Simplifying decisions in changing times

With so much news, legislation change and disruption, this year we’re making it simpler for you to keep up to date by merging our Views and Pulse newsletters into one quarterly Exchange Newsletter.

Of course your adviser will contact you directly with timely updates on anything that impacts your personal situation, and Exchange will deliver a central update of the big trends and changes you need to be across in terms of wealth creation, legal, tax and accounting, finance and insurance.

In this edition we take a closer look at income protection, the fixed rate cliff, testamentary trusts, the evolving tax benefits of electric vehicles, and the breakthroughs in artificial intelligence.

Is it time to consider switching from income protection to trauma or TPD insurance?

In light of rising income protection premiums, some of our clients are making the move to a lump sum total permanent disability (TPD) or trauma insurance to take advantage of premium savings – up to 50% in some cases.

The differences between income protection, trauma and TPD insurances

While these policies can provide financial support during difficult times, they serve different purposes.

Income protection insurance is designed to replace a portion of your income if you’re unable to work due to an illness or injury. The policy pays out a regular income, usually a percentage of your pre-disability income, until you’re able to return to work, or until the end of the benefit period.
Trauma insurance provides a lump sum payment if you are diagnosed with a specified critical illness, such as cancer, heart attack or stroke. The payment can be used to cover medical expenses, pay off debt or for any other expenses that arise due to your illness.
TPD provides a lump sum payment should you become totally and permanently disabled.

There’s a lot to consider before switching

The decision to switch from an income protection policy to a lump sum TPD or trauma insurance policy depends on a number of factors, including your personal circumstances, financial goals and risk tolerance.

While it is true that income protection premiums have been rising in recent years, there are many things to take into account before making the switch:

Would a regular income stream be better for you? For example it can be particularly valuable for those with significant ongoing financial commitments or who are self-employed.
Or, would a one-time lump sum payment in the event of a serious illness or disability give you the flexibility you need to better manage your finances?
What are the total costs of switching? While premiums for a TPD or trauma policy may be lower than those for income protection insurance, it is important to consider lifetime costs of the policy including any exclusions or limitations on coverage.

EXAMPLE

Male aged 40, non smoker, NSW
Salary $200,000 (excluding super)
White collar professional / senior management / high earning executive

What are the pros and cons of receiving a large lump sum vs long term monthly claim benefits?

Pros:

You have money in the bank to invest, making the money last longer
Lump sum trauma payment is not taxed
TPD held through super is tax free
Premiums can be funded by super fund cashflow
Historically less out-of-market premium rises

Cons:

For TPD, you need to be totally and permanently disabled
Trauma insurance premiums can only be paid personally (ie, not with super)
Income protection monthly benefit is taxable
Premiums erode super balance

Before making any decisions or changes, it is important to consult with a financial adviser who can provide you with tailored advice based on your specific situation. They can help you understand the benefits and risks of each type of insurance policy, and help you choose the best option for your needs.

What happens when fixed rate and interest only loans expire?

There’s a lot of talk about the personal and broader impacts of having some 800,000 fixed rate loans expiring in 2023. On top of this, there is also a huge volume of interest-only loans that will also expire in the next 12 months, piling on more repayment pressures.

For many borrowers facing this scenario, their interest rates could double overnight. Take for example a borrower who has taken out a 30-year loan with the first 5 years of repayments set at interest only. After this, the variable monthly repayments will be calculated on the remaining 25 years of the original 30-year loan term.

To run some numbers, if this borrower has been enjoying a competitive interest-only fixed rate of 2.49% for five years, that could rise to 5.34% after it shifts to principal and interest and thanks to the recent rate rises. This is what the current repayments are, and what they’ll look like very soon:

That’s over 80% more! Many borrowers will end up paying more than that depending on what they have negotiated with their lenders.

Many investors have funded their investment properties with interest only loans to keep their ‘good debt’ (debt/loans that are tax deductible) at the same level, so they can more quickly reduce their ‘bad debt’ (non-deductible home loans relating to the principal place of residence).

