Forgot to make that super contribution? Don’t despair, you may ‘catch-up’

Forgot to make that super contribution? Don’t despair, you may ‘catch-up’

It’s not uncommon to meet prospective clients who either forgot to make a concessional super contribution the previous year, or didn’t feel it was necessary.

However, all is not lost, with a little understood strategy which, in some circumstances, allows you to make ‘catch-up’ contributions.

So what are ‘catch-up’ contributions?

The rules around catch-up, or more accurately known as ‘Carry-forward’ contributions, simply allow super fund members to use any of their unused concessional contributions cap (or limit) on a rolling basis for five years.

So, if you didn’t make the maximum concessional contributions ($25,000 in 2019/2020), you can carry forward the unused amount for up to 5 years. After 5 years, any unused concessional contributions will expire.

The first year these rules came into force and concessional contributions could be accrued from was the 2018/2019 financial year.

Why were they introduced?

The Federal Government introduced carried-forward contributions to help those who have had interrupted working lives to get more money into superannuation. Those who had time off work to have children, care for children or loved ones, or even those who previously didn’t have the financial capacity to contribute to superannuation all benefit from these rules.

Who is eligible to make carry-forward contributions?

Anyone who has a total superannuation balance under $500,000 as at 30th June in the previous financial year is eligible to make catch up contributions.

What are concessional contributions again?

Concessional contributions are those made from pre-tax dollars. It includes:

  • employer contributions of 9.5% pa of your salary
  • Salary sacrifice contributions.
  • Lump sum contributions to superannuation which you notify your superfund provided that you intend to claim a personal tax deduction.

There is an annual $25,000 limit for concessional contributions.

How does it work?

This can best be illustrated with an example.

Tina has a total superannuation balance of $300,000. After taking a couple of years leave, she returned to work in July 2019.

During the 2019/2020 financial year, Tina was eligible to carry forward her concessional contributions she didn’t make in 2018/2019, however, she chose to not make an additional contribution above her employer contributions of $10,000.

So, for the 2020/2021 year, Tina has a total of $65,000 of eligible concessional contributions. She has done particularly well from her holding in Afterpay shares and decides to sell them giving rise to a significant capital gains tax liability. Tina has a meeting with her adviser at Steward Wealth about how she may reduce this tax liability. Her adviser recommends making full use of the carry-forward provisions and advises her to make concessional contributions totaling $65,000 (including her employer contributions). Not only will she receive a tax deduction for the contribution, but she will also grow her superannuation balance.

Forgot to make that super contribution Dont despair you may catch-up

In summary

Carry-forward provisions are a real opportunity for those who haven’t been in a position to make contributions to superannuation, or who have simply forgotten to do so.

While it can assist in building up your retirement benefit, as you can see from our case study above, careful planning can also make it a very effective tax planning tool.

Superannuation can be very complex and advice really needs to be tailored to each individual. If you would like to discuss further, the Steward Wealth team are more than happy to assist you.

Want an assessment as to how this strategy could work to maximise your financial well-being?

Call Steward Wealth today on (03) 9975 7070.

How has applying for a loan changed in Covid19?

How has applying for a loan changed in Covid19?

The economic impact of Covid19, and its resulting uncertainty around employment, has forced many people to reassess their current lending arrangements to ensure they are in the best position to ride out the proverbial storm.

While new housing finance has experienced a significant hit in 2020, refinancing has reached record highs increasing 25% in May. To put this in perspective, refinancing has historically made up about 26% of total lending but jumped to 43% in June. With so many choosing to refinance their loans what have lenders changed when assessing your application?

1. Certain industries and types of work are being treated with caution

Obviously Covid19 has had a disproportionate impact across certain industries with jobs in tourism, hospitality, entertainment, retail, personal transport (Ubers and taxis), personal services (beauty) and sporting professionals most affected. If you work in any of these industries, you can expect to be ask for additional information and be prepared for the lender to contact your employer to find out your true status and whether that’s likely to change any time soon.

If you are currently on JobKeeper payments or enforced annual leave, some lenders may take this into account and even use it as a reason to deny your application. Select lenders have excluded lending to these industries completely but on the flip side some are offering incentives for certain in demand industries such as healthcare.

2. Tighter assessment of income

Lenders are concerned that applicants may see a dip in their income compared to what they had earned pre-Covid-19. When verifying income, you may be asked for the very latest payslips and even evidence that these payments had been deposited to your bank account. Lenders are also especially tough on borrowers with less stable income types such as commission, contract, probation, overtime, bonus or casual income.

If you are self-employed, you may be required to produce current BAS declarations in addition to your latest tax returns to show recent revenue has not been significantly affected.

