Author Topic: Australian Case Study/Investment Policy Statement Review  (Read 7055 times)

Shaz_Au

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Australian Case Study/Investment Policy Statement Review
« on: February 10, 2015, 08:55:41 PM »
Hi All,
Calling all Mustaches (and a big hello to the other Aussies on here), could you please provide some feedback on my Investment Policy Statement (IPS) that I have been drafting?  It is attached in the next post below, sorry it is a wall of text!  I haven't come across any other Australian's IPS yet.

I’ve kind of tacked a case study onto this to give you some basic information about my situation.  I am 33 and one half of a DINK (double income no kids). I've only listed my income and "my half" of our Assets and Liabilities. You'll notice I haven't listed many expenses yet, we are working on tracking these in YNAB and I will update over time to give you the complete picture.

I'm a long time lurker, first time poster but there is no need to be nice, lets see how I roll with the facepunches.

Thanks,
Shaz


Assets:
House: $175K
Shares and share account: ~$15.5K (stock picking, VTS, VAS, VEU, VAF)
Long Term Savings/Emergency Fund: $15K (offset against mortgage interest)
Superannuation: ~$78K

Liabilities:
Mortgage: $117K @ 4.84%

Income:
Salary: ~$70K annual
Internet/Phone Reimbursement: $360
Monthly take home salary of ~$4600

Current Expenses (monthly):
Mortgage: $867
Additional Extra Repayment: $867 (I pay this instead of groceries and fuel)
Home Insurance: $22.50
Internet/Phone: $32
Security Monitoring: $16.50
Health Insurance: $74
Gas: $32
Electricity: ~$0 over the year (solar feed-in tariff)
Council Rates & ESL: $125
Car Insurance $5.50 (3rd party property)
Car Registration $23
Car repairs ~$83 (service and maintenance)(GUESS)
-------------------------------------------
Total Expenses above = $2147.50

Monthly Savings
Extra Mortgage Repayment: $433
Long term savings/Emergency Fund: $542
Shares savings: $1083 (this is the goal, it doesn't always eventuate)
------------------------------------
Total Savings above = $2058 (44.7%)

Everything else unaccounted for goes towards sport, toys, gifts, adhoc travel, eating, drinking, etc. (shocking I know)
-------------------------------------
Current black hole = $394.50
« Last Edit: February 11, 2015, 12:32:37 AM by Shaz_Au »

Shaz_Au

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Re: Australian Case Study/Investment Policy Statement Review
« Reply #1 on: February 10, 2015, 09:00:38 PM »
Investment Policy Statement
Updated 11/02/2015

1.   Investment Objectives
Objective 1: To retire before age 50 (currently 33)
Objective 2: fund retirement sustainably and independently without reliance on government assistance
Objective 3: Maintain an Emergency Fund with a minimum of 6 months living expenses.
Objective 4: follow John Bogle’s investment strategy of buy and hold long-term using low cost index funds

2.   Strategy
Investments outside of Superannuation

These investments will account for roughly half of my total retirement funds.  These funds will allow me to retire before my Superannuation Preservation Date and reduce the effect of any future changes to Preservation Dates made by the government. 
During the period of retirement where I am retired but my Superannuation is not accessible I will be drawing on these investments.  During this time the SWR of 4% will still be used however this will be based off my total (Superannuation & Non-superannuation) investments rather than just this investment amount.

Superannuation
These investments will account for the other half of my total retirement funds.  By contributing additional funds to Superannuation I will be able to take some advantage of the tax benefits available.  These investments will also ensure I have a safety net that would provide adequate funds for my old age retirement in the case my investments outside of Superannuation failed.
 
Emergency Fund
Maintain a minimum of six months living expenses.  These funds are to be only accessed for emergency needs, eg in the case of a loss or employment, injury, etc.  These funds are only to be used to cover essential living expenses, eg Bills, Mortgage, Groceries, etc. 

3.   Funds and accounts
Investments outside of Superannuation
These investments will primarily use low cost index ETF products for both Stocks and Bonds.  No additional individual stock purchases should be made.  Additional contributions should be made using a minimum sum of $2500 to minimise the effect of brokerage costs.

