Cost of a self managed superannuation fund

Wanting to get more control of your superannuation and wondering what its costs to have your own self managed superannuation fund (SMSF)?

There are several components to the cost of running an SMSF, including:

  • Investment management fee
  • Accounting fee
  • Audit fee
  • ATO supervision levy
  • Professional fees for advice, administration and anything else you choose to outsource

The Australian Taxation Office (ATO) have just released a statistical overview of SMSFs for 2009-2010 that reveals some average costs based on fund size.

Graph source: ATO Self-managed superannuation funds: A statistical overview 2009-10, Graph 21

You might think your retail superannuation fund is expensive. But most modern off-the-shelf superannuation funds have total expenses (administration and investment) under 2% per annum. In fact most of my clients are in accounts where this fee is around 1% p.a. or less.

As you can see from the ATO’s graph, the average SMSF needs at least $200,000 in funds before the fee drops under 2% per year. And the average operating cost doesn’t drop under 1% p.a. until the balance is over $500,000.

Given that in Australia the average superannuation balance is well under that level you can see that a SMSF is not cost effective for most Australians.

So if you are considering a SMSF you need to have a much better reason than saving money. Read this article for an insight into when a SMSF may be appropriate.

Buying a house with friends or family

This article was originally published in the LawCentral Bulletin 390 on 7th November 2011 and is republished with permission of the author, Brett Davies.

Hi Brett. I’m a recent university graduate. I’ve been lucky enough to land a graduate job earning a decent wage. The problem is, with rents so high and house prices even worse I can’t seem to get a foothold in the market. I have a bunch of friends that are in a similar boat. Can we all chip in to buy a house without getting into legal fights later on?

You are not alone. My graduate lawyers constantly ask for a pay rise so they can buy a house. However, it seems with the cost of renting and house prices – some people feel trapped.

Option 1: Buy a house with friends agreement

The ‘buy a house with friends agreement’ is a great way to get a foothold in the property market. You and your Gen-Y mates can pool your resources to buy a house together.

Sounds simple. But, why do you need it when you can just do that without an agreement?

The Buy A House With Friends Agreement clearly sets out the nature of the relationship between all your friends. We call the relationship a syndicate. It just sounds better than calling it a collective of mates.

But, everyone gets along fine. Why do we need legal documents?

Those are famous last words of many people who do business with friends. Just because everyone gets along well now, doesn’t mean that you always will. The buy a house with friends agreement defines:

  1. Each party’s investment contribution;
  2. What the property is that the syndicate owns;
  3. How the property is owned;
  4. Each party’s share of the capital and income of the venture;
  5. Whether the parties can borrow against the property;
  6. How the parties can end the agreement;
  7. How the parties can transfer their share of the syndicate;
  8. Whether the parties can force the sale of the property; and
  9. How the parties can exit the syndicate.

By establishing all of the above details at the beginning – everyone knows where they stand.

We even include a mutual promise that each party is to promptly meet their individual finance obligations. What does that mean? Put simply, everyone agrees to pay their mortgage repayments on time.

Although my litigators hate me for this it saves you more on legal fees to have the agreement in place now. We see disputes over property going to court and in the end both parties spend their share of the property in legal fees. It is such a waste of your time and effort.

Option 2: Investing through a Unit Trust

A unit trust is another great way for a group of people to pool their resources to invest somewhere. In this case, invest in property. The key players in a unit trust are:

  • Trustee; and
  • Unit Holders.

The unit trust is a ‘relationship’ between the trustee and the unit holders whereby the trustee owns property for the sole benefit of the unit holders. The trustee can either be each unit holder (acting in their personal capacity) jointly or you can set up a corporate trustee.

The unit trust offers greater flexibility for the unit holders. The unit holders are able to freely transfer their unit holdings amongst each other and subject to the terms of the trust, can transfer their units to third parties too. The units are much the same as shares in a company in that respect.

