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If Trump wins...what would it mean for sharemarkets? · The Money Puzzle

0:06
Speaker 1: Hello and welcome to the Australian's Money Puzzle Podcast. I'm
0:10
Speaker 1: James Kirby, the Wealth Editor at The Australian. Welcome aboard, everybody. Well,
0:21
Speaker 1: you may not have yet got your full results for
0:26
Speaker 1: the financial year, but you may start to be getting
0:28
Speaker 1: your super returns. They were probably at the 9% mark,
0:34
Speaker 1: maybe higher if you've any decent fund at all. And
0:38
Speaker 1: if you were looking at how your shares went, my
0:40
Speaker 1: oh my, a very, very good year. You would expect
0:44
Speaker 1: on the Australian market that you did at least 12%.
0:47
Speaker 1: I'm talking your shares doing about 8% and your dividends
0:52
Speaker 1: doing maybe four and a half thereabouts. So you get
0:56
Speaker 1: a total return on 12-ish. good year by any standards historically,
1:01
Speaker 1: comfortably ahead of inflation. And then the U.S. market's absolutely wonderful.
1:05
Speaker 1: I mean, there are wonderful returns from the U.S. market.
1:08
Speaker 1: You're looking at in the order of 20% plus on
1:12
Speaker 1: world indices. You're looking at more like mid-20s on U.S. indices.
1:18
Speaker 1: The U.S. indices are now so powerful, are so successful
1:22
Speaker 1: that they are representing 70% of the world's stock market
1:27
Speaker 1: as represented by the Morgan Stanley Capital International Index, the MISCI,
1:31
Speaker 1: as they call it. So the question we ask is,
1:38
Speaker 1: is this as good as it gets, both on your
1:41
Speaker 1: super and on your share market return? We had Ashley
1:44
Speaker 1: Owen on the show last week, of course. Needless to say,
1:47
Speaker 1: as I expected, as I predicted, we had a big
1:50
Speaker 1: response to that. And as I said, we could almost
1:53
Speaker 1: do that show every single month of the year. And
1:57
Speaker 1: we'd have avid listeners every month of the year. How
2:00
Speaker 1: much should you have in super? And I thought Ashley
2:01
Speaker 1: was quite good in how he really got into the
2:04
Speaker 1: tickets there on the basis that, you know, it is
2:06
Speaker 1: different for everyone. A lot of it is your own expectations.
2:09
Speaker 1: There are formulas you can follow. If you miss the show,
2:11
Speaker 1: make sure you listen back to it. My guest today is,
2:15
Speaker 1: of course, James Gerrard of financialadvisor.com.au, friend of the show.
2:21
Speaker 1: best friend of the show. How are you, James Gerrard?
2:24
Speaker 2: I'm doing great. Thank you, James. Lovely to be on,
2:26
Speaker 2: as always.
2:27
Speaker 1: Great to have you on. Tell me, I imagine you've
2:30
Speaker 1: got all these smiling clients. They probably think you're marvelous,
2:33
Speaker 1: do they? Oh, James, this was so good this year.
2:35
Speaker 1: You're so good as an advisor. And you sit there going, yeah, well,
2:39
Speaker 1: you know, the markets were damn good this year. Is
2:42
Speaker 1: it a year like that, pray tell?
2:45
Speaker 2: Yeah, well, most of my clients have been with me
2:47
Speaker 2: for 10 years or more. We've been through good years,
2:50
Speaker 2: but they've been through bad years as well. So they're
2:53
Speaker 2: happy having double-digit returns, most of them, but they understand
2:57
Speaker 2: that there will be a bad year that comes and
2:59
Speaker 2: we have to sort of look at things over long
3:00
Speaker 2: periods of time. But yeah, you'd always take a positive
3:04
Speaker 2: return over a negative return. But I guess from here,
3:06
Speaker 2: it's just about will it continue, which I think we'll
3:08
Speaker 2: probably explore a little bit today. Yes.
3:11
Speaker 1: I mean, I have a self-managed fund and I Fortunately,
3:14
Speaker 1: finally took my own advice about a year and a
3:16
Speaker 1: half ago, and I did shift substantially into offshore markets.
3:21
Speaker 1: When I say substantially, maybe a quarter of all the
3:23
Speaker 1: shares are now in one way or another not on
3:28
Speaker 1: the ASX, mostly on the US. And mostly I am
3:33
Speaker 1: using funds or ETFs to access that rather than picking
3:37
Speaker 1: them individually. But, you know, it really did lift it.
3:41
Speaker 1: And you're talking 20% plus rather than 12% on the
3:45
Speaker 1: local market. I was talking to someone last night and
3:48
Speaker 1: they were saying, when is the Australian market ever going
3:52
Speaker 1: to come around? When is it ever going to be
3:54
Speaker 1: better than the US? Because it isn't. Year after year,
3:58
Speaker 1: year after year after year, how far back do you
3:59
Speaker 1: want to go? When they go really well, we go okay.
4:02
Speaker 1: When they fall, we fall with them. It's a difficult one.
4:06
Speaker 1: So in terms of just super... returns and super returns being,
4:11
Speaker 1: let's say they're 9% for everybody. And then let's say
4:15
Speaker 1: that they are heavily underpinned, no matter who you buy
4:19
Speaker 1: share markets in the share markets were exceptionally good. I
4:24
Speaker 1: imagine a danger with an advisor is that people start
4:27
Speaker 1: to expect that this is normal, that this is what
4:31
Speaker 1: they should get each year.
4:34
Speaker 2: Correct. People have short memories. It wasn't that long ago
4:37
Speaker 2: that the technology stocks in America were out of favor
4:40
Speaker 2: and a lot of big companies were dropping 20, 40, 50%
4:43
Speaker 2: in value over a 12-month period. Now, of course, the
4:47
Speaker 2: fortunes for those companies have changed and conditions are great
4:50
Speaker 2: for share markets and also cash rates are high as well. So,
4:53
Speaker 2: bonds and term deposits are yielding great. So, we're in
4:56
Speaker 2: a slightly unique situation where all asset allocations are performing
5:00
Speaker 2: well because usually where the share market's doing well, you're
5:03
Speaker 2: not getting that much on on cash and property markets
5:06
Speaker 2: aren't doing great if share markets are doing well, but
5:08
Speaker 2: everything across the board has been going great over the
5:10
Speaker 2: past four months. So you are absolutely right. Investors shouldn't
5:14
Speaker 2: get complacent because it's not always going to be like this. Yes.
5:18
Speaker 1: I mean, I don't want to be Harbinger of doom
5:20
Speaker 1: or anything like that, but there was a period, 2008.
5:22
Speaker 1: Oh my God, 2008. Everything was falling. Everything. I remember
5:29
Speaker 1: the only thing, because at the time, We're running an
5:33
Speaker 1: investment like a newsletter. And it was just so grim.
