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What Is Dollar-Cost Averaging and why is now an ideal time to start?

By using Dollar Cost Averaging, investors can get their money working for them without having to worry about the daily ups and downs of the wider market

One of the biggest deterrents for new investors is the idea that you need a lot of money to get started. When you’re still learning the ropes, the thoughts of putting a significant amount of money at the mercy of the market is very scary.

However, there is a strategy that allows you to get skin in the game while you’re still learning and no is the ideal time to start

.

How does dollar-cost averaging work?

Dollar-cost averaging means that you invest a fixed amount of money into the same fund or selection of stocks at regular intervals over a period of time.

For example, a great way to start dollar cost averaging would be to invest $100 into an ETF that tracks the S&P 500 — like the Vanguard S&P 500 ETF (NYSEARCA: VOO) — on the first day of every month. Key to dollar-cost averaging is consistency. In order for the strategy to work effectively, you need to make sure you’re fastidious in your investing and add more money to your portfolio every month.

Types of Dollar-Cost Averaging

There are three primary types of dollar-cost averaging: Basic DCA, Value DCA, and Momentum DCA.

Basic dollar-cost averaging is, well… basic! It is the simplest type of dollar-cost averaging and means that you invest the same set amount of money (a fixed dollar amount) into your portfolio every week/month — regardless of other happenings in the market. Once you have decided on the amount you wish to invest and the frequency, all you have to do is decide what stocks the money will go into.

One important thing to understand with basic dollar-cost averaging is the relationship that forms between the number of shares you buy and the movements of the market. If the share price of the investment drops in one particular month, you will end up buying more shares because the amount you are investing is still the same. Similarly, if a share price increases, you will get fewer shares per fixed dollar amount.

With Value dollar-cost averaging, you still make regular investments on a predetermined schedule. However, the difference between Value DCA and Basic DCA is that the amount you invest changes depending on the performance of your stocks.

If the price of the stock(s) you’re investing in falls over the last month, you increase the amount of money you invest in it next time. If it rises, you decrease the amount. This means that you are increasing the number of discount shares you are getting by buying low and decreasing the number of expensive shares you are receiving by not buying when it’s high.

Momentum dollar-cost averaging is similar to Value dollar-cost averaging but flipped around. So in this case, you decrease the investment after a negative month and increase the investment after a positive month. This allows you to ride on the wave of upward trending stocks and focus less on underperforming ones.

What are the advantages of dollar-cost averaging?

One of the biggest advantages of dollar-cost averaging is that it removes emotion from the equation. Humans are constantly trying to look for patterns in the chaos and can often become paralyzed by decisions. Nowhere is this more evident than the stock market.

Take the recent COVID-19 induced volatility, for example. Many investors became obsessed with the day-to-day swings of the market, trying to sell high and buy low. While this makes sense in theory, it is an incredibly difficult strategy to execute in practice and often ends up with you losing more money than if you’d just done nothing at all.   

Dollar-cost averaging is often considered a hedge against market volatility. By consistently investing, you can take advantage of the average historical return of 10% that the market has experienced since inception in 1928.

Let’s use this as an example. If we are to assume that the market returns an average of 10% per annum, a $100 investment per month over five years would equate to just over $7,300 — $1,300 of which would be interest accrued on the principal invested.

When we push this dollar-cost averaging strategy out to ten years, it becomes a much-more impressive $19,125.

And what about twenty years? Well, if you managed to dollar-cost average for that long, you could be sitting on $68,730 at the end — almost $45,000 of which is interest accrued on the investment.

Not bad for a $100 investment per month, is it?

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Superannuation early access fraud scheme detected by Tax Office and freezes super scheme

The tax office has frozen applications for early access to superannuation after identifying instances of identity theft. More than 1.2 million Australians have applied to withdraw nearly $10 billion from their super accounts during the coronavirus pandemic.

The Australian Federal Police are investigating attempts to defraud the Federal Government’s early access to superannuation scheme.

