The thing is, I actually really don’t like talking about politicians and what they say and plan to do at all. That piece was never meant to be political but after reflecting for some time now, it was always going to be that way due to the nature of the subject matter.
So why the hell would I ever go near it again?
Because even though I don’t like those 🤡, politicians do affect us in the journey to FIRE and I need to set the scene first in order to talk about how we come to the conclusion at the end and where we’re heading moving forward.
And the beauty of having your own blog is you get to write and publish whatever you want. I create content from my point of view and never claimed my writing was balanced. This site isn’t the ABC or some neutral FIRE outlet. I presented facts in that article with my opinion which I understand everyone isn’t going to agree with.
However, that topic was interesting to me (and a bunch of others) so if I’m offending you or you don’t like what I’m writing, maybe you should follow another FIRE blogger ✌
Franking Refunds Survived…For Now
Like Steven Bradbury before him, ScoMo and the Coalition skated past the ALP for a come from behind victory and with it, the franking credit refunds will remain for the foreseeable future.
This was a hot topic amongst the FIRE community and now that the election has passed, it seems like things should proceed as per normal right?
I mean, franking credit refunds didn’t get the chop so fully franked dividends are safe to retire on yeah…?
Well… about that
Whilst I think that the result of the election speaks volumes to where the majority of Australians priorities lie, I strongly believe that a lot of the policies the ALP were trying to win votes on will not be touched for a very, very long time. They were aggressive with their tax reforms, franking credit refunds being one of the smaller changes (CGT and trust distributions being a lot bigger).
This was supposedly the unlosable election for the ALP. Every poll in the country had them winning by a landslide. Sportbet even paid out on them winning two days early to the tune of 1.3M 😮
For them to lose in the fashion they did, especially after all the shit the Coalition has done during its previous term tells me that the majority of Australians did not agree with the policies they were proposing.
And it’s my opinion that aggressive tax reforms played a huge part!
Now I’m definitely not an expert on this subject and don’t know for sure (no one really does) but I doubt we will see such aggressive policies proposed by any party for some time. I’d almost bank on it that scraping franking credit refunds will not even be thought about in the next election. They’ll go after something else, that’s a given. But it won’t be the same policies that contributed to them losing the election this year.
Sidebar: I’m not here to talk about the policies or politics so for the love of God don’t @ me in the comments about it.
But that’s enough about the election.
Again, I really don’t like politicians in general and try to avoid talking about them as much as possible. I only bring them up because it’s important to set the scene for the decisions we’re making in regards to investing for financial independence which is what this blog is all about.
Which brings me back to the point about the franking credit refunds.
Whilst I truly don’t think any political party will go near them for a very long time. I also learnt something very valuable from that campaign policy.
The legislation risk associated with franking credits in general.
I was completely naive in thinking the government would not pull the rug out from underneath us and the refunds would be here to stay.
What a fool I am!
I’m just thankful we’re still in the accumulation phase and have a chance to mitigate this risk a bit moving forward (more on this below).
But wouldn’t it have absolutely sucked if you’d worked your whole life and built up a retirement fund utilizing franking credit refunds only for the government to turn around and change the rules on you!
The refunds are safe for now. But I plan to be retired for 50+ years. That’s a long time for people to forget what happened in 2019 and if I were a betting man, I’d wager that sooner or later, franking credit refunds will be back on the chopping block!
Are Aussie Shares Worth It Without Franking Credits?
The thing about franking credits for those who are chasing FIRE in Australia is that without the refund, they are worth a hell of a lot less and in some cases, will mean that you don’t receive any benefit from the franking credits at all.
Let me give you an example.
Mrs FB and I know that to fund our current lifestyle in Australia, we spend around $48K over the course of 12 months.
We plan to own a house one day, so if we remove our rent and add on a bit to cover rates, maintenance on the property, insurance etc, we get to around ~$42K at a guess.
