minimising tax

Minimising tax if you borrow to buy shares

30 Jan, 2017

Many investors choose to borrow money (usually via a margin loan) to buy shares. This strategy, although risky, can deliver healthy returns and offer opportunities for minimising tax.

In a rising market, borrowing to invest should work in your favour. In a falling market, however, it can multiply any losses; you might have to sell your shares at a loss and be left with a loan to repay. If you’re new to investing, this strategy is best avoided. You can read more here about the pros and cons of borrowing money to fund an investment.

 

What tax deductions are available on a margin loan?

If you borrow money to purchase an investment property you can claim the loan interest as a tax deduction, and the same rules apply when you borrow to purchase a share portfolio. The only condition is that the investment can reasonably be expected to generate assessable income in the form of dividends or capital gains (but it doesn’t have to produce income every year in order for you to be able to claim the costs).

If you use your loan partly to purchase your shares and partly for another (private) purpose, only the interest incurred on the portion used to acquire the shares can be included in your claim.

When this strategy works well, the interest expense offsets any dividend income received, meaning that any franking credits can then be used to reduce other taxable income. Meanwhile the shares increase in value and can later be sold for a profit when the taxpayer is on a lower tax rate, for example during maternity leave or in retirement. Do keep in mind, though, that it doesn’t always work out this way.

Also eligible for a tax deduction are borrowing expenses (such as establishment fees, legal expenses and stamp duty on loans) associated with the loan. If your eligible borrowing expenses come to more than $100, they must be spread over five years or  the full term of the loan, whichever is shorter. Borrowing expenses under $100 can be claimed in full as a deduction in the year incurred.

Interest can be paid up to 12 months in advance for the following financial year. If you know your income will be lower next tax year (for example, due to redundancy or maternity leave), it’s well worth prepaying 12 months of interest on your margin loan before this year end as the tax deduction will be worth more while you’re on a high income.

 

Is minimising tax this way right for you?

It’s easy to be lured in by the promise of minimising tax through deductions, but at the end of the day the returns generated by your investment need to outweigh the interest charges on your loan – otherwise you may as well have just put the money in a shoebox under your bed. Margin loans generally come with higher interest rates, so do your sums first and consider the big picture.

You may choose to use a capital-protected borrowings strategy, whereby you are wholly or partly protected if the market value of your investment falls. Any interest paid for capital protection under this kind of arrangement is not deductible but is instead treated like a payment for a put option.

Special rules apply if you borrow within self-managed super funds, but they are extremely complex, so anyone wishing to do this should seek professional advice.

 

To sum up:

  • If you borrow money to purchase shares, the interest on the loan and any associated borrowing expenses may be claimed as a tax deduction thereby minimising tax on the investment
  • To be eligible for this deduction, the investment must be reasonably expected to produce income through dividends, capital gains or both, but it doesn’t have to generate income every tax year
  • This can be a risky strategy because any losses will be magnified, so approach it with caution, especially if you’re a new investor. Your aim is for the investment to return more than enough to cover your interest costs on the loan, regardless of any tax deductions
  • You can pay interest on your margin loan up to 12 months in advance. It’s worth doing this during a high-income year when you know your income will be lower the following year since you’ll receive a better rate on the tax deduction when your income is higher
  • It’s possible to protect your initial investment, at least in part, with a capital-protected borrowings strategy, but interest payments on this are not eligible for a tax deduction

 

 

rental property tax deductions

Tax deductions on rental property costs

27 Jan, 2017

Aside from legal and borrowing expenses, there are plenty of other costs incurred from owning a rental property which you may be able to claim as a tax deduction. These include:

  • advertising for tenants
  • bank charges
  • body corporate fees and charges, also known as strata levies
  • cleaning
  • council rates
  • electricity and gas
  • gardening and lawn maintenance
  • in-house audio/video service charges
  • insurance (building, contents and public liability)
  • land tax
  • letting fees
  • pest control
  • property agent’s fees and commission
  • quantity surveyor’s fees
  • secretarial and bookkeeping fees
  • security patrol fees
  • servicing costs — for example, servicing a water heater
  • stationery and postage
  • tax-related expenses
  • telephone calls and rental
  • water rates

You can claim for these immediately in the year you incur the expense, but only if you have borne the cost of the expense yourself rather than passing it on to your tenants.