Key Points

 

  • More than a million Australians are accessing their superannuation early
  • The Australian Federal Police are investigating fraudulent activity related to the early superannuation scheme
  • Labor’s financial services spokesman, Stephen Jones says the party will demand an explanation

Assistant Treasurer Michael Sukkar

Assistant Treasurer Michael Sukkar said “claims for early super would be put on hold while the allegations were investigated and we’ll undertake that process just to make sure there is nothing more that the Australian Tax Office could do”.

Home Affairs Minister Peter Dutton, who is responsible for various policing and intelligence agencies, said there had been no cyber intrusions within superannuation funds or the ATO.

Opposition Leader Anthony Albanese said the government was unwise to allow early access to superannuation and would damage people’s retirement savings, reduce the liquidity of super funds, and distort future market investments.

Tax Office Statement

In a statement, the Tax Office said it appeared people had their details used illegally in a bid to scam the program.

“This has been stopped and the impacted individuals are being contacted,” the statement said.

“The ATO’s online systems have not been compromised.”

Jeremy Hirschhorn, the ATO’s second commissioner, said ministers had “exhorted us to do our best” but had not suggested specific responses.

The committee heard that 1.1 million Australians have applied for access to superannuation, with $9.4bn of retirement savings approved for early release.

 “He used assumed 11 identities and 53 fictitious identities to submit 68 claims for government benefits … [the] total value of claims exceeded $70,000.”

The Australian Tax Commissioner said there had been about 1 million applications for early withdrawal approved, totalling more than $9 billion.

Government authorities have detected a “sophisticated” alleged fraud of early access to superannuation, which may have deprived up to 150 Australians of $120,000 of retirement savings.

On Thursday, Treasury, the tax office and the Australian federal police fronted the Covid-19 Senate inquiry to discuss the integrity of $194bn in three tranches of stimulus.

The Australian Taxation Office commissioner, Chris Jordan, confirmed “some limited fraudulent activity has been identified and immediately acted upon” in relation to impersonation to defraud workers of retirement savings.

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Covid-19 Super Access $10,000

If you are suffering from financial stress as a result of the coronavirus, you may be eligible to access some of your Superannuation.

Generally, you are unable to access your super until you meet a full condition of release, such as retirement or reaching age 65.

The coronavirus pandemic has caused many Australians to lose their jobs, or unable to continue earning an income sufficient to cover living expenses.

The Government understands the situation many people face and will allow temporary access of super

Covid-19 Early Access To Super

If you are eligible to access your super under these measures, you will be able to withdraw up to $10,000 prior to 1 July 2020.

Should you remain eligible, you will also have access to a further $10,000 after 1 July 2020 for a limited time (approximately 3 months).

This early access to your superannuation can alleviate some of the financial stress you are facing.

These Covid-19 early access to super provisions are expected to commence from mid-April 2020, with the exact date yet to be detailed.

Am I Eligible for Covid-19 Early Super Access?

To be eligible to access $10,000 of your superannuation early under these circumstances, you need to meet one or more of the following requirements:

  • You are unemployed;

OR

OR

  • On or after 1 January 2020:
    • You were made redundant,
    • your working hours reduced by 20 per cent or more; or
    • if you are a sole trader, your business was suspended or there was a reduction in your turnover of 20% or more.

Will it Affect My Tax or Centrelink?

Accessing your super early due to the coronavirus will not affect or be assessed against any other Centrelink or Department of Veteran Affairs (DVA) payments you might be receiving.

Furthermore, the withdrawals made from super under these circumstances will be received completely tax free.


How To Apply for Early Access due to Covid-19?

The application for early access is to be made through the MyGov Website.

You will need evidence that you meet the eligibility criteria noted above.

You may be able to contact your superannuation provider for further details, but they will not be able to help you with your claim.

In saying this, it would be a good idea, while the application is being processed, to ensure your super fund has your up-to-date bank details and proof of identity, so that payment is not delayed.

All processing of early release of your super due to coronavirus will be completed through the MyGov portal.

Once you have applied, the ATO will provide you and your superannuation fund with a determination. Only at that stage will your super fund release up to $10,000 of your balance.

You will not need to apply to your fund directly. The payment will be automatically made to you.

