January Newsletter 2023
As a new year begins, we wish everyone a happy, healthy and prosperous 2023. Many families will be glad to put 2022 behind them and although challenges remain, we look forward to better times ahead.
As Australia’s system of compulsory superannuation celebrated its 30th anniversary in July, in our first article we take a closer look at one of super’s biggest success stories – the number of people deciding to take control of their retirement savings with a self-managed super fund (SMSF).
It’s not just school leavers who dream of a gap year. Our second article, How to plan a gap year for grown ups, is for those of us who’ve been working for a decade or two (or more) may also long for a real break from career and commitments.
Our third article asks you to consider cover to protect your most important asset – your ability to earn.
And our final article helps you get up to speed on the global rollout of eInvoicing – a new and more efficient way to deal with the paperwork involved in sending and receiving business invoices, and with the potential to save you and your business both time and money.
How do SMSFs invest?
As Australia’s system of compulsory superannuation celebrated its 30th anniversary in July, this is a good time to take a closer look at one of super’s biggest success stories – the number of people deciding to take control of their retirement savings with a self-managed super fund (SMSF).
There are now almost 607,000 SMSFs worth a combined $894 million, with 1.1 million members.
While one of the benefits of running your own fund is the flexibility to chart your own course, concerns have been raised over the years that SMSFs are too heavily invested in cash and shares and not as well diversified as large public funds. The latest figures show these concerns are largely unfounded.
Comparing SMSFs and large funds
SMSF administrator, SuperConcepts recently surveyed 4,500 funds to find out how SMSF trustees invest and identify any emerging trends.i They also wanted to see how SMSFs compare with large APRA-regulated funds including – industry, retail, public sector and corporate funds – in terms of their investments.
The table below shows the overall asset breakdown as at 31 March 2022.
|Asset type||SMSF %||APRA fund %|
|Cash and short-term deposits||12.2||9.1|
|Australian fixed interest||8.4||10.0|
|International fixed interest||2.1||7.9|
|Other (incl. infrastructure, cryptocurrency, commodities and collectables)||4.9||9.0|
Several differences stand out:
- SMSFs have a higher level of cash and short-term deposits, although not massively so.
- SMSFs hold more Australian shares and property
- APRA funds hold more international shares and fixed interest, and more alternative assets.
At first glance, these differences conform to the stereotype of SMSFs being too dependent on cash, Australian shares and property.
However, the preference for cash may come down to a higher proportion of SMSF members in pension phase (45 per cent of SMSFs are partly or fully in pension phase according to the ATO). The more members a fund has in pension phase, the more cash and liquid investments it needs to cover benefit payments.
Also, the differences are not so stark when you group assets. For instance, cash and fixed interest combined amount to 22.7 per cent for SMSFs and 27.0 per cent for APRA funds. Similarly, local and international shares (56.4 per cent for SMSFs, 55.5 per cent for APRA funds) and property and other (20.9 per cent vs 17.5 per cent ).
It’s likely that the differences within these broad asset groupings are driven by access to different markets, and SMSF trustees being more comfortable picking investments they know such as local shares and property.
What’s more, while big funds can invest directly in large infrastructure projects with steady capital appreciation and reliable income streams, SMSF investors may be pursuing a similar strategy but with real property instead.
Top 10 SMSF investments
Whether it’s the familiarity factor or ease of access, the top 10 investments by value held by SMSFs in the SuperConcepts survey were all Australian shares. As you might expect, the major banks dominate the top 10, along with market heavyweights BHP, CSL and Telstra.
Another thing the top 10 have in common, apart from being household names and easy to access, is dividends. Just as SMSFs in retirement phase hold higher levels of cash to fund their daily income needs, high dividend paying shares are prized for their regular income stream.
Use of ETFs and managed funds
While SMSFs hold large sums in direct Australian shares, diversification improves markedly when you add investments in Australian and international shares held via ETFs and managed funds.
The SuperConcepts survey found almost one third of SMSF investments by value are held in pooled investments. The highest usage is for international shares and fixed interest, where 75 per cent of exposure is via ETFs and managed funds.
As it’s still relatively difficult to access direct investments in international shares, it’s not surprising that global share funds account for eight of the top 10 ETFs and managed funds.
This latest research shows that the diversification of SMSF investment portfolios is broadly comparable to the big super funds. After 30 years of growth and a new generation taking control of their investments, the SMSF sector has well and truly come of age.
If you would like to discuss your SMSF’s investment strategy or you are thinking of setting up your own fund, give us a call.
