Investopoly Stuart Wemyss

The Albanese government’s first Federal Budget last month was a bit of a fizzer in that there wasn’t much in the way of changes that affected investors and superannuants. 
However, subsequent murmurs by politicians’ hint at proposed changes that the government may be contemplating. In particular, I wanted to address these potential super changes and how they may impact you. 
Higher super contribution taxes for higher earners
In 2011, the Gillard government introduced a higher rate of tax that applies to super contributions made by higher income earners post 1 July 2012. The aim of this new tax was to reduce the tax benefits that super afforded to higher income earners (i.e., higher income earners enjoy a much higher tax saving in dollar terms than lower income earners). This tax is called “Division 293 tax”. 
Div. 293 applies to taxpayers that earn over a certain amount. The tax applies to all concessional (including employer) contributions at a flat rate of 30%, instead of the usual 15%. The Div. 293 income threshold is currently $250,000 based on adjustable taxable income. However, between 2012 and 2017 the threshold was higher at $300,000. 
It would be an ‘easy win’ for the government to reduce the Div. 293 threshold to raise more tax revenue. Reducing it to say $200,000 would align it to the highest marginal tax rate threshold once the stage 3 tax cuts are implemented post 1 July 2024. It would still be beneficial for higher income earners to make contributions, as it would save 17% in tax (i.e., taxed at 30% of contributed into super or 47% if taken as cash salary). 
Introduce a cap on super 
Currently, there is no limit to the amount that you can have inside super. When you are retired (i.e., in pension phase), the first $1.7 million is tax free. That is, any income and capital gains generated by this balance is tax free. Any amount more than $1.7million continues to be taxed at the standard flat rate of 15% on income and 10% on capital gains – which is still pretty good. 
But if you have over $5 million in super for example, why should you get the benefit of a 15% tax rate? The whole point of lower tax rates in super is that it increases the number of people that can fund their own retirement and not be a burden on the welfare system. But if you have $5 million, you will probably never qualify for the aged pension even if you pay the usual income tax rates. 
Capping the amount people can have in super is a no-brainer and should have been done years ago. It would help the government increase tax revenue without costing too many votes. 
Reduce the amount of super that is tax-free
As noted above, each person can have up to $1.7 million in super when retired (in pension phase) and enjoy a zero-tax rate. That means the super fund pays nil tax on investment income and capital gains (whilst still enjoying the benefits of franking credits). Also, any amount you withdraw from super as a pension is also tax free. This cap is called the transfer balance cap (TBC).
The TBC was introduced on 1 July 2017 and was originally $1.6 million. However, it is indexed to CPI and increased in $100,000 increments. Therefore, the TBC was increased to $1.7 million on 1 July 2021. 
Reducing the TBC would be an attractive way for the government to raise tax revenue as it would only impact wealthier Australians. They
To subscribe to Stuart's blog: https://www.prosolution.com.au/stay-connected/