The plan before the election was for us to split our dividend income 50-50 and pay ourselves the $18,200 (tax-free income threshold) each from Aussie franked dividends. Let’s assume that the dividends are fully franked.
We each would receive $18,200 in cash throughout the year plus $7,800 in franking credits each. This means that the ATO would look at us having a taxable income of $26,000 for that year (dividend plus the FC).
Here’s the math behind the grossed-up dividend.
Dividend
% Franking
Franking Credit
Tax Before FC
Tax After FC
Grossed up dividend
$18,200
100%
$7,800.00
$1,482
-$6,318
$24,518.00
The franking credits soaked up the owed tax of $1,482. This will still happen if the refunds were ever removed.
But more importantly, the franking credits refunded us $6,318!
Because we, as the shareholder, have already pre-paid tax @ 30% that was removed from the dividend before it hit our accounts. It’s only fair that this is recorded (the franking credit) and the ATO is aware of us pre-paying the tax so we can be refunded later if we paid too much tax for that year which in this example, we did.
This was always the intention of imputation credits. Not to only stop double taxation (which consequently it also does), but to ensure that income is taxed once by those obliged to pay it.
So the end result is around $24.5K each to fund our life after retirement.
That’s almost $50K! More than enough for us to live comfortably forever whilst factoring in inflation.
But if we remove the refund. We only end up with $36K between us.
That’s a whopping $13,036 dollars difference and means we need to head back to work.
Or let me put it to you another way. You’re losing 28% of your return 💸
Tipping Point
I was on the fence for a long time before moving towards an Aussie dividend approach with Strategy 3.
A lot of people out there don’t realise that a major part of the dividend approach for me was not about total return. In fact, I even mentioned it in Strategy 3 that if I were to guess, I’d wager that Strategy 3 would slightly delay my FIRE date because of the less efficient tax method of income (dividends are less efficient vs capital gains) and less diversification.
We moved to Strategy 3 predominately because of the psychological aspect of receiving income that was not affected as greatly by human emotion (share prices) and is more anchored to business fundamentals (income of a profitable business that is passed to the shareholder via a dividend).
There have been great Australian based articles written that objectively looks at retiring on dividends vs capital growth and I constantly receive messages that link to studies showing superior returns for an internationally diversified low-cost ETF portfolio.
Guys, I’m a die-hard FIRE fanatic,
I’ve come across most of these theories and articles before! What’s missing here is the human element. We’re not investing robots. I’m not too fussed between minor differences in returns and place great value in simplicity and sleep at night factor.
I thought the trade-off of less international diversification and a slightly delayed FIRE date was worth retiring on dividends vs dividends + capital gains.
But everyone has their tipping point.
Without the franking credit refund, Aussie shares just don’t cut the mustard IMO.
The difference is just not worth it for us. But everyone’s circumstances are different.
For instance, those looking to retire on FATFIRE will not be as greatly affected by this change since they will have more of an income to soak up those credits.
And many people have rightly suggested to me that there are a lot of alternative strategies to generate unfranked income such as REITs, Bonds, P2P lending etc.
These are viable alternatives for some, but we want to continue investing in companies for now.
Mitigating Risks
Let me be quite clear.
I’m still a massive fan of the dividend approach.
But placing such an enormous amount of faith that politicians won’t change the rules around franking credits over the next 50 years just doesn’t seem logical to me.
I want to mitigate the legislation risk of a potential franking credit refund axing as much as possible but at the same time, continue our overarching investment philosophy of investing in great companies.
We want to reduce our portfolios franked dividends and take advantage of a more diversified portfolio again. Which means…
I kept the international part of our portfolio when we decided to focus on Aussie shares. And when the very real news of potential changes in franking refunds was mentioned, I felt such a huge sigh of relief knowing we still had some international exposure. I guess this just goes to show the power of international diversification. If one country stuffs something up, there’s plenty more out there so you’re covered… doesn’t really work if you’re all in on the one country though 😅
Given that I don’t think franking credits refunds will be there over the next 50 years (no refund for us basically means no credits at all). I would like to receive some income from international companies along the way. It’s not going to be as good as the Aussie yield, but it helps the situation and my sleep at night factor.