5:39
Speaker 1: The only thing that there was any action at all
5:41
Speaker 1: was these gas exploration stocks in Queensland. That was about
5:45
Speaker 1: the only thing. And everything was going the wrong way.
5:48
Speaker 1: Absolutely everything. And what people forget is not just that
5:51
Speaker 1: it fell, but it was so grindingly difficult because it
5:54
Speaker 1: fell by nearly 50% between the top of 207 and
5:58
Speaker 1: the very bottom of 209. And I think just as
6:01
Speaker 1: a word of warning, For anyone who gets a little
6:04
Speaker 1: bit too excited about the returns they've just had, there
6:09
Speaker 1: are periods where it is gruelingly difficult to be exposed
6:13
Speaker 1: to shares. And there is a sense of it will
6:17
Speaker 1: never turn. It always does, but it can take... But
6:20
Speaker 1: the COVID crash didn't take that long, did it, James?
6:23
Speaker 1: Maybe six months. But the GFC crash took two years
6:27
Speaker 1: to happen. That was the hard part, and maybe two
6:30
Speaker 1: years to recover thereabouts. So you really have to have
6:33
Speaker 1: a strong constitution to go with it, especially as an
6:37
Speaker 1: independent investor. But structurally, I wonder if it's the case
6:42
Speaker 1: that the conditions last year that drove such a good
6:48
Speaker 1: share market return would seem to be perfect again this year,
6:53
Speaker 1: and we don't see anything yet that would change that.
6:57
Speaker 1: So is it the case that people probably could be
7:02
Speaker 1: confident on shares, and if they are, should they have
7:05
Speaker 1: more overseas? Because we know independent Australian investors still have
7:10
Speaker 1: not much overseas compared to successful institutional investors, such as
7:14
Speaker 1: the Future Fund.
7:16
Speaker 2: It's an interesting situation because you have, on one hand,
7:20
Speaker 2: as you say, the market conditions, which are conducive for
7:23
Speaker 2: more share market gains. So you're going through the sort
7:26
Speaker 2: of normal economic indicators and things that we as professional
7:29
Speaker 2: investors have a look at for our clients. Economic indicators,
7:32
Speaker 2: so GDP in America is great, unemployment's low. Monetary policy,
7:37
Speaker 2: so inflation's falling. It's come down from 9%. It's now 3%.
7:41
Speaker 2: So that means that the Fed Reserve should decrease interest
7:43
Speaker 2: rate or cash rates, which would be good for share
7:45
Speaker 2: markets in America. If you look at the political situation,
7:48
Speaker 2: it's looking more likely with a Trump win, and that's
7:51
Speaker 2: seen to be good for share markets because Trump is pro-business.
7:55
Speaker 2: So that should be a shot in the arm for
7:57
Speaker 2: share markets. And Corporate earnings, they've been strong and it
8:00
Speaker 2: looks like they'll continue to be strong. So on one side,
8:03
Speaker 2: everything looks good, ticking the boxes for share markets to
8:06
Speaker 2: keep going up. But on the other hand, we always
8:09
Speaker 2: have to have regard to valuations of share markets. How
8:12
Speaker 2: expensive or cheap is the share market compared to historical averages?
8:17
Speaker 2: And one of the very crude metrics we have a
8:19
Speaker 2: look at is what's called the price to earnings ratio.
8:22
Speaker 2: And at the moment, the US share market is trading
8:24
Speaker 2: on a price to earnings ratio of about 29 times earnings.
8:28
Speaker 2: which is higher than the historic rate of 18 times,
8:31
Speaker 2: which means that share markets historically are more expensive now
8:35
Speaker 2: compared to historical averages. And what I've observed is that
8:39
Speaker 2: share markets always go back to the long-term average. So
8:42
Speaker 2: on one hand, there's room for more gains to be had.
8:46
Speaker 2: But on the other hand, at some stage in the future,
8:48
Speaker 2: there will be a drop for it to go back
8:50
Speaker 2: to the long-term average.
8:51
Speaker 1: So 29 times is the P on the US market
8:54
Speaker 1: right now?
8:55
Speaker 2: Yeah, at the moment, yeah.
8:57
Speaker 1: That's getting high, huh? It is. What would you say
9:00
Speaker 1: is a comfortable number?
9:01
Speaker 2: I'd say back around that 25, which is still above
9:05
Speaker 2: the average, but still not too overvalued. So pulling out
9:09
Speaker 2: my crystal ball, as I do occasionally, I think that
9:12
Speaker 2: in the lead up to the US presidential election, share
9:14
Speaker 2: markets will continue to bubble along and see maybe 5%
9:18
Speaker 2: or 10% gains. But then after that. And if Trump
9:21
Speaker 2: gets into power, that's when we'll start to see some
9:23
Speaker 2: shocks to market. He may reignite a trade war with China,
9:26
Speaker 2: for example, or it could be something outside of Trump's control.
9:29
Speaker 2: It might be a geopolitical event with Russia or Ukraine
9:32
Speaker 2: flaring up. So something will happen because the more expensive
9:36
Speaker 2: share markets are, the more sensitive share markets are to
9:39
Speaker 2: negative news because the investors are just looking for a
9:42
Speaker 2: small piece of information to go, aha, this is a
9:44
Speaker 2: signal we need to take our profits and start selling.
9:47
Speaker 1: And as you say, The last time Trump won, the
9:50
Speaker 1: share market had quite a lift straight away after his election.
9:54
Speaker 1: You might say that would happen with any Republican candidate,
9:58
Speaker 1: but it just so happens that he's the one. this time.
10:03
Speaker 1: Whether you like him or not, here he comes again. Okay,
10:06
Speaker 1: just one final thing on that. The bit I always
10:08
Speaker 1: worry about every year is the U.S. autumn weather. jitters,
10:13
Speaker 1: the September, October, the crash season, all the great crashes,
10:18
Speaker 1: all the great drops, they always happen in September, October.
10:21
Speaker 1: It's late July. We're only about six or eight weeks
10:25
Speaker 1: off from that patch. Personally, I'm always very, very careful
10:29
Speaker 1: buying shares before that patch because there's often a drop.
10:33
Speaker 1: What do you think?
10:34
Speaker 2: I agree with that. It is a historical warning period
10:38
Speaker 2: where share markets are conducive to drop in. But on
10:40
Speaker 2: the other hand, Yeah, we do have those strong economic
10:43
Speaker 2: factors there saying that we should plow through this time
10:46
Speaker 2: around and keep getting stronger. So it really depends on
10:49
Speaker 2: using that saying, you can't see around corners. It's going
10:51
Speaker 2: to be something that pops up and just smacks us
10:53
Speaker 2: in the face that causes share markets to drop that
10:55
Speaker 2: we don't know what it is today.