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Allocated Pensions and Centrelink

The relationship between Allocated Pensions and Centrelink is important to understand.

Your allocated pension will affect the level of Age Pension that you are entitled to.

This article explains how your Allocated Pension affects your Centrelink entitlements and what can be done to improve your benefits.

It also details how the change in rules, as of 1 January 2015, affected the assessment of Allocated Pensions.

Basic Eligibility Assessment for Centrelink Age Pension

The level of Centrelink Age Pension that you are entitled to is based on two tests:

Whichever test results in the Government paying you the lowest level of Age Pension entitlements is the test that will be applied.

It should go without saying that the higher your income and/or assets, the lower Age Pension benefit you will receive.

Allocated Pension Centrelink Assessment – Income Test

In relation to Centrelink, an Allocated Pension is assessed in the following manner:

The annual income that you receive from your Allocated Pension is assessed under the Income Test for Centrelink purposes. However, the income that you receive is reduced by the Centrelink deductible amount

The deductible amount is intended to represent the capital component of your Allocated Pension income stream and is therefore not assessed as Income. The Annual Deductible Amount is calculated as follows:

(Purchase Price of Pension – commutations since inception)\ relevant number

This amount will generally remain static throughout the life of the pension, however should definitely be recalculated at the beginning of each year, as it will be affected and change as a result of any commutations that are made.

The Income that is assessed is the gross pension payment less the Deductible Amount.

For example, it you received pension payment of $2,500/month and the Deductible Amount was $14,500 p.a. The only income that would be assessed for Centrelink purposes would be $15,500 p.a.

 

How to increase the Deductible Amount

As you get older, the Relevant Number used in the calculation of your Deductible Amount will reduce, as it is based on your life expectancy.

Therefore, if the capital balance of your pension was to remain at a similar level, your Deductible Amount for Centrelink purposes could increase by refreshing the pension (rolling back your pension to accumulation phase and commencing a new pension), as the Purchase Price would be divisible by a smaller number, which would increase the Annual Deductible Amount.

You just need to ensure that any costs associated with refreshing the pension, time out of the market and other administrative and legislative requirements make this strategy a worthwhile and compliant exercise.

 

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Can I Buy a House With My Superannuation?

Buying a house with your Superannuation is possible, but there are some things you need to understand before doing so.

There are actually two parts to the question, ‘Can I buy a house with my Superannuation?’.

There is buying a house “to live in” as your home and then there is buying a house “as an investment property”, or maybe even a holiday house.

Depending on what you are trying to achieve, the answer may differ.

Can I Buy a House With My Superannuation To Live In?

If you plan on using your Superannuation to purchase a house to “live in”, you must first withdraw however much you need from your Super account into your personal bank account, then use that money to buy a house.

You are unable to purchase a house to “live in”, if that house is owned within your Super account, even if you have a Self Managed Superannuation Fund. 

So, how do you withdraw your Super? In order to have full access to your Superannuation and withdraw into your personal bank account, you must first meet a Superannuation condition of release. The most common forms of full conditions of release are ‘retirement’ and ‘reaching age 65’.

Retirement can include stopping work after reaching your preservation age with no intention of returning to full time or part time work, or having an employment arrangement come to an end after age 60 but reaching age 65 is self-explanatory.

Can I Buy a House With My Superannuation For Investment?

You are able to use your Superannuation savings to buy an investment property or rental property; however, there are strict guidelines on how you must do this.

In order to buy a house or commercial property for investment using your Superannuation, you would need to setup a Self Managed Superannuation Fund, as most other Superannuation funds have limited investment options that generally do not include direct property investments.

Furthermore, you need to ensure that the trust deed of the SMSF allows it, as well as the SMSFs investment strategy.

A SMSF is a Superannuation fund managed by you, whereby you are the trustee of the Super fund. There can be large costs associated in setting up and ongoing management. Consider the myriad of administrative and legal responsibilities associated; so this is something you should research thoroughly before getting into.

Importantly, a property owned within a SMSF is unable to be used for personal purposes, unless it is business real property, which can be rented to your business, provided it is done at arm’s length and for the benefit of the members of the SMSF. Again, purchasing business real property within a SMSF has many rules and limitations, so you should research thoroughly and obtain professional advice before exploring this option.