Also, with the help of capital gains, an internationally diversified portfolio according to almost every major study done of the subject, will reduce risk, volatility and increase safer withdrawal rates!
To LIC or Not To LIC?
This one’s quite straightforward. A LIC has to pay a fully franked dividend. An ETF does not. VAS, for example, has a franking % of around 70-80 % which means that part of the income is not franked.
As I detailed in my ETFs vs LICS article, they are so similar that we are basically splitting hairs when comparing the two. As such, the greater legislation risk associated with LICs to me has shifted my favour towards ETFs.
I want to make myself clear again. I’m still a fan of LICs. I love the dividends they produce and the two companies I’m invested in (Milton and AFIC) have goals that align with my own (to grow their income over time).
It’s just that A200/VAS are so incredibly similar but have the key difference in utilizing a trust structure and not a company. The legislation risk has tipped the scales in favour of ETFs for me moving forward.
This is purely a tax minimisation decision. It has nothing to do with changing the overarching investment principles (investing in great companies) or a shift away from Aussie dividends.
The FI Explorer wrote a great piece on a sceptical view of LICs which some of you out there have emailed me about. I agree with what is written in that article, always have. I never invested in LICs expecting a superior return. What I go back to is the mental aspect of investing. A lot of people who retiree will feel more comfortable living on a relatively stable smooth flow of dividends vs more volatility but a slightly higher return.
Strategy 2.5
Okie Dokie.
So here she is. The new…ish strategy moving forward.
It’s called 2.5 because it’s extremely similar to strategy 2 just with a few tweaks. It’s almost like we’re going back to strategy 2 and I didn’t think enough has changed to honour it with strategy 4.
Change 1
Firstly, with the addition of buying more international shares back in the plan, we will move back to a ‘split’ approach.
Our splits have changed slightly from strategy 2 with more of an emphasis on Aussie shares as the dividends are still attractive regardless of franking credits refunds.
We will be looking to maintain a split of
60% A200/VAS/LICs (Aussie)
20% IVV/VTS (US)
20% VEU (world ex US)
We’ll keep our two LICs in the portfolio but won’t buy any more units moving forward.
The plan when buying new shares is a lot easier than looking at when LICs are trading at a premium or not.
Before we buy each month, we will look at the current splits in the portfolio and purchase the shares which have the lowest targeted weighting.
For example, this is what our portfolio currently looks like.
So next time we buy, it will be to ‘top-up’ the lowest split, which in this case will be World ex US or VEU. The splits are all out of wack because we focussed on Aussie equities during the last 12 months. Ideally, you want to be as close to your splits as much as possible. When your portfolio reaches a certain point however, the market movements will be so great that you might find it hard to maintain your splits even by buying the lowest weighting split. But this will be a good problem to have since your portfolio at that stage will be in the 7 figures.
Something really cool about this strategy is that you’re always buying the split that is down. If one split booms but the others don’t, you won’t be purchasing more of that booming split.
Change 2
The second change we will be making is switching from VTS to IVV.
iShares Core S&P 500 ETF is extremely similar to VTS with a few differences but no major ones we’re concerned about. VTS is more diversified and 0.01% cheaper but is not domiciled in Australia and does not offer DRP. This means that we need to fill in the W-8BEN-E form every three years or so.
The W-8BEN-E form is literally 10 minutes of your time every 3 years and is often overblown in terms of effort, but nonetheless, the two funds are so similar that it’s worth saving the extra admin plus having the DRP option available which I’ve been looking to use as of late.
Here are their 10-year returns to just show how similar they are.
Change 3
The third part of the plan is a hybrid approach between relying only on dividends vs dividends and selling parts of the portfolio. IVV and VEU don’t pay a lot of dividends, but they still pay them.
IVV has returned 3.27% over the last decade and VEU has done 2.85%. Not great, but still cash flowing into the account. And more importantly, those dividends are unfranked income!