Are you thinking ‘if this all goes well we might buy another place later’?

If your answer to the above question is yes, then a unit trust may be the way to go for you. The unit trust offers the flexibility of acquiring new trust assets without requiring a new agreement. That is because the unit trust lives for at least 80 years.

Once you have set up the structure, it is practically with you for life.

Who do you appoint as the trustee?

It really depends on the number of people you intend to involve in the whole process. Remember, every person that is named as a trustee of the unit trust is required to be named as the registered owner of the property. That can be very cumbersome if you pool together 10 friends. You even need to change the title registration every time a unit holder sells out or a new one comes in. After all, there is no need for a former unit holder to be a trustee.

Another option is to create a corporate trustee. It is a relatively simple process. Just build a company on Law Central and you are on your way. Now the company is shown as the registered owner of the property. Better yet, whenever unit holders change – you don’t need to change the trustee.

Who controls the corporate trustee?

In the normal course, you appoint at least one person to be the director. You also issue shares to each of the unit holders in the same proportions as their unit holding. That way each unit holder has an appropriate degree of influence over the corporate trustee.

Then, when unit holders change or their unit holding changes, they simply transfer the appropriate number of shares in the trustee company to ensure everything remains kosher.

I hope you and your friends manage to make a solid start in the property market. If you are unsure about what is right for you, speak to your accountant and adviser first to get the financial advice you need. Then call me and one of my team can set you in the right structure.

How compound interest works

MoneySmart, the financial literacy website produced by Australian Government regulator ASIC have produced this brief video to explain how compound interest works.

Compound interest is an essential base concept to understand before investing. So if you don’t understand it then I recommend you spend one minute watching this video. Then please share in the comments below – did the video help you understand?


A great 21st birthday gift

My partner and I would like to buy shares for my son’s birthday. He will turn 21 on 9 November and we want to buy him something that he will have for a very long time. Eventually we came up with the idea of starting him off with his own share portfolio, but we have absolutely no idea how to go about this. We also don’t know if it is possible and whether it is a viable, long-term plan. We’d appreciate some advice…

Earlier today I received this question by e-mail:

Hello Matt

My partner and I would like to buy shares for my son’s birthday. He will turn 21 on 9 November and we want to buy him something that he will have for a very long time. Eventually we came up with the idea of starting him off with his own share portfolio, but we have absolutely no idea how to go about this. We also don’t know if it is possible and whether it is a viable, long-term plan.

Regards, Jane (name changed for privacy)

My instinctive thought of  a gift that would last him a very long time is that of financial literacy. The knowledge on how to make smart, appropriate financial decisions will last a life time and will both make and save him hundreds of thousands of dollars. However, it’s hard to gift financial literacy for a birthday as you can’t force a horse to water let alone force them to drink.

A really useful gift

Following the financial theme my next instinctive idea was to gift him an opening balance in a First Home Saver Account. I think this is a great idea for the following reasons:

  • It’s likely that he’ll want to buy a house some time
  • A house and a mortgage is something he’ll have for a very long time
  • The Government gives you some free money when you contribute to the account
  • Giving him a boost on saving for a house will improve his financial position
  • You can’t easily withdraw the money and blow it on indulgences

When I spoke to Jane she said they’d also considered buying a gold bar.

The problem with giving shares

Buying shares, a manged fund or a gold bar all have a certain novelty factor. But there’s no guarantee your 21 year old will have any of them for a long time. They all can easily be sold.

In fact once your child finally leaves the nest and buys their own home it would make good financial sense to liquidate all other financial assets to reduce their mortgage.

If giving your child a financial gift like shares, managed funds or gold bars has a spin-off effect of increasing their interest in managing rather than just spending their money then terrific. But I suspect that is luck and not something you can manufacture. Opening a First Home Saver Account could have the same affect and be more aligned to what they foresee in their future.

As it turns out Jane’s son is already diligently saving to buy a house, but not using a First Home Saver Account. So I suggested she investigate that route as fitting her criteria of a viable, long-term plan.

