Barefoot Investor: Biggest budget reveal was changes to super not tax cuts

WHILE the Treasurer was getting mass coverage for his tax cuts, the real story of this Budget was overlooked. Here's what the Barefoot Investor says you need to know.

FAR as I can tell, we’re the only country that goes a little ‘Hollywood’ for the Budget. Other nations just read theirs out on a Tuesday afternoon in parliament, and no one gives a toss.

Not us. We lock all the journalists up, and give the Treasurer the prime-time razzle-dazzle.

And this Budget was a little … Family Feud. A bit, er, boring.

So what did we learn?

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My first takeout is that Australia is the Jay-Z of the world economy … we’re swimming in cash.

That’s largely because there’s been an uptick in the global economy, which is boosting the price of our resources.

Australia goes a bit “Hollywood” over the budget announcement. Picture: AP

It’s also because unemployment is low. Oh, and also because we’re running a fairly aggressive immigration policy.

This pile of cash is what’s funding the centrepiece of the Budget ‒ a $10-a-week tax cut for low- and middle-income earners.

It’s also what ScoMo hopes will fund what is effectively a ‘flat tax’, where 94 per cent of the population pays 32.5 per cent or less.*

*In seven years’ time.

Look, in seven years’ time I plan on living on a Tuscan vineyard so I can drink vino and wear slacks without socks … but I’ll have three kids in primary school by then, so the closest I’ll get to bellissimo is my local, La Porchetta.

Bottom line? I’m not getting my holiday lifestyle, and you’re not getting your flat tax.

Anyway, while the tax cuts stole the limelight, the real story ‒ which was largely ignored ‒ was the changes to super.

So here are three things that really deserve prime-time attention:

First, if you’ve been shocked by what you’ve seen at the Royal Commission (and you should be), you can now teach these bozos a lesson, switch your super fund, and not get whacked with an exit fee.

(Still, anyone who’s tried to roll over their super knows it’s harder than breaking up with your high school sweetheart. There’s so much back and forth, so many itty-bitty details and forms ... it’s almost like they want you to give up and keep your money there!).

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Second, a campaign that I’ve been banging on about for years is the rort of compulsory life insurance through super.

Young people collectively pay nearly $200 million a year in life insurance they don’t need. The Government will now force super funds to stop automatically charging young people under the age of 25.

That’ll add thousands of dollars to young people’s end balances.

Third, the government is finally moving to protect one of the biggest cash cows of the super industry: the 6 million inactive (read: forgotten) accounts that super funds feast on.

The Government has put a fee cap on these low-balance funds and is making it easier to consolidate them.

All in all, it was a terrible night for the super fund lobbyists, which means it was a great night for you and me.

In fact, I think the super changes will potentially have a bigger long-term impact than the short-term tax cuts. Just don’t expect to read too much about it.

After all, super isn’t very Hollywood, is it?

Tread Your Own Path!

Tracy to going to gift her mum $200,000 to buy a house.

HELPING OUT MUM

TRACY ASKS: At the age of just 30, I am VERY aware of the importance of super. Here’s why.

My mum is two years off the pension and has $8,000 in super. Yep, not a typo.

I am going to ‘gift’ her $200,000 or so from the sale of my house (I have another, so will not be homeless), and she will be able to buy a house on which she will owe nothing.

I have two questions for you. How might this ‘gift’ affect us? And how can Mum, who works full time earning $40,000 a year, maximise her super in the two years of work she has left?

BAREFOOT REPLIES: I hope my daughter looks after me as well as you do for your mum!

First up, let’s look at what you’re trying to achieve: you want to put a stable roof over your mum’s head so she has a sense of security and doesn’t have to worry about moving.

If I were in your shoes, I wouldn’t just give her the cash.

Instead, I’d consider buying an investment property in your name and renting it out to her.

There are three advantages to this:

First, when she goes on the age pension she’ll get rent assistance ‒ the maximum payment is $134.80 per fortnight.

Second, as long as it’s an arm’s-length transaction, you’ll be able to claim the interest and related expenses of the property against your tax, like any other investor can.