How to plan a gap year for grown ups
It’s not just school leavers who dream of a gap year. Those of us who’ve been working for a decade or two (or more) may also long for a real break from career and commitments.
It does not even need to be a year – just enough of an extended break to reset and to take stock of what’s important to you. There‘s the opportunity to learn new skills or another language, explore different cultures or do a road trip around Australia.
By planning ahead and making sure your break is not going to derail future financial goals, taking an extended period off work can be achievable.
Dare to dream
Start by finding an idea that might work for you. There are a host of websites that can help you to plan your adult gap year. They will provide tips and tricks for travel and where to find work (paid or volunteer).
You might consider:
Setting off around Australia. Taking off on an extended trip you can take the time along the way to really get to know parts of the country you’ve never seen. You could camp, caravan or stay in quirky country motels along the way.
Chasing the sun. Research affordable countries in warmer climates and set up in a beach shack. You will need to check rules on tourist visas.
Becoming a backpacker. There are plenty of cheap but comfortable accommodation options around the world to allow you to prolong your time away.
Taking a long walk. You can find much-loved and ancient tracks in Australia and around the world to expand your horizons. From the Great Himalayan Trail in Nepal – to Spain‘s Camino De Santiago, or one of Australia‘s iconic walks such as the Heysen Trail in South Australia.
The importance of planning
Once you have established what your break will involve, work out a budget that takes account of the costs you will continue to incur (such as mortgage or loan repayments, insurance, utilities, car registration and rates) as well as your best estimates for accommodation, food, travel and spending money for your destination.
Don‘t be daunted by an amount that may appear unachievable at first glance.
Work out how to save on costs when travelling. Some ideas include:
Living like a local. Try swapping your house with someone in another part of the world. House swap websites match up homeowners looking to live in different places for varying periods of time. Alternatively, you could rent out your home while you are away and/or sign up to a housesitting website.
Working differently. Your gap year might be more about doing something different than taking it easy. Find organisations and websites – such as workaway.info and wwoof.com.au – that cater for working travellers. You could choose to work on farms around the world in return for food and board for example.
Becoming a digital nomad. If manual labour isn‘t your thing, you could pack your computer and hook up to one of the many digital work websites – such as digitalnomadsworld.com, upwork.com or fiverr.com. Many countries now encourage this trend by offering digital nomad visas.
Then, with your costs under control, and a clear goal in mind, it‘s time for a savings plan.
You will want to reduce your current living expenses as much as possible to maximise savings and think about setting up a direct debit to a high interest savings account. Check the MoneySmart Savings Goal calculator to see how much you will need to save every month.
If you have more than a few years to plan your gap year, you could look into some longer term savings and investment options such as shares, exchange-traded funds (ETFs), or term deposits.
While a gap year is exciting, planning ahead financially is essential to ensure you don’t fall into debt.
You also need to carefully consider how this could affect your long-term financial goals. You probably won’t be making super contributions, so this may impact your super balance and retirement plans.
If you’d like to take time off in the future, contact us today to ensure that taking a break from earning an income won’t impact your future financial security.
Time to protect your income
Consider cover for your most important asset – your ability to earn.
One of the reasons people say they don’t have income protection is the perceived cost. But if you were to lose your ability to earn you might regret not having cover, or not having enough cover.
Sadly, one in five Australian families will be impacted by the death of a parent, a serious accident or an illness that renders a parent unable to work.i
These are sobering statistics given that only 31 per cent of Australians have income protection insurance.ii
Who needs it?
Income protection insurance comes into its own when you have commitments like a mortgage and a family. It is particularly helpful if you are self-employed and rely solely on your ability to work to earn an income. But it is also useful for employees as the cover will kick in once your sick leave runs out.
Insurance can mean the difference between maintaining your current lifestyle or defaulting on your mortgage and having to take your children out of private school. It can also give you peace of mind at a stressful time.
Most income protection policies pay up to 75 per cent of your salary for a negotiated period of time. This is often for two years although you can opt for payments up to the age of 70. What you choose will determine the cost.
You also need to decide whether to have a waiting period and, if so, for how long. For instance, if you are an employee it might make sense to wait 90 days or until you exhaust your sick leave entitlements. This will lower your premiums.
Lots of decisions
Timing is just one of the issues you need to address. There are other decisions to consider including whether to hold the policy inside your super fund or outside.
The key benefit of holding income protection inside super is that paying the premiums will have no impact on your cash flow; premiums can be funded from your employer contributions or your account balance. However, deducting premiums from your super will reduce your retirement savings.