10:57
Speaker 1: Yeah, the black swan event, as they call it. Okay,
11:00
Speaker 1: now that's the share market. We're going to bounce around
11:02
Speaker 1: on a few subjects today, folks, for the simple reason
11:04
Speaker 1: that there are a couple of pressing subjects I know
11:07
Speaker 1: that you would all be very interested in. James, one
11:11
Speaker 1: of the things I wanted to also talk about, and
11:14
Speaker 1: they're unrelated, folks, but they're all related to investors and
11:18
Speaker 1: the activities that you or I might be doing in
11:20
Speaker 1: the market. Just quickly, in the stockbroking world and in
11:25
Speaker 1: the advisory world, there's a format for investors that has
11:32
Speaker 1: become very popular and is growing very, very quickly called
11:34
Speaker 1: self-managed accounts, SMAs. And everything I've read about SMAs talks
11:41
Speaker 1: about how great they are and how they're growing so quickly.
11:44
Speaker 1: And you said to me, I don't like them at all.
11:46
Speaker 1: I wouldn't go near them and I wouldn't put anybody
11:48
Speaker 1: into them. And then I said to you, well, why
11:51
Speaker 1: don't you say that loud and clear and do a
11:54
Speaker 1: piece about it in the Australian, which you did, which
11:58
Speaker 1: was great. What do you think now about those SMAs?
12:01
Speaker 1: Do you think people are starting to become a little
12:04
Speaker 1: sceptical about them? And just if you would, for the listeners,
12:07
Speaker 1: should they be approached by anyone? with these self-managed accounts,
12:10
Speaker 1: which are, as I say, the hottest thing you've seen
12:12
Speaker 1: for a long time in the local market in terms
12:14
Speaker 1: of a structure for independent investors. Just encapsulate what you
12:20
Speaker 1: thought was wrong with them.
12:22
Speaker 2: Absolutely. So these separately managed accounts, they're there to provide
12:27
Speaker 2: convenience to the client, but also to the financial advisor,
12:31
Speaker 2: because basically the financial advisor is selecting a fund to
12:36
Speaker 2: invest into, And that's run by a separately managed account manager.
12:41
Speaker 2: So it could be an asset manager. It could be
12:44
Speaker 2: a company like Lonsec or Morningstar. So basically, the financial
12:47
Speaker 2: advisor is placing you as the client into a fund.
12:51
Speaker 2: That fund is then investing into other managed funds in
12:53
Speaker 2: ETFs and shares. And that's all usually wrapped up inside
12:57
Speaker 2: of a platform. So if you count the layers of fees,
12:59
Speaker 2: you have financial advisor fee, you have separately managed account
13:02
Speaker 2: manager fee, you have fund manager fee, You have ETF
13:06
Speaker 2: manager fee and then you have platform fee. So there's
13:08
Speaker 2: like four or five different types of fees in there.
13:11
Speaker 2: And the financial advisor at the end of the day
13:13
Speaker 2: has no control over whether BHP is being sold or
13:16
Speaker 2: Rio Tinto is being sold because he's outsourced that responsibility.
13:20
Speaker 2: So I have no issues with separately managed accounts. if
13:23
Speaker 2: it's made very clear that the investment management part of
13:26
Speaker 2: the service that the financial advisor is providing has been outsourced.
13:30
Speaker 2: And if the advisor is truly providing other services. So
13:34
Speaker 2: I've got some friends who are financial advisors and they
13:37
Speaker 2: operate SMAs very legitimately because they're focused on clients with
13:41
Speaker 2: say disabilities, and they're helping the family set up trust
13:44
Speaker 2: and they're giving advice around how to deal with NDIS
13:47
Speaker 2: and other things like that. But if it's a run-of-the-mill
13:50
Speaker 2: financial advisor who's hanging their hat with regards to what
13:53
Speaker 2: they do for you on investment management and they're putting
13:55
Speaker 2: you into an SMA, you're paying them a fee basically
13:58
Speaker 2: for nothing and they're laughing amongst themselves at industry conferences
14:01
Speaker 2: about how easy it is to manage clients' money.
14:05
Speaker 1: How easy because you pay them a fee so they
14:07
Speaker 1: pay someone else a fee And they in turn pay
14:10
Speaker 1: layers of fees across the system. And they've outsourced the
14:15
Speaker 1: whole issue of investment management. So what's left for them
14:17
Speaker 1: to do? Red tape, box ticking. Exactly.
14:21
Speaker 2: And what really irks me is that in their reviews
14:24
Speaker 2: with clients is they're pretending like, oh, yes, we made
14:27
Speaker 2: this change to our portfolio when we've shifted X percent
14:31
Speaker 2: to US shares. But really, they had no control of
14:33
Speaker 2: it at all. It was that manager who paid another
14:35
Speaker 2: manager to do that made a change. They're just reporting
14:38
Speaker 2: back to you, but pretending like they were the one
14:39
Speaker 2: that instigated that change, which is all bollocks.
14:44
Speaker 1: It reminds me of the occasional fleeting commentator that occasionally
14:49
Speaker 1: made their way through my own section where someone would
14:52
Speaker 1: write these global macro pieces. And then I would look
14:55
Speaker 1: and I'd say, I think I've read that somewhere before.
14:58
Speaker 1: And I would see there it was in the Wall
14:59
Speaker 1: Street Journal or The Economist. And I'd say, okay, that's
15:02
Speaker 1: not going to work anymore for our audiences. Okay, look,
15:06
Speaker 1: just before we go to the break, one last thing
15:08
Speaker 1: really interesting about that concept about if Trump wins, because
15:13
Speaker 1: elections are so important now and they are so, we're
15:17
Speaker 1: getting very extremes, right? So the middle of the road
15:20
Speaker 1: is gone, as we know just now in elections. We
15:23
Speaker 1: find there's a Labour government in Australia. There's a Labour government,
15:26
Speaker 1: quite a left-wing Labour government replacing quite a right-wing Tory
15:29
Speaker 1: government in the UK. There's a surprise rebound government of
15:35
Speaker 1: the left against the right in France. And then, of course,
15:38
Speaker 1: in the US, the ultimate market. And this is why
15:41
Speaker 1: we're interested in it. It's not a show about politics.
15:44
Speaker 1: It's a show about markets. But if Republicans win and
15:48
Speaker 1: if Trump wins, the last time he won, the market
15:50
Speaker 1: got a big lift. Paradoxically, the economy is very good
15:53
Speaker 1: under Biden, but he's not getting any kudos on that front.
15:57
Speaker 1: And Trump, you see even the big players on Wall
16:01
Speaker 1: Street who would say they don't like him and don't
16:04
Speaker 1: like aspects about him in recent times are currying favor.
16:07
Speaker 1: And there's lots of stories about the big Wall Street
16:09
Speaker 1: leaders going back to Trump and forgiving Trump. And basically,
16:13
Speaker 1: they're pragmatic. They're saying this guy's going to win. We
16:15
Speaker 1: better be on side with him. But I wanted to
16:17
Speaker 1: ask you, if Trump wins then, do you see that
16:21
Speaker 1: as something that would extend the bull market, basically, that
16:24
Speaker 1: we've been seeing on the U.S.