Can I Use My Super To Buy My First Home?

You are unable to use your Superannuation to buy your first home to live in, unless you have met a full Superannuation condition of release, as noted above.

However, you can use the First Home Super Saver (FHSS) to save towards your home deposit. This is done by making voluntary concessional or voluntary non-concessional contributions into your Super account, then applying for a release and withdrawing up to $15,000 plus earnings from any one year or $30,000 plus earnings across all years.

Voluntary concessional contributions include salary sacrifice contributions and personal concessional contributions. Voluntary non-concessional contributions are after-tax personal contributions.

The benefit of the First Home Super Saver Scheme is that voluntary concessional contributions can reduce your personal income tax. Also, both types of contributions, when invested within Super, will have earnings taxed at a maximum of 15%, which may be lower than your individual tax rate, allowing you to save for your deposit sooner.

Make sure you understand the FHSS rules in full before using it to save towards your first home.

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What is a Recontribution Strategy?

A superannuation recontribution strategy involves withdrawing some or all of your super balance and recontributing back into super as a non-concessional contribution. 

It is a reasonably common strategy recommended by financial advisers to their clients under certain circumstances.

So, what is a recontribution strategy?

To understand a recontribution strategy, it is important to first understand superannuation tax components.

Your superannuation balance is made up of taxable components and/or tax free components. 

The reason tax components (or tax elements) are important is because they determine the validity of a recontribution strategy.

Ultimately, you want your super balance to have a high level of tax-free components and a lower level of taxable components.

If your super balance consists of a high level of taxable components, a recontribution strategy can be used to replace them with tax-free components.

What Are Superannuation Tax Components?

When a contribution is made to your superannuation accumulation account and a tax deduction is not claimed (after tax contribution) it forms part of  the “tax free”component. Such contributions are referred to as non-concessional contributions.

To work out the ‘Taxable Component’ of your superannuation balance, you simply add up all of the Non-Concessional Contributions that have been made to your account and deduct it from the total balance of your account.

Whatever is left is considered the Taxable Component.

Why Do Tax Components Matter?

Ideally, you want your account to have a higher Tax Free Component than a Taxable Component for the following reasons:

  1. If you pass away and your balance is paid to a non-dependent (e.g. child over 18), 15% death benefits tax will be payable on the Taxable Component
  2. If you are under age 60, the Tax Free component is received tax free on any withdrawals, including income payments (assuming you can access your super); whereas the Taxable Component is assessable.
  3. If there are future changes in legislation whereby the Taxable Component is once again taxed on withdrawal for those over aged 60, you will be better positioned if you have more of a Tax Free Component.

How Does a Recontribution Strategy Work?

Let’s go with the same balance stated above. A $300,000 super account made up of $250,000 Taxable and $50,000 Tax Free. Our intention is to convert the Taxable component into a Tax Free component.

For the purposes of this, we will assume that you are over age 60, but under 65, and have met a full condition of release of your total benefits. Therefore, you should have the ability to withdraw your total balance tax free as a lump sum (check to make sure you don’t have any Taxable-Untaxed component – this may result in tax).

We will also assume that you have not triggered the bring forward rule for Non Concessional Contributions in the previous two financial years.

All withdrawals must be made proportionately. This means that we should not simply withdrawal the $250,000 Taxable Component and recontribute it, as this would contain part of the Tax Free Component and would leave part of the Taxable Component inside super and we would not be maximising the strategy.

We must withdrawal the total $300,000 and recontribute it back in as a Non Concessional Contribution.

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Australian Budget updates rates for 2019/2020

The 2019/2020 financial year introduces some new opportunities to allow you to save for your retirement through super. In this article we cover these and also provide an overview of the ‘protecting your super’ legislation and personal income tax changes.

Claiming a deduction on personal super contributions

Since 1 July 2017, employees as well as the self-employed, can claim a tax deduction on personal super contributions.