3. Change to how rental income is assessed

Prior to Covid-19 most lenders were generally happy to count around 80% of the rent you receive from an investment property towards your income. However, with COVID-19 reducing the ability of some tenants to meet their rental obligations, banks have subsequently reduced the amount of rental income they will count, in some cases down to 50%.

Further to this reduction, given the current restrictions in place, rental income generated from short-term accommodation or Airbnb are not being counted at all in certain circumstances.

4. Lower loan to valuation ratios for some borrowers.

In the past borrowers have been able to lend up to 95% of the value of their property with applications over 80% requiring the borrower to also apply for Lenders Mortgage Insurance (LMI). During Covid-19 select lenders have now restricted certain borrowers, for example the self-employed, to a maximum lend of 80% and industries that have felt the full impact of Covid-19 limited to 70% in some cases.

5. Proving your identity and signing documents have moved online

Previously your lender, or mortgage broker, was required to identify you in person by sighting your current identification documents. Most lenders have now changed their policies to allow this identification to take place electronically via platforms such as Zoom or Skype.

Likewise, prior to Covid-19, most lenders required you to physically sign and return your application and loan documents. Now almost all lenders have moved towards various electronic signing options for all documents including mortgages in New South Wales, Victoria and South Australia. Documents that still cannot be electronically signed inlcude guarantees as well as mortgage documents in other states.

6. Delayed processing times

With the influx of refinancing applications, plus increased scrutiny of each application on top of customers applying to have their repayments paused, some lenders have been overwhelmed by the additional workload and average turnaround times have significantly increased. Some lenders, particularly those with offshore processing, are taking more than 4-6 weeks, whilst others have managed to keep timeframes as low as 2-3 days.

It must be stressed that each lender has taken a slightly different approach to how they have adjusted to Covid-19 and the summaries in this article do not apply evenly. Seeking assistance from a mortgage broker has never been more valuable to help navigate the nuances of finding the best available lending solution.

Micro bubbles

Micro bubbles

After my first ride in a Tesla, climbing back into my diesel car felt very much like I’d gone back in time – noisy, slow, and those fiendish fumes coming out of the exhaust. I only know a few Tesla owners, but they all swear by them and claim they will never go back to an internal combustion driven car.

I don’t think there’s any doubt Tesla is at the forefront of an inexorable change in the auto industry, and that we are on the way to a car market dominated by electric vehicles. What I am far less certain about, is whether the seven-fold increase in the share price over the past nine months, which includes a 50% jump in the past five weeks, makes sense.

Chart 1: Tesla’s share price has risen 7x in 9 months
Micro bubbles image1

I make absolutely no claim to any expertise about Tesla as an investment, and if you own the shares I’m sure as hell not suggesting you should sell them. What I am wary about, though, is that there are pockets of the share market, in particular the tech-heavy NASDAQ index, that appear stretched at the moment, to the point where you could say they have the whiff of bubble about them. To be clear, by no means the whole of the market – it’s like there are micro bubbles.

I certainly don’t think it’s reminiscent of the dotcom bubble that popped so spectacularly in early 2000, when the NASDAQ index fell 78% between March 2000 and October 2002, the biggest tech companies are reporting phenomenal earnings and sales growth that are clearly backing their astonishing performance. However, there’s no shortage of bears among the commentariat, and I recently listened to a conversation between two US-based bloggers whom I respect, because they are generally level headed and not prone to hyperbole, where they straight up called the book going on in parts of the NASDAQ a bubble,

Here are a few of the things that have caught my eye:

  • In the US there are a few online trading firms that charge zero brokerage, and they have apparently ignited a retail (as in private investors) trading boom. In its earnings report last week, TD Ameritrade reported average client trades per day had risen to 3.4 million during the June quarter, a 65% increase on the March quarter, and more than three times higher than a year ago. Its top 15 trading days had all happened in the June quarter and 10 of those were in the month of June.
  • Probably the best known of the free trading platforms is Robinhood. It has gone from 1 million users in 2016 to now 10 million, more than half of all accounts are opened by first time investors and its median customer age is 31. It too has seen trading activity triple in 12 months, with reports abounding about young investors punting their COVID stimulus cheques, and others drawn to the stock market through boredom because casinos were closed and sports betting has all but stopped.
  • Robinhood investors are becoming recognised for chasing fads. A recent example is Eastman Kodak, which announced it had been given a $765 million loan from the government to produce pharmaceutical components, and 60,000 account holders bought into the stock on a single day in which the price soared as much as 500%, having already risen 200% the day before. The shares were up 1,430% over the week.
Chart 2: Shares in Kodak jumped more than 1,400% in a week after Robinhood investors piled in
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  • As an indicator of the level of retail trading activity, trading volumes on the NASDAQ compared to the New York Stock Exchange (NYSE) have recently rocketed.
Chart 3: trading volumes on the NASDAQ compared to the NYSE have rocketed
Micro bubbles image3
  • Michael Batnick, one of those US bloggers, points out there are 170 names in the Russell 1000 index that are up by 100% or more from their March bottom. Some of those include:

Wayfair, 835%
Tesla, 326%
Wendy’s, 211%
Docusign, 194%
Zillow, 165%
Chipotle, 144%
Roku, 140%
Beyond Meat, 140%
GrubHub, 130%
Zoom, 124%

  • It’s not all just retail investors punting individual stocks, inflows to tech sector ETFs and managed funds has also exploded higher:
Chart 4: tech ETFs and managed funds are seeing huge inflows as well
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  • There are other assets that have been associated with speculative bubbles in the past that are once again attracting punters, such as Bitcoin and gold, which has just hit a new all-time high.
Chart 5: Bitcoin futures have attracted speculators
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Chart 6: gold has just hit a new all-time high (in US$)
Micro bubbles image6
  • Another favourite US blogger of mine, Josh Brown, recently pointed to the re-emergence of Special Purpose Acquisition Companies (SPACs) as a sign of a bubble, or, as he put it, an excess of credulity on the part of investors. A SPAC is where investors hand over money to someone who promises to invest it in an acquisition, but there are no details whatsoever of what they’ll buy, or when. It’s pretty much investing on a wing and a prayer. Just recently one SPAC attracted US$4 billion.
  • Australia, of course, doesn’t have anything like the number of tech companies, but there have been some eye-popping rises among the few we do have. For example, Afterpay has risen 125% so far this calendar year, and Kogan is up 120%. Yes, I get there are strong reasons as to why, and I agree a company like Afterpay looks set to grow its international user base numbers enormously, it’s just how far forward is it reasonable to drag earnings?
Chart 7: Afterpay has risen 125% so far in 2020 alone
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Chart 8: Kogan is up to 120% in 2020
Micro bubbles image8

To reiterate, I don’t include the five tech giants, Facebook, Apple, Microsoft, Amazon and Google, in this. While there is growing consternation that they represent an historically high proportion of the S&P 500 at 22%, they also represent 18% of total earnings, and their earnings are growing way faster than the rest of the market. So while they have seen spectacular rises since the March correction, it is, I believe, much easier to rationalise, especially in an environment of super low interest rates.

I also readily concede the basis of the US dotcom boom of 1999-2000, that the internet would be transformative of how we live and do business, was dead right, it was just wrong about how they should be valued and retail investors ended up getting carried away – and then carted out backwards. This time around it’s again entirely possible the market is right about the impact of electric vehicles, small pharmaceutical companies and other online business models, it’s again a question of what valuation you put on them now, and there are signs some retail investors are once again getting carried away.

As unusual or extreme some of the above stories and examples might be, the thing about a bubble is it can go up a lot higher, and last for a lot longer, than you would ever think possible. Alan Greenspan, who at the time was the Chairman of the US Federal Reserve (their central bank), famously referred to the ‘irrational exuberance’ of the stock market in November 1996, more than three years before it peaked. It’s entirely possible if there is a correction it’s confined to a specific part of the market, leaving the rest of it largely unaffected.

As I said, this is not a suggestion to sell your tech shares, but it is a recommendation to be very careful.

How can I pause my home loan repayments and how does it work?

How can I pause my home loan repayments and how does it work?

With an estimated 1 million people facing unemployment as a result of the current crisis it’s no wonder that the ability to service what is most household’s largest expense, mortgage repayments, will be placed under stress. If you’re in this precarious situation, or know someone else who might be, you may ask “what are the options and how does it work?”

Each lender has provided those in hardship with a six-month payment holiday. This article summarises the big four banks’ policy response but all lenders have implemented similar measures, with slight variations.

Commonwealth Bank

You will be able to defer home loan repayments for up to six months and, instead of making your repayments, interest will be capitalised, in other words, added to your loan balance. That balance will be recalculated at the end of the period and extended so repayments stay the same as they were before you started the deferral.

Westpac

You will be able to defer repayments for three months initially, with a possible extra three-month extension available after review. The deferred interest will be capitalised and when payments resume, they will increase slightly for the remainder of your loan term.

NAB

You will be able to defer your repayments for up to six month and there will be a three month ‘check in’ point with the bank. Like Westpac, the deferred interest will be capitalised and when they resume, payments will increase slightly for the remainder of your loan term. You will still be able to redraw during the repayment pause if you have made additional repayments to date.

ANZ

You may be able to put your repayments on hold for six months and interest will be capitalised. The bank will check in with you after three months and at the end of the period your minimum repayments will slightly increase to account for the increased loan balance.

What do I need to provide to have my payments suspended?

