Your Financial Questions, Answered: December '19

General

December is officially here, marking the end of 2019 and a financial quarter that fluctuated greatly in its outlook, which resulted in many wondering what the future ahead may look like.

As your trusted team of financial experts, we thought we’d break down exactly what you need to know in order to ensure that you have the knowledge you need to continue making smart financial decisions.

This Q&A covers the following topics:

  1. What you need to know about Div 293 tax
  2. The implementation of the government’s mortgage guarantee scheme
  3. The difference between good and bad debt

Breaking Down Division 293 Tax

If your gross taxable income and employer super guarantee contributions exceed $250,000 a year, your concessional pre-tax super contributions will be taxed at a a rate of 30%. This percentage is made up of the 15% tax paid by your super fund on your employer’s contributions and an additional 15% Division 293 tax on the amount by which your income and super contributions exceeds $250,000.

Calculations for the Division 293 tax are made by the ATO after you lodge your income tax return, with the extra tax already being drawn. That means that if you are required to pay any extra tax, you may receive a bill for this tax in the form of an ‘Additional tax on concessional contributions (Division 293) notice’ from the ATO.

With tax season just around the corner, understanding Division 293 tax and how it may impact on you is imperative for those of you with a high income.

Your Div 293 Questions Answered

  • Q. What should I do if I receive a Division 293 notice?

    First of all: don’t panic. Of course, it can be pretty worrying to be handed a bill to pay without any notice. But there are certain strategies you can take advantage of to avoid having to pay your Division 293 notice out-of-pocket, such as using your super fund to pay for it.

    Remember that for any change in your financial circumstances, your financial advisor is here to help you decide on the best course of action for your particular financial needs.

  • Q. My income and super contributions are above 250k. What impacts can I expect from these changes?

    If your income and tax-free super contributions are above $250,000, you will be subject to the higher tax rate. But it’s important to remember that you’ll only be taxed at the 30% rate on your income above the cut-off, not your entire income, so it may be time to reassess any income-reducing or superannuation strategies you currently have in place.

What You Need to Know About the Government’s Mortgage Guarantee Scheme

Ahead of the May 2019 elections, the Federal Government announced a scheme that would enable first home buyers to purchase a property with as little as a 5 per cent deposit. Under this scheme, the government will offer loan guarantees for first home buyers seeking to purchase properties that fall under the scheme’s property price caps. The idea behind it was simple: to make it easier for first home buyers with middle and lower incomes to break into the Australian property marketing.

But a recent announcement from the Government has revealed that the scheme will operate on a first-come-first-served basis, with only 10,000 first home buyers each year in the whole of Australia able to benefit from January 2020. While details on the specifics of the roll-out of this scheme are scarce, the Government appears to be focused on supporting first home buyers in regional areas. Housing Minister Michael Sukkar, in conversation with the ABC, has claimed that only two of Australia’s big four banks will be selected to participate in the scheme, with 50 per cent of the mortgage guarantees set aside for smaller, regional lenders.

Applicants will also have to select properties which adhere to the scheme’s property price cap in order to be considered for the scheme. This price cap is calculated on both the median house price in capital cities and regional centres. Currently, the caps are set at:

  • Brisbane and QLD’s regional centres: $475,000
  • Sydney and NSW: $700,000
  • Melbourne and VIC: $600,000

For those first home buyers amongst you, the announcement of the mortgage guarantee scheme may have initially had you jumping for joy. However, just like many other aspects of your financial world, how effective this scheme may be in helping you to achieve your dream of home ownership depends on a variety of factors.

Your Mortgage Scheme Questions Answered

  • Q: I’m a first home buyer. This scheme is a good thing for me, right?

    Whether this scheme is beneficial or not to you will really depend on your particular financial circumstances. The mortgage guarantee scheme is targeting a very specific niche of the Australian population looking to break into the property requirement and as such the eligibility requirements are very narrow.

    To start with, to be eligible for the scheme you would have to be considering properties that are generally cheaper than the average house price for a capital city. While not always the case, this could mean you limiting your search to properties in areas that may not be the right investment for you and your needs simply to take advantage of the guarantee scheme. At My Wealth Solutions, we believe that a home purchase should be a lifestyle asset as well as a potential investment, meaning that you should consider a wide variety of lifestyle factors, such as proximity to schools or public transport, before making your decision. By limiting yourself to only properties that are eligible for the mortgage guarantee scheme, you may be sacrificing these lifestyle factors which may prove to be more beneficial to you and your financial goals in the long-term.

    While the scheme does provide a way to break into the property market for those that already fit its eligibility requirements, for the majority of our clients, whether or not it is beneficial to you really will depend on your financial needs, goals and current circumstances.

  • Q: What are the downsides to the mortgage guarantee scheme?

    To start with, the mortgage guarantee scheme encourages first home buyers to purchase a property with a much lower deposit than would normally be required. While this may sound like a way to help those without a large amount of savings break into the property market, it may actually end up costing them more over the lifetime of their loan as their repayments and interest paid will be more due to a reduced deposit.

    You will also still be subject to a servicing assessment with your loan provider even under the mortgage guarantee scheme. A serviceability assessment determines the ability of an individual to make repayments on a loan, based on the difference between the size of the loan and that person’s income and expenses. Depending on the outcome of this assessment, it may directly affect how much you’re able to borrow and how much you’ll need to save to show that you’re capable of borrowing the amount required.