How to give the gift of financial literacy

For those parents whose adult children live in Perth you can give them a gift of financial literacy by enrolling them in my course: DIY Wealth Creation for Busy People. In fact two of the current participants who are aged in their 20s told me they are attending because their Auntie raved about the course, insisted they attend as “it would set them up for life” and even paid their course fee. 🙂

With math this bad would you trust this adviser?

Yesterday I received an e-mail message from financial services firm [name removed*] pre-promoting a “big event” they’re holding in October.

The following is part of their big sell:

Too right that’s not pretty reading.

Mr [name removed*]  has used simple math of dividing $1 million by $6,464.10 to come up with “154.7 years to become a millionaire”

That’s such B.S. (Yet the decimal point makes it seem so precise and legit.)

In fact it’ll take just under 35 years to accumulate $1 million if you are smart enough to invest your regular savings.

Here’s the assumptions in my calculation:

  • You invest your regular savings and earn a conservative  5% per annum net after-tax
  • The average wage grows at around 4% per annum
  • The regular saving is increased each year in line with the increase in wages so that you always save 10% of the average wage

You too can verify the calculation. Use this Future Value of Growing Annuity formula.

(Of course in 35 years the buying power of $1 million will be a lot less than now.)

The number’s don’t lie

The ironic thing is that the subject line of the e-mail was “Ouch! Numbers don’t lie…”

I agree that saving just 10% of your wage probably won’t make you rich. (In fact last year I reported on some research that estimated you need to save around 20% to achieve just a comfortable retirement.)

But using such sloppy projections to promote a wealth creation event is misleading, in my opinion. The numbers may not lie but…

It makes me wonder what other trickery may be included during this big event to encourage you to part with your hard earned?


* I really wanted to name the firm and event promoter but my wife made me remove it. (Excuse me while I go and make her lunch.)

Latest AXA Guide to Investment Markets

About every six months AXA Australia publish an interpretation of what has been happening in the local markets and economy in the context of the global economy. Of the many commentaries published by Australian product providers the AXA guide is one I feel is most written in plain, accessible language.

The latest AXA Guide to Investment Markets, dated June 2011 is titled “Understanding the ups and downs”.

Among the topics covered in the latest guide are:

  • Global debt
  • Surging commodity prices
  • “Two-speed” economy in Australia
  • Australian dollar
There’s one guarantee in economic interpretations – and that is that all the economists will disagree. No-one has a working crystal ball.
So read the AXA guide (and all others) for your interest but with caution – it’s not fact nor gospel.

Risky SMSF borrowing advice from real estate agents

The Institute of Chartered Accountants of Australia (ICAA) superannuation specialist, Liz Westover recently wrote of her alarm at some marketing material she received from a real estate agent promoting borrowing within a self managed superannuation fund (SMSF) to buy property.

Westover wrote: “I was surprised and somewhat alarmed that some of the information provided was technically wrong and misleading, particularly in relation to the tax measures.”

Remember that Real Estate agents are NOT licensed financial advice providers.

Real Estate agents are licensed facilitators of a real estate transaction.

And in the current property climate it seems that some will do whatever they can to get more transactions occurring.  Don’t allow yourself to be misled – get financial advice only from licensed financial advisers.



How to reduce your tax

A desire to reduce tax is one of the key drivers many people list when they initially contact me for financial advice. So today I will share with you my perspective on how you can save tax.

First a word of caution

Only tax accountants and tax lawyers are legally allowed to provide you with specific tax advice. This article is an introduction to some key concepts of reducing your tax from a big picture planning perspective. And of course at the fringes there are some special cases. Start by understanding the key concepts before delving into the fringes.

Speak to your tax accountant for personal tax advice. And if you don’t have one – maybe you should get one as part of your financial team.