Again this will vary for each lender but in most cases you won’t have to provide any evidence that you’ve suffered substantial loss of income, or have contracted corona virus, but you may have to sign a declaration as such.

You should only defer mortgage payments if you really have to

It’s worth noting that there’s no advantage deferring the loan if in fact you can afford the repayments as capitalising the interest will mean that your repayments will increase over the life of the loan. For example, if you paused the interest repayments on a $300,000 loan with a current rate of 3%, after 6 months the balance of the loan will increase to $304,500. In most cases when you recommence your repayments, the minimum amount will be calculated based on this increased loan balance.

If you, or someone you know, unfortunately falls into this category you will need to contact your lender’s financial hardship team which can guide you through the application process. As always, please feel free to get in touch if we can assist in any way.

Lessons from previous bear markets

Lessons from previous bear markets

There’s an old saying that the stock market goes up by the stairs and down by the elevator, except this time it’s been more like jumping out the window. The ASX 200’s gut-wrenching 30% plunge from its late February peak was clocked up in a brutally quick 17 trading days and has left punch drunk investors wondering if things will ever get better and occasionally even wondering if they can continue to bear the pain. Let me assure you, things will get better, regrettably, however, nobody knows when. 

Every investor needs to have a plan, or a strategy, that reflects their ability, willingness and need to take on risk. If share markets didn’t face the risk of falling, they would not offer long-term returns above cash. While bear markets will always test an investor’s resolve, hopefully some historical context will be helpful, not just in terms of how bad it can feel at the time, but the inevitability of recovery afterwards.

Notably, this hasn’t been the sharpest selloff we’ve ever had in Australia, that ignominious title goes to 1987, a near five month correction that saw the All Ordinaries almost halve and included Black Monday (which was actually a Tuesday when the tsunami of selling hit Australia) where shares dropped 26% in a single day.

Then there was the GFC, where the All Ordinaries fell 55% over an excruciating 14 months from its peak in November 2007 to its final bottom in early March of 2009.

All up, if you use the rule of thumb that a bear market is a fall of at least 20%, over the past 60 years Australian shares have experienced seven of them, including the current one. The average time it took to recover the losses was 53 months, though it’s varied between 15 in the mid-1990s to more than 10 years after the GFC (the length of the recovery period is highly influenced by how overvalued the market was going into the selloff). That means the average return over the recovery period has been better than 10% per annum, or almost 13% if you exclude the GFC as an outlier.

Again, for some context, in the US there have been 12 bear markets since 1965 with an average fall of 31%, and an average recovery period of 21 months (less than half Australia’s). That means once the bear market is finished the average returns over the recovery period have been more than 23% per annum.

The question everyone’s asking is when will the current correction stop, and the honest, but entirely frustrating, answer is nobody knows. The analysts at Heuristic Investment Systems have looked at the history of US share market corrections and concluded that mid-sized recessions have typically resulted in the market falling 25-30%, which is where we are now. Deeper recessions, like the GFC tend to see falls of 40-50%, so arguably the market’s pricing in a 60% chance of a deep recession.

Looked at another way, company earnings typically fall 15% in an average recession and the ‘forward price to earnings multiple’, that is the PE ratio the market trades on based on forecast earnings for the year ahead, can go down between two and seven points. From where the US market was immediately prior to this correction starting, a 15% cut in earnings and the PE dropping to 15 would take the S&P 500 to 2,250.

An alternative way to assess how share valuations stack up is the ‘equity risk premium’ (ERP), which measures the extra return shares are offering compared to a risk-free investment in bonds. Even after accounting for expected cuts in earnings forecasts, for the ERP to be as high as it was during the GFC and the European debt crisis would imply 2,600 on the S&P 500.

What those estimates tell you is the share market is already pricing in a serious economic slowdown. Even though there are some commentators arguing this slowdown could be worse than the GFC, we’ve had 10 years of slow but steady growth in between, so don’t expect the index to retreat all the way back to the same level. Plus, central banks and governments, having learned from the GFC, are coordinating their efforts to throw the kitchen sink at supporting economies.

For those that have not sold their shareholdings, there is arguably a lot of value in shares at current levels and to sell now would simply lock in a loss, and for those lucky enough to be holding cash, you have the kind of opportunity that comes along maybe once a decade to build a great, rest-of-your-life portfolio.

If you’re wondering when to invest, don’t for a minute think you’ll be able to pick the bottom, the odds on that are about the same as winning the lottery. And remember, the market will start to turn when the odds of recovery are 50.1%, as opposed to 49.9%, so if you wait for certainty, the market will have taken off well ahead of that point. You should also bear in mind, you don’t have to be all in or all out so you can hedge your bets: if you think there’s a 30% chance the market has bottomed, then you can invest 30% of your resources.