We will aim to not touch the portfolio and use the dividends from both Aussie and international shares to live on. If it’s a bad year, however, we will look to sell-off some units to cover the shortfall.
I’ve already gone into why selling parts of the portfolio is perfectly ok if you allow for it to recover in strategy 2. In fact, from a rational market point of view, there’s really little difference between selling units for income and having the company pay you via a dividend. In theory, both should have the exact same consequences. But markets are not rational so they vary to some degree and is a prime reason why we like the dividend approach more.
How It Works
Let’s look at how the newly allocated portfolio would have done during the last 12 months. Here, I have created a dummy portfolio with all trades done exactly one year ago with the total of the portfolio’s value being a cool $1M which is what we’re aiming for.
Aussie equities (I had to use VAS to go back far enough) @ 60%
US (IVV) @ 20%
World ex US (VEU) @ 20%
$46,809 worth of dividends ain’t bad and is more than of FI number of ~$42K!
Bumping up the weighting of Aussie shares to 60% (it was 40% for strategy 2), plus the lower dividend payments of our international shares have actually generated enough income for us to live off during the last 12 months.
But this was a particularly good year for Aussie shares and it won’t be this good all the time. We will save any extra income during those good years to create a cash buffer in preparation for the bad ones that will no doubt come.
If it’s a particularly bad year for dividends, we will look at selling off some units to cover our expenses.
The other thing is that the likelihood of us not earning any money in retirement is extremely low. I’ve covered this in what retire early means to us in the context of FIRE.
I’m extremely confident that the dividends from a $1M portfolio that is weighted to 60% Aussie shares plus any additional income will be more than enough for us.
Selling off units is there as an option but I don’t think we’ll need it tbh!
Time will tell.
To summarise strategy 2.5
An internationally diversified portfolio consisting of 60% Aussie shares and 40% international
Buying IVV instead of VTS moving forward for DRP and Australian domiciled.
Buying Aussie ETFs and not LICs due to risks associated with franking credits. ETFs don’t pay fully franked dividends and are impacted slightly less in the event of legislation passing.
Stop Changing Strategies Dude!
This is you
“Man, you flip flop more than my thongs! Stick to one strategy mate and stay the course. If the axing of the franking credit refund caused you to change strategies, you were never in it for the right reasons.”
And this is me
“Yo! The overarching strategy of investing in great companies has never changed. There was definitely a major difference between strategy 1 and strategy 2. But the fundamentals from strategy 2 to 3 and now to 2.5 are exactly the same”
The thing is, investing in great companies should always be the number 1 goal. All this other shit comes later.
The issue with picking the good companies from the duds is that it’s really hard to do. Which is why index investing is so cool.
The tweaks between our strategies are really fine-tuning our portfolio to meet our specific needs in the following areas:
Mindset/sleep at night factor
Simplicity
Tax minimisation
Mitigating legislation risk (something I hadn’t considered before)
I think everyone should be a bit flexible with how they invest to a certain degree. Picking one strategy and literally not changing anything during your whole life seems unlikely. Franking credit refunds are a great example of this.
And what’s to say the government won’t impose some stupid tax on other asset classes or something else within our life?
It would be ridiculous to suggest that if the government turned around and started taxing Aussie shares an additional 30% that everyone should just ‘stay the course’ and not look at alternative methods.
Everyone has their tipping point when enough is enough. And even though the refund remains, for now, I’m looking at protecting against this potential rule change without drastically upheaving everything.
I think strategy 2.5 is a nice balance between everything that’s important to us in an investing strategy.
Conclusion
I’m still learning as I go.
Judging by some of the emails I get, you’d think that I’m some sort of investing guru which couldn’t be further from the truth.
This years election taught me a valuable lesson that I hadn’t considered as much as I should have before.
The legislation risks for investing in general but particularly the very real possibility of no more franking credit refunds one day.