Key ways to reduce tax

Four key ways to reduce your tax are:

  1. Spend money in the production of taxable income
  2. Spend money where the Government wants you to
  3. Give money away charitably
  4. Park your money in a lower tax entity (e.g. superannuation, company, trust, partner’s name)

Note that the first three ways listed above involve you giving away or losing money as a way to reduce your tax.

Key concept: you don’t get everything back

A common misconception is that a $1 tax deduction saves you $1 in tax. That is not correct.

You don’t get everything back.

For an individual tax payer you get back the equivalent of your marginal tax rate. The majority of Australians have a marginal tax rate of 30% (excluding levies). So they get back only 30% of what they spend on deductible items.

An example

You give away $10 to charity. At the end of the financial year you claim the donation as a deduction and the tax on your income is reduced by $3 (what you ‘get back’ when your marginal tax rate is 30%).

Your net cash flow has however reduced by $7. That’s $7 less you could repay off your mortgage, invest or spend.

Spending money in the production of taxable income

Spending money in the production of taxable income is probably the primary source of higher tax deductions and thereby a reduction in your tax payable.

Conceptually you can split it into deductions related to active (personal exertion) income and those related to passive (investment) income.

Save tax on active income

As you may already be aware you can claim some expenses relate to your job, including these common categories:

  • Self-funded work-related education
  • Uniforms
  • Some travel
  • Some car expenses (not a full deduction as it is subject to some fringe benefits tax)
  • Retirement savings (i.e. before-tax contributions to superannuation often through ‘salary sacrifice’)

The Australian Taxation Office (ATO) publishes guides for specific industries and occupations. Check them out to see if there is a guide relevant to you and consult with your tax accountant.

One easy deduction you may not be aware of is that of your income protection insurance premiums. Most insurance is not tax deductible but income protection is because if you later need to claim then the benefit will be taxed as if it was your employment income.

Save tax on passive investment income

In general if your investments earn income each year you can claim a tax deduction for expenses related to those investments, including for:

  • Interest paid on money borrowed to invest
  • Expenses related to maintaining the investment

In Australia you can also use investment related expenses to reduce your taxable income from your job.

That aspect gets many people salivating so much that they overlook key financial principles.

  • If through investing your investment income is higher than your investment expenses you will actually increase your taxable income and pay more tax.
  • When your investment income is less than your investment expenses your investment is losing money.
  • Your net investment loss may reduce your tax payable on your wages income but you don’t get all of the loss back (remember). So you still have an after-tax net income loss.
  • When you’re making a net income loss on your investment you need to make it up in additional capital gain so that overall you get an acceptable return on investment.

Save tax on investment gains

When you sell your investment you realise your capital gain. In Australia the capital gain is included in your taxable income for the year.

You can reduce the tax payable on your capital gain through:

  • Holding the investment for over 12 months so that only half of your gain is taxable
  • Deducting capital expenses such as transaction costs and stamp duty
  • Offset prior realised capital losses

Tax rebates and offsets

The Government really wants you to:

  • Keep working and earning money
  • Raise future tax payers (so they earn more tax)
  • Look after yourself in retirement (so they spend less tax)

So the Government gives you an incentive to do that by rebating some tax to you for ‘expenses’ related to their goals. Current examples include:

  • Child care rebate
  • Education tax refund
  • Spouse superannuation contribution tax offset

Along the way there are other rebates that come and go depending on what behaviour the Government wants to incentivise at the time.

The difference between deductions, rebates and offsets is the way the Government calculates what you ‘get back’.

The key is to stay aware of what is out there and then delve into the detail for those schemes that may apply to how you live your life. Your financial planner and tax accountant are a great help in keeping you aware.

Park your money in a lower tax entity

I believe tax management needs to be looked at broadly across the total tax you pay on all of your money.

In my opinion one of the best ways to reduce your overall tax payable is to reduce the tax rate that applies to the income you earn. Primarily you can achieve this by holding your money in different legal entities, since each class of legal entity can have a different tax rate. (Think of a legal entity as a big tank which can hold financial stuff.)