CoreLogic data indicates that property prices in the 5 largest capital cities have fallen by 7.1% since May, when the RBA started hiking interest rates. Sydney has seen the largest price fall – down by around 10%, and Melbourne has fallen by 6.7%. 
But it’s not all bad news. House prices in Brisbane, Adelaide, and Perth are still materially higher than they were a year ago. 
I wrote a blog in March in response to fund manager, Christopher Joye’s prediction that property prices would fall 15% to 25% within 2 years if the RBA hiked rates by at least 1%. At the time, it was my view that prices would fall 5% to 7%. This has happened now, and I don’t think we’ll see any more (material) falls for the reasons set out below. 
Supply and demand are more balanced 
One of the reasons that prices have fallen this year is that it’s no longer necessary to overpay to buy a property. Last year, I wrote that the only way to successfully buy a property in 2021 was to overpay. That’s because potential buyers outnumbered potential sellers. 
Buyer demand has fallen (probably due to higher rates, share market volatility and talk of a possible recession) but so has supply i.e., the number of new listings – they are 18% below the 5 year average. As such, the market is relatively balanced (between buyers and sellers) which means there is no need to overpay anymore. Good quality, investment-grade property is still attracting strong buyer demand and is typically selling for fair value. 
Of course, some geographic markets might experience different conditions, such as regional towns and beachside locations. It is possible that some locations may experience larger declines in demand and as such, prices may continue to fall. 
Most borrowers have factored in higher rates 
Most borrowers realised that interest rates would not stay at 2% p.a. forever. Of course, if they were listening to (and believing) the RBA governor last year, they wouldn’t have expected rates to rise this year (the governor was saying they’d rise in 2024). But whether it was 2024 or 2022, most borrowers have been prepared for higher interest rates. 
It is true that the historically low rates in 2020 and 2021 did encourage people to borrow more. But not because they thought rates would never rise. Most borrowers realised that interest rates tend to range between 5% and 7% over the long run, so they viewed borrowing in 2020 or 2021 as a bit of a free kick (cheap money for a few years), especially if they fixed, which many borrowers did. 
Many existing borrowers took the opportunity to fix the interest rates on their mortgages during 2020 and 2021. These fixed rates will start expiring from next year and as such, repayments will increase substantially – more than double in some cases. This will have an impact on discretionary spending, which hasn’t yet declined. 
Also, variable interest rate borrowers haven’t yet felt the full effect of the rate hikes, as there’s a two-to-three-month lag. 
The upshot is that most borrowers are prepared for higher loan repayments. There’s a lot of fat in
To subscribe to Stuart's blog: https://www.prosolution.com.au/stay-connected/

There are many large and powerful institutions that have a vested interest in rising property prices. But all levels of government (i.e., federal, state and local) probably have the most to gain, as I’ll explain in this blog. This leads to two important observations. 
Firstly, the government is the main contributor to housing affordability pressures i.e., making housing less affordable. 
Secondly, government tax revenues are dependent upon rising prices and demand for property. I don’t want to debate whether this is right or wrong. I’m merely interested in highlighting economic and financial reality, as I think it’s helpful to inform personal investment decisions. 
The federal government revenue
The negative gearing tax break afforded to property investors has been widely debated since it was introduced in 1985. You will recall that Bill Shorten proposed to remove negative gearing in his unsuccessful federal election campaign in 2019. But its only half of the tax story.  
Using ATO data for the 2019/20 tax year, it appears that property investors claimed circa $728.5 million dollars of negative gearing income losses. But this is dwarfed by the taxable capital gains that taxpayers declared in the same year of over $20 billion. Of course these gains come from many sources (not just property investments) including share investments, sale of businesses, and so on. But property is a lumpy asset, so it tends to give rise to large CGT liabilities. Unfortunately, more granular information was unavailable. 
I’ve said in this blog many times, the most efficient way to build wealth is to invest in properties that have the attributes to drive strong capital growth over the long run, even if they produce a negative cash flow (because the rental yields are low). The wealth accumulating power of compounding capital growth will eventually dwarf any negative cash flow. 
The same is true when it comes to federal government tax revenue. The government generates a lot of (CGT) taxation revenue from rising property prices. 
State government tax revenue is highly dependent on property 
Australian states and territories generate two main taxation revenue streams from property, being stamp duty (i.e., transfer duty payable when a property is sold) and land tax. These two property taxes generate a lot of tax revenue for the states. In fact, for most states, property taxes are the single largest source of taxation revenue. For example:  
§  VIC: budgeted property revenue of $14 billion which accounts for 46.5% of the state’s total taxation revenue. 
§  NSW: budgeted property revenue of $16.5 billion which accounts for 41.6% of the state’s total taxation revenue.
§  QLD: budgeted property revenue of $6.5 billion which accounts for 34.5% of the state’s total taxation revenue. 
Transfer duty is driven by the volume and value of property sales. The states are responsible for regulating the property market. It should come as no surprise that state governments have been quite lax with regulating these markets and/or enforcing consumer protections. For example, financial advisors have very onerous obligations if they want to recommend a client invests $100k into the share market (regulated by the federal government). However, property buyers’ agents have very few obligations (virtually none) if they recommend a client invest $1m into an investment property. States want more property transactions to generate more tax revenue 
Land tax revenue is driven by land valua
To subscribe to Stuart's blog: https://www.prosolution.com.au/stay-connected/