16:26
Speaker 2: I do, but I think it'll be short-term in nature.
16:28
Speaker 2: We may see a bit of what we can call
16:30
Speaker 2: buyer's remorse after maybe three or six months. So if
16:34
Speaker 2: Trump gets elected, there'll be, hooray, this is great for business.
16:37
Speaker 2: This is great for reducing tax, prompting the US economy
16:41
Speaker 2: to drive forward, increase their GDP. But after three or
16:44
Speaker 2: six months, people might go, ooh, what have we done here?
16:46
Speaker 2: And that'll start to happen once Trump comes out with
16:49
Speaker 2: his quite extravagant policy decisions, off-the-cuff comments. And so markets
16:53
Speaker 2: will start to then pull back because although... Share markets
16:57
Speaker 2: like Republicans because they're more pro-business. Share markets like stability
17:01
Speaker 2: as well. They don't like it when the politician comes
17:04
Speaker 2: out with an unexpected policy announcement, which Trump has done historically.
17:08
Speaker 2: So I think that short-term boosts, but then sometime between
17:11
Speaker 2: three months and maybe nine months, we might see a
17:13
Speaker 2: pullback as reality sets in of who they've actually elected.
17:17
Speaker 1: Yeah, and I suppose you'd have to say it would
17:19
Speaker 1: also be a win for old business and fossil fuel business.
17:25
Speaker 1: up against ESG business by definition.
17:29
Speaker 2: Yep.
17:29
Speaker 1: Okay. That's also something I suppose that we have to
17:31
Speaker 1: consider as investors. All right, we'll take a short break
17:38
Speaker 1: and we'll be back in a moment. Hello and welcome
17:52
Speaker 1: back to the Australian's Money Puzzle podcast. I'm James Kirby,
17:55
Speaker 1: the World Editor at The Australian, talking to James Gerrard,
17:58
Speaker 1: regular on the show, head of financialadvice.com.au. One of the
18:06
Speaker 1: more interesting things I saw this week, a couple of
18:09
Speaker 1: things happened. The ETF industry hit $ 200 billion in the
18:13
Speaker 1: local market and on they go. They are steaming along
18:16
Speaker 1: with big players, particularly You would know Vanguard and the
18:21
Speaker 1: domestic sort of champions, beta shares, both becoming stronger and
18:25
Speaker 1: stronger in recent times as all the ETF players doing
18:29
Speaker 1: fairly well, GlobalX, et cetera. People going in there as
18:33
Speaker 1: the market comes to understand that ETFs, that amazing proposal
18:39
Speaker 1: they offer an investor, which is that you will do
18:42
Speaker 1: as well as the market. you won't do any worse
18:45
Speaker 1: and you won't do any better. You will not shoot
18:46
Speaker 1: out the lights, neither will you do terribly because you
18:49
Speaker 1: will just do whatever the market does. So if the
18:52
Speaker 1: ASX did 12% last year and you had an ASX ETF,
18:56
Speaker 1: you did 12%. And a lot of people are perfectly
18:58
Speaker 1: happy with that. Certainly as a core of their portfolio. Now,
19:03
Speaker 1: one of the things we've got to be careful about
19:05
Speaker 1: is just as we're starting to understand ETFs, the goalposts move.
19:10
Speaker 1: And financial people being what they are, they can never
19:13
Speaker 1: leave things alone. And they are starting to create things
19:16
Speaker 1: called active ETFs, where they change, but they don't offer
19:21
Speaker 1: what they used to, right? So what they do is
19:23
Speaker 1: they say, yes, we have two ETFs. We have the
19:26
Speaker 1: traditional mirror ETF, or we just, whatever the ASX does,
19:29
Speaker 1: we will get exactly that. But then they have active ETFs,
19:33
Speaker 1: and they say something like, it's the exact same as
19:35
Speaker 1: it used to be, except we're doing something slightly different.
19:38
Speaker 1: Whatever that might be, equally weighted. We're trying to balance
19:41
Speaker 1: the share portfolio so certain things don't happen. And that's
19:45
Speaker 1: called active ETFs. And they are very, very different. And
19:49
Speaker 1: I wish the industry would make it more clear to
19:51
Speaker 1: the everyday investor that they are not what we regard
19:55
Speaker 1: as ETFs. And this is leading me into the first question,
19:57
Speaker 1: which is from Daniel. Just wondering, if you are able
20:01
Speaker 1: to provide an overview of the best performing active ETFs
20:06
Speaker 1: listed on the Australian Stock Exchange over the last five years,
20:09
Speaker 1: I am thinking it might be a good time to
20:12
Speaker 1: move from non-active, right? That's passive. That's the traditional mirror
20:16
Speaker 1: ETF I was talking about, or index fund, which just
20:19
Speaker 1: matches the market, to active. Daniel, it's a great question.
20:24
Speaker 1: And I bet we'll get a damn good answer from James,
20:26
Speaker 1: because he's actually gone and taken the trouble to look
20:29
Speaker 1: at this. And James, I wonder, I'm only going to
20:32
Speaker 1: guess now, but the best performing active ETF on the
20:35
Speaker 1: ASX will be something utterly obscure, like a and NASDAQ
20:41
Speaker 1: options-driven something or other. I don't know the answer. Tell
20:45
Speaker 1: me what it is. I'm completely wrong.
20:48
Speaker 2: Tell me. That's right. It's something that's not a traditional asset.
20:52
Speaker 2: It's one of those crypto ETFs that's only been around
20:55
Speaker 2: for about 12 months or so, but it's up close
20:57
Speaker 2: to 200%. They're sort of timed it well.
20:59
Speaker 1: Okay, so it's actually even more off the table than
21:02
Speaker 1: I thought. It's crypto. So you see, how far is
21:07
Speaker 1: crypto from what people think ETFs are? I think this
21:09
Speaker 1: captures exactly what I'm driving at for Daniel. But all right,
21:13
Speaker 1: so that's the answer, Daniel. I don't even want to
21:16
Speaker 1: know its name. Some crypto ETF, which is just like
21:20
Speaker 1: as far away from conventional, traditional, and conservative investing as
21:25
Speaker 1: you can get, was the winner, Daniel. Now, the bigger
21:28
Speaker 1: question is, Daniel, and this is never advice, this is
21:31
Speaker 1: to all the Daniels in the world, if you're thinking
21:35
Speaker 1: it's a good time to move from traditional ETFs to
21:38
Speaker 1: active ones. I wonder what James Gerrard has to say.