If your property is not rented or available for rent for the whole year, for example if you live in it for 3 months of the year, you must apportion the costs accordingly.

Life insurance is not tax deductible as it is considered personal in nature, but you should still consider taking out a policy to cover your mortgage so you have peace of mind that your loved ones will be financially secure when you’re not around to provide for them.

 

Rental property land tax expenses

When it comes to land tax, each state has different rates and rules which determine how much, if anything, you’ll have to pay (there is no such tax in the Northern Territory). The tax is worked out from the unimproved value of the land– not the value of the whole property.

If the value of your land exceeds the thresholds set out in the table below, you will be liable for land tax and will need to submit a land tax return.

 

State land tax thresholds

 

State Land tax threshold Website
ACT $75 000 www.revenue.act.gov.au
NSW $432 000 www.osr.nsw.gov.au
Qld $600 000 www.osr.qld.gov.au
SA $316 000 www.revenuesa.sa.gov.au
Tas. $25 000 www.sro.tas.gov.au
Vic. $250 000 www.sro.vic.gov.au
WA $300 000 www.osr.wa.gov.au

Land tax is generally not payable on owner-occupied homes or land used for primary production, whereas a zero threshold usually applies to properties held in a trust or company.

 

Expenses excluded from rental property tax deductions

Expenses that are considered private or of a capital nature cannot be claimed as a tax deduction in association with your rental property. They may, however, be eligible for a claim for decline in value or capital works. Certain capital costs may be included in the cost base of the property for CGT purposes.

Some rental property costs that cannot be claimed as a tax deduction are:

  • acquisition and disposal costs of the property
  • body corporate payments to a special-purpose fund to pay for particular capital expenditure
  • expenses you do not actually incur, such as water or electricity charges paid by your tenants
  • expenses that are not related to the rental of a property, such as expenses connected to your own use of a holiday home that you rent out for part of the year

If you intent to claim a tax deduction for any eligible expenses, ensure you keep records and receipts to support the claim. You must be able to show a link between the expense and deriving the rental income. This is especially important if you use the property partly for private purposes.

 

To sum up:

  • Some costs associated with owning a rental property may be claimed as an income tax deduction
  • Expenses that are classed as capital in nature or private aren’t deductible but may be eligible for other claims or offsets
  • If you live in the property for some of the year and rent it out at other times, you can only claim for the expenses relating to the period it is used as a rental
  • It’s important to keep receipts and written records that back up your claim and show that the expenses occurred in the course of generating rental income

 

 

rent your property

Rent your property out but make sure it’s ‘genuinely available’ for rent

25 Jan, 2017

Tax refunds from deductions relating to investment properties can be pretty appealing, especially in cases when the property doesn’t generate much income. However, for your claim to meet the ATO’s requirements when you rent your property, it must be either rented out or ‘genuinely available’ for rent in the year for which you’re claiming a deduction.

 

What not to do when you rent your property out

Here are some things that won’t meet the ‘genuinely available’ requirement:

  • You rent your property out for two months of the year and then live in it yourself (you can still claim expenses for the portion it was rented for)
  • You tell a few friends your property is for rent but don’t bother to actually advertise it anywhere
  • You advertise your property with ridiculously high rents, knowing that nobody will take it and you’ll be able to claim the loss as a tax deduction, and in the meantime you don’t have any tenants causing damage or wear and tear

If your property is not rented out for the whole year, the ATO will need to see evidence that you intended to rent it out and were making an effort to find a tenant.

You might have a holiday home which you stay in some of the time and offer to your friends and family for free, but which also has paying tenants for some of the year. In this case, you may not claim a deduction for the weeks when you lived in it or allowed people to stay rent-free; your expenses must be apportioned accordingly.

If you think you can get around this by charging your friends $1 a week to stay in your property – they are, after all, then paying rent – think again. The ATO will view this as a ‘private’ arrangement and will allow you to claim enough to offset the rent, but not enough to make a loss.

Fortunately, there are other ways you can legitimately reduce taxes on your rental property.

