How to grow your wealth in turbulent times

The rollercoaster Australians have been riding since early 2020 won’t be slowing down anytime soon. What does that mean for high-income earners and their investment strategies?

Liana Cauchi, an ANZ Private Wealth Advisor, sympathises with those who feel exhausted by recent developments.

“I shake my head in wonder; we’ve had 20 years’ worth of events – the pandemic lockdowns, a short-lived ‘Corona recession’, a powerful rebound from that downturn, a bond sell-off coupled with high volatility in equities and now an inflation breakout – crammed into a little over two years,” she says.

“I understand why people get caught up in the moment and believe they need to buy or sell assets quickly. But, at the risk of repeating the most clichéd of financial advisor clichés, it is about time in the market, not timing the market.

The best way to reach your financial goals is to ascertain what you are trying to achieve, determine the level of risk you’re comfortable with, create a diversified investment portfolio, then resist the – admittedly powerful – temptation to overreact during periods when asset prices are skyrocketing or plummeting.”

Liana notes that analysis from UBS (based on the S&P 500 index) found that, since 1928, an investor who was able to consistently exit the market 10 months prior to the peak, and then re-enter 10 months after the trough, was no better off than an investor who had simply stayed the course. And that doesn’t factor in trading costs and tax implications.     

More on that shortly, but first some easy first steps to consider for this new financial year.

Superannuation

Especially for those in the top tax bracket, maximising super contributions can be a straightforward, tax-effective strategy.

“For most people, concessional contributions are taxed  at 15 per cent on the way into a superannuation fund, and earnings within the fund are also taxed at 15 per cent,” Liana says.

“That’s a reasonable rate, especially for those paying 45 cents on the dollar in income tax.” Please note, if you’re an employee who earns a healthy salary, you will have almost certainly maxed out your concessional contributions by the end of the financial year, so it’s typically those who are self-employed who need to check they’ve made the maximum concessional contributions.

Please also note that if you declare a taxable income of $250,000 or more, you will be subject to ‘Division 293’ tax which reduces the tax concession on the amount you’re putting into super.

As with many things related to tax and super, the Division 293 rules are somewhat complicated but essentially require those deemed to be high-income earners to pay an extra 15 per cent tax on their super contributions, meaning they are paying a 30 per cent rate rather than the standard 15 per cent rate. Or, as the ATO puts it, “Division 293 reduces the tax concession high income earners receive, even if this is due to a one-off event, and aligns it more closely with the concessions received by average income earners.

Concessional contributions are taxed within your super fund at a concessional rate of 15%. If you are a high-income earner, your marginal tax rate is higher than an average income earner. When you make concessional contributions to your fund, you receive a larger tax concession. Division 293 imposes an additional tax of 15% to bring the concession back to an amount in line with the average.”

Most affluent Australians are aware of the tax advantages of super. But those that are time-poor may not have heard about recent tweaks to super arrangements.

Downsizer age threshold lowered from 65 to 60

As of July 1, 2022, if you’re over 60 and meet the criteria, you can put $300,000 from the sale of the family home into your super and another $300,000 into your spouse/partner’s super (as long the home is held in joint names).

The option to catch up on concessional contributions

“This came in a few years ago but some people are still unaware of it,” Liana notes. “Let’s say you own your own business and haven’t put any money, or only a minimal amount of money into your super since the 2018-2019 financial year, and your balance is below $500,000, you can effectively ‘make up’ concessional contributions for the last five years, up to the cap for each financial year.”

Liana shares an example of a client of hers who used this strategy after selling an investment property that had high capital-gains tax implications. Her super balance was low because she hadn't been working so she made concessional contributions with some of the proceeds from the sale.

Maximising tax-deductible expenses

“It’s now too late to do this for the 2021-2022 financial year, but it’s useful information to have before the end of the 2022-2023 financial year,” Liana says. “You could bring your tax bill down if you do the following by June 30.”

1) Contribute to a good cause you want to support:

Just make sure the charity has been endorsed as a Deductible Gift Recipient.

2) Claim investment property expenses:

Consider the depreciation expenses and other deductible items that you may be able to claim for this year. Pay insurance premiums: Renewing your insurance and making advanced payments on certain types of insurance cover can be claimed as tax deductions. For example, premiums on income protection insurance are tax deductible in the fiscal year paid. Review your insurance policies and find out which are tax deductible.

