Welcome to our Spring newsletter. September means it’s football finals season and hopefully the beginning of warmer weather despite the recent late winter chill.
In August, the focus was on US Federal Reserve chair Jerome Powell’s speech at the annual Jackson Hole business gathering on August 26, and he was blunt. To hose down talk of interest rate cuts in 2023, he said the Fed was focused on bringing US inflation down to 2% (from 8.5% now), even at the risk of recession. He said this will “take some time”, will likely require a “sustained period of below trend economic growth”, and households should expect “some pain” in the months ahead. The S&P500 share index promptly fell 3.4% and bond yields rose. Economists expect the US central bank will continue lifting rates each month for the remainder of 2022.
In Australia, economic conditions are less gloomy. Australia’s trade surplus was a record $136.4 billion in 2022-23. Unemployment fell to 3.4% in July while wages growth rose to an annual rate of 2.6% in the year to June, the strongest in 8 years but well below inflation. The ANZ-Roy Morgan consumer confidence index rose slightly in September to a still depressed 85.0 points while the NAB business confidence index jumped to +6.9 points in July, well above the long-term average of +5.4 points. Half-way through the June half-year reporting season, CommSec reports ASX200 company profits increased 56% in aggregate while dividends are 6% lower on a year earlier.
The Aussie dollar fell more than one cent over the month to close around US68.5c. Aussie shares bucked the global trend, finishing steady over the month.
How much super do I need to retire?
Working out how much you need to save for retirement is a question that keeps many pre-retirees awake at night. Recent market volatility and fluctuating superannuation balances have only added to the uncertainty.
So it’s timely that new research shows you may need less than you fear. For most people, it will certainly be less than the figure of $1 million or more that is often bandied around.
For most people, the amount you need to save will depend on how much you wish to spend in retirement to maintain your current standard of living. When Super Consumers Australia (SCA) recently set about designing retirement savings targets they started by looking at what pre-retirees aged 55 to 59 actually spend now.
Retirement savings targets
SCA estimated retirement savings targets for three levels of spending – low, medium and high – for recently retired singles and couples aged 65 to 69.
Significantly, only so-called high spending couples who want to spend at least $75,000 a year would need to save more than $1 million. A couple hoping to spend a medium-level $56,000 a year would need to save $352,000. High spending singles would need $743,000 to cover spending of $51,000 a year, and $258,000 for medium annual spending of $38,000.i
While these savings targets are based on what people actually spend, there is a buffer built in to provide confidence that your savings can weather periods of market volatility and won’t run out before you reach age 90.
They assume you own your home outright and will be eligible for the Age Pension, which is reflected in the relatively low savings targets for all but wealthier retirees.*
Retirement planning rules of thumb
The SCA research is the latest attempt at a retirement planning ‘rule of thumb’. Rules of thumb are popular shortcuts that give a best estimate of what tends to work for most people, based on practical experience and population averages.
These tend to fall into two camps:
- A target replacement rate for retirement income. This approach assumes most people want to continue the standard of living they are used to, so it takes pre-retirement income as a starting point. A target replacement range of 65-75 per cent of pre-retirement income is generally deemed appropriate for most Australians.ii
- Budget standards. This approach estimates the cost of a basket of goods and services likely to provide a given standard of living in retirement. The best-known example in Australia is the Association of Superannuation Funds of Australia (ASFA) Retirement Standard which provides ‘modest’ and ‘comfortable’ budget estimates.iii
SCA sits somewhere between the two, offering three levels of spending to ASFA’s two, based on pre-retirement spending rather than a basket of goods. Interestingly, the results are similar with ASFAs ‘comfortable’ budget falling between SCA’s medium and high targets.
ASFA estimates a single retiree will need to save $545,000 to live comfortably on annual income of $46,494 a year, while retired couples will need $640,000 to generate annual income of $65,445. This also assumes you are a homeowner and will be eligible for the Age Pension.