Third, it makes things a lot simpler.

You should have a written tenancy agreement that sets out who pays for what, and what upkeep she’s expected to do, just like you would for any other tenant.

That’s not only going to help you prove this is an arm’s-length transaction, but also manage everyone’s expectations.

Also, in the event of her passing, the property is yours and is separate to her estate.

Now, as far as how your mum should manage her money over the next few years before she retires, here’s what I’d suggest if it was my mum:

When she retires she’s going to live on $23,597 per annum (the maximum pension for a single person, not including rent assistance and the health care card, worth at least $1,500 a year).

I’d encourage her to be a ‘practice pensioner’ — by living off that figure now and saving the rest of her wage.

Her aim should be twofold:

First, to have a goal of at least $100,000 in super when she finishes full-time work in five years (not two!).

Second, to never retire … keep working part time at least a day or so a week, and supplement her pension by up to an additional $6,500 a year (which, thanks to the Budget, will increase to $7,800 on 1 July 2019).

The upshot is that you’ll have an investment property with a great tenant. You mum will have the security of a home, plus $100,000 in super to draw on, and she’ll be earning more in retirement (after tax) than she is right now!

Of course, you should run this past your accountant and financial adviser, but that’s how I’d do it.

Is it ever a good financial time to have a baby?

CAN I AFFORD TO BECOME A MUM?

HANNAH ASKS: My husband wants us to have a baby, but I am petrified at the thought of not earning money.

How far backwards would we go if I can work only a couple of days a week, and/or have to pay daycare fees so I can work?

Hubby runs his own business earning around $120,000 a year, and has two small business loans for equipment.

His income varies month to month, so it is my wage ($57,000) that gives us the steady money.

We have no loans other than our mortgage, and have Mojo tucked away. But can we afford a baby? Please tell me it’s going to be OK!

BAREFOOT REPLIES: It’s going to be OK. (Well, so long as you haven’t gone all ‘postcode povvo’ and got a super-sized mortgage.)

I’ve spent my entire married life as a small-business owner, so I have some ideas.

First, you are very much a part-owner in the business, so you need to be across the numbers, even if that means sitting down with the family accountant and having them explain the current state of the business to you.

Fact is, you’re going to be relying on this business to take care of your family, so you need to know it inside out.

Second, the benefit of understanding the true state of the business isn’t just that you’ll stress less, but that the two of you should be able to set some realistic 12-month business goals, both in terms of lowering costs and increasing income.

Write them down, and review them at least quarterly.

I actually do this with my wife on our Date Nights. At the start she was more ‘nah’ than ‘yeah’, but after seven years of being my partner in the business she’s shown insights I would never have had.

Plus she’s actually way more hard nosed than me when it comes to negotiating deals.

Finally, I’d go out on a Barefoot Date Night and sketch out your buckets — Daily Expenses (60 per cent), Splurge (10 per cent), Smile (10 per cent) and Fire Extinguisher (20 per cent) — and base it only on a conservative estimate of your husband’s income from his business.

If the numbers stack up, it’s time to become a mum!

I AM NEVER LOOKING BACK

TANYA ASKS: Six years ago I left my ex, due to him punching me. It was the right thing to do, but it certainly set me back financially.

That is why I have found your book so amazing. I already feel much better about my situation.

I have my new fee-free accounts set up with better interest rates, have been on the phone to my super, and have split my money into ‘buckets’. This is the start of financial control, for my sake and my children’s.

While I still feel anxious ‒ as a single parent with a mortgage and $8,000 of debt (personal loan and credit card) ‒ I feel more in control, and I know I’ve got this!

I am never looking back.

BAREFOOT REPLIES: What you’ve done is taught your kids two amazing life lessons.

First, that domestic violence is not acceptable.

Second, that you are strong enough to stand on your own two feet financially.

Happy Mother’s Day!

If you have a burning money question, go to barefootinvestor.com and #askbarefoot.

The Barefoot Investor holds an Australian Financial Services Licence (302081). This is general advice only. It should not replace individual, independent, personal financial advice.