For us and I assume a lot of people chasing FIRE, franking credits without the refund in retirement won’t be worth the concentration risk or the ~4% yield (still pretty good) when you consider that you’re losing up to 30% of your return due to the additional tax that you otherwise wouldn’t be paying had you invested in something other than franked dividends.
Although not completely, Strategy 2.5 mitigates this potential change by re-introducing international shares back in the portfolio which reduces our reliance on Aussie dividends. It also makes other small changes as mentioned above.
When we made the shift away from property to focus on shares, the number 1 goal was to invest in great companies. None of this other stuff is as important as that. Index investing means we don’t have to research which companies are going to be good or bad. It filters that stuff out for us.
Because we don’t have to worry about choosing the good companies from the bad, we can instead spend our time to tweak our strategies so they align with what’s most important to us.
Mrs FB and I optimise the portfolio to improve these areas:
Mindset/sleep at night factor
Simplicity
Tax minimisation
Mitigating legislation risk (new)
Strategy 2.5 improves on all of these areas whilst not uprooting our investing fundamentals which is what any good tweak should do!
That’s it for now.
Let me know what you think in the comment section below 🤙
Such an incredibly busy month June turned out to be and the next few months coming up are gonna be even busier!
This update is two weeks late because I’ve honestly just not had the time to sit down and put it together. I’ve been juggling work, traveling, tax admin work for five different things (personal return, trust return, Aussie Firebug return for the money made through this site and my UK company returns which also includes a personal one), organizing our big Euro summer trip which starts next week and enjoying our new city 😅
So if you’ve sent me an email during the last 3-6 months please known I’m not ignoring you and that I’ll eventually get around to replying to you when I get a minute!
With that said…
A few biggish things happened in June.
I officially quit my job back in Australia!
I didn’t quit back in January when I left on this trip because I always felt like it was unnecessary. I had long service leave and I knew there was a very good chance of them giving me 12 months off with some unpaid leave.
I was hedging my bets against the very real possibility that we wouldn’t like it over here and wanted to move back. Some of our friends went through a very similar experience where they moved to London and it wasn’t what they imagined so they came home.
But the funny thing is that having that job to come home to was a bit of a mental blocker for me and our future plans. We’re well on track that working for money will become optional within a few years and as good as the job was, it’s not where my passions lie and I’d like to try something new when I get back to Australia.
Even just a wondering thought about the possibilities for next year was often met with the anxiety of knowing I’d have to return to my job.
But the beauty of FIRE is that it gives you options and you no longer have to make every decision based around money. Money works for you, not that other way around!
I thought long and hard about it and concluded that ultimately the job was holding me back from doing exactly what I wanted to do.
Resigning from a perfectly good job in my home town that may not come up for grabs again for a decade (low job opportunities for my line of work in the country) sounds insane to most people (including my mum).
But I knew I’d made the right decision straight after calling my boss as I was hit with the ultimate wave of freedom, excitement, and nervousness.
It’s extremely liberating not knowing what the future holds. Playing it safe can be boring sometimes and we’ve been playing it safe for as long as I can remember. Time to get adventurous for a while 😎
So these monthly updates have now turned into a part-time travel blog of late haha.
And keeping up with that tradition, we traveled to the land of the Scots in June. Here are some of the places we visited.
Yes. That’s Haggis flavored chips. Delightful too I might add
Arthur’s Seat
Edinburgh was absolutely amazing with breathtaking scenery and the city is stunning! I don’t have the photos to do it justice but it just feels so badass walking around it. Very old and has a great grunge feel to it.
I was sort of expecting London to feel how Edinburgh felt. But London to me is a very new modern city, I believe this is partly because of the big fire that burnt down half the city in 1666 so maybe the streets don’t feel so old but Endinborught just had that old school vibe that made it special.
We also hit up Glasgow but I can’t say it was that special especially considering we just came from Edinburgh (the Glasgow locals would kill someone for saying that lol).
It was a short trip but we loved Scotland and will be back!