If you are aged between 65 and 74 you can make a contribution to super but you need to meet a work test. To pass the work test, you need to have been ‘gainfully employed’1 for at least 40 hours over 30 consecutive days during the financial year in which you plan to make the contribution. That’s a little over one week’s worth of full-time work in a single month.

Also, if you’re aged between 65 and 74 and have a ‘total super balance’2 under $300,000, you can make personal contributions to super in the first financial year in which you no longer meet the work test. This is likely to be the first year following your retirement.

Unfortunately, if you are 75 or over you are not eligible to make a personal contribution to super.

Generally, the cap on concessional contributions is $25,000 each financial year.

What if you didn't contribute last financial year - do you miss out?

For the first time this financial year, if you have a total super balance of under $500,000, you can contribute the unused portion of your concessional contributions cap, or ‘carry-forward’ amount, from last financial year. That is, if you didn’t contribute in the 2018/19 financial year, you may be able to carry forward $25,000 to this financial year and contribute up to $50,000.

Currently, only the unused concessional contribution cap amounts in the 2018/19 financial year can be carried forward. Then, for future financial years, the unused concessional contribution cap amounts can be carried forward, on a rolling basis, for five years.

So, if you’ve accrued a carry-forward concessional contribution amount, you may want to start, or increase your salary sacrifice contributions, or make a personal concessional contribution to super. This can be particularly beneficial for your tax bill if you’ve significantly increased your income, for example, if you’ve sold an asset with a large capital gain.

Protecting your super legislation.

The ‘protecting you super’ legislation came into effect on 1 July 2019 and is designed to protect people’s super balances. The three main changes are:

    • Insurance in super – if you have an inactive super account, defined as an account where you have made no contributions in the last 16 months, your insurance will be cancelled unless you take action. You can retain your insurance by contacting your super fund and ‘opting-in’ to retain your insurance or having a contribution made into your account every 16 months.
    • Low super balances – if your super account balance is under $6,000 there is a cap placed on fees, limiting them to no more than 3% per year. Also, if you have an ‘inactive low balance’ account, the Australian Taxation Office (ATO) is now responsible, where possible, for consolidating this money with your active super account. An inactive low balance account is broadly defined as an account with a balance of under $6,000 where no activity has occurred in the last 16 months. This includes where no contributions have been made to the account in the last 16 months and where there is no active insurance on the account. Other new definitions apply.
    • Exit fees – when you exit a super fund you will no longer be charged an exit fee.
    • Low super balances – If your super account balance is under $6,000 there is a cap placed on fees, limiting them to no more than 3% per year. Also, if you have an‘inactive low balance’ account, the Australian Taxation Office (ATO) is now responsible, where possible, for consolidating this money with your active super account. An inactive low balance account is broadly defined as an account with a balance of under $6,000 where no activity has occurred in the last 16 months. This includes where no contributions have been made to the account in the last 16 months and where there is no active insurance on the account. Other new definitions apply.

Personal income taxes and Tax offsets

Australians can continue to enjoy the first round of personal income tax changes that started in July 2018.

From 1 July 2022, the Government will increase the 32.5% tax threshold from $90,000 to $120,000. This means there will be less people in the 37% tax bracket and more in the 32.5% tax bracket. On 1 July 2024, the 37% tax bracket will eventually disappear and the 32.5% tax bracket will reduce to 30%. It’s estimated that 94% of personal taxpayers will have a marginal tax rate of 30% or less in the 2024/25 financial year.

In addition to the changes to income tax, the Government has introduced a temporary tax offset called the low and middle income tax offset (LMITO), of up to a maximum of $1,080 per person and phases out for those earning over $126,000 per annum.

This is in addition to the low income tax offset (LITO) for those earning under $66,666 per annum.

The LMITO offsets will end after the 2021/22 financial year. However, from 1 July 2022, the Government will increase the (LITO), from $445 to $700to continue to support low income earners.

You don’t need to do anything to receive the tax offsets, the ATO will assess your eligibility when you complete your personal tax return.

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Excess Super Contributions Tax Rules

Excess superannuation contributions tax is payable on contributions that exceed the “non-concessional contributions cap” or the “concessional contributions cap”

The rate of excess contributions tax that is payable on excess contributions is dependent on the type of contribution that was being made. Your individual taxable income will also affect the level of excess contributions tax payable.