 

To sum up:

  • Any property investors wishing to claim tax deductions for rental property expenses must be able to show their property was rented or ‘genuinely available’ during the tax year
  • Not bothering to advertise or setting the rent unreasonably high will mean your property doesn’t meet the ‘genuinely available’ criteria
  • If you live in your property for part of the year or offer it rent-free to people, any expenses relating to this period cannot be claimed as a deduction

 

 

tax on dividends

Understanding tax on dividends from shares

23 Jan, 2017

As a shareholder, you’re entitled to a share of a company’s profits, usually paid as dividends. But how does tax on dividends work? When Australian companies issue dividends, they must be classed for tax purposes as either ‘franked’ or ‘unfranked’.

 

Franked and unfranked dividends

Dividends paid by Australian companies from profits that have already been taxed are known as ‘franked dividends’. This kind of dividend carries tax credits for the whole dividend.

On the other hand, if the Australian company hasn’t paid any tax on the profits used to pay the dividends, these are ‘unfranked dividends’.

When you receive dividends from an Australian company, you should also receive a statement advising:

  • the amount of the dividend that is unfranked
  • the amount of the dividend that is franked
  • any franking credits
  • any TFN withholding tax withheld on unfranked dividends

 

Tax on dividends paid to non-residents

Non-resident individuals do not have to pay Australian income tax on franked dividends, but they also are not entitled to any franking tax offset for franked dividends.

If a non-resident receives unfranked dividends, they will be subject to a final withholding tax, typically 15% if Australia has a double taxation agreement with the taxpayer’s resident country, and 30% if not.

Franking credits are covered in more detail in another article.

 

Tips for dividend holders

  • Any company that pays you a dividend should have your TFN on record to ensure tax is withheld at the correct marginal rate on any unfranked dividends (in the absence of a TFN the highest rate of 47% will apply). If TFN tax is withheld from you, include it in your tax return so it can be credited to you in your assessment.
  • When it comes to paying tax on dividends, make sure you declare your dividends in the correct tax year. Although a statement may arrive in August saying the dividend is for the previous tax year, you need to include it on your tax return for the year in which you receive the payment.
  • If you hold any shares in joint names, you don’t have to submit a separate partnership tax return. Just divide the dividends paid between the individual recipients and show your proportion in your individual tax return.
  • The ATO states that if a shareholder (or associate) borrows money from a private company but doesn’t repay the loan in full by the end of the income year, the outstanding loan amount may be viewed as a non-commercial loan and assessed as an unfranked dividend in the shareholder’s tax return to the extent of the private company’s retained earnings.

 

A summary of tax on dividends:

  • Dividends paid by Australian companies are either franked (meaning the company has already paid tax on that money) or unfranked (meaning that no tax has yet been paid on the profits)
  • Your dividend statement should clearly state whether any dividends paid are franked or unfranked; it will also include the value of any franking credits and tax withheld
  • Non-residents don’t have to pay income tax on franked dividends but also can’t claim a franking tax offset. Unfranked dividends will be taxed at 15% or 30%, depending on the agreement in place with the taxpayer’s resident country
  • Make sure your dividend payer has your TFN on record so any tax is withheld at the correct marginal rate
  • When completing your tax return, include any dividends paid in that tax year, regardless of the tax year to which the dividend relates

 

self-education expenses

Understanding the $250 threshold for self-education expenses

20 Jan, 2017

When you make a claim for a tax deduction based on work-related self-education expenses, under Australian law, the first $250 of your expenses is not tax deductible. However, this can be offset by various other expenses you may have incurred, so it all comes down to the categories that your expenses fall into.

Confused? We’ll try to make it all clear.

 

Categories of self-education expenses

First, here are the different categories of self-education expenses:

Category Allowable expenses
A tuition fees, textbooks, stationery, student union fees, public transport fares, car expenses worked out using the ‘logbook’ method, running expenses for a room set aside specifically for study
B depreciation deductions such as a computer, desk or car for which you are claiming a deduction in Category A
C repair costs to assets used for work-related study
D car expenses using the ‘cents per kilometre’ method; you cannot claim car expenses under this category if you have included deductions for decline in value or repairs to your car under categories B or C
E expenses you have incurred but cannot use as a deduction

Source: © Australian Taxation Office for the Commonwealth of Australia.