Superannuation
Ensure superannuation is consolidated into a minimal number of low cost accounts while still allowing required levels of diversification of investment.  The target for total fees for these investments is less than 0.5%.  Once a minimum balance of $200K is met a Self Managed Super Fund or Wrap Account should also be investigated (this is the ATO recommended minimum amount due to fees).

Emergency Fund
Where a mortgage on our Primary Place of Residence still exists the emergency fund should be placed in an account to offset the mortgage interest (effectively a tax free investment at the current mortgage interest rate).  In the case where there is no mortgage then a high interest savings account or similar with good liquidity should be used.

4.   Target Allocation
Investments outside of Superannuation
Maintain an 80:20 stocks to bonds ratio during majority of the accumulation phase (> year 2025).  A more conservative profile can be considered in the future, either towards the end of the accumulation stage, or once the draw down phase begins (example: 60:30:10 stocks, bonds and cash ratio).

The Australian stock market only equates to 3% of the G20 Economies.  To ensure diversification on the world market and avoid an overly heavy home country bias an equal allocation of Australian to international stocks should be maintained.

The US stock market equates to 42% of the G20 Economies.  To match market capitalisation a roughly equal allocation of US to other international stocks should be maintained.

Summary of Asset Allocation
•   40% Australian Share Market (VAS)
•   40% International Shares (50% US, 50% world EX US)(VTS,VEU)
•   20% Fixed Interest (VAF)

Superannuation
Maintain an 80:20 stocks to fixed interest ratio during the majority of the accumulation phase (> year 2035).  During the accumulation phase the amount of cash in the fixed interest portion of this investment should be minimised, target less than 5%.
A more conservative profile can be considered in the future at the end of the accumulation stage, or once the draw down phase begins (example: 60:30:10 stocks, bonds and cash ratio).

5.   Review
Investments outside of Superannuation
Investment performance will be recorded monthly, the monthly record shall include the following:  current value, monthly contribution, total contributions and the current investment allocations as a percentage.

A review of the index fund market to be conducted at 24 month intervals to ensure the current products are competitive and whether new contributions should be made to an alternative index fund.  Unless there a significant financial benefit otherwise, any existing investments should not be changed to new products.

Superannuation
Review performance quarterly, the quarterly review shall include the following:  current value, quarterly contribution, total contributions and the current investment allocations as a percentage.
A review of products at 24 month intervals.

6.   Rebalancing

Wherever possible rebalancing should be performed using additional contributions.

Investments outside of Superannuation
During the monthly reporting where a balance is greater than 5% outside its target allocation this will be flagged.  If this balance is not brought back within 5% in the following 12 months then a rebalance event will occur.  When a rebalance event occurs only those asset allocations greater than 5% outside of its target will be rebalanced.

Superannuation
Rebalance annually where a balance is greater than 5% outside its allocation.


bigchrisb

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Re: Australian Case Study/Investment Policy Statement Review
« Reply #2 on: February 10, 2015, 10:16:54 PM »
The investment policy looks reasonable to me.

A couple of comments in random order:
- Budget.  Hard to digest this quickly when different things are presented on different cycles (quarterly, monthly, fortnightly, yearly).  Maybe adjust it all to a single period, such as monthly.  Also not clear without getting out a calculator what your total expenses look like against your total income, and what the surplus is.
- Different investment entities have different tax consequences.  Rather than maintain the same asset allocation in each entity, why not put them in the most tax effective entity, and worry about the asset allocation in aggregate, rather than the asset allocation in each entity individually.  Its all your money.
- A matter of personal taste, but I have less bonds in my asset allocations for the early days.
- Do you want any other property in your AA? You have a heavy bias to Aus Resi through your house, but what about non-resi?  I hold a percentage of REITS for this.
-  Consider the tax effective earnings available in each of these.  With a salary of $70k, you are on a 34.5% marginal rate.  That means that to match your 4.84% post tax return by paying off your mortgage, that you would need 7.4% pre tax return.  And with no risk, no volatility.  I'd think seriously about slamming down that mortgage with your taxable money for the next couple of years, and relying on super for some equity exposure.

