TikTok is climbing at a substantial rate. TikTok more than doubled both revenue and profit in Australia last year. This comes at a time when the Chinese-owned application is being banned on government devices in Australia and in some whole states over the pond in the USA. It seems this negative view of the app is having little impact on their business.
The Australian Energy Regulator (AER) has confirmed electricity prices will increase by between 20 and 25 percent from July 1 this year – an increase that is lower than what was previously expected. The decision will directly impact 600,000 customers on the default offer. Chair of the AER, Clare Savage stated that this increase ‘is much lower than where we were fearing it could have been last September/October, but still obviously a significant price rise for customers and difficult news at a time of cost of living pressure.’ The good news is that the price increase can be counteracted for a lot of Aussies due to the new energy bill relief from the recent federal budget.
Smart Money upside #119
Here we unpack the numbers from a recent client we helped, what they were doing with their money when they came to see us, what they chose to do as a result of going through the financial planning process, and the financial impact and upside we helped them achieve. To chat about how to get these sorts of results, you can book an intro chat with us here.
Individual, mid 30’s; household income ~ $220k; total assets ~ $1.3m; saving ~ $10k annually.
Not sure what alternative options to investing were available as they were currently all in on the property and had maximised their serviceability.
What they wanted from us / the advice process
Peace of mind with their cash flow position (particularly noting high debt levels), alternative options for investments and clarity on future dream home purchases.
What success looks like for them
Building a diversified portfolio and the future ability to purchase their dream home.
What money strategy they were following before we went through the planning process
Investing through the property and paying down debt.
What money strategy they chose to pursue from our planning work
Re-organizing cash flow to better manage debt, savings, and investing, diversifying assets via building shares, and maintaining a desired lifestyle.
Key benefits of going through the process
Clarity on wealth-building trajectory and diversification to better manage risk.
Value of advice after all advice fees year one: $1K
Year 20 upside after advice fees: $220K
If this story resonates you can book an intro call with us here.
Video of the week
The ATO has just released their 2023 hit list of the areas they’ll be cracking down on for personal income tax returns for audit. In this week’s video, I unpack their targets so you don’t end up in trouble this tax time. Check out the full video here.
Client story of the week
This week’s client story unpacks how this client in her mid 40’s created a wealth uplift of $36k in 12 months through property investing. We used this strategy as a stepping stone towards her owning her dream home completely mortgage free. Check out the full video here.
Learn the tips, hacks, and strategies to help you level up your money game. Pods released last week:
Free online money education to help you invest smarter and create a life not limited by money:
- Get tax smart – June 21, 2023, 12pm
- How to invest tax smart in the new financial year -July 12 , 12pm
- Plan smarter with money – Aug 16, 2023, 12pm
- How to FIRE without sacrificing your lifestyle – Sept 20, 2023, 12pm
Blog of the week: How to save 11% in tax when you invest
In the current inflation and cost of living crisis, every dollar counts. And, if you want to not just keep up, but actually get ahead, you need to find a way to keep investing even while things are tight.
If you can find a way to make this happen, you’ll come through this period of disruption in a stronger position than you went into it – but it’s not easy.
Finding some spare money to invest is a challenge in itself. Then, once you invest as your investments build and grow you need to pay tax on your investment income on top of everything else.
But there’s one way to invest that delivers you some serious tax breaks, and at the same time gives a simple way to build your wealth into the future.
Enter investment bonds…
An investment bond is effectively an investment account that’s subject to some special rules and tax rates, sort of like superannuation but without the same restrictions on access.
Why investment bonds?
The big benefit of investment bonds is their tax efficiencies. With an investment bond, you can invest capital gains tax free for the long term, and all investment income (dividends) don’t get added to your tax return and so aren’t taxed at your marginal tax rate.
This significantly reduces the tax rate that applies to your investment income, and therefore increases your after tax investment return. The higher your after tax return, the faster you’ll get ahead – making more progress in less time.
Key rules of investment bonds
There are two main tax related rules and benefits of investment bonds. Firstly, when you hold the investment for 10 years or longer, capital gains tax doesn’t apply. This means any growth on your investments over the long term is received entirely tax free, rather than being subject to marginal tax rates of up to 47% (discounted by 50% for investments held for longer than 12 months).
The second benefit is that income like dividends and interest from investment bonds doesn’t get included on your tax return, and instead is taxed ‘internally’ by the fund at a maximum rate of 30%. This rate is lower than marginal tax rates if your income is above $45k, and gives a significant tax saving.