 

Now, you need to put these into the formula:

Total self-education expenses claim = A – [$250 – (C + D + E expenses)] + B + C + D

Note that if the total amount of (C + D + E expenses) is over $250, that part of the calculation reduces to 0 rather than becoming a negative value.

Including category E means that if you have other expenses that are not allowable as a deduction, you can offset these against the $250 before your claim amount has to be reduced. These include:

  • capital costs of items acquired in the financial year and used for work-related study purposes, such as a computer or desk
  • childcare costs incurred due to attendance at lectures or other work-related study activities
  • travel expenses for the last stage of travel from either:
    • your home to your place of education and then to your workplace, or;
    • your workplace to your place of education and then to your home.

Let’s look at an example to illustrate how this might work. Say Liz has an accounting cadetship with a firm in the city and is taking a college course in the evenings. She spends $320 on textbooks for the year, and she also travels from work to college by bus, costing her $80 a year (both category A expenses). Although she incurred costs of $400, Liz can only claim $150 after the $250 reduction.

Read more about who is eligible for a tax deduction on self-education expenses and what is and isn’t included here.

 

education savings plan

Understanding tax on an education savings plan for your child

18 Jan, 2017

Why consider an education savings plan? Raising and educating kids isn’t cheap. The Australian Scholarship Group estimates that parents of children born in 2016 will have to spend around $70,000 on government education up to the end of secondary school, or as much as half a million dollars for private education.

It’s also easy to underestimate the potential costs – buying your child a tablet for schoolwork wasn’t a consideration 10 years ago, so who knows where we’ll be in another decade.

For these reasons, it’s a really good idea to start saving for your child’s education as early as possible. Understanding the tax system for education savings plans will help you make sure your money stretches as far as possible.

 

How to set up an education savings plan

Many friendly societies issue education savings plans which can be a tax-effective way to save for your child’s future. While they encourage you to make regular deposits and restrict withdrawals, keeping you more disciplined in your saving habits, they don’t always offer the best returns on your investment. As with any savings or investment, do your research before you commit to anything.

 

Tax-free education savings plans

If a savings plan is established solely for the purpose of providing ‘education benefits’ for the nominated student(s), it may be exempt from taxation. An education savings plan of this nature may not then be used as security for borrowing or raising money.

If you withdraw money that relates to contributions made, the funds are considered capital in nature and are therefore tax-free.

Withdrawal of funds that relate to investment income on the original contributions, however, must be counted as assessable income for the student.

If a student makes a withdrawal relating to investment income after turning 18, they will be subject to adult tax-free thresholds and a low-income tax offset, which reduces the chances of them having to pay tax. If the student is under 18, higher tax rates for minors apply, and the withdrawal is more likely to be taxed.

 

Non-education spending

If you withdraw money from the savings plan for a purpose that is not directly related to the nominated student’s education, it will be treated as ‘non-education benefits’. In this case, the member – not the nominated student – will be treated as the recipient by the ATO.

This benefit will be subject to the following rules, which also apply to the proceeds of a 10-year bond:

  • No personal tax is payable on withdrawals after 10 years subject to a 125 per cent further contributions tax rule (where the total amount of contributions paid during a year increases by no more than 125 per cent of the total contributions in the previous year).
  • If a withdrawal is in the first eight years, the growth component is assessable but a 30 per cent tax offset applies to offset the personal tax impact.
  • If the withdrawal is within the ninth year, only two-thirds of the growth is assessable, with only one-third assessable if withdrawn in the tenth year. The 30 per cent tax rebate is also available on withdrawals in those years, and is calculated on the assessable portion.

It is, therefore, worth keeping the fund until it reaches its 10-year anniversary, even if your child has already left school and no longer needs it, as this will deliver greater tax benefits.