21:43
Speaker 2: And I do have something to say. Casting our mind
21:48
Speaker 2: back 10 years ago, everybody who invested into share markets
21:54
Speaker 2: via a financial advisor or an investment manager typically done
21:56
Speaker 2: so via a managed funds. They were very popular. But
22:00
Speaker 2: fast forward 10 years, ETFs are all the rage. And
22:04
Speaker 2: so the ETF managers, they're in a very crowded market now.
22:07
Speaker 2: There's lots of ETF managers. There's hundreds of ETFs. They're
22:10
Speaker 2: trying to still get momentum, get more money into ETFs.
22:14
Speaker 2: So what they're doing is saying, okay, we've sort of
22:17
Speaker 2: done all of the passive ETFs we can. We've got
22:19
Speaker 2: baskets for share markets, property markets. We've even narrowed down
22:23
Speaker 2: ETF baskets to countries. You can invest in Japan versus India.
22:28
Speaker 2: You can invest in bank stocks as an ETF. So
22:30
Speaker 2: now they're saying, okay, we're going to offer active ETFs.
22:33
Speaker 2: which sounds great, but really it's a bit of smoke
22:35
Speaker 2: and mirrors because they're really just going back to managed funds.
22:39
Speaker 2: And the problem with managed funds, active managed funds, which
22:42
Speaker 2: are now being called active ETFs, is that 70% of
22:45
Speaker 2: them will underperform the index on a 12-month period. So
22:50
Speaker 2: just let that sit with you. If you invest in
22:52
Speaker 2: a share market ETF, an Australian share market ETF, a
22:56
Speaker 2: passive one, fine, your average return over a 10-year period
22:58
Speaker 2: is going to be around 9% return. If you invest
23:01
Speaker 2: into an active ETF that targets the Australian share market,
23:05
Speaker 2: 7 out of 10 of those managers are going to
23:08
Speaker 2: underperform the index ETF on a 12-month period. And over
23:12
Speaker 2: a 10-year period, 9 out of the 10 active ETF
23:15
Speaker 2: managers are going to underperform the index there.
23:19
Speaker 1: I think it's unbelievable. So the managed funds, the stock pickers,
23:23
Speaker 1: they've faded. And let's name some names. They've faded, right? Platinum,
23:27
Speaker 1: which used to rule the roost, or Magellan or Perpetua.
23:31
Speaker 1: They were stock pickers. They got it wrong. They didn't
23:35
Speaker 1: beat the index year after year. An industry created ETFs
23:39
Speaker 1: or index funds, and they said, look, we just matched
23:41
Speaker 1: the index. That's all we promised. No more, no less.
23:44
Speaker 1: And they have collected $ 200 billion from Australian investors because
23:49
Speaker 1: everyone loves the idea. And believe it or not, the
23:52
Speaker 1: same people who invented them have gone off and created
23:54
Speaker 1: active ETFs, which are stock pickers, basically. And it turns
23:57
Speaker 1: out that those active ETFs, their record is as bad
24:01
Speaker 1: as the old managed funds that they don't match the index.
24:06
Speaker 1: I actually didn't know that. I have only heard this
24:08
Speaker 1: this morning. I actually didn't think that they would be
24:12
Speaker 1: so bad, but they are. Isn't that amazing?
24:15
Speaker 2: Yeah, because the only real difference is that the old
24:17
Speaker 2: managed funds were unlisted. You had to put in a
24:19
Speaker 2: paper application to buy the active managed fund, whereas the
24:22
Speaker 2: the new breed of managed fund, these active ETFs, same
24:25
Speaker 2: philosophy in that they're stock pickers. The only difference is
24:28
Speaker 2: that you buy them through the share market rather than
24:30
Speaker 2: buying them off market using paper-based applications.
24:33
Speaker 1: Yeah. God. It's so difficult, isn't it? And by the way, folks,
24:37
Speaker 1: there are always active managers who beat the index. Always.
24:42
Speaker 1: But they are so few and far between. And the
24:45
Speaker 1: number that beat the index every year, you could put
24:48
Speaker 1: on the head of a pin. Okay. Before we get
24:51
Speaker 1: over criticals, on the active ETFs. So we have put
24:53
Speaker 1: out a big fat warning on them so that everyone
24:56
Speaker 1: knows the difference between buying an active ETF and a
24:59
Speaker 1: managed fund. There's nothing in it. Is that fair to say, James?
25:01
Speaker 1: Am I overdoing it? Is that more or less?
25:03
Speaker 2: No. Yeah?
25:04
Speaker 1: Yeah.
25:04
Speaker 2: That's pretty much it. The only difference is the way
25:07
Speaker 2: that you buy it. You either buy it directly with
25:08
Speaker 2: the fund manager, if it's an old school managed fund,
25:11
Speaker 2: or you buy it through the share market if it's
25:12
Speaker 2: an active ETF. But other than that, they're underneath what
25:15
Speaker 2: they do, exactly the same. They pick stocks, charge a fee.
25:18
Speaker 1: We will leave that on the table. for you to consider.
25:20
Speaker 1: We will take a break and we will be back
25:22
Speaker 1: with a terrific batch of questions that largely run off
25:25
Speaker 1: last week's show about how much you should have in super.
25:28
Speaker 1: Back in a moment. Hello, welcome back to the Australian's
25:35
Speaker 1: Money Puzzle podcast. James Kirby and James Gerrard here with
25:40
Speaker 1: you this morning. We're all sitting pretty, as I mentioned
25:46
Speaker 1: at the start, all feeling terribly good about our super
25:49
Speaker 1: this year. Isn't it nice when it comes right? Isn't
25:51
Speaker 1: it really nice when your shares come right? I'll tell
25:54
Speaker 1: you what, folks, anyone who's a long-term investor, if you
25:56
Speaker 1: were through those dog years where the market goes backwards,
26:00
Speaker 1: it breaks your heart. James, I don't know if your
26:03
Speaker 1: investors tell you this or your clients, but to be
26:05
Speaker 1: putting money into super pre-tax at the max 30,000 a
26:09
Speaker 1: year and to watch Your super go down is hard.
26:15
Speaker 1: You don't forget. So you do appreciate it when it's good. Now,
26:19
Speaker 1: on the issue of how much you should have in super,
26:22
Speaker 1: we have a string of questions. Why don't we read
26:24
Speaker 1: them all alternatively, James, if you want to read the
26:27
Speaker 1: first one from Dan.
26:29
Speaker 2: Perfect. Dan says, hi, my partner and I are roughly
26:33
Speaker 2: 20 to 25 years away from retiring. However, if the
26:36
Speaker 2: current trend continues, which it most likely will, there will
26:39
Speaker 2: be a significant difference in super balance at retirement. potentially
26:42
Speaker 2: $ 1 million versus $ 100, 000. Will this matter from a tax
26:47
Speaker 2: perspective at retirement? Is it worth and what's the best
26:51
Speaker 2: strategy to even out our super balances? Is it best
26:54
Speaker 2: to do it now or closer to retirement?