This makes sense sometimes, but it’s important to plan for what comes next. If you are facing this scenario, the following strategies may be an option:

Negotiate to move to interest only
Extend the term of the loan to reduce principal repayments
Build up an offset account to absorb higher repayments whilst interest rates stabilise

However, banks and lenders will rarely suggest that borrowers unlock equity to have funds available if required in the future, because it is not in their best financial interest. This means you may need to make this happen proactively or consider refinancing to a deal that works harder for you.

With a huge volume of fixed rates and interest-only loans coming to an end in 2023 – and a lot of uncertainty around rates – the sooner you assess your next move the better so that you are in a position to move quickly if you need to.

Note: As rates increase this has the reverse effect on your lending capacity.

If your fixed rate loan is expiring, you are unsure if you have a competitive rate, or would just like some independent advice around how to structure your finances over the coming year, we’d be happy to discuss your options.

It’s important to speak with your adviser or contact our mortgage specialist Wade Stanley directly for specific advice relevant to your circumstances.

The importance of testamentary trusts for families

While it’s not a nice thought, it’s important to consider what may happen to your money and assets should you and/or your partner pass away – particularly if you have young children or grandchildren.

There is a misconception that testamentary trusts are only for the extremely rich. However, they are actually important legal tools that can help families plan for their future and protect their assets in case of unexpected death.

Particularly useful for couples who have blended families or anyone who wants to provide for specific beneficiaries in a certain way, they ensure your affairs are handled in line with your wishes.

While they have many applications, they commonly help in circumstances such as:

Where beneficiaries are under 18 and not old enough to manage their inheritance
You want to protect young adults from wasting their inheritance by building in long-term protection mechanisms
You want to protect your inheritance from relationship breakdowns and/or bankruptcy
One or more beneficiaries may not be in a position to appropriately manage their inheritance due to circumstances such as a disability, age, gambling problems or substance addictions
You want to provide your children, or grandchildren, with a tax-free annual income over time, rather than a lump sum
You want to protect the inheritance from survivor repartnering
Testamentary trusts can be structured in a way that provides tax advantages for beneficiaries
You want to provide certainty your legacy will be passed on

You can specify conditions or restrictions on the distribution of the assets to the beneficiaries, such as age restrictions, conditions on how the assets are to be used, or limitations on the amount of money that can be distributed at any given time.

Let’s take a look at a couple of general examples of a couple, Dan and Ava, where Ava has passed away. We’ll compare the outcomes of a simple will against a testamentary trust (TT) will.

If you’re considering your wills and estate planning, a testamentary trust can be a valuable tool for providing for your beneficiaries in the long term and ensuring your assets are managed and distributed according to your wishes.

Again, contact your adviser for further information relevant to your circumstances.

Six potential tax benefits of buying an electric vehicle

With more cars on the market, better charging options, falling costs and rising environmental concerns, more and more Australians are considering the switch to an electric vehicle (EV) next time they upgrade their car.

Adding to their appeal, there are several significant tax benefits available for buying an EV in Australia which we outline below.

Note: The availability and value of these tax benefits can vary depending on the state or territory you live in, as well as your personal circumstances. It’s a good idea to consult with a tax professional to understand how these benefits apply to you.

Luxury Car Tax (LCT) exemption Electric vehicles are exempt from LCT, which is a tax applied to cars over a certain price threshold. The current LCT threshold is $77,565 for fuel-efficient vehicles, and $68,740 for other vehicles. As most EVs fall under the $77,565 threshold, they are generally exempt from LCT.

Instant Asset Write-Off If you’re a business owner, you may be eligible for the Instant Asset Write-Off scheme, which allows you to immediately deduct the cost of an electric vehicle up to a certain amount. The threshold for the scheme is currently set at $150,000, but it’s worth checking with your tax advisor to confirm your eligibility.

Fuel tax credits If you use your electric vehicle for business purposes, you may be eligible for fuel tax credits. This applies to the electricity you use to charge your EV, which is considered a fuel for tax purposes. The current rate for fuel tax credits is 14.5 cents per kilowatt-hour.