 

To recap:

  • An education savings plan provides a tax-efficient way to save for the future education costs of your child
  • A savings plan from a friendly society can be a good option, but check the expected return as they are not always a competitive way to save
  • An education savings plan must have the sole purpose of providing ‘education benefits’ for the nominated student(s)
  • Withdrawals relating to contributions to the fund are tax-free, whereas those relating to investment income will be subject to the usual income tax rates for the student – if they are aged under 18, the tax rates are much higher
  • Benefits that are not directly related to the student’s education are treated as ‘non-education benefits’ and are treated as belonging to the member – not the student
  • Non-education benefits are subject to the same rules as the proceeds of a 10-year bond, meaning that keeping the savings fund for 10 years or more will deliver better tax benefits

 

self-education expenses

Claiming tax deductions for self-education expenses

16 Jan, 2017

If you complete a work-related study course at a school, college, university or other recognised place of education, you may be able to claim a tax deduction on self-education expenses related to that course.

 

Determining your eligibility for a self-education expenses deduction

The ATO’s requirements are that you work and study at the same time, the course is clearly connected to your current employment, and it either:

  • maintains or improves the specific skills or knowledge you require in your current employment

or

  • results in, or is likely to result in, an increase in your income from your current employment.

If the area of study is too general and doesn’t have a clear connection to your current income-earning activities, you cannot claim a tax deduction for self-education expenses on that course.

The ATO is pretty strict on this point, so make sure the course is specifically related to your current employment if you want to claim expenses as a tax deduction. It’s not enough to say that the course will offer you better employment opportunities in the future.

 

Which expenses are included?

As long as you satisfy the above requirements, the following self-education expenses may be claimed as tax deductions:

  • accommodation and meals if you have to be away from home for one or more nights for the course
  • computer expenses, including interest to finance a computer purchase
  • depreciation of the cost of your computer, professional libraries, desks, chairs, filing cabinets, bookshelves, calculators, technical instruments, tools and other equipment used for your studies (such as desk lamps)
  • photocopying
  • running expenses for a room you have set aside for your work-related study, including heating, cooling and lighting costs for the time you’re studying in the room
  • self-education expenses paid with your Overseas Study — Higher Education Loan Program (OS-HELP) loan
  • stationery
  • student union fees
  • textbooks, professional and trade journals
  • travel expenses between your home (or work) to your place of education and back
  • tuition fees, including fees payable under FEE-HELP

If you use a particular room for work-related study purposes, you can claim a fixed rate of 45 cents per hour of usage to cover the cost of heating, cooling, lighting, cleaning and decline in value of furniture, instead of having to record and calculate these costs individually.

 

Expenses that are not eligible for a tax deduction include:

  • accommodation and meals associated with day-to-day living expenses
  • repayments you make (whether compulsory or voluntary) on debts you may have under the following loan schemes:
    • HECS-HELP
    • FEE-HELP
    • OS-HELP
    • Student Financial Supplement Scheme (SFSS)
  • self-education expenses such as tuition fees paid under HECS-HELP

In some cases, the amount of your claim may be reduced by $250, but you can find out more about that here.

 

In summary:

  • Expenses related to a study course that you complete for work purposes can be claimed as a tax deduction providing the course meets certain requirements
  • The course must be completed while you’re working, must be clearly connected to your current employment, and must either improve skills needed for your current employment or be likely to result in an increase in income from your current employment
  • If there is no a sufficient link between your course and your current employment, the ATO may reject your claim
  • Various expenses are covered, including accommodation and food for trips away from home, depreciation of items you use to study, and running costs of a room at home you use to study
  • Day-to-day accommodation and food costs and certain tuition fees and debt payments are not covered

 

is your net worth enough

Is your net worth enough to make you a millionaire one day?

13 Jan, 2017

Many people strive to accumulate net worth of a million dollars or more at some point in their lives – there’s just something exciting about being able to label yourself a millionaire, isn’t there?

So, having established your current net worth, there are a couple of ways you can work out whether you’re on the road to millionaire status (or, if you have more modest goals, whether you’re doing enough to be financially secure).

 

The millionaire formula

To see how you stack up against millionaires, you can multiply your age by your pretax annual household income from all sources except inheritances. Divide this figure by ten to see what your net worth should be, again disregarding any inherited wealth.

So a 35-year-old earning $120,000 should be aiming for a net worth of $420,000 (35 x 120,000 = 4,200,000, ÷ 10 = 420,000).