I recently appeared as a guest on The Australian newspaper’s Money Café podcast, where we discussed the FIRE moment. The acronym stands for Financially Independent, Retire Early, which involves living as frugally as possible, investing as much as possible so that you can afford to retire as soon as possible. 
A listener that works in the mental health sector wrote into the show to say that she would actively discourage people from retiring early. Instead, perhaps work less, she suggested. She believed that working was beneficial to a person’s wellbeing and mental health. 
A UK study from 2013 found that retirement increased the probability of suffering from clinic depression by circa 40% and a physical health conditions by 60%. 
Retirement might not be as enjoyable as you expect
Imagine having the whole day to do whatever you want. No deadlines. No emails. No meetings. No obligations. Sounds appealing, right? The problem is that for many people, the retirement honeymoon wears off quickly. It is not uncommon for people to deal with a variety of feelings: 
§  Loss of self-worth. For many of us, our occupation contributes a lot towards how we define ourselves and our self-worth. Once we have retired, we no longer see ourselves as “a lawyer, a surgeon, a CEO…”, which can lead to a loss of identity which is often connected to ones self-worth.  §  Miss daily routine. The daily routine of travelling to work, meetings, deadlines and so on adds structure to our day. Without this structure, people can start to feel bored, aimless, and isolated.§  Hobbies and interests aren’t enough. Hobbies and interests can be great pastimes whilst we are working, as they allow us time to relax and socialise. However, once we stop working, we might find we need activities that offer more than just relaxation. §  Expectations are different to your spouses. If your spouse wants completely different things from retirement this could create conflict. I think most people are underprepared for retirement.
There are two important needs that work satisfies  
Speaker and coach, Tony Robbins has adapted Maslow's hierarchy of needs to derive 6 human needs to be fulfilled/happy being (1) certainty, (2) variety, (3) significance, (4) connection/love, (5) growth and (6) contribution. 
The last two needs are often fulfilled by our occupation. 
Growth 
Growth refers to the desire to constantly improve and learn more. If you are constantly striving to learn more at work, expand your capability, do work you are proud of, strive for promotions and so on, then it’s likely growth is important to you. If so, you will need to consider how you will fulfil this need in retirement. That could include finding paid or unpaid employment you connect with, studying, taking up a new hobby, travelling the world and so on. 
Contribution 
Contribution refers to a sense of service and focus on helping, giving to and supporting others. As Tony Robbins says, living is giving. This need can be fulfilled by your occupation if you work for an organisation or business that pursues a cause that you identify with. If this describes you, you’ll need to consider how you will fill this need in retirement. Some solutions to this might include helping/looking after families and/or friends, volunteering or starting your own charity for
To subscribe to Stuart's blog: https://www.prosolution.com.au/stay-connected/

A common question I receive is how much should I invest in property? That is, how do you know when you have enough, and should you start investing in other assets? 
It’s a good question because it invites people to consider their goals and develop a long-term strategy to achieve them. I set out some of the factors that you should consider below. But ultimately, it really depends on personal circumstances.  
Rule of thumb is you need 20 to 25 times income 
The first consideration is the value of the investment assets you have today compared to what you need by the time you want to retire. 
As a rule of thumb, you need to accumulate investment assets equal to 20 to 25 times the annual income you require to fund retirement. For example, if you aim to spend $100k p.a. when you are retired, you need to accumulate $2 to $2.5 million of net investment assets by the time you retire. These assets could include equity in investment properties (i.e., net sales proceeds less CGT and outstanding loans), shares and superannuation. 
Lifecycle of an investor 
If you are a long way from achieving your net asset goal, then it is likely that your investment strategy will need to be more aggressive e.g., borrowing to invest. However, if you are close to achieving this goal, then your focus should be on ensuring the mix of assets are correct. 
This video sets out the typical lifecycle of an investor e.g., why it’s best to start with property, then invest in super and shares. 
What is the right mix? 
Longevity risk is the risk that you will live longer than your financial resources will allow i.e., you’ll run out of money. To protect yourself against longevity, your investments must generate a combination of capital growth and income. Income will help you fund living expenses and capital growth will protect your asset base against the impact of inflation. 
For example, if you have $2.5 million of investment assets, your average return might consist of 3.5% income and 3.5% growth. This will provide you with approximately $88k p.a. of income. If some of this income is franked (imputation credits) or from super, you probably won’t pay any tax. In addition to income, the value of your investments will appreciate by $88k, of which you’ll need to spend $12k to top-up living expenses (i.e., to give you $100k p.a.). The remaining $76k will be reinvested and compound. This should ensure your investment assets keep up with inflation i.e., no real change in value. If that happens, theoretically (i.e., mathematically), you can afford to live forever. 
Considerations…