Examples of legal entities are:

  • You
  • Your partner
  • Superannuation trusts (commonly known as ‘super funds’)
  • Discretionary trusts
  • Companies (e.g. Pty Ltd and Ltd)

The tax rate for individuals such as you and your partner is based on a sliding scale related to your taxable income. The top marginal tax rate is 45% (excluding levies). As mentioned earlier the majority of Australians have a marginal tax rate of 30%.

Companies pay a top tax rate of 30%, whilst superannuation trusts pay a top tax rate of just 15%.

So the majority of Australians could reduce their total tax bill by investing through superannuation rather than in their own name. Your individual tax payable may not reduce but your total tax will reduce and therefore your net wealth will increase.

Another simple way to reduce tax is to hold your investments in the name of the partner with the lowest marginal tax rate. For example keep your cash savings in a bank account in their name. (Better still keep your cash savings in a mortgage offset account – but that is another article.)

High income earning Australians (those with a marginal tax rate above 30%) could reduce their tax by investing through entities such as companies and discretionary trusts. But the tax saved could be offset by the cost burden of establishing and maintain the entities. Plus there are other really important considerations, which you should first discuss with your advisers.

Putting it all together

As I said earlier I believe tax management needs to be looked at broadly across the total tax you pay on all of your money.

More importantly for most people tax reduction should not be your primary driver in selecting financial strategies. In my experience most people have much bigger financial fish to fry.

The ultimate purpose of managing your money is to ensure you have enough money for what you need when you need it.

Yes, reducing your overall tax will increase the money you have.

But there are some non-tax saving strategies, like repaying personal debt, that will increase your wealth and lifestyle faster, easier and more sustainably. Learn about those strategies too.

Residential property vs shares since 1926

The residential property versus shares debate is popular and can be as fiery as political and religious debates. So I’m often asked about comparisons of the long term returns.

Following is some commentary I came across from Dr Shane Oliver, Chief Economist and Head of Investment Strategy at AMP Capital Investments. (Emphasis added by me.)

After allowing for costs, residential investment property and shares generate similar long-term returns. This can be seen in the next chart, which shows an estimate of the long-term return from housing, shares, bonds and cash.

Over the long term, the returns from housing and shares tend to cycle around each other at similar levels. In fact, both have returned an average of 11.5% p.a. over the last 80 years or so. While housing is less volatile than shares and seems safer for many, it offers a lower level of liquidity and diversifcation. The bottom line is, once the similar returns of housing and shares are allowed for, and these characteristics are traded off, there is a case for both in investors’ portfolios over the long term.


Source: Oliver’s Insights, Edition 37 – 25 November 2010, ‘Australian housing – is it a bubble? What’s the risk?’

How to sell shares without a broker

Over the last 20 years there have been plenty of share floats that have brought everyday Australians into the world of share ownership. One day, perhaps upon retirement, you may decide that you want to sell these shares to fund your lifestyle. This article reveals how to sell your shares without a broker.

Over the last 20 years there have been plenty of share floats that have brought everyday Australians into the world of share ownership. For example:

  • Privatisation of Government assets like Commonwealth Bank, CSL and Telstra.
  • Also large companies like AMP have demutualised and listed on the stock exchange and in the process issued shares to policy holders.

One day, perhaps upon retirement, you may decide that you want to sell these shares to fund your lifestyle. But, how do you sell your shares when you don’t have a broker?

(Technically you can’t directly trade on the Australian Stock Exchange – you have to use an authorised broker. By ‘without a broker’ I mean without the old-school method of talking to a human.)

Online share trading facilities

In our modern world the first idea that may spring to your mind is to establish an account with one of the many online share trading providers.  Certainly that will work. But if you only want to conduct one or two trades it is a lot of effort.

Plus in setting up an account most online providers also establish a new, linked cash account for settling the trades. Again for one or two trades it is an extra account that’ll probably be more hassle than benefit.