Shaz_Au

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Re: Australian Case Study/Investment Policy Statement Review
« Reply #3 on: February 10, 2015, 11:14:58 PM »
Thanks for stopping by to comment BCB.
  • I will go ahead and fix the expenses to a common cycle.
  • Any chance you can explain or point me towards more reading material regarding asset types and their differing tax consequences? I haven't come across much that applies to Australian taxation.
  • Regarding the Stock/Bonds ratio, yes I'm playing it at a fairly balanced level but otherwise during a downturn I might not be able to sleep at night.
  • As for property, if anything we want to decrease our exposure at the moment by downsizing, it is preventing us from reaching our required savings rate (>60%).  Have not considered non-resi property at this stage.  The exposure to property through VAS is not enough for your liking?
  • This was quite unexpected from you, I have read your Journal, I thought you would be advising to leverage it to the max!  Paying off chunks of the mortgage is what we have always done.  Yes it is low risk but we haven't been getting ahead either!  It looked from our figures that it was more beneficial for us to invest rather than pay down the mortgage. PS How'd you come to your pretax calc of 7.4%?


marty998

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Re: Australian Case Study/Investment Policy Statement Review
« Reply #4 on: February 10, 2015, 11:49:44 PM »
SUggest you buy at least $5k at a time instead of $2.5k.

Otherwise you are losing 0.5% to 1% in brokerage each time (if your brokerage is $25 then thats 1% gone)

The tax advantage of australian shares is the franking credits on the dividends. You won't find that in international shares or bonds. It's part of a growing problem in Australia of investment decisions being driven solely on tax reasons and not on the merits of the investment.

MsRichLife

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Re: Australian Case Study/Investment Policy Statement Review
« Reply #5 on: February 11, 2015, 12:13:45 AM »
PS How'd you come to your pretax calc of 7.4%?[/li][/list]

Putting money in your offset account is equivalent to earning 4.84% post tax. If you had to earn that money pre-tax, you'd need to be getting a return of 7.4%.

It's hard to beat that return for negligible risk. That's why all my debt is paid down with offset accounts.

Shaz_Au

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Re: Australian Case Study/Investment Policy Statement Review
« Reply #6 on: February 11, 2015, 12:56:34 AM »
More replies, goody!

I've been busy too guys, I've updated the case study with monthly figures and tidied it up with totals too.

I'm also still questioning my line item: additional extra repayment too. I think half of it should go to savings, here's my thinking.  We budget $200 for groceries and fuel for the week, instead of paying half of that I put $200 in the mortgage.  In effect 50% is actually savings correct?

Yes don't worry I am going to break down that black hole of expenses. I'm tracking them now with YNAB to get a better idea of where it is all going.

Hi Marty, I'm currently using CMC Markets, they charge an $11 brokerage fee,  so yes I'd be loosing about 0.44% per trade.  It currently takes me about 2.5 months to save the $2.5k.  So it would be 5 months to save up $5K.  How do you weigh up the lower expense ratio vs the potentially missed market returns over the additional time?  I guess if I put these savings to work in the offset account in the meantime would help make up the difference.

Thanks for the reply MsRichLife! Yes, there is nothing quite like a guaranteed return.  Over the long term though the numbers I have gone through shows the stock market returns are better.  However maths isn't my strong point so I might be wrong here too. Just like spending our life savings, and over-capitalising building a massive house that is now worth less than we paid for it was a bad idea :(  We have worked hard to get back above water though, hence how I know all about paying off chunks of the mortgage.  Mutilate the Mortgage was one of my favourite sites before I found MMM and all the extra related blogs like LAF and BNL.


marty998

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Re: Australian Case Study/Investment Policy Statement Review
« Reply #7 on: February 11, 2015, 01:12:17 AM »
fair point, happy to be told off when needed :)


Shaz_Au

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Re: Australian Case Study/Investment Policy Statement Review
« Reply #8 on: February 11, 2015, 01:21:21 AM »
Told off? I don't think so :) I asked for feedback, bring on the questions, make me justify my decisions!  The whole lot of you have already inspired me to use my offset account better.  I'm not promising I'll be able to stop myself buying the next lot of ETFs before I reach $5k though!  Thanks for the help

deborah

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Re: Australian Case Study/Investment Policy Statement Review
« Reply #9 on: February 11, 2015, 01:37:06 AM »
Why don't you put the extra savings into the offset account, and then once every 5 months take it out and put it into an EFT? Keep a record of how much is going toward the EFT, so you know what is really mortgage and what is just accumulating.

