the key super thresholds for 2015/16 will be:
- (General) Concessional contributions cap – $30,000 (no change)
- (Special) Concessional contribution cap – $35,000 (no change). This cap applies to taxpayers who are aged 49 or more on 30 June 2015.
- Non concessional contributions cap – $180,000 (no change)
New Rules around Excess Non Concessional Superannuation Contributions
Punitive tax on excess superannuation contributions has been a contentious area for a number of years. New rules relating to non concessional super contributions – sometimes referred to as personal or after tax contributions, not employer or salary sacrifice contributions – have finally been passed.
On 3 March 2015, the Tax and Superannuation Laws Amendment (2014 Measures No. 7) Bill 2014 was passed by both houses of Parliament. This Bill gives effect to the 2014/15 Federal Budget proposal in respect of penalties levied on excess non-concessional contributions (NCCs). Once enacted (the bill still requires Royal Assent), the problem of excess non-concessional contributions will have been solved in respect of contributions made on or after 1 July 2013.
The new rules allow a member to elect to have excess NCCs refunded, along with 85% of associated earnings. The excess NCC amount is refunded tax free to the member. The full amount of associated earnings is added to the member’s assessable income and taxed at their marginal tax rate. The member is also entitled to a 15% tax offset reflecting tax payable within the super fund on earnings.
Associated earnings are calculated by the ATO using a formula based on the General Interest Charge. This amount is added to assessable income for the year the excess NCC relates. This measure applies to excess NCCs made from 1 July 2013. The calculation of an excess NCC is unchanged.
There are much more limited options if a super member has excess non-concessional contributions in relation to 2012/13 or earlier financial year.
Limited recourse borrowing arrangements (LRBAs) in SMSFs
Meg Heffron from Heffron SMSF Solutions recently wrote an interesting piece commenting on The Financial System Inquiry (FSI) report’s recommendation to remove borrowing from superannuation. The recommendation was predicated on an objective of “prevent[ing] the unnecessary build-up of risk in the superannuation system and the financial system more broadly”.
“It would therefore be interesting to explore what exactly what is meant by risk. If you were to ask many SMSF members today what they perceive to be their biggest risk, I expect it would be the risk of having inadequate savings to live on in retirement.
Obviously one way of failing to have enough would be to lose it all on an ill-judged investment. Another way of failing to have enough would be not achieving high enough investment returns. This is why conventional wisdom would be to encourage today’s 20-year-olds to steer clear of investing entirely in cash even though it feels safe.
Unfortunately nothing in life is ever simple – gearing in super could act positively or negatively on the “I won’t have enough” risk. Leverage can magnify the impact of a bad investment. This is the risk that is usually highlighted and certainly the one on which the FSI comments are based.
But it is also a wealth creation tool that our community often uses to maximise investment returns. It allows investors to take advantage of opportunities involving large assets that would otherwise be inaccessible. It allows funds to purchase a large asset without selling everything else they own and compromising diversification.
So which is worse? Allowing some people to blow themselves up by gearing or preventing lots of people from maximising returns by prohibiting gearing?
If we continue this train of thought about the risk of catastrophic failure, there is one glaring omission in the FSI report. That is the unique position occupied by business real property as one of the very few assets an SMSF can lease to a related party with impunity, even if it is pretty much the only asset owned by the fund.
When it all goes horribly wrong, this is also leveraging the outcome – the business owner faces the loss of a major personal asset (the business), loss of income (their job) and often a material fall in value of the fund’s major asset (the property) because its tenant is unable to pay the rent”.
Deeming rate reduction from 20 March 2015
From 20 March 2015, the social security deeming rates will reduce. Deeming assumes that bank accounts and other financial investments are earning a certain amount of income regardless of the income they are actually earning.
Changes to deeming rates:
- Lower deeming rate will reduce from 2% to 1.75%
- Upper deeming rate will reduce from 3.5% to 3.25%.
The deeming thresholds are unchanged at:
- $48,000 for single pensioners and allowees
- $79,600 for pensioner couples
- $39,800 for each member of an allowee couple.