The end of financial year (EOFY) provides a great opportunity to engage with clients. As investors contemplate their EOFY financial position, they are more inclined to make investment decisions and adjust their financial plans and investment portfolio. Cathy Kovacs explains.
Even with a long-term strategy in mind, there are tactical decisions that are generally made at this time of year.
PAYG vs non-PAYG
For non pay as you go (PAYG) taxpayers, their end of year income and tax position becomes more certain. With this certainty comes the desire to, where possible, reduce tax obligations. For PAYG taxpayers, there is a looming deadline to maximise tax effective investment decisions.
For both these groups, the most popular investment actions become optimising contributions to super, realising tax losses to offset capital gains, and prepaying interest on investment loans to reduce income tax.
An investment strategy aimed at growing capital and income should underline both of these decisions. Optimising contributions to super and making investment decisions inside super should be considered in parallel.
So often, clients make the first decision without having a view on the second. The risk here is that the decision is made to contribute to super, the contribution sits in cash, and there it stays.
Thinking through the universe of investment options and considering the total portfolio will drive a more comprehensive consideration of contributions. It will also ensure that money is invested wisely for long-term growth and/or income – whichever strategy will meet the funds’ investment objectives.
Share market investment
For investors who are looking for a liquid investment with growth potential and tax effective income, the Australian sharemarket is the most likely investment choice. Large cap equities paying fully franked dividends have delivered significant wealth to investors since 2012.
The S&P/ASX200 has returned 35 per cent from June 2012 to June 2014. Add to this the stability, or lack of volatility, of the Australian sharemarket this year and the all time low interest rate environment, and a long-term ‘borrow to grow’ wealth strategy for higher income earners is worth considering.
SMSFs gear up
Despite the resilience of the market, or maybe because of it, many self-managed super funds (SMSFs) have started considering protected lending strategies. The range of listed and unlisted ‘limited recourse loans’ available have made lending far more accessible to SMSF’s.
Knowing that an SMSF can legitimately and easily borrow to invest in liquid assets like shares may encourage SMSFs with a long-term growth strategy to consider gearing and contribute more to super at this time of year.
The evidence and popular press seems to suggest that more SMSFs are gearing inside super, however the predominance of borrowing is toward investment properties. This strategy seems to be contradictory to the need for diversification of investments and lack foresight for those funds that will need liquid assets at a point in time.
No substitute for good advice
The role of a financial planner in driving the discussion around long-term wealth creation and annual tactical solutions is very important. Further, financial planners can provide access to more liquid investments than direct property.
Finally, the availability of investment solutions bundled with investment loans reduce the application process and enhance the customer and adviser experience. Investor confidence and accessibility is partially responsible for investors deciding to go their own way when it comes to investment decisions.
With this in mind, planners should have the confidence to start the conversation with clients about the pros and cons of tax effective investing lending both inside and outside of super.
Cathy Kovacs is head of equities and gearing solutions at BT Financial Group.