Net Worth Update
Huge month for the old NW which can mainly be contributed to three big factors.
The first is that I received all my entitlements (basically the rest of my leave that was owed) when I quit my job which turned out to be around $10k.
The second was that the markets had a very good month bringing it around $8k.
And lastly, I received my first full month contracting paycheck 🤑. Would you believe that it took almost 2 months to be paid at my current contract because there was a bit of a process with the payroll system and getting me on it?
The other thing that cannot be overstated was how much expenses I was reimbursed with that paycheck. I’ve been paying for all my work expenses like accommodation at the client site, meals, travel, etc. the entire time which amounted to close £2.5K. So my invoice had my rate PLUS all the stuff which turned it into quite a decent amount of cashola that hit the account.
I currently owe a heap of tax though (which is paid quarterly in the UK I believe) so it’s not as much as it seems… But still, it was a nice bump to hit the account.
It still tripped me out that I didn’t get paid for almost two months and had to pay for everything during that time. I mean, we had the spare cash thankfully, but not everyone could have done that. If you’re thinking about doing contract work make sure you have AT LEAST 6 months of living expenses.
*DISCLAIMER* Various data sources (RP data, Domain.com etc.) are used in combination of what similar surrounding properties were sold for to calculate an estimate. This is an official Commonwealth bank estimate and one which they use to approve loans.
ETFs/LICs
And the Aussie Bull run continues!
I have no idea what the future holds, but I do find it interesting that nearly every single economist/part-time financial guru out there was calling the next recession back in December. I thought it was heading that was for sure as well!
But as we have learned time and time again. No one knows what’s around the corner and I have found it to be extremely relaxing just sticking to our routine of investing once a month and not caring what the markets are doing. I’ve been so busy that I haven’t really had a chance and it’s and it’s something I think less and less about anyways these days.
The federal election has finished and I’m in the middle of a dedicated post about what the outcome means for our journey and to share a few more in-depth thoughts and opinions on how our strategy has changed from not only the result but also, more importantly, the potential changes that were being talked about.
Work has been ramping up lately and I can distinctly remember thinking last Thursday in the office as the team and I were diligently working away at 8:30 pm…
“Damn… I’m definitely not at the council anymore”
😂😂😂
But for real, the timelines for consultants are brutal. We have a deliverable due next week and it’s crazy the hours we’re putting in. It 100% helps that’s I’m getting paid more than double what I was back home but for some of the junior analysts, that’s a tough pill to swallow!
The other thing is that I know this isn’t going to be my life for the next 10-20 years. The projects are really interesting and it’s kinda cool working on different problems each contract.
We hit up Frankfurt in Germany for May to see my cousin who has moved there with his partner. This trip was predominantly to see my cuz who I haven’t caught up with in over 6 years! He’s from Canada and our parents are first cousins so I’m not sure exactly what that makes us (4th cousins?).
He actually came to Australia in 2009 to meet all his Aussie relatives (me included) and we’re around the same age so we had a lot in common. Would you believe that he arrived in Victoria on Black Saturday of all days! I remember meeting him for the first time and having to explain that these bush fires were the worst I’ve ever seen and this was not the norm.
I went to see him and his family in 2013 in Toronto and I made a promise that I’d be back at some point. We have actually decided to spend Christmas this year with that side of the family in Toronto and hopefully, we can have a white Christmas once in our lives. That would be pretty sweet.
There’s something really special about catching up with family you’ve never met before. It was my favourite part of my US/Canada trip back in 2013 and I’m really looking forward to it again at the end of this year.
Here are some shots of Frankfurt.
I can’t remember what this was called but it’s a traditional dish of some sort. There is a whole block of cheese under the pink stuff (I had no idea what I was eating half the time).
And ya just can’t go past some German beer 😋
Germany gets the 👍
The other news from May is that it was my birthday!
I have officially entered my 30’s 👴
You know how you always read about insanely young successful people who are millionaires before they turned 30? I had secretly hoped that I would join this elite group when I was still in high school. I had a lot of ambition and drive and thought I could climb the corporate ladder and be a ‘young gun’ property millionaire before the big three zero.