 

Your income : net worth ratio

Another approach is to consider your net worth as a proportion of your annual income:

If your net worth is less than your annual income

Firstly, you’re not alone; the majority of Australians fall into this category. Especially if you’re young and just starting out, it’s common to be in this position and it isn’t necessarily a sign of failure. You do have some work to do though. Focus on clearing your debt, reducing your spending and finding tax-efficient ways to invest so you can build your wealth more rapidly.

If your net worth is between one and three years’ income

If you’re aged 40 or under and own your own home, this is a sign that you’re in pretty good shape financially. If you’re over 40 and/or still renting, you’re not in a terrible position but by reducing your spending and investing more wisely you’ll be better off financially.

If your net worth is more than three years’ income

You’re doing pretty well for yourself, especially if you’re under 40. Keep investing carefully so your wealth grows each year, and you’ll find yourself financially independent and living the good life.

It should go without saying that these both apply to individuals who are already in successful careers. Having a net worth of $35,000 while earning $10,000 – although it would place you in the third category above – does not mean you’re on the way to financial independence.

Of course, being a millionaire isn’t everything. It’s easy to get fixated on numbers, but what’s really important is being able to provide for you and your family and having enough to live comfortably in retirement.

 

compound interest

Understanding the miracle of compound interest on your investments

11 Jan, 2017

The saying “time is money” is often applied to labour – doing nothing is failing to make money – but have you thought about how it applies to saving money, too? When you invest your money well and let compound interest do its thing, the results over time are truly amazing.

 

Compound interest: an illustration

There is a story about an Indian Rajah which explains the idea of compounding rather well. The Rajah wanted to reward one of his courtiers, and asked him what he would like.

The courtier brought out a chess board and requested that one grain of rice be placed on the first square, two on the second, four on the third, and so on – each time doubling the amount until all 64 squares were occupied. The Rajah, wondering why the courtier had made such a humble request, happily agreed. But it wasn’t until his men set about the task that they realised – thanks to the effects of compounding – that there wouldn’t be enough rice in the whole of India to cover the final square.

The poor courtier was beheaded as a punishment for his insolence.

Fortunately for you, compounding needn’t result in you losing your head. Except perhaps figuratively, in excitement at the amount of money it can make you.

 

What is compounding?

In money terms, compounding involves saving some money and letting the earnings build up and accrue interest, instead of spending them. 

Let’s imagine two friends, Jim and Jeff. They each have $10,000 dollars to invest, and they each put their funds in an account earning interest at a rate of 10% per annum.

At the end of the first year, both friends have made $1,000 in interest. Jim wants to buy a new phone, so he withdraws that $1,000 and keeps the $10,000 capital in his account. Jeff, however, has read this article and knows all about compound interest, so he doesn’t touch that $1,000 and instead has $11,000 invested. At the end of the second year, Jim receives another $1,000 in interest. This time he wants to treat himself to a holiday. Jeff’s interest is up to $1,100 this year, and again he leaves it untouched. Jim has a balance of $10,000 whereas Jeff now has $12,100 working for him. That’s a 21% increase in capital for Jeff, and all he had to do was leave the money alone – no further investments required.

Compounding may seem a little slow to get going, but the effects over time are dramatic – especially with a greater capital investment.

If you invested $100,000 in a share trust, for example, and the investment earned 10% per annum, it would end up doubling in value every seven years if you always re-invested the earnings. The figures, rounded off, would look like this:

 

Starting investment:   $100,000

End Year 7:                  $200,000

End Year 14:                $400,000

End Year 21:                $800,000

End Year 28:                $1,600,000

End Year 35:                $3,200,000

End Year 42:                $6,400,000

 

Remember, there is no additional investment needed; this just requires you to leave the money (and earnings) untouched. The vital thing to note is that the growth for each seven-year period is always greater than the total growth in all the previous periods. From years 36 to 42 the investment grew by $3,200,000, whereas in the previous 35 years the growth was $3,100,000. From years 22 to 28 the growth was $800,000, but in the 21 years before it was $790,000.