Upside of investment bonds
Investment bonds aren’t right for everyone, but if they do fit for you they can deliver some serious upside.
When you invest through an investment bond, as mentioned above the maximum rate of tax on investment income is 30%, and there is no capital gains tax when you satisfy the ten year rule.
I wanted to unpack the numbers, comparing investing through one of these bonds against investing in your personal name.
Based on the long term Australian share market return of 9.8%, broken down as 4.8% income and 5% growth, we can look at the after tax return on investment bonds as below:
Before tax income of 4.8%, taxed at 30% >> after tax income return: 3.36%
Before tax growth return = after tax growth return: 5%
Total after tax return = 8.36% (total tax 1.44%)
The implied tax rate here is 14.7% (1.44%/9.8%)
This compares to investments owned in your personal name as below, assuming a personal tax rate of 34.5% (i.e. the tax rate that applies when your income is above $45k p.a.):
Before tax income of 4.8%, taxed at 34.5% >> after tax income return: 3.14%
Before tax growth 5%, taxed @marginal rate 34.5% w. 50% CGT discount = after tax growth return: 4.14%
Total after tax return = 7.28% (total tax 2.52%)
The implied tax rate here is 25.7% (2.52%/9.8%)
Based on the figures above, you can see that the tax rate on investing through investment bonds is a whopping 11% higher compared to investing in your personal name. The extra 11% goes straight to your bottom line, helping your investments to grow faster.
Worth noting that the above is based on a taxable income of $45k p.a., meaning that if your income (and tax rate) is higher, the benefits of bonds will be even greater.
Where did these bonds come from?
Investment bonds have been around for a long time, and I have to call out that historically they’ve sucked – they were expensive, didn’t have great investment options, and were really clunky with admin and paperwork.
But times have changed.
In recent years, with caps placed on superannuation, the ATO cracking down on trust investors, and with the development of more and better investment technology, investment bonds have been reborn.
Today they have sharp pricing, quality investment options, and a decent user experience to boot.
What are the risks?
Investment bonds are typically invested into the share market, so there will be ups and downs as the market moves. This means you generally shouldn’t invest money you might need in the short term, or you could be forced to sell investments when markets are down and suffer a loss.
Specifically with investment bonds, to access the main tax benefits you need to keep the money invested for the full ten-year period, so this is definitely a long-term play.
And last but definitely not least, your money is going to be put into investments – so if you choose bad investments you can lose money.
Worth noting these risks can be managed when you’re smart with your planning. Only use bonds when they fit in with your other money (and lifestyle) plans, and only use investments that consistently perform well over the long term.
Tax is the silent killer, and is something most people don’t think about until after they do their tax return, but thinking ahead around your tax will pay serious dividends. Every dollar of tax you save is an extra dollar you can use to get ahead faster or enjoy your lifestyle a little more.
Investment bonds aren’t for everyone, but if they do fit with your strategy they can deliver some serious benefits. They are complex, so if you’re going down this path make sure you understand the risks and consider getting some good advice – your focus on getting this right can make a huge difference to your bottom line not just today, but into the years ahead.
To your success,
PS: Pivot Wealth exists to help people invest smarter to create a life not limited by money. If you want help to make your next steps easier, you can book a 10 minute, no BS chat with us here.
Founder and Adviser
The information in this note is not personal advice, a guaranteed pathway to that elusive beach bod, or the lost script of Edna St. Vincent Millay’s Pulitzer Prize-winning Conversation at Midnight. This is just a bulk communication pushed out into the internet, and it doesn’t even have your name on it. Your personal situation, needs & objectives, and financial situation have not been considered in putting this together – nor have we considered your dietary preferences, the way you like your hair cut, or your favourite travel destination – but we have spent a lot of time thinking about the future of urban society, whether there is other intelligent life in the solar system, and the pervasion of soy and linseed bread in Australian metropolitan hubs. You should consider the appropriateness of any general advice in relation to your own objectives, financial situation and needs and seek advice before taking any action. You should also consider using a variety of eau de toilette fragrances to keep your partner interested and colleagues on side, not using plastic straws, and minimising your screen time. Where information relates to a financial product, you should read and understand the relevant product disclosure statement. Where information relates to your own potential for awesomeness, you should consider backing yourself totally and completely. Past performance is definitely not an indicator of future performance when it comes to investments and financial products, as well as the likelihood of your children sitting still and quiet for an hour being satisfied playing with a used piece of wrapping paper. Financial services guide.