Reduced registration fees In some states and territories, electric vehicle owners may be eligible for reduced registration fees. For example, in the Australian Capital Territory (ACT), electric vehicle owners pay a reduced registration fee of $100 per year, compared to $468 for a petrol vehicle.

Fringe benefit tax exemptions From 1 July 2022, new electric vehicles under the luxury car limit are exempt from fringe benefits tax. This means an electric vehicle under $84,916 can be salary packaged for a substantial tax benefit. When the Bill becomes law, the FBT exemption will apply retrospectively from 1 July 2022 to eligible electric cars that were first held and used on or after 1 July 2022.

A car must be classified as a zero or low emissions vehicle for the exemption to be available. Zero or low emissions vehicles include:

battery electric vehicles
hydrogen fuel cell electric vehicles, and
plug-in hybrid electric vehicles.

Also, if you purchased an electric vehicle before 30 June 2022 but have not yet received it, you may be eligible for this exemption.

This exemption will allow employees to salary package an electric vehicle from their employer to obtain a substantial tax benefit. This legislation intends to improve the viability of purchasing a new electric vehicle.

Salary sacrifice A car that is not an electric vehicle may cause an FBT liability for an employer if an employee enters a novated lease. While some concessions are available to employees who obtain a car fringe benefit, these are usually passed on and paid for with pre-tax dollars.

We have prepared an example illustrating the difference an electric vehicle will make on salary sacrifice options. In this example, an individual earning $156,000 will obtain a tax benefit of $11,593 in the 2022–23 income year (assuming no further changes are made to the individual tax brackets).

By salary packaging an electric vehicle, there is an exemption from fringe benefits tax (FBT). However, there is a difference in the price of an electric vehicle with a comparable petrol vehicle.

Overall, due to the concessional FBT treatment of cars, taxpayers are better off by salary packaging the vehicle through a novated lease.

If choosing to go with a petrol car, the approximate savings over a 4-year period by salary packaging is $14,248. As the balloon payment is $19,670, a taxpayer would be required to find the additional $5,422 from their post-tax salary to cover the final payment.

If choosing to go with an electric car, the approximate savings over a 4-year period by salary packaging is $46,372. This saving would cover the balloon payment of $30,384, with $15,988 in savings remaining post-tax salary.

Need EV advice?

Your eligibility and the value of these tax benefits can vary based on your location and personal circumstances, so be sure to seek professional advice. We’d be happy to discuss the specific details and potential benefits for you.

The AI robots are coming!

Artificial Intelligence (AI) has emerged as a transformative technology in recent years, disrupting and transforming various industries. With the advancements in AI research and development, there has been a rise in the use of AI across the economy, opening up new possibilities and opportunities for businesses, governments, and individuals.

AI refers to the development of computer systems that can perform tasks that would typically require human intelligence, such as perception, reasoning, learning, and problem-solving. The technology is based on complex algorithms that enable machines to process large amounts of data and make informed decisions, mimicking human thought processes.

One of the most significant benefits of AI is its ability to analyse vast amounts of data and detect patterns that might be otherwise invisible to humans. This is particularly valuable in industries that require data analysis and decision-making, such as finance, healthcare, and manufacturing.

In finance, AI is already being used to detect fraud, predict market trends, and personalize investment strategies. AI-powered chatbots are also becoming increasingly popular, providing financial advice to customers and helping them navigate complex financial products.

The healthcare industry is another area where AI is having a significant impact. AI-powered medical imaging systems can analyse X-rays, CT scans, and MRIs, helping doctors to identify and diagnose diseases with greater accuracy. In addition, AI is also being used to develop personalized treatment plans, monitor patient health, and even predict disease outbreaks.

The manufacturing industry is also embracing AI technology to optimize production processes, reduce waste, and improve quality control. AI-powered robots and automated systems can perform tasks with greater efficiency and accuracy than humans, reducing the risk of errors and increasing productivity.