FFA

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Re: Australian Case Study/Investment Policy Statement Review
« Reply #10 on: February 11, 2015, 01:44:03 AM »
Hi Shaz, firstly well done for taking the time this IPS is obviously well thought out and considered, which is a great start. Many other good comments already.

- I definitely agree with the pay down your mortgage fast strategy. Cannot compare cost elimination (risk-free return) vs market dependent (high risk)

- Super : "The target for total fees for these investments is less than 0.5%.  Once a minimum balance of $200K is met a Self Managed Super Fund or Wrap Account should also be investigated (this is the ATO recommended minimum amount due to fees). " Just to share I looked into this recently and had thought it would make a lot of sense for me to SMSF since my balance is above that threshold. However after my research I found the industry funds are the way to go, especially if you just plan to use a simple index strategy, it would take a HUGE balance to make it worthwhile to SMSF (there are balanced index funds with MER as low as 0.04%!).

- AA : I like your simple 40/20/20/20 VAS/VTS/VEU/VAF. Seems a very good default portfolio to take. Don't let me sway you from it, but just wondering if you considered an age related formulae, e.g. age minus 13 in bonds / 113 - age in shares (to match your current situation) ? This way portfolio risk will naturally and gradually adjust over time. I noted your "A more conservative profile can be considered in the future, either towards the end of the accumulation stage, or once the draw down phase begins (example: 60:30:10 stocks, bonds and cash ratio)." which is a more flexible approach to the same issue...

- Cash/Fixed interest: Personally I'm holding nearly all of mine in high interest accounts and just took a term deposit. I need to look more into VAF myself !

FFA

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Re: Australian Case Study/Investment Policy Statement Review
« Reply #11 on: February 11, 2015, 02:07:49 AM »
Why don't you put the extra savings into the offset account, and then once every 5 months take it out and put it into an EFT? Keep a record of how much is going toward the EFT, so you know what is really mortgage and what is just accumulating.
+1 . I also would do this way. I know your concern about missed market returns but it's the same idea as paying into offset account, you need to risk adjust the options.

By trading ETF's in economical size you are reducing brokerage cost (guaranteed benefit) and by temporarily parking the money in offset account you are earning (or avoid paying) interest (also a guaranteed benefit). The loss of return due to buying your ETF's on a 5 month frequency instead of 2.5 months is far from certain, and in many cases it could even be a gain.

Shaz_Au

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Re: Australian Case Study/Investment Policy Statement Review
« Reply #12 on: February 11, 2015, 04:02:29 AM »
Thanks Deborah, I completely agree with you, I'm already thinking that YNAB will be able to track this amount in my offset account for me as well.

Hi FFA, thanks for adding another Aussie blog to read, along with MsRichLife I've got 2 new ones today, this is great!  Your feedback on the IPS is greatly appreciated too.  I will look into the bonds ratio, both BigchrisB and yourself have suggested that now, I'll see what I come up with.  Out of interest, according to your formula I'm right where I want to be this year too.

I'm not sure how much better the returns of VAF are compared to a high interest bank account like Ubank or the others that come recommended, especially when brokerage is taken into account. 

The choices between the different etfs hasn't been easy for me.  My basic decisions were:
  • I chose VAF over VGB as it has better diversification (not just Gov bonds) and liquidity (size of the fund), even so it may still actually be more risky than VGB
  • VGS wasn't available when I purchased VTS and VEU but I think I will continue to go this way now that I have them, again better diversification, event though I know VEU means I lose out on some franking credits as it includes Australian Stocks but it looks like with the difference in MERs its a wash (I am taking Super(annuation)freak's word on this a bit, I need to confirm it myself).  My SO might be taking a plunge into shares soon too, maybe she will go the VGS option instead (Although I keep hearing that hitting the mortgage is a better plan!)
  • VAS over VHY was the easy decision for me, I plan to be a buy and hold investor therefore a capital gain is better (tax differed) rather than chasing dividend yields (taxable income).
Now if only I knew anything about index investing before I bought some individual stocks, e.g. My WOW and WPL are in a big hole!  (Note: I'm not suggesting I have a clue yet either)
« Last Edit: February 11, 2015, 04:06:26 AM by Shaz_Au »