26:56
Speaker 1: Great question. And that holds for anyone. If you're in
27:00
Speaker 1: your 30s, especially, you know, one partner is getting whatever,
27:05
Speaker 1: in that case, You're looking at a situation where one
27:08
Speaker 1: partner's super is going to be multiples of the other.
27:10
Speaker 1: That's in every second household in Australia. So what's the risk, James,
27:14
Speaker 1: and what could they possibly do?
27:17
Speaker 2: So it is important to try and equalize superannuation balances
27:21
Speaker 2: for retirement. And the reason is that the noose has
27:24
Speaker 2: been placed around the neck of tax-free super and it's
27:26
Speaker 2: slowly being tightened. Already we've seen the $ 1. 9 million cap
27:30
Speaker 2: come in on the maximum amount that you can have
27:32
Speaker 2: in the pension phase. tax-free. And then from next year,
27:35
Speaker 2: if it gets legislated, there'll be that awful 30% tax
27:38
Speaker 2: on unrealized gains and income above $ 3 million inside a super.
27:43
Speaker 2: So as a planning strategy to mitigate the risk of
27:47
Speaker 2: a higher super account getting taxed, because who knows, 20,
27:50
Speaker 2: 25 years down the track, they may have brought that
27:52
Speaker 2: threshold down to a million dollars and start to tax
27:55
Speaker 2: that higher account balance more, won't be tax-free in retirement.
27:58
Speaker 2: So You should start to do that now. There's a
28:00
Speaker 2: few things that you can consider. And again, not advice,
28:02
Speaker 2: just general information. There's contribution splitting. So that's where 85%
28:08
Speaker 2: of a spouse's super contribution can be sent to the
28:11
Speaker 2: other spouse's account. So let's say partner number one has
28:16
Speaker 2: $ 10, 000 as a super contribution into their account. They can
28:18
Speaker 2: actually pick up $ 8, 500 of that contribution and send that
28:23
Speaker 2: across to partner number two's And they can do that
28:26
Speaker 2: on a yearly basis. So that's great to boost the
28:29
Speaker 2: balance of the lower balance spouse. The other thing that
28:33
Speaker 2: they could have a look at depending on income levels
28:35
Speaker 2: is what's called the spouse contribution. So that's where lower
28:38
Speaker 2: income spouses and generally lower income correlates to lower super
28:42
Speaker 2: balances because of lower super contribution. So I've just made
28:45
Speaker 2: an assumption here that the spouse with the lower super
28:47
Speaker 2: balance has a lower income. So the higher income spouse puts.
28:51
Speaker 1: $ 3, 000.
28:52
Speaker 2: Into their lower income spouse's super account. And that means
28:55
Speaker 2: that the higher income spouse gets a $ 540 tax offset
28:59
Speaker 2: as well. So not only are we boosting the lower
29:02
Speaker 2: super balance by $ 3, 000, the higher income spouse gets a
29:06
Speaker 2: $ 540 tax offset. So that's great. And then there's a
29:09
Speaker 2: few other little things like government co-contributions, salary sacrifice, cash
29:13
Speaker 2: up concessional contributions for the spouse with the lower super balance.
29:15
Speaker 2: But because we have caps with how much money you
29:18
Speaker 2: can put into super it's not something that you can
29:20
Speaker 2: just approach age 59 and go okay great we're going
29:22
Speaker 2: to equalize this million dollars and hundred thousand dollars too
29:25
Speaker 2: late you have to do it well in advance.
29:28
Speaker 1: Well in advance so you're thinking the right way dan
29:30
Speaker 1: i mean the the basic thing is that what you
29:33
Speaker 1: don't want is a ludicrous situation where you're both together
29:37
Speaker 1: and you have more than $ 1. 9 million in super and
29:42
Speaker 1: your partner has very little in super and you're paying
29:46
Speaker 1: tax on your super when the other person has, who knows,
29:50
Speaker 1: like a million dollars they could have had in there.
29:52
Speaker 1: before they hit a tax, before they were to pay
29:55
Speaker 1: tax at all. That's the essential thing. So planning, planning
29:58
Speaker 1: way ahead. Great idea.
29:59
Speaker 2: Okay.
30:00
Speaker 1: That was Dan. There's a few of them. So we'll
30:03
Speaker 1: try and get through them before the end of the show. Hi, James,
30:06
Speaker 1: regular listener. I've learned a lot from it. So thank you.
30:09
Speaker 1: Thank you, Neil. I'm semi-retired. Just moved my super into
30:13
Speaker 1: a pension account. Investments earnings are now tax-free.
30:16
Speaker 2: Yahoo.
30:17
Speaker 1: But wondering if this should modify my investment strategy. Capital
30:21
Speaker 1: gains are not a concern now, so are growth stocks
30:24
Speaker 1: more attractive? Okay, just very quickly, James. We're always told
30:28
Speaker 1: about growth, lots of growth when you're younger, move it
30:31
Speaker 1: towards income when you're older. Neil is challenging that to
30:35
Speaker 1: a degree. He's saying, hey, you know, I could, I
30:38
Speaker 1: don't have to worry about tax now. Maybe I should
30:41
Speaker 1: have more growth. He's kind of upending the textbook principles.
30:46
Speaker 1: What do you think?
30:48
Speaker 2: He may be buoyed from the optimism gained by double
30:50
Speaker 2: digit returns on his super account.
30:52
Speaker 1: He may be the exact sort of person we've been
30:54
Speaker 1: concerned about who thinks it's perhaps easier than it is. Yeah. Yeah.
30:59
Speaker 2: That's right. So we'll reel Neil back down to earth.
31:02
Speaker 2: And what I'd say to Neil is that you need
31:05
Speaker 2: to think about what's important for you in retirement when
31:09
Speaker 2: you're not earning an income and you're relying on your
31:11
Speaker 2: super account to generate your income stream to support your
31:15
Speaker 2: spending for the rest of your life and So to
31:17
Speaker 2: answer my own question, it's income. That's what we want
31:20
Speaker 2: from your investments, not capital growth anymore. We want reliable,
31:24
Speaker 2: high income. So depending on your current mix, I'd be
31:29
Speaker 2: probably looking at staying that type of arrangement. And to
31:33
Speaker 2: all the Niels in the world, as we get close
31:35
Speaker 2: to retirement, generally we want to be more defensive. We
31:39
Speaker 2: want to put in more blue-chip stocks, more bonds in there,
31:41
Speaker 2: focus on capital preservation. and income. So yeah, I probably
31:46
Speaker 2: wouldn't be going for an all-out let's go growth strategy
31:50
Speaker 2: because if we have a snap event and something that
31:52
Speaker 2: black swan event, as you coined earlier, James, we could
31:56
Speaker 2: see super accounts drop by 30% and that would just
31:59
Speaker 2: send people who are in that transition to retirement phase
32:02
Speaker 2: back five or 10 years with their super balance. So
32:04
Speaker 2: we definitely don't want that to happen.