Limitations of shortcuts
The big unknown is how long you will live. If you’re healthy and have good genes, you might expect to live well into your 90s which may require a bigger nest egg. Luckily, it’s never too late to give your super a boost. You could:
- Salary sacrifice some of your pre-tax income or make a personal super contribution and claim a tax deduction but stay within the annual concessional contributions cap of $27,500.
- Make an after-tax super contribution of up to the annual limit of $110,000, or up to $330,000 using the bring-forward rule.
- Downsize your home and put up to $300,000 of the proceeds into your super fund. Thanks to new rules that came into force on July 1, you may be able to add to your super up to age 75 even if you’re no longer working.
While retirement planning rules of thumb are a useful starting point, they are no substitute for a personal plan. If you would like to discuss your retirement income strategy, give us a call.
*Assumptions also include average annual inflation of 2.5% in future, which is the average rate over the past 20 years, and average annual returns net of fees and taxes of 5.6% in retirement phase and 5% in accumulation phase.
i CONSULTATIVE REPORT: Retirement Spending Levels and Savings Targets, Super Consumers Australia,
ii 2020 Retirement Income Review, The Treasury
iii Association of Superannuation Funds of Australia (ASFA) Retirement Standard
Tax Alert September 2022
With the tax regulator taking a more aggressive approach to tax debts and reviewing work from home deduction rules, tax issues could become a higher priority in 2022-23.
Here’s a roundup of some of the latest developments in the world of tax.
Consultation on working from home deductions
Taxpayers could face the prospect of new rules when it comes to claiming working from home deductions after the ATO announced it was undertaking a targeted consultation.
Now the temporary shortcut method for working from home deductions has ended (available 1 March 2020 to 30 June 2022), the ATO is currently refreshing its approach to the traditional fixed rate method of calculating work from home deductions.
The regulator is consulting tax practitioner representatives and expects discussions to be completed in October 2022, with any new rules for the current financial year to be announced after this.
Offsetting of tax debts resumes
After taking a lenient approach during the pandemic, the tax man has begun chasing outstanding tax debts by sending taxpayers letters reminding them about existing debts placed on hold.
During the 2022-23 financial year, the ATO will recommence offsetting tax refunds or credits to pay off a taxpayer’s existing tax debts.
In some cases, tax credits will also be used to pay off debts owed to other government agencies such as Centrelink.
JobMaker Hiring Credit open
The seventh claim period for JobMaker Hiring Credit payments is now open and will end on 31 October 2022.
The scheme allows businesses to claim the credit for up to a year for each eligible employee hired between 7 October 2020 and 6 October 2021.
Eligible employers can nominate additional eligible employees through their STP-enabled software and claim using ATO Online Services or their accountant.
ATO app for sole traders
The ATO is encouraging sole traders to download and use the ATO app for a more personalised experience when viewing their tax lodgements and payment due dates.
The app also allows sole traders to check the progress of their tax return, view their income tax and activity statement accounts, access transactions and payment plan details and make payments in ATO online.
Useful tools and calculators such as my Deductions and the Tax Withheld Calculator are also available, together with a Business Performance Check Tool allowing you to compare your business performance with others in your industry.
Thresholds for 2022-23 car claims
The maximum value for calculating depreciation on the business use of a car first used or leased during 2022–23 has increased to $64,741.
The car limit is indexed annually in line with CPI movements and represents the threshold limit on the cost you can use to work out depreciation on a passenger vehicle.
If you purchase a vehicle priced over the car limit, your maximum claimable GST credit is $5,885 in 2022-23.
From 1 July 2022, the luxury car tax (LCT) threshold has also increased. The new threshold for fuel efficient vehicles is $84,916 (up from $79,659) and for all other vehicles it increases to $71,849 (up from $69,152).
Crypto not taxed as foreign currency
The government has announced crypto currencies will continue to be excluded from foreign currency arrangements for tax purposes. Capital gains tax (CGT) will continue to apply to crypto assets held as investments.