FFA

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Re: Australian Case Study/Investment Policy Statement Review
« Reply #13 on: February 11, 2015, 09:19:24 AM »
I'm not sure how much better the returns of VAF are compared to a high interest bank account like Ubank or the others that come recommended, especially when brokerage is taken into account. 
vaf returns recently are much better. But you need to be aware bond funds will fluctuate a lot more with interest rates (inversely). As interest rates have been falling, bond funds are doing well lately.

Now this is market timing which is usually frowned upon, but personally I'm not keen on holding bonds, especially international FI, until monetary policies normalise, ie QE finished, positive interest rates, etc.

As these are defensive investments my main objective is capital preservation not returns. So for the time being I'm sticking to the high interest accounts (and term deposits for some fixed rate.)

gorey

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Re: Australian Case Study/Investment Policy Statement Review
« Reply #14 on: February 11, 2015, 03:58:46 PM »
I see people are recommending that shaz pay off the mortgage first but is this really the best option? 117k isn't a large mortgage in Australia and the compounding effect of having the money in shares/super are going to going increase her asset base whilst providing an income down the track. If she focuses on paying down her mortgage, that's several years that she will need to delay building her assets. In 10 years time, with inflation and salary rises, 117k of mortgage debt is going to seem tiny and will be able to be paid off easily. Just my 2c


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bigchrisb

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Re: Australian Case Study/Investment Policy Statement Review
« Reply #15 on: February 11, 2015, 04:34:56 PM »
I thought I'd elaborate on my take on the mortgage/shares argument.   My personal preference (and recommendation if you have the risk tolerance for it) is for you to pay down the mortgage, then redraw money (in a quarantined split loan) that is now tax deductible with which to buy shares.

My rationale for this is:
Lets say you have $5k in cash ready to deploy.  You are seeing this as two options, $5k into the market, or $5k on the mortgage.

- Paying down the mortgage will get you a guaranteed 7.4% pre tax return.
- This is also the cost of you diverting this money to buy stocks - you are buying a risk asset, that may or may not exceed this 7.4%. You think it probably will (and I tend to agree with you).  So by not paying down the mortgage and buying stocks, your pre-tax "benefit" from this strategy is x%-7.4%, where x% is the return on stocks.
- If instead you were to pay down the mortgage, and re-draw the money to invest with, you would now be able to claim a tax deduction on the interest.  So your pre-tax benefit of owning stocks changes to x%-4.48%, with the same risk profile (after all, you have the same amount of debt, still secured against your house, and the same exposure to stocks).  So, you are about 3% ahead. 

Not much point arguing about a difference in 0.2% or 0.3% cost basis, when you are leaving 3%/year on the table.

However, there are some issues with this:
1. You might be charged a split fee etc.  Figure out what this is.
2. Typically your bank will only allow redraws up to 80% of the house value.  Based on the value/loan numbers above, this only gives about  $23k to play with, which may not be enough to warrant the split fees etc.
3. Some people get really really nervous about having investment debt secured against their home.  Personally I don't have issue with it (after all, if I kept the same mortgage and bought stocks with my savings, I'd still be in the same debt position!)

So my approach would be to pay down the mortgage until I had enough spare equity to redraw.  Then set up a redraw to invest with.  Continue to recycle the available credit in my house into deductible debt.  Once I was happy with my AA between shares and property, then start paying down the deductible debt.

Edited for typos and better readability
 
« Last Edit: February 11, 2015, 08:54:20 PM by bigchrisb »

FFA

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Re: Australian Case Study/Investment Policy Statement Review
« Reply #16 on: February 11, 2015, 07:53:27 PM »
I see people are recommending that shaz pay off the mortgage first but is this really the best option? 117k isn't a large mortgage in Australia and the compounding effect of having the money in shares/super are going to going increase her asset base whilst providing an income down the track. If she focuses on paying down her mortgage, that's several years that she will need to delay building her assets. In 10 years time, with inflation and salary rises, 117k of mortgage debt is going to seem tiny and will be able to be paid off easily. Just my 2c


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It's a valid point too, and reflecting back I also had the same concern, and started diversifying regular investments into managed funds, so as not to only end up with property at the end of it. But I reckon 80-90% of my surplus earnings into mortgage repayment/offset and only a small percentage into the share funds. The outcome of this : I have a very skewed AA ! Too much property, not enough shares. I don't regret it though.