But priorities change right?
As silly as it sounds, I almost pity senior managers/directors and CEOs now when I once envied what they had and the power they wielded. I look at things completely different these days and instead of envy, I just think about how stressful and time poor these people must be. I couldn’t think of anything worse than running on the corporate treadmill for how long it must have taken them to reach the position they’re in now.
There are exceptions to the rule of course and I’m sure there’s some CEO out there running their own startup or something and loving life. But odds are if you showed me a ‘normal’ week in the life of a CEO I’d imagine it’s not something I’d aspire to.
Mrs. FB still has a really good chance to reach the exclusive millionaire before 30 club though. She turns 28 in December and depending on how these next few years pan out, it’s definitely possible.
Who really cares though, it’s just a number.
I honestly couldn’t be any more happy than where I’m at right now at 30!
It’s really easy to be lost in what you don’t have in a world of Social Media where all these influencers are just uploading all the good stuff and none of the bad, but man… when I sit back and think about the life we’re living I really have nothing to complain about.
I think it’s really important to have goals and it would have been cool to join one of my biggest FIRE inspirations, MMM, and reached 🔥 by 30 but as the old saying goes…
“Shoot for the moon. Even if you miss, you’ll land among the stars.”
And we’re loving the stars right now 😁
Net Worth Update
Not much to say for this month. We’re slightly down after booking some flights for our Summer trip coming up in July.
Super was down a bit with our shares basically staying the same.
*DISCLAIMER* Various data sources (RP data, Domain.com etc.) are used in combination of what similar surrounding properties were sold for to calculate an estimate. This is an official Commonwealth bank estimate and one which they use to approve loans.
ETFs/LICs
Woohoo!
We made $15 bucks this month lol.
After what started out as a really good month has turned mostly red as we finished off May. This was largely due to Australian shares bouncing back from ‘priced in’ changes that were potentially going to happen at the election. I’m only guessing here, but because the other party got in, we seen those prices swing the other way and a lot of Aussie ETFs made some serious gains in May.
So whilst our Aussie shares had a great run, our international took a major hit especially from the states.
Speaking of Aussie shares…
It’s officially been over 1 year since the release of BetaShares A200.
I thought it’d be interesting to see how it went over the last 12 months and compare it to my other Aussie ETF index, Vanguards VAS.
Here were the results
I made a quick dummy portfolio (in Sharesight of course) of $100,000 in each A200 and VAS in May 2018 to see what the differences were like over the 12 months.
What’s interesting to note is the significant difference in capital gains vs dividends between the two. This was fully expected because A200 is a new fund won’t have similar dividends until it reaches a mature size in a few years. If you’re in the accumulation phase, as in you’re not yet retired and are still adding to your snowball., I think the A200 makes for a more efficient investment vs VAS because it has not yet started to generate a lot of dividends. This will change over the next few years though but right now, especially the situation we’re in (earning income in another country), this makes for a far superior tax efficient vehicle vs VAS and all of our other LICs. We’re in the middle of deciding to change our tax residency to the UK but basically if/when we do, it would mean that all dividends are taxed at the higher bracket. The ability to distribute income via the trust helps this situation but I’m aware that most people don’t have that luxury.
I’m actually surprised to see such a difference in returns in just the first year, to be honest. A200 is half the cost of VAS in terms of management fees but the 7 basis points would need a few decades of compounding to really make a difference between the two. The return difference was definitely made up by the top 200 out performing the top 300.
Will this happen in the future? I’ve got no idea.
Nevertheless, without a crystal ball, I’ll always choose the cheaper option.
Mrs. FB and I were well and truly in ‘The Grind’ for roughly the last 4 years back home. We had holidays every year and plenty of social events but the routine of work, gym, nightly wind down (book/Game of Thrones/Youtube) from Mon-Fri was pretty much the same for a very long time.