32:05
Speaker 1: That's right. That is the risk. All right, Christine, I'm
32:08
Speaker 1: a long-time listener, first-time caller. My question is, if I
32:11
Speaker 1: wanted a total investment portfolio... inside and outside of super,
32:16
Speaker 1: of 50% Australian shares and 50% international shares, what should
32:20
Speaker 1: I consider? In other words, is it better to hold
32:23
Speaker 1: the Australian shares outside of super and the international shares
32:27
Speaker 1: in super, or does it not make any difference? It
32:30
Speaker 1: makes a difference, Christine, probably because your Australian shares have
32:36
Speaker 1: a 4.5% dividend yield and your American ones have, what
32:38
Speaker 1: have they, bugger all, basically, isn't it? Well, what is it?
32:41
Speaker 1: Is it even 2%, James? I'm not sure. Very low.
32:44
Speaker 1: So you might give Christina some guidance there.
32:48
Speaker 2: Yeah, it's a slightly difficult one because it depends on
32:51
Speaker 2: a lot of individual circumstances with regards to how old
32:54
Speaker 2: you are. So how soon can you access your super?
32:56
Speaker 2: What type of strategy are you going to employ? Will
32:59
Speaker 2: it be a buy and hold? Will it be a
33:01
Speaker 2: take profits every year? What's your tax rate personally as well?
33:05
Speaker 2: So you almost need to draw out like a little
33:06
Speaker 2: matrix and go, All right. Well, Christine's basically asking between
33:10
Speaker 2: super and non-super, and she's also asking between Australian shares
33:14
Speaker 2: and international shares. So just looking at the characteristics of
33:17
Speaker 2: each of those. And as you said, James, Australian shares,
33:19
Speaker 2: higher dividend, lower growth compared to international shares. And international shares,
33:24
Speaker 2: higher growth historically, but lower dividends. And then with superannuation,
33:28
Speaker 2: when you're working, the maximum tax that you can pay
33:30
Speaker 2: in your super account is 15%. But if you're retired,
33:33
Speaker 2: it's 0% tax. And With your employment income, personally, you
33:37
Speaker 2: can pay up to 47% tax. So you have to
33:39
Speaker 2: sort of like consider all those things and then work
33:41
Speaker 2: out what's the best approach. There's no one single answer
33:44
Speaker 2: for that one, unfortunately.
33:45
Speaker 1: Yeah, there isn't. Obviously, super is a tax-protected vehicle and
33:49
Speaker 1: is excellent as a tax vehicle once you retire, Christine,
33:53
Speaker 1: and that's fairly obvious. And as James says, in terms
33:56
Speaker 1: of guidance in those particular allocations, the big difference is
34:00
Speaker 1: the Australian share is for a long time have trailed
34:04
Speaker 1: the US shares in terms of their growth and very
34:08
Speaker 1: much the case in recent times. They do, however, have
34:11
Speaker 1: a 4.5% dividend yield. And that is nice because when
34:15
Speaker 1: things go down, you still get that yield. And that
34:18
Speaker 1: is what a lot of people depend on for income. Okay, James,
34:22
Speaker 1: read the last two questions. I'll just introduce the two questions.
34:25
Speaker 1: They're two questions on the same thing, folks. And everyone's
34:28
Speaker 1: always asking about this. If you're moving money around in
34:32
Speaker 1: your super fund in any fashion, do they sell their
34:35
Speaker 1: shares and then do they buy them back? And does
34:39
Speaker 1: that cost you? That's basically what these two questions are about.
34:41
Speaker 1: But James, if you'd like to read the two of them,
34:43
Speaker 1: one from Luke and one from Chris, then we'll deal
34:45
Speaker 1: with them.
34:46
Speaker 2: Of course. So let's start with Luke. So Luke says,
34:48
Speaker 2: regarding the re-contribution strategy with SUPA to minimize your family's
34:52
Speaker 2: tax on inheritance, And just as a side to that,
34:56
Speaker 2: that's 17% on the taxable component of your super if
34:59
Speaker 2: it goes to a non-financial dependent. So coming back to Luke,
35:02
Speaker 2: if you had some shares in super, do you have
35:04
Speaker 2: to sell the shares to take them out of super
35:07
Speaker 2: and then recontribute that cash back into super? So the
35:10
Speaker 2: answer to that depends on the type of super account
35:13
Speaker 2: you have. If you have a self-managed super account, you
35:17
Speaker 2: may be able to do what's called an in-specie transfer process.
35:20
Speaker 2: So you sign a piece of paper, you do what's
35:22
Speaker 2: called an off-market transfer. The shares are transferred from super
35:25
Speaker 2: to your personal name, and then you can do another
35:27
Speaker 2: transfer and put them back again. Whereas if you're with
35:30
Speaker 2: a retail or industry super fund, they're more likely to say, no, sorry,
35:34
Speaker 2: we can't help you with that. That's not one of
35:35
Speaker 2: the features of our fund. And you have no option
35:37
Speaker 2: other than to sell, send the cash out to your
35:39
Speaker 2: personal bank account, send the money back into the super fund,
35:42
Speaker 2: repurchase the shares. Last thing I'd say with that is
35:45
Speaker 2: just be careful of what the tax office coin as
35:48
Speaker 2: wash sale rules is. So if you sell the 100%
35:52
Speaker 2: of say BHP from your super, you cash that out
35:54
Speaker 2: and you put that cash back in again, you buy
35:56
Speaker 2: BHP again. Although this is not the same purpose for
36:00
Speaker 2: tax purposes, the tax office may have a look at you,
36:02
Speaker 2: particularly if you have a self-managed super fund and say,
36:04
Speaker 2: why exactly did you do that transaction? Were you trying
36:07
Speaker 2: to dodge tax there. So you just need to be
36:09
Speaker 2: careful about maybe not buying exactly the same shares back
36:13
Speaker 2: that you sold as part of that recontribution strategy.
36:16
Speaker 1: And you would say to the tax office, gosh, no,
36:18
Speaker 1: I never tried to do anything. I tried to pay
36:20
Speaker 1: as much tax as possible every time. That's my whole approach. Yeah, sure. Okay, look,
36:28
Speaker 1: in terms of that one, that's interesting, James. So an
36:32
Speaker 1: SMSF That's an advantage of an SMSF then, that re-contribution
36:36
Speaker 1: strategy is actually a pragmatic and practical thing. While in
36:39
Speaker 1: the big funds, it's a bit of trouble. It sounds
36:41
Speaker 1: like a lot of trouble, actually. I never knew that.