The subtle effect of "forced saving" is the hidden benefit of paying down debt. I don't know if it's the same for everyone, but having this motivation of eliminating the mortgage and avoiding interest charges was very compelling for me. I am sure it spurred me to a much higher savings rate than I would have achieved if I was primarily saving to invest. On reflection, I feel this forced saving effect was probably a bigger benefit to me than the leverage in and of itself.

Shaz_Au

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Re: Australian Case Study/Investment Policy Statement Review
« Reply #17 on: February 11, 2015, 08:32:37 PM »
Gorey, thanks for posting to backup both sides of the argument. Yours were my exact thoughts that got me started on my current course of action. I am not sure if you missed it but I am only one half the equation and one half of the mortgage too, I am also male, yeah strange name, I get that a lot :)

Thanks bigchrisb for an awesome post, it took me a couple of read throughs but it makes a scary amount of sense.  This is a completely different way of thinking for me.  I won't go rushing into this by any means but I think I will investigate what options are available with our current lender and what the costs involved may be.

Regarding the asset allocation of Shares vs Bonds, I'm going to stick with the current 80:20 split, I think this is the best happy medium for me.  Not too aggressive and not too conservative too early but just right :) I did look at the formula suggestion but the rule of thumb is a bit too conservative for me and changing up, recording and rebalancing the the AA every year seems unnecessary for me at this stage when I am happy with the current level of shares vs bonds risk.

Generally it sounds like I am on the right track with my IPS. 
  • Does anyone have more information about splitting the asset allocation over my total pool (super&outside) to take advantage of any tax benefits? 
  • No further comments on the proposed domestic/US/international splits or VAS/VTS/VEU?

I will do a separate post concerning my proposed changes to my Superannuation soon, I thought mine was in a bad way (retail fund) you should see my SOs!

PS I was a bit worried about posting all this financial information up on a public forum but all your helpful and supportive replies have been great! Thanks everyone.

bigchrisb

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Re: Australian Case Study/Investment Policy Statement Review
« Reply #18 on: February 11, 2015, 09:01:10 PM »
Thanks for stopping by to comment BCB.
  • Any chance you can explain or point me towards more reading material regarding asset types and their differing tax consequences? I haven't come across much that applies to Australian taxation.

Not a lot out there in a well structured form from what I can find.  I've posted a bit about my thoughts in my journal and in the AUS investing thread.

Basically, what I try to do is to:
- Get all the debt/deductions in my own name
- Get anything that is tax deferred, or has likely capital gains that I'm going to realise in my own name. REITS
- Keep some low yielding stuff in my own name that I'm going to hold forever - international (IVV/VTS/VEU)
- Try to get higher yielding stuff into my super fund (most shares)
- If I had bonds, they would be in super too.  I don't hold any.  It doesn't make a lot of sense to me to have bonds and investment debt.

My structure is complicated a little by also having a family trust and investment company set up.  I try to do most investment in the trust, with tax advantaged distributions to me, and regular income to the company, which then just sits there compounding.  The company tax rate is a lot lower than my personal rate, so locking the money up there, and potentially missing out on capital gains discounts stacks up for me. [/list]

FFA

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Re: Australian Case Study/Investment Policy Statement Review
« Reply #19 on: February 12, 2015, 12:47:47 AM »
Generally it sounds like I am on the right track with my IPS. 
  • Does anyone have more information about splitting the asset allocation over my total pool (super&outside) to take advantage of any tax benefits? 
  • No further comments on the proposed domestic/US/international splits or VAS/VTS/VEU?

Yup I think it looks good.