If you hold income protection outside your superannuation fund you can pay premiums 12 months in advance and offset the expense against this year’s tax.iii
Stepped, level or mixed premiums?
Stepped premiums start low, but increase over time; level premiums are constant throughout the life of the policy although there may be minor annual adjustments for inflation. Mixed premiums allow you to blend the two within or across cover types. For example, you could have life cover that is 50 per cent stepped and 50 per cent level, or trauma cover stepped and life cover level.
If you are only looking for short-term cover for five to 10 years, then stepped might be cheaper; if you are expecting to maintain your cover for about 20 years, then you could choose level or mixed premiums.
This is because after 10 years the stepped premiums in dollar terms become more expensive than level or mixed premiums and you will end up paying more overall.
Agreed value or indemnity? With agreed value, any payout is determined at the time you take out the policy. With an indemnity policy, the insurer generally looks at your level of income in the 12-24 months prior to the claim. Agreed value is usually preferable if you are self-employed and your income fluctuates from year to year
If you have financial responsibilities and depend on your ability to earn an income, you can’t afford not to insure.
Call us if you would like to discuss your income protection needs.
i http://www.lifewise.org.au/downloads/file/aboutthelifewisecampaign/ 2010_0203_LifewiseNATSEMSummaryA4FINAL.pdf
Get set for eInvoicing
The rollout of electronic invoicing (or eInvoicing) is gaining momentum in Australia – and globally – as a new and more efficient way to deal with the paperwork involved in sending and receiving business invoices and procurement documents.
For small business owners, the arrival of eInvoicing might sound like yet another task to add to your ever- expanding to-do list. But rather than being another bureaucratic box to tick, it has the potential to save you and your business both time and money.
What is eInvoicing?
eInvoicing is a process to streamline invoicing. It’s different to sending an email or PDF through your current software, as it involves directly exchanging a standardised format eInvoice via software used by both the buyer and supplier.
Australia has adopted the international Peppol eProcurement framework as its common standard for automated digital exchange of invoice and procurement information.
The Commonwealth appointed the ATO as Australia’s Peppol authority and it is responsible for developing and administering the local framework and authorising approved service providers. Although it sets local standards, the ATO can’t view the contents of any eInvoices being transmitted between businesses.
Currently it’s not compulsory for businesses to use eInvoicing, but the trend is well underway in the public sector. The Commonwealth made it mandatory for all its agencies to adopt the framework by 1 July 2022, with several state governments also committing to its introduction.
Benefits of eInvoicing
Once a business implements eInvoicing, it no longer needs to print, post or email paper-based or PDF invoices. Purchasers no longer need to manually enter or scan invoices into their software.
Businesses connect via a secure network and can immediately transact with their registered trading partners through approved access points to exchange invoices and other procurement documents. Once the sender creates an invoice, the information is sent directly and securely to the receiver’s software for approval and payment.
According to the ATO, eInvoicing is “a more efficient, accurate and secure way to transact with your suppliers and buyers than current systems using PDF and email”. Experts estimate its introduction could save the Australian economy $28 billion over 10 years.i
The benefits for small business include a reduction in the cost and time involved in invoicing and better control of your invoicing process without the need for repetitive manual entry and chasing lost or inaccurately addressed invoices.
Other advantages include greater visibility of the delivery status of your invoices and reduced risk of fake or compromised invoices. As Peppol is an international framework, it also enables and simplifies exchange of procurement documents and invoice information across borders.
How to get ready to switch
Making the switch to eInvoicing can be fast and easy for a small business, as your current accounting software (such as MYOB or Xero) could already be eInvoice enabled.
If you don’t use accounting software, some software providers offer free and low cost options. Alternatively, you can connect your software to an add-on eInvoicing product or purchase accounting software offering eInvoicing tools.
Enterprises without business management software may be able to use an eInvoicing web portal, as some providers offer services to small businesses that send or receive few invoices.
If you would like more information or help to get started, give us a call.
Planning for a seamless transition
An important step in moving to eInvoicing is to identify and understand your current invoicing and purchase order processes, including the number of invoices sent and received, how often this occurs and your top suppliers and buyers.
You can then talk to eInvoicing service providers and your current software providers to review your options.
It’s sensible to also discuss the transition with your trading partners. You can check the Peppol Directory for registered users and the business documents they can receive.ii
If you do move to eInvoicing, you may need to alter some of your internal processes to accommodate its standardised approach. The ATO offers an eInvoicing Value Assessment Questionnaire you can work through to determine whether it would be of value for your business.iiii https://www.ato.gov.au/business/eInvoicing/eInvoicing-for-government/