The longer you leave it, the more you make and the faster your investment grows. If you managed the full 42-year program but your friend didn’t start as early and only managed 28 years, you would have four times as much as them in the end. And THAT is why you should start saving early (and not be tempted to spend the interest on a phone or a holiday).

 

To summarise:

  • Compounding is the effect of interest accruing on your initial investment and any subsequent earnings (interest being reinvested to earn more interest).
  • Using this method, an investment at 10% interest per annum can double in value every seven years.
  • The effects of compounding accelerate the longer the investment is left.
  • It really is worth starting to invest as early in life as possible to get the full benefits of compound interest.

 

saving for the future

Why bother saving at all? Here are a few good reasons…

09 Jan, 2017

We’ve covered many aspects of how to save, how to reduce your debt and how to invest wisely, but what if you’re still wondering “why bother”? What’s the point in learning about investments and saving money when the government will provide a pension for you in old age?

Well, there’s a very good reason to save for your retirement.

 

Where is your pension going to come from?

It’s true that Australia takes care of its citizens with social security benefits for things like unemployment, sickness and old age, but these have a tendency to make people more complacent where saving is concerned. If the government’s got your back, why not just enjoy life now?

This may have worked in your parents’ or grandparents’ time, but things are changing and if you examine the numbers closely, you’ll see that your pension may not be as secure as you imagined.

 

More people, less income

The baby boom and a massive immigration program between 1945 and 1970 resulted in a steep population rise. But then in the 1970s, various factors caused the birth rate to drop dramatically and at the same time our immigration program was reduced.

Since then the situation has been further impacted by the following:

  1. Huge advances in health care have increased life expectancy. Now women under 50 have a 54% chance of living to 90 years old, and men under 50 have the same chance of living to 85. Retirees are finding it increasingly difficult to make their money last to the end of their lives.
  1. As social attitudes have changed, divorce has become more common and there are more single-parent families relying on government support.
  1. The general public is demanding more from governments at all levels. This leads to more public servants being employed – at a cost, of course.
  1. New technology is reducing the number of jobs in the workplace, and when companies restructure they may offer early retirement to some employees. People who retire earlier have to make their savings last even longer.
  1. Although Australia’s birth rate has increased slightly in recent years it’s still sitting below replacement level. This means that not enough potential workers are being born to replace the number of people that will be retiring from the workforce.

When you add all these factors to the equation you can see that the number of people expecting benefits is increasing while the number of people paying into the system through taxes is decreasing.

 

Australia’s ageing population

Baby Boomers are now all aged 40 and over, and some have reached retirement. By 2030 they’ll all be 65 or over. This, coupled with the birth rate that’s below replacement level, means the average age of the population is on the rise.

It’s predicted that by 2020 Australia’s population will be at 26 million. This in itself is not a problem, but the issue lies in the uneven spread of the increase. While the 15–24 age group will increase by just 5.6%, there will be a whopping 111% rise in the number of over 65s. We’ll have almost 1.7 million people aged 75 or over by 2020, and statistics show that health care costs for this age group are seven times the national average per person.

Other projections suggest that by 2030 we could have more people relying on government benefits than actually working – so every worker will be supporting at least one other person.

Do you see now why you shouldn’t rely solely on a pension for your retirement? The government basically has two ways to meet the growing demand for benefits with a declining workforce: increase taxes or cut benefits. Since the top earners are already being taxed almost 50% of their income, the only option may be to reduce the benefits on offer.

While you should still be guaranteed some level of pension, you have to ask yourself whether it’s going to be enough to live a comfortable retirement.

Getting to grips with saving and investing now – and making an effort to put a decent amount aside each month – will secure you a much more comfortable future so you don’t have to worry about living out your later years in financial hardship. Anyone can achieve financial independence if they truly put their minds to it.

 

So, why should you bother saving?

  • Australia’s benefits system can give people the false impression that there is no need to save for the future.
  • An ageing population means the system is coming under strain; more people are receiving benefits while there are fewer workers paying into the system.
  • Since there is uncertainty around the level of pension provision in 10, 20 or 30 years’ time, it’s a very good idea to start saving for your retirement now rather than assuming you’ll be able to get everything you need from the government.