3) Make interest payments, even if they aren’t due:

If you have an investment loan – whether it be a margin loan or property investment loan – that attracts deductible interest, it may be worth paying the full amount monthly and then prepaying for the year ahead in June. Interest pre-paid on investment loans may be a tax deduction in the year paid.

The end of an economic era

In the weeks leading up to and following the end of the 2021-2022 Australian financial year, US$2 trillion was wiped off the value of the world’s cryptocurrencies (from their peak in November, 2021), the world’s governments began to accept high inflation probably wasn’t transitory (or at least as not as transitory as first hoped), central banks – including Australia’s – kept ratcheting up interest rates, the price of many shares, particularly tech ones, declined precipitously, and lots of reputable experts began warning of 15-20 per cent falls in home prices in major Australian property markets. Regardless of what happens with inflation, interest rates and asset prices in the coming months, it appears one economic era has ended, and another is starting. For almost a decade and a half following the GFC, interest rates were near zero, inflation was basically non-existent and those who owned equities and real estate typically saw solid, and sometimes spectacular, returns on their investments.

Overall, the last 15 years have been kind to investors, but Liana says the party was always destined to end. “It’s just not realistic to think you can enjoy annual returns in the range of 10-20 per cent forever,” she points out. “Long-term, share market, super fund and real estate returns average out around 7-9 per cent. Theoretically, that means if the value of your investment property, or super, or share portfolio goes up 20 per cent one year, it’s going to go down 11-13 per cent some other year. Provided you are disciplined enough to avoid buying at the top of the market and panic selling at the bottom of it, historically, investing for the long term has prevailed.”

Keeping your head when those around you are losing theirs

Liana has two pieces of advice for investors spooked by what is beginning to look like an economic bloodbath. First, don’t believe everything you read in the newspapers. Second, consider the upsides of staying the course.

“Even large financial institutions such as ANZ, with the resources and ability to employ highly intelligent people, can’t predict the future with 100 per cent accuracy,” Liana points out. “Many of the same media outlets that are now predicting a severe recession were last year predicting that we were heading into a ‘Roaring Twenties’ period of technological innovation and strong economic growth. I can’t predict whether there will be a serious downturn. But there is reason for optimism as well as pessimism about the Australian economy. A handful of tech companies aside, most businesses are desperately trying to hire workers rather than making them redundant. And if the price of an investment property you have no intention of selling any time soon goes up 10 per cent one year and down 10 per cent the next, that is not a catastrophe. Especially if you can now get 20 per cent more rent for that property than was the case two years ago.”

Liana says you don’t have to look back too far to see examples of investors making suboptimal decisions due to what turned out to be false alarms.

“I know of several people who were convinced the Australian and global economy were going to crash because of Covid and who sold their shares and investment properties in the last quarter of the 2020-2021 financial year,” she says. “We all now know what direction share and property prices went in the 2021-2022 financial year.”

Whether the reporters are right or wrong, Liana says there isn’t much investors can do about it in the short term without suffering losses or sacrificing future gains. “If the doomsayers are correct and asset prices are headed south, you risk taking a loss if you sell now rather than riding out the trough,” she says.

“If the doomsayers are mistaken and share and property prices will rebound after a few months of volatility, those who sell now won’t benefit from that rebound.”

How a financial advisor can help

ANZ Private Advisers put considerable effort into working with their clients to ascertain their clients’ risk tolerance before they provide advice about building or restructuring an investment portfolio.

“There are two good reasons to sell an asset at an inopportune time,” Liana says. “If you are 65 or older you may have to, for instance, sell an investment property to finance your retirement. Given the vagaries of economic cycles, there’s not much that can be done to avoid that eventuality. Also, if you can’t sleep at night worrying about how much money you have already lost and how much more you stand to lose if you don’t cut your losses immediately, then no investment is worth destroying your peace of mind for. But that eventuality shouldn’t arise if you’ve worked out how risk tolerant you are and then constructed a diversified portfolio to generate solid long-term returns that will allow you to realise your financial goals. That’s where the support and expertise offered by a calm and experienced financial advisor can prove invaluable.”