The announcement will be backdated to 1 July 2021 to ensure a consistent tax requirement for crypto asset holders.
New rate for claiming car expenses
Taxpayers electing to use the cents per kilometre method when calculating work related car expenses in their income tax deductions have a new kilometre rate to use.
From 1 July 2022, a 78 cents per kilometre rate applies. This rate will remain in place in subsequent income years until varied by legislation.
Director ID reminder
The deadline is approaching for directors to apply for their director ID – a unique 15-digit identifier.
From 1 November 2021 directors of all businesses, including directors of self-managed super fund (SMSF) corporate trustees, need a director ID. Anyone who was a director before that date has until 30 November 2022 to apply.
Directors appointed between 1 November 2021 and 4 April 2022 had to apply within 28 days of their appointment. From 5 April 2022, intending directors must apply before they are appointed.
Go on… take a break!
One of the things many of us have been missing over the past few years is holidays, but now that the world is opening up again for travel and destinations that have been pretty quiet are now eagerly welcoming back tourists, taking a break has never been more appealing.
Holidays are not just a lovely way to spend time, they are fantastic for us on so many levels. Having a break from the daily grind gets us out of our usual routine, opens us up to new experiences and is good for us mentally and physically.
However, the stats tell us that for many Australians it’s been a long time between breaks. In fact, around 8 million Australians have accrued nearly 175 million days of leave over the past 12 months, up from 151 the previous year.i That’s a lot of missed holidays!
Whether you are one of those who hasn’t had much of a break lately or even if you’ve just got back from a trip and are planning your next one – there are a host of good reasons to take a holiday.
Holiday to keep the doctor away
Holidays have been proven to lower stress which has a myriad of benefits including addressing the risk of cardiovascular issues like stroke and heart attack. A study following more than 12,000 middle-aged men at high risk for heart disease, found those who took yearly breaks were less likely to die from any cause, including heart attacks and other cardiovascular issues.ii
It’s not just physical health that benefits, taking a break is unsurprisingly pretty good for mental health with even a short break of a few days having a powerful mood enhancing effect.iii
Travel to broaden the mind
Lifelong learning is not only good for our careers but also important for our personal growth. And travel is a learning experience like no other, whether you are heading to a new country or a different part of your city or state you’ll meet new people and experience a different way of life.
Travel is also the ultimate experience in mindfulness – you are living in the moment when you are on holiday. A break in routine takes us off autopilot and puts us in charge.
Having a break makes you more productive
If you are worried about the impact a break can have on your career – don’t be! Research by Boston Consulting Group found that professionals who took planned time off were significantly more productive than those who spent more time working.iv Holidays offer time for introspection, goal setting and a chance to recharge your batteries for a new lease on life.
Planning for a wonderful time
Not all vacations are created equal. Just taking any quickly thrown-together escape may not provide all the health and productivity benefits associated with taking a vacation. A poorly planned break can be a source of tension and stress, rather than the opposite.
So how do you get the best out of a break?
Be flexible – While it’s important to plan before you leave, have enough flexibility for discovery – be open to new experiences and willing to change the schedule to accommodate those spontaneous magical moments.
Don’t sweat the small stuff – Things can and do go awry once you are away but don’t let silly little things spoil the break.
Switch off – Don’t be tempted to check your emails or socials every few minutes – stay in the moment. A decent break from work will also reinforce that the office doesn’t need you 24/7 and that life comes first.
Watch the budget but have some allowances to splurge – Focus on experiences and the memories you’ll take home with you rather than what’s on sale at the gift shop or duty free.
And finally, don’t feel that a holiday must be a luxurious destination or for a long period of time to count. A change of scenery can be as good as a holiday – even taking a mini break and heading off for a weekend away to a lovely destination can provide all the benefits of a holiday. So, what are you waiting for? Start planning that next trip. The wide, wonderful world awaits!