36:44
Speaker 1: All right. And I suppose also, you know, you don't
36:47
Speaker 1: have to be so, if a person was doing something
36:50
Speaker 1: like that, you don't have to, you could buy, for instance,
36:53
Speaker 1: an ETF from one company on the Australian share market
36:56
Speaker 1: and then you could sell one and then buy another
36:58
Speaker 1: ETF from another company, which is a completely different investment,
37:01
Speaker 1: but you're actually doing the same thing. in the unlikely
37:03
Speaker 1: event that the ATO will be so absurd as to
37:07
Speaker 1: try and challenge you on what is a legitimate strategy. Okay,
37:10
Speaker 1: what about the question from Chris?
37:12
Speaker 2: Chris says, thanks for the podcast. If I change settings
37:15
Speaker 2: within my super fund from conservative to high growth, for example,
37:18
Speaker 2: does that mean my balance is cashed out to an
37:20
Speaker 2: existing shareholding attracting capital gains tax? In other words, do
37:24
Speaker 2: I take the short-term hit for switching my super settings? Cheers, Chris.
37:29
Speaker 2: So with most... what we call unitized super funds, which
37:33
Speaker 2: are actually most retail and industry super funds, every day
37:37
Speaker 2: in the unit price of your balance option, your growth option,
37:40
Speaker 2: your Australian share option, they continuously factor in capital gains
37:44
Speaker 2: tax into that unit price at the end of the day.
37:46
Speaker 2: So if you were to sell down to cash, there's
37:48
Speaker 2: no capital gains tax hit. It's more if you run
37:51
Speaker 2: your own self-managed super fund, that's when you crystallize the
37:55
Speaker 2: gain or loss on the individual stock ETF or managed
37:57
Speaker 2: fund in your self-managed fund. So in most cases, no,
38:00
Speaker 2: that's not an issue at all. But it's best just
38:02
Speaker 2: to check with your super fund because some retail funds
38:06
Speaker 2: in particular, they do calculate capital gains tax separately. But
38:09
Speaker 2: for 90% of them, they're all built into the unit
38:12
Speaker 2: price of the day. So whatever you see on your balance,
38:14
Speaker 2: that's what you're going to get if you cash it in.
38:16
Speaker 1: Yeah, really interesting, isn't it? So there you are. There's
38:18
Speaker 1: two questions. First of all, we're on a similar theme
38:21
Speaker 1: about moving money around. And it's interesting. There are very
38:23
Speaker 1: different answers for self-managed super funds and retail funds. And
38:27
Speaker 1: that's a really interesting dimension to it. And I thought
38:30
Speaker 1: that's an interesting, the recontribution strategy, by the way, folks,
38:34
Speaker 1: just one last thing. If you don't understand this and
38:37
Speaker 1: it's loopy, but it works and it's entirely legitimate. If
38:41
Speaker 1: you have super and you leave it in an inheritance,
38:45
Speaker 1: the taxable component being the part where you had some
38:48
Speaker 1: tax concession for most people is the vast majority of
38:52
Speaker 1: their super, right? Because it was compulsory. you actually pay 17% tax.
38:57
Speaker 1: Your inheritors would pay 17% tax on that super. If
39:01
Speaker 1: they were adult children, is that it, James? Who are
39:03
Speaker 1: the ones who have to pay 17% tax? Absolutely.
39:06
Speaker 2: So from husband to wife or spouse to spouse, no tax,
39:09
Speaker 2: but to adult children who are not financially dependent, 17%
39:13
Speaker 2: tax on the taxable component.
39:14
Speaker 1: So people say there's no debt taxes in Australia, but
39:18
Speaker 1: actually super, which is more and more important and more common,
39:22
Speaker 1: and becomes after the family home, the main investment for
39:24
Speaker 1: many people. There is inheritance tax and it's 17%. To
39:27
Speaker 1: avoid that, legitimately, you can continually take a certain amount
39:33
Speaker 1: out of super and re-contribute that amount back in. Can
39:36
Speaker 1: you believe this? And when each time you put that,
39:38
Speaker 1: for every dollar you take out, when you put the
39:40
Speaker 1: dollar back in, that dollar is reduced from the taxable
39:44
Speaker 1: component of the inheritance. Is that it? 100%.
39:47
Speaker 2: Yeah. Okay.
39:47
Speaker 1: So, Absurd, but entirely legitimate. And I must say, if
39:54
Speaker 1: you wanted to ensure that your adult children in the
39:58
Speaker 1: fullness of time got the most inheritance they could possibly
40:02
Speaker 1: get from your super, then you would do it. Is
40:03
Speaker 1: there limits on how much? You can't just basically take
40:06
Speaker 1: out a million and put it back in. You've got
40:08
Speaker 1: to do it systematically, don't you? What's the procedure?
40:13
Speaker 2: That's right. And probably timely that this is mentioned because
40:16
Speaker 2: the non-concessional contribution cap has increased from $ 110, 000 to $ 120, 000.
40:21
Speaker 2: And for people who are below the age of 75,
40:24
Speaker 2: they could actually pull forward to future years of that
40:28
Speaker 2: annual contribution as well. So at the moment, it's a
40:30
Speaker 2: maximum of $ 360, 000 that people can pull out of super,
40:34
Speaker 2: which will have a mix of taxable and tax-free component.
40:37
Speaker 2: And then it goes to their personal bank account, and
40:39
Speaker 2: then they put that back into super and And when
40:41
Speaker 2: it goes back into super, it goes in as that
40:43
Speaker 2: non-concessional contribution up to 360,000. And that increases the tax-free component.
40:48
Speaker 2: So less tax to non-dependents later on by doing that strategy.
40:52
Speaker 1: It's a strategy that could only have been devised in
40:54
Speaker 1: a completely patchwork quill system that has emerged over the years.
40:59
Speaker 1: But I tell you what, folks, wealthy people in Australia,
41:03
Speaker 1: they systematically do it. As I say, we don't realize
41:07
Speaker 1: that there is actually an inheritance tax. And not only that,
41:10
Speaker 1: but that inheritance tax is based on that taxable component
41:15
Speaker 1: in super. And for many families, super will be the
41:19
Speaker 1: inheritance apart from the family home. Okay, terrific. Hey, that's
41:23
Speaker 1: really good, James. Quite technical at times, nature of it.
41:27
Speaker 1: I hope it was useful to you all. I'm sure
41:29
Speaker 1: it was. If you were interested in how much you
41:31
Speaker 1: should have in super, maybe you might also be interested
41:33
Speaker 1: in how much super you might leave someday to somebody.
41:38
Speaker 1: If you don't spend it all, Okay. Hey, thank you, James.
41:44
Speaker 2: It's my pleasure. Thanks for having me as always. And
41:47
Speaker 2: what great questions from the listeners. Very intelligent, very insightful questions.
41:50
Speaker 1: They are indeed.
41:51
Speaker 2: Well done. Well done, listeners. Yes.
41:53
Speaker 1: Thank you, listeners. And keep them rolling, please. I'd love
41:56
Speaker 1: to have some more. The Money Puzzle at theaustralian.com.au. Talk
42:02
Speaker 1: to you soon.