I've also puzzled a bit over this tax advice having seen it a few times in the past. What you find on bogleheads is US based and not directly applicable. The way I interpret is : keep cash/FI mainly in super as the interest has no tax deductions/offsets. Aus shares preferably outside super to get more benefit from franking credits. Int. shares perhaps better in super too (?? if only to simplify your tax return).

I can understand there might be a lot more to it if you trade in/out more actively and also have company structures, as per bigchris' reply. But for my case i'm unconvinced how much difference it makes and haven't as yet put a huge priority on implementing this. i'm also interested to hear other feedback what approach people take to this?

marty998

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Re: Australian Case Study/Investment Policy Statement Review
« Reply #20 on: February 12, 2015, 01:19:32 AM »
Generally it sounds like I am on the right track with my IPS. 
  • Does anyone have more information about splitting the asset allocation over my total pool (super&outside) to take advantage of any tax benefits? 
  • No further comments on the proposed domestic/US/international splits or VAS/VTS/VEU?

Yup I think it looks good.

I've also puzzled a bit over this tax advice having seen it a few times in the past. What you find on bogleheads is US based and not directly applicable. The way I interpret is : keep cash/FI mainly in super as the interest has no tax deductions/offsets. Aus shares preferably outside super to get more benefit from franking credits. Int. shares perhaps better in super too (?? if only to simplify your tax return).

I can understand there might be a lot more to it if you trade in/out more actively and also have company structures, as per bigchris' reply. But for my case i'm unconvinced how much difference it makes and haven't as yet put a huge priority on implementing this. i'm also interested to hear other feedback what approach people take to this?

I support this view - cash and FI in super. Equities outside of super as much as possible, but if you're old enough then everything should be in super.

deborah

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Re: Australian Case Study/Investment Policy Statement Review
« Reply #21 on: February 12, 2015, 01:38:58 AM »
I have everything inside super. When I retired I had several years worth of money in a high interest savings account (probably not the best place).

After I reached preservation age, I put everything left into super. My expenses are less than 4% of the balance, so I have left some of it in accumulation phase until I reach 60 (and maybe for longer). After 60 taxation for super is different, so you can take out more without being taxed. Before 65 you need to take out 4% of what is in pension phase. After 65, the % you need to take out each year rises, until you need to take out 14% each year when you are rather old.

I have more in pension phase than I need (in case of emergency), so I contribute the payment I don't use back into super. This gives me a tax break if I need it (contributing before tax), or dilutes the taxed component if I don't need the tax break (contributing after tax). When I reach 65 and won't be allowed to put any more in, my superannuation will be as large as possible. It also means that if they change the rules tomorrow I will have as much as possible in any grandfathered provisions (although I doubt the stuff in accumulation phase will be grandfathered).

As any income in pension phase is not taxed within super, but any income in accumulation phase is, shares with fully franked dividends are in accumulation phase...

Once I hit 65, I will need to work out what I will do with what I don't use each year because I won't be able to put it back in. By that stage, an  annuity may be worth looking into because as you age, annuities become more viable as investments - and we might be in a more inflationary environment with higher interest rates.
« Last Edit: February 12, 2015, 01:44:04 AM by deborah »

Shaz_Au

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Re: Australian Case Study/Investment Policy Statement Review
« Reply #22 on: March 01, 2015, 05:25:48 PM »
A quick update:
  • We have already begun using our offset account to better advantage. Thanks everyone, this is having a small but immediate effect on the interest we are paying
  • I've Investigated the loan split idea for investing the money in shares but being able to claim the tax deduction for interest. there is a $110 setup fee but other than the interest there is no ongoing costs.  Thanks for this suggestion bigchrisb. We just need to sit down and work through this and make a plan before we can make a final decision.
  • I still haven't done anything with our super, need to get onto this (my fees 0.78%, hers 1.64%!!!).  Originally I was thinking of going a 1:1 split Australian Super:Host Plus split.  Then with each fund putting majority in the indexed option and using the individual investment options to match my target allocation.  Calculated fee for doing this was <= .25%.  Maybe it's too complicated, hence nothing being done?