    Just like many aspects of your financial world, whether the mortgage guarantee scheme is beneficial or not for you will depend on your specific financial needs and goals. If you’re considering applying for the scheme, your financial advisor can help you to understand both the benefits and downsides of the scheme in relation to your unique financial situation and decide on the right path forward for you.

The Difference Between Good and Bad Debt

It is a common belief that all debt is bad debt. After all, owing money and having to make repayments may seem counterintuitive to growing your wealth and achieving a brighter financial future. But, in reality, not all debts are considered bad – there is actually such a thing as good debt, which can be used to help you achieve your financial goals.

How to know what the difference between good and bad debt is something that we are frequently asked about, so as your team of expert financial professionals we thought we’d break down this topic and give you our definitions:

For us, good debt is defined at its most basic as any debt that is tax-deductible and/or is owing on a nest egg asset that can be utilised to help you build your wealth. Good debt can include things like an investment property or business loan, both of which can be managed to grow your wealth in the long-term.

Similarly, bad debt is defined as any debt that is not tax-deductible and/or is not owing on an asset that will help you grow your wealth. There are a number of obvious examples of bad debt, such as credit card debt, debt owing on consumer goods such as clothes or food, car loans and even the mortgage on your principal place of residence if not structured correctly.

Your Debt Questions Answered

  • Q: What are some of the ways good debt can help me?

    A mortgage is a great example of how bad debt can be turned into good debt, which can in turn help you to grow your wealth. While you may initially think that a mortgage may be considered bad debt, you can utilise a strategy known as debt recycling to transform your non-tax-deductible mortgage repayments into tax-deductible debt by using the equity in your property to purchase an income-producing asset, such as an investment property. You then take the tax-deductible income produced by this investment asset to pay off your home loan, thus lowering your tax obligations as a whole.

    Debt recycling is a strategy especially worth noting for high-income earners as it helps to lower the often significant tax obligations these earners face. However, debt recycling does involve using your primary place of residence as security for an investment loan, which can be risky depending on your financial circumstances. Thus, it is something that should not be attempted before first discussing with your financial advisor the pros and cons for your particular financial situation.

  • Q: Is bad debt really all bad?

    Just like the mortgage example above, there are many types of debt that don’t fit into either the good or bad category. For example, while credit cards are usually considered a definite form of bad debt, credit card reward programs can actually be used to turn that bad debt into good debt. Credit card reward programs enable consumers to earn free goods and services, such as airline tickets, just by using your credit card as you normally would. If you have the discipline to pay off your credit card balance in full every month, and thus avoid paying extra in interest, this may be a worthwhile strategy to save on what otherwise would have been a straight expense.

    You may also borrow money at a low interest rate and use it to invest in an asset with a higher rate-of-return. This is known as leveraging and is often attempted by investors in order to attempt to ensure they achieve better-than-expected investment results. However, this strategy is extremely risky, as you are entirely dependent on the stability of the markets in which you invest in order to both benefit from your asset and pay back your loan.

    Considering this, we would highly recommend seeking the advice and guidance of your financial advisor if you’re considering utilising leveraging to grow your wealth.

CLIENT TESTIMONIAL

I was referred to My Wealth Solutions during an informal conversation with an acquaintance about consolidating superannuation accounts and financial advice in general. After some research, my wife and I decided to contact My Wealth Solutions and signed up. Following a number of friendly, focussed and professional conversations with Nikki about financial goals and priorities, My Wealth Solutions presented us with a well-researched and comprehensive report that detailed a number of options that we could consider. My wife and I have since decided which options and financial goals to pursue, and have been impressed with the prompt, courteous and professional service provided by Nikki and her team.

Joerns
CLIENT TESTIMONIAL

Fabulous team. Incredible personalised service. I have been with MWS for a number of years now and recommend to everyone! 5 stars.

Jessica J
CLIENT TESTIMONIAL
Nikki and the team at My Wealth Solutions have been extremely helpful in building a savings strategy for my wife and I, as well as tuning our superannuation and life insurance to make the most of our money and get the best coverage for us. Nikki explains everything in a clear and easy to follow way, and we didn’t feel at any point that we were being lost in the jargon or terminology. My wife and I are very happy with the service that we are being provided, we are glad that My Wealth Solutions are helping us reach our savings goals, and we would definitely recommend them for any financial planning or advice.
Tony B
CLIENT TESTIMONIAL

I believe whole heartedly everyone needs to take their wealth and future in their own hands and not just rely on their industry super fund. Financial industry professionals like Ben are key in helping us all achieve the goals we need looking beyond retirement. We were grossly under insured and had a poor idea about what insurance could really do for us as a family. He was so friendly and very approachable…Big tick from us!

Kristy R
CLIENT TESTIMONIAL

We have found the team at My Wealth Solutions to be professional and extremely knowledgeable within their field. Ben has taught us so much about how to better our financial situation. Dallas and I highly recommend Ben and the team to anybody wanting to take their finances to the next level.

Renee W
CLIENT TESTIMONIAL

Excellent service, very professional and great attention to detail. Highly recommend Ben and the team at My Wealth Solutions to take care of any of your financial needs.

Ilija S
CLIENT TESTIMONIAL

Ben and the team have been such an asset to our wealth building journey. They’re always readily available for help and advice, specific to our particular scenario. It has been a pleasure working with this team and look forward to many more interactions in the future.

Erika D
CLIENT TESTIMONIAL

We had an outstanding experience in dealing with My Wealth. They have set us up for the future and educated us all things finance. Couldn’t recommend more.

Danny K

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