I discuss some of the factors that I consider when contemplating whether an investor has the right mix of assets. 
Consider the impact of debt servicing costs 
Investing in more (investment-grade) property will help you accumulate more wealth over the long run. However, if you are borrowing money to fund these investments, which most people do, it means your cash flow will become more sensitive to changes in interest rates. That’s not what you want if you are approaching retirement or would like the flexibility to enable you to reduce your employment income. In this situation, you really want less debt, not more. 
The other consideration is that investing in property absorbs more of your surplus cash flow i.e., funding the shortfall between rental income and interest cost. If you contribute all your cash flow towards funding investment property holding costs, you won’t have any ability to invest in other assets (shares and super) or repay debt. This creates an opportunity cost and might cause you to be further away from retirement, not closer to it. 

To subscribe to Stuart's blog: https://www.prosolution.com.au/stay-connected/

Calendar year to date, the stock and bond markets have produced some of the worst returns on record, which is unusual because bonds and stocks are typically negatively correlated. In fact, this has only happened two times over the past 96 years, as illustrated in this chart. Even gold, commodities and property have lost value this year. It’s really been a horrible market for investment returns. 
I discuss the key risks that have driven markets lower below, as well as highlighting the investment opportunities that exist as a result. 
How high will interest rates rise and for how long? 
I think the biggest factor that is creating the most uncertainty is what the terminal cash rate may be i.e., how high will central banks have to raise rates to reduce inflation. I don’t think the market will begin any sustainable recovery until the terminal cash rate becomes clear and ascertainable.
If the terminal cash rate turns out to be lower than what the market has priced in, then it is possible that markets could rebound strongly. In Australia, the market has priced in a terminal cash rate of 4.0%, so it’s entirely possible that the market has over-sold, since no economists expect the RBA to raise rates by another 1.40%. For example, the big 4 banks forecast the terminal cash rate to be 3.1-3.6% which is an increase by another 0.5% to 1.0% over the coming 6 to 9 months. 
In the US, its equivalent cash rate is currently set at 3.00-3.25% and the market is expecting a terminal rate of between 4.5-5.0%, so it seems the US Fed Reserve has a lot more work to do than the RBA does in Australia. 
My point is that until we see successive data that confirms inflation has begun returning to normal levels, the market cannot accurately price in an accurate terminal cash rate. 
Will there be a recession? If so, how deep? 
In response to rising inflation, central banks have hiked interest rates faster that anytime in history. 
Normally, when a central bank wants to tighten monetary policy, it does so less aggressively so that it can measure the impact that higher rates is having on the economy. This more measured approach allows central bankers to adjust their approach to ensure it doesn’t raise rates too far and cause a recession i.e., slow economic growth too much. 
Given most economic data lags by two to three months, central banks are really flying blind at the moment. That is, they won’t be able to measure the impact of current interest rate settings until the end of this year or start of 2023. As such, there’s a risk that they raise rates too fast and too hard and send the economy into a recession. How deep that recession is will depend on how much they overtightened rates. And that is yet to be seen, but it’s a risk that markets are contemplating. 
Will there be a nuclear war?
Of course, the most significant geopolitical risk is Putin using nuclear weapons in its conflict with the Ukraine. If it does, the Western alliance will have to respond and of course that could spiral into World War III.  
I am certainly not a geopolitical expert, so I cannot offer any commentary about this risk other than to say it’s a risk factor that must be impacting markets. 
What damage will energy prices inflict 
The price of domestic energy (gas and electricity) is rising around the world, especially in the UK where prices have more than doubled over the past 12 months. These price increases are likely to cause economic pain for residences of northern hemisphere countries as they approach winter. 
Residents therefore must tackle higher
To subscribe to Stuart's blog: https://www.prosolution.com.au/stay-connected/