Thanks for sharing Deborah, I'm a long way off from being in a similar position but it is still good to read about some of the advantages super is able to provide. I just wish my folks were interested in this stuff; I'm sure there is so much more they could be doing.

slothman

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Re: Australian Case Study/Investment Policy Statement Review
« Reply #23 on: March 02, 2015, 06:04:45 PM »
So my approach would be to pay down the mortgage until I had enough spare equity to redraw.  Then set up a redraw to invest with.  Continue to recycle the available credit in my house into deductible debt. 

Hi Bigchris, can you please confirm that this is kosher from an ATO perspective? My mortgage broker said the interest would not be deductible in that scenario. I have more than half of the PPOR mortgage sitting in an offset account that I want to deploy.

I will also check with my accountant.

FFA

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Re: Australian Case Study/Investment Policy Statement Review
« Reply #24 on: March 04, 2015, 02:39:44 AM »
So my approach would be to pay down the mortgage until I had enough spare equity to redraw.  Then set up a redraw to invest with.  Continue to recycle the available credit in my house into deductible debt. 

Hi Bigchris, can you please confirm that this is kosher from an ATO perspective? My mortgage broker said the interest would not be deductible in that scenario. I have more than half of the PPOR mortgage sitting in an offset account that I want to deploy.

I will also check with my accountant.
I understood offset accounts are fine but redraws you need to be careful with.

bigchrisb

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Re: Australian Case Study/Investment Policy Statement Review
« Reply #25 on: March 04, 2015, 01:25:18 PM »
Tax can be a bit complex. I've sought my advice from my accountant and from the ato. I recommend you do your own due diligence on your situation, but I would be looking for a better source for tax advice than a mortgage broker...

bigchrisb

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Re: Australian Case Study/Investment Policy Statement Review
« Reply #26 on: March 04, 2015, 01:58:51 PM »
The advice I have been given is that deductibility of debt depends upon the income producing nature of the asset originally purchased with a loan.  This has a number of scenarios:

Borrow to buy IP, debt is deductible as long as it stays an IP.
Move in to the same IP, debt is no longer deductible.

Borrow for PPOR, debt is not deductible.  Move out and turn it into an IP, debt becomes deductible. In this scenario, if you had an offset on the PPOR, withdrawing from the offset would leave the loan fully deductible (irrespective of if the drawings were used for the purchase of income producing assets.  Hence why mortgage brokers recommend the use of offsets here - if in this situation you repaid principal, then turned into an IP, you would not be able what you already paid back deductible. 

Redrawing from the offset on your PPOR to buy shares would make part of your loan deductible - but payments would be applied in proportion against the deductible and non deductible portions.

Using a split to make it two loans, means you can quarantine the deductible debt from the non deductible debt more cleanly.

New drawings (via redraw/split) deductibility would depend on what you did with the money.

I.e.  using an offset doesn't change the purpose of the loan. Using a split and redraw  does. Which of these is right will depend upon your  situation.

 

slothman

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Re: Australian Case Study/Investment Policy Statement Review
« Reply #27 on: March 04, 2015, 09:31:54 PM »
New drawings (via redraw/split) deductibility would depend on what you did with the money.

I.e.  using an offset doesn't change the purpose of the loan. Using a split and redraw  does. Which of these is right will depend upon your  situation.

Thanks! I since had it clarified with my broker and accountant. If I use my offset money to pay down my PPOR principal, apply for a new loan account against my PPOR and use it to purchase income generating assets then the repayments will be tax deductible.

Much more effective doing it that way than using offset money to purchase shares directly, as decresing my offset balance increases my non-deductible debt.

superannuationfreak

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Re: Australian Case Study/Investment Policy Statement Review
« Reply #28 on: March 10, 2015, 09:35:43 PM »
When I had a meaningful mortgage I did not hold bonds outside of Super.  The offset account is higher expected-return, lower risk and more tax efficient.  Similarly I don't like borrowing more than I need to at Australian interest rates, particularly while holding bonds.

Assuming your taxable income continues to grow, I would be looking into Salary Sacrifice into Super.  Currently ~34.5% (?), before too long you will likely be looking at a 39% marginal tax rate just on your wages so, for me, it is worth losing a little flexibility with a portion of my savings to (effectively) reduce some of that income to a 15% rate. YMMV

Incidentally I don't think I got your email but my email form seems to be working.