The purpose of excess contributions tax is not designed to penalise people for exceeding the relevant contribution caps, but rather to ensure that any excess contributions are taxed at the rate they would have otherwise been taxed had the excess contributions not been made.

In saying that, in some situations the excess contributions tax on non-concessional contributions can be taxed at a rate that is higher than an individual’s marginal tax rate.

What Is A Concessional Contribution?

A concessional contribution is a contribution made or received into a Superannuation fund that the contributor claimed a tax deduction for. The current concessional contribution cap is $25,000 per person, per financial year.

The new rules also allow individuals with superannuation balances to carry forward unused concessional contribution caps for up to 5 years from 1 July 2018, which can be utilised from 1 July 2019.

Keep in mind that people aged over 65 will need to meet the Superannuation work test to make or receive concessional contributions. 

The ordinary contributions tax payable on concessional contributions is 15% of the amount contributed. Please note, there is an additional 15% contributions tax payable by high income earners and a low income Superannuation contribution designed to offset the standard contributions tax

What is a Non-Concessional Contribution?

A non-concessional contribution is an after-tax contribution made into a Superannuation account. Non-concessional contributions are generally made from an individual’s personal bank account into Superannuation for the purpose of saving towards retirement in a tax effective manner. 

Superannuation can be tax-effective as all earnings on investments within are taxed at a maximum of 15%, as opposed to an individual’s marginal tax rate. The current non concessional contribution cap is $100,000 per person, per financial year.

Further, an individual with a Superannuation balance of $1.6 million or more will not be able to make any additional non-concessional contributions. There is also the ability to bring forward up to 2 additional years of the non-concessional cap for individuals under age 65.

Transitional rules apply to the non-concessional contribution ‘bring-forward’ rule in respect of the significant reduction in the cap from 1 July 2017.

Non-concessional contributions do not incur contributions tax as they are after-tax contributions and tax has already been paid on this amount prior.

Excess Contributions Tax: Concessional Contributions

Exceeding the concessional contribution cap will result in the excess being treated as excess contributions. Excess contributions are included in an individual’s assessable income and taxed at their personal marginal tax rate. An excess concessional contribution charge also applies.

As these excess contributions are taxed at an individual’s marginal tax rate, a 15% non-refundable tax offset is received in order to reimburse for the 15% contributions tax that was paid ensuring the individual is not over-taxed.

Up to 85% of the excess contributions are able to be released from Superannuation to assist with the additional personal income tax payable. Any amount released is not counted towards a persons non-concessional contribution cap.

Excess contributions that are not released will count an individual’s non-concessional contribution cap. This could result in inadvertently exceeding the non-concessional contribution cap.

Excess Contributions Tax: Non-Concessional Contributions

Exceeding the non-concessional contribution cap will result in the excess being treated as “excess contributions”. 

The excess non-concessional contributions can be withdrawn from Superannuation, plus 85% of any earnings on that amount.

The earnings relevant to the excess contributions are included in an individual’s assessable income and taxed at their marginal tax rate, minus a 15% tax offset designed to rebate the tax on those earnings.

Excess contributions that are not withdrawn from Superannuation are taxed at the highest Marginal Tax Rate (MTR), plus Medicare (currently 45%, plus 2% Medicare Levy) within the Super fund.

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How to compare super funds in 7 easy steps

Superannuation is a long-term investment but that doesn’t mean you can afford to put off thinking about it for a day that never comes.

Like any long-distance journey, you want to make sure you know where you are headed and how to reach it. That includes finding a vehicle that’s fit for purpose. Otherwise, you could end up short of funds to enjoy your destination – in this case, retirement.

Whether you are choosing your first super fund, consolidating several funds into one, or wanting to switch to something better, it pays to invest some time in thinking about what you need in a fund and then comparing what’s on offer.

Most people these days can choose their fund, unless you happen to be an employee in a defined benefit fund or covered by an industrial agreement. You may be lucky and end up in a high-performing default fund, but unless you verify that this is the case what you don’t know could be very costly.