The potential use cases of AI are not limited to these industries, however. AI can be applied to many other sectors, including retail, transportation, education, and entertainment. In retail, AI-powered chatbots and virtual assistants can provide personalized customer service, while in transportation, AI can be used to optimize logistics and reduce delivery times. In education, AI can assist in personalized learning and adaptive testing, while in entertainment, AI can create immersive experiences for users, such as virtual reality and augmented reality.

However, with the rise of AI also come some challenges and concerns. One of the most significant concerns is job displacement, as machines increasingly replace human workers in repetitive and low-skilled tasks. There are also ethical concerns surrounding the use of AI, particularly with regards to privacy, bias, and accountability.

Despite these concerns, the potential benefits of AI across the economy are significant, and businesses and governments are investing heavily in AI research and development. With the continued advancements in AI technology, we can expect to see even more transformative use cases across various industries in the coming years.

There are several publicly traded companies that are leading the charge in AI research, development, and application. Here are some of the most prominent ones:

Alphabet (GOOGL): The parent company of Google, Alphabet is a leading player in the AI space. The company’s AI research division, Google Brain, has made significant breakthroughs in deep learning and natural language processing. Alphabet is also a major investor in other AI companies, such as DeepMind and Waymo.
Amazon (AMZN): Amazon is known for its e-commerce business, but it has also been investing heavily in AI. The company’s AI assistant, Alexa, is one of the most widely used voice assistants in the world. Amazon is also using AI to improve its logistics and supply chain operations, and it has invested in AI-powered healthcare startups.
Microsoft (MSFT): Microsoft has been investing in AI for many years, and its AI research division, Microsoft Research, has made significant contributions to the field. The company’s cloud platform, Azure, offers AI tools and services to businesses, and its AI assistant, Cortana, is used by millions of people worldwide.
NVIDIA (NVDA): NVIDIA is a leading provider of graphics processing units (GPUs), which are critical for running AI workloads. The company’s GPUs are widely used in AI training and inference, and NVIDIA has developed specialized hardware, such as the Tensor Core, specifically for AI workloads.
Intel (INTC): Intel is a major player in the AI space, with its Xeon processors and specialized Nervana chips used in AI training and inference. The company is also investing in AI startups and developing AI tools and frameworks for developers.
IBM (IBM): IBM has been working on AI for many years, and its AI platform, Watson, is used by businesses and researchers worldwide. The company has also developed specialized hardware, such as the TrueNorth chip, for AI workloads.
Baidu (BIDU): Baidu is one of the largest search engines in China, and the company has been investing heavily in AI research and development. Its AI assistant, Duer, is used by millions of people in China, and the company is also working on autonomous driving technology.

These are just a few of the many companies at the forefront of AI research and development. As AI continues to transform various industries, we can expect to see many more companies investing in this technology in the years to come.

Note: The above article (The AI Robots are Coming) was written in its entirety by AI tool ChatGPT, which is partly owned by Microsoft.

Here for you at every life stage

If you would like assistance with any aspect of your wealth creation, legal, tax and accounting, and management strategies, please contact your adviser directly or call us on (02) 9997 4647.

Disclaimer: This publication has been compiled by Financial Decisions (AFSL/ACL Number 341678). Past performance is not a reliable indicator of future performance. While every effort has been taken to ensure that the assumptions on which the outlooks given in this publication are based on reasonable data, the outlooks may be based on incorrect assumptions or may not take into account known or unknown risk and uncertainties. Material contained in this publication is an overview or summary only and it should not be considered a comprehensive statement on any matter nor relied upon as such. The information and any advice in this publication do not take into account your personal objectives, financial situation or needs. Therefore you should consider its appropriateness having regard to these factors before acting on it. While the information contained in this publication is based on information obtained from sources believed to be reliable, it has not been independently verified. To the maximum extent permitted by law: (a) no guarantee, representation or warranty is given that any information or advice in this publication is complete, accurate, up-to-date or fit for any purpose; and (b) Financial Decisions nor its employees are in any way liable to you (including for negligence) in respect of any reliance upon such information or advice. March 2023

Contact: Financial Decisions PO Box 484 Mona Vale NSW 1660, T 02 9997 4647, F 02 9997 7407

Exchange – March 2023