Further, if you have some shares in your name, some in your partner’s name and even some in joint names you also may need a separate trading account for each ownership type.

One off trading facilities

If you just want to sell shares and not buy then a one off guest or visitor trade is what you need.

With a visitor trade you can sell the shares and receive a cheque posted to you, which you deposit into an existing account of your choice. No need to establish a new bank account.

Both of the big Australian online share brokers E*Trade and Commsec offer one off trading services. E*Trade refer to it as a Visitor Trade and CommSec refer to it as a One Off trade. You can download the forms from their website.


Yes it still involves a bit of paperwork and you still have to prove your identity by submitting certified copies of your ID. But it does avoid the extra paperwork of closing an account at the end.

TIP: If you already are a customer of CBA and have therefore proven your identity you can avoid that part of the process if you use the Commsec one off trade facility.


One off trades usually cost more than the standard per-trade fee from each broker. But it is still as low as $50 with E*Trade or $66 with Commsec (depending on size). See their websites for specific details to decide which is cheapest for your trade.

Market price only

One disadvantage of a one off visitor trade compared to establishing the online account is that your shares will be sold at the market price at the time your form is processed. You don’t get to dictate the sale price.

If you want to be able to time the sale of your shares and nominate the sale price you will need to establish the online account or go through the traditional human brokers (remember those?).

Issuer sponsored shares only

You can only use the one off trade facilities if your shares are what is known as “issuer sponsored” rather than “broker sponsored”.

The Commsec form describes how to tell the difference:

  1. Find your share holding statement.
  2. Look for the Shareholder Reference Number (SRN), which it is a 10 digit number.
  3. If your SRN starts with  the letter “I” then your shares are issuer sponsored.
  4. If your SRN starts with the letter “X” then your shares are broker sponsored.

Broker sponsored shares

If your shares are already broker sponsored then just contact that broking company and ask them about the process and cost to sell the shares. You’ll be able to find the broker’s name and contact details on your share holding statement.

If you don’t fancy them or their fees then you can establish an account with one of the online share brokers and transfer your shares to them as your new nominated broker. Then you sell your shares using the normal online trading facility.

The Truth (And Myth) About Passive Income

Do you salivate at the thought of passive income and long to start your own business?

Nacie Carson, founder of The Life Uncommon, a career transition and entrepreneurship community has written an insightful article examining the truth and myths of passive income. Carson draws on her own experience to highlight common delusions as well as frame some realities.

The first time I read through their information, I interpreted their material as “passive income is easy and effortless, all you have to do is set it and forget it.” When I revisited their material, I understood that their actual message is “passive income is a great revenue source that is earned from persistent, ongoing cultivation.”

The context of Carson’s article is online entrepreneurship however I think her observations are relevant to the pursuit of easy money and passive income in traditional investing.

You don’t just get rivers of golden passive income for life just by buying any old property or share, or starting a business. Wealth accumulation takes “persistent, ongoing cultivation”.

Other nuggets from Carson include:

So what’s the truth about passive income – is there such a thing, or is passive income a myth that marketers tell to line their own pockets?

From my own experience, I say there is such a thing, but it’s a nuanced thing.

…[my] passive income triumphs required a significant up-front investment of time, effort, and tinkering on my part, and in many ways I see them more as delayed payment or ongoing dividends.

[I] would tell any fledging entrepreneur that the simple truth of passive income is this: passive doesn’t mean effortless.

Carson’s comments echo comments I frequently make about the Do It Yourself approach to wealth creation. It takes a significant up-front investment of your time and energy to first acquire the expertise you need.

Then it takes additional time and effort to apply the expertise before you earn a decent return on investment for your money.

You then have to consistently apply that expertise to get a return for the up-front time and energy you invested.


Misleading marketing finally acknowledged

I shudder whenever I see the big newspaper and magazines advertisements of companies that purport to teach people how to easily & profitably trade shares and derivatives (like options, warrants & CFDs). They promise so much confidence and certainty of gains.