The following 7 steps are designed to guide you through the process of comparing and choosing a fund that will get you where you want to go.

1. Know what you want

Before you start comparing the market for any major purchase, be it a car or a super fund, it’s important to think about what you want. Otherwise you could end up paying for expensive extras you don’t need.

A fund with a wide range of investment options and scope for active management and individual tailoring will generally charge higher fees. Australian Expatriate Superannuation Fund is designed for members who want a hands-off, easy to understand, no-frills fund with low fees. Personal super products are designed with the self-employed or self-directed in mind while retirees drawing down their super need a pension account.

An increasing number of Australians, particularly younger members, want the ability to choose a sustainable or socially responsible, or a fund that takes ESG (environmental, social and governance) issues into account in all investment decisions.

Your time horizon and appetite for risk is also a factor. Younger members can afford to take on more risk so a high growth option with a good track record is important. Or you may be interested in fund with a life-stage or life-cycle option which automatically adjust your asset allocation, or the mix of high- and low-risk investments, as you age. If you are near the end of your working life or already retired, you will want a fund with a highly rated pension account.

It’s not all about investments and returns. Do you want a fund with a good insurance offering, the ability to monitor and transact from your mobile, free advice or the ability to make a binding death benefit nomination? The latter provided more certainty over who inherits your super when you die.

2. Explore your options

If you are already in a fund, check its website or annual reports so you know what it does and doesn’t offer. Also check its investment performance over 3, 5, 7 and 10 years as well as its fee structure. Then go online to research and compare other funds on offer.

The three most established comparison websites are Chant West, Selecting Super and Super Ratings. All produce annual performance tables and fund ratings as well as educational material.

Most of this material is free, but Chant West and Selecting Super charge for a more detailed comparison of two or three funds. The ratings methodology of each group is slightly different, but they all use a combination of factors including returns, fees, insurance offerings and member services.

3. Survey the investment landscape

Most super funds these days offer an extensive a la carte menu of investment choices. You can mix and match your own portfolio of shares, property, fixed interest, cash and other assets, or choose from a selection of pre-mixed investment options.

‘Conservative’ pre-mixed options contain mostly lower-risk defensive assets such as bonds, cash and fixed interest investments. ‘Growth’ options hold mostly higher-risk shares and property, and ‘Balanced’ options are more equally weighted between the two. In practice though, Balanced options can hold up to 70 per cent growth assets, so drill down and check the asset allocation.

For those who want more control but may not have the account balance or inclination to run their own SMSF, many funds now allow you to buy and sell direct shares and exchange-traded funds.

4. Compare performance history

Past performance is so guarantee of future returns, but you can have more confidence in a fund with a track record of above average returns over at least five years.

You will also notice that short-term fluctuations from one year to the next tend to even out in the long run. This is particularly evident with high growth options, which invest mostly in shares, whereas conservative options produce steadier, lower returns over time.

If the thought of losing a sizeable chunk of your fund’s value in a single year makes you anxious, then a more conservative investment option might help you sleep easier at night.

When checking performance, make sure to compare like with like. For example, compare high growth options with other high growth options and life-stage options with other life-stage options. This is especially important when comparing balanced funds because the tilt towards growth assets can vary enormously.

5. Add up the costs

Small differences in fees can add up to a big dent in returns over the life of your super. The amount of money available to you in retirement will depend on your investment returns less fees and tax. It’s not uncommon for people to spend a great deal of time trying to minimise tax, while fees fly under the radar.

Superannuation funds are required to disclose their total fees and charges in their Product Disclosure Statement (PDS) and your annual statement. These include an administration fee to cover the costs of managing the fund and your account, investment fees to cover the cost of managing your investments and performance fees where applicable. While exit fees are pretty much a thing of the past, do check if there is a fee for advice and if you are getting what you pay for.

There are plenty of low-cost funds with total annual fees of less than 1% of your account balance, but fees should never be looked at in isolation. Funds with a lot of money in property and private equity, for example, tend to have higher costs than funds with mostly cash and bonds. The trade-off for higher risk and costs ought to be higher returns in the long run, but don’t assume this is the case, check it out.

6. Don’t forget insurance

Taking out insurance cover inside your super fund can be very cost effective because funds are able to negotiate group rates. Many funds offer life insurance, total and permanent disability (TPD) and income protection at competitive rates.

Do be aware though that insurance premiums inside super are paid from your account, so there is less money earning a return. This may be a price you are willing to pay if you don’t have enough free cash flow to pay premiums outside super.

For some people with a SMSF, the attraction of low-cost insurance is enough to justify keeping a small amount of money in an industry fund on the side. However, default cover in super is generally limited, so you may need to top up your cover. It can be slower to pay and unless you have a binding nomination your chosen beneficiaries may not receive your insurance death benefits.

Many employees in public offer funds will have default insurance cover. However, changes announced in the 2018 Federal Budget, due to be introduced on 1 July 2019, will make insurance opt-in for members under 25 and members with low balances or inactive account. As a result, premiums are expected to rise for members with insurance.

Changes to default cover make this an opportune time to check the type, level and cost of insurance you hold in super and compare what’s on offer elsewhere. You can find this information on your annual statement and funds’ websites.

7. Follow your leads

Once you’ve identified some promising funds, it’s time to probe deeper. Check their website, download their PDS and phone or use online chat to ask questions. Even if you don’t have questions, chatting will give you an insight into their customer service.

At this stage you might also want to check for other services and benefits that are important to you. Some may want a fund that offers free financial advice, educational tools and member information seminars. Others may want cheap insurance, the ability to make a binding death benefit nomination or a seamless transition from accumulation to pension phase.

If you decide to change funds, you can do this by filling in a rollover form and sending it to you new fund or by logging in to your MyGov account.

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Is Superannuation Included in Taxable Income?

From figuring out what income you’ll be taxed on to claiming work deductions – tax returns can feel a bit daunting. We’ve broken down what income the Australian Taxation Office (ATO) says you need to include on your tax return and clear up whether super is in or out.

In short – no, superannuation is not included as part of your taxable income according to the ATO. However, super contributions themselves are taxed. So what income does the ATO say you need to pay tax on?

What is taxable income?

Taxable income is the income that you have to pay tax on. According to the ATO, this can be calculated by taking your ‘assessable income’ and then subtracting any deductions you’re allowed to claim. The ATO says your assessable income includes things like your salary and wages, tips, gratuities and other payments for service, interest from bank accounts, dividends from investments, and pensions. Deductions are usually costs you’ve incurred that are directly related to your income and may include things like vehicle and travel expenses and home office expenses.

The ATO says that super is not included or reported as income when you lodge your tax return at the end of the financial year. So, for example, if you receive a yearly income of $75,000, your reported, assessable income will be $75,000, not $75,000 plus super.

How is super taxed?

It should be noted that some types of super contributions themselves are taxed. According to the ATO, how super contributions are taxed will depend on whether the contributions were made before or after paying income tax, whether you exceed one or both of the super contribution caps, and your level of income.

Before-tax super contributions or “concessional contributions: are generally taxed at 15% at the time they are received by your super fund. Concessional contributions are things like compulsory employer contributions and salary sacrifice payments made to your super account. According to the ATO, if you’re a low income earner ($37,000 or less) in a particular financial year, the low income super tax offset will apply so that any tax paid on these super contributions will be automatically added back into your super account (up to $500). On the other hand, high-income earners (those with a combined income and super contributions of more than $250,000), must pay either an additional 15% tax on their concessional contributions or the amount in excess of the current $250,000 threshold, whichever is the lesser amount.


The ATO’s advice is that after-tax super contributions are not taxed when received by your super fund. However, the ATO also states that if your after-tax (non-concessional) contributions exceed the cap for a particular financial year, you can then choose to either withdraw the excess amount and have it assessed as part of your taxable income, or leave it in your super account and let it be taxed at 47%. According to the ATO, after-tax super contributions include things like contributions made from your after-tax income, contributions made by a spouse to your super fund, and personal contributions not claimed as an income tax deduction.

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