According to their website (accessed 20 April 2011) the business Safety In the Market (operated by The Hubb Organisation Pty Ltd) has “assisted thousands of Australians [to] discover how they can trade the financial markets safely and profitably” since 1989.

That’s over 20 years of big promises.

Finally the regulator ASIC has reigned in their promises by obtaining court orders preventing Safety In The Market from making or publishing misleading or deceptive representations about its trading methodology.

ASIC’s concern was about claims that the methodologies were “proven”. A nice piece of marketing bollocks you will read in lots of adverts.

This kind of grandiose marketing can go on for years before the regulator gets around to taking action – as you can see by SITM’s longevity. So just because an organisation has been around for years don’t interpret that as being evidence of a basis to their big claims.

As always be aware and ask yourself if you have what it takes to be one of the minority with the intelligence and discipline to consistently make a profit.


Margin call calculation

When you have a margin loan it is important to understand how much your portfolio value can fall before you receive a margin call. This article reveals the formula for calculating the percentage fall to trigger a margin call.

A margin call occurs when you no longer own enough of the investment to keep the lender confident they’ll get their money back. If you receive a margin call you are asked to either:

  • Add more security for the loan – this can be cash or other approved investments
  • Reduce the loan balance – either through cash or by selling some of the investment

Neither of those remedies can be particularly pleasant so when you have a margin loan it is important to understand how much your portfolio value can fall before you receive a margin call.

The formula for calculating the percentage fall to trigger a margin call is shown below:

LVR stands for Loan to Value Ratio. It is calculated based on the amount you owe (the loan) divided by the total value of the security (the investment). For example an $80,000 loan against a $100,000 investment has a LVR of 80%.

The abbreviation in the margin call formula are:

  • Base LVR% = maximum allowed LVR% based on the quality of the lodged security (the investments)
  • Current LVR% = your loan ÷ your current portfolio value
  • Buffer% = the allowed buffer before triggering a margin call

Generally lenders won’t call you as soon as your Current LVR hits the Base LVR. Since the investments often fluctuate in value daily they give you a bit of leeway – know as a buffer. Many lenders give you a buffer of 5% but some have a buffer up to 10%.

For example if your Base LVR is 75% and the lender’s buffer is 5% they will call you when your Current LVR hits 80%.

Below is an example calculation of how much your portfolio needs to fall to trigger a margin call. The parameters in the calculation are:

  • Base LVR% = 75%
  • Current LVR% = 50%
  • Buffer% = 5%

If you choose to gear conservatively (at 50%) against quality assets with an allowed LVR of 75% (base) then your portfolio value can fall 37.5% before you trigger a margin call. That has happened but it is rare, which should give you confidence to consider margin lending.

If you can’t be bothered doing the calculation the following table gives you some examples of the percentage fall required. Note the buffer in this table is 10%. (Source: Leveraged Equities.)

From the above table you can see that when your buffer is 10% rather than 5% in the earlier example then for a current LVR of 50% and base LVR of 75% then your portfolio can fall by 41% before a margin call is triggered.

SMSF Guide

If you are contemplating a self managed superannuation fund or already have one then you may be interested in this useful SMSF Guide produced by Macquarie’s technical team

Over 29,000 self managed superannuation funds were established in the 2009-10 financial year, taking the total number of SMSFs to 427,491. (Source: ATO, Sept 2010).

If you are contemplating a self managed superannuation fund or already have one then you may be interested in this useful SMSF Guide produced by Macquarie’s technical team. (Look in the section called ‘Education Centre’. The Guide is called “Self Managed Super Funds – from set up to wind up“)

Self managed superannuation funds are increasingly popular as people believe a SMSF gives them greater control over their money. However a SMSF is often not needed to get the level of control you desire. Read my earlier article to discover when you may or may not need a SMSF.