When you get stuck in ‘The Grind’ it seems like days melt into weeks, weeks dissolve into months and before you know it, a year has passed without you even blinking!
When you’re out of the grind and exploring around through … it feels like you get to see and experience more in a month than you might in a year!
Which is why these monthly updates are so long these days I guess 😁
I have been contracting as a consultant for over a month now and the dynamics of the workplace have been extremely interesting to witness. Without naming names, I have landed a contract with a multinational corporation within the heart of London. I had come across the ‘corporate elite’ back home but it feels like it’s ramped up over here. Where you work and what position you have is very important in some groups. And the cost of living is so high that a lot of people who have relatively high paying jobs can’t afford much. A lot of it has to do with ‘Keeping up with Jones’, where you live, why do you have roommates? Can’t you afford a place yourself, bars you go to etc. etc.
I will say this though, the Brits know how to drink! It has been really fun working a new job and getting to know a new team.
I have been working a few days a week outside of London at the client’s site which has been a bit of a hassle but my employer pays for all transport, food and accommodation which helps. When we’re out at the client’s site, all dinners are paid for on the corporate card. Now I’ve been a public servant for the last 7 years so you could imagine my shock when they started to order alcohol 😱.
I can definitely see the appeal for working these consulting jobs though. It’s almost like a trap. Basically, everything is paid for, the money is great and you get to travel internationally if you want.
But there is a secret tax which is paid without you noticing if you’re not careful. And that is the impact these jobs have on your health and relationships. It’s so incredibly easier to eat bad and drink wine every night because one, you’re not paying for it, and two, it’s what everyone does and you don’t want to be the only one not going out with the group. And the time away from home sucks!
But I tell ya what, if you’re young without a partner/family (or if your partner is willing to relocate), this type of work can be amazing!
I’m going to try to stay in London 5 days a week for my next contract and we’re only here for a short period of time (relatively) so it’s not quite the same… part of me wants to get back to ‘The Grind’ but the new experiences have been cool so far!
Speaking of new experiences. We attending our first Rugby match in April.
Up the Quins
We also made our way down to Brighton for the long weekend and was blessed with amazing 22c weather 😂. But for real, the weather was actually good and my goodness does everyone get up and about for it. Volleyball, beach ping pong, skating down the boulevard, sunbaking, beach bars were absolutely packed!
When the sun is shining, everyone is up for a good time and the vibe was amazing.
Although I had to laugh that they called this a ‘beach’
It’s more of a rock barrier but let’s not spoil their party 😜
We are trying to stick to one country per month and somewhere in the UK too with the other two weeks off just to recharge.
Our first Euro trip was catching the Euro Star to the land of chocolate, waffles and beer… Belgium!
Even though the UK is apart of Europe… it’s not really Euro in most peoples eyes. I definitely noticed a more European vibe when we arrived in Belgium.
Sir Firebug
The options
The best waffle I’ve ever had!
Belgium beer 🙂
The cobblestone streets are just incredible. Also, I know there’s plenty of them but my God the elaborateness of the churches and the town centre is out of control.
Just staring at the detail of the craftsmanship on these buildings is mind-blowing.
This one must have had over 1,000 individually crafted statues that were nearly the size of an adult (seriously, click on it and zoom in). Can you imagine how much work went into those statues… and there’s over a 1,000 😱
There will never be buildings built like this again because most of today’s buildings are built for profit or are built with taxpayers dollars. Everything about these structures is over the top and not efficient but gee whizz they look cool.
The waffles, beer and chocolate lived up to the high standard I was expecting so no complaints there!
9/10 for would recommend!
Net Worth Update
It wasn’t much but we keep progressing with the net worth in April moving the needle by about $4K in the right direction. The big change, however, is the weightings of our overall net worth have changed significantly.
I refinanced (again) to a new lender (Macquarie) who has given us a really good rate of 3.90% for both the investment loans with an offset. But unfortunately, they wanted a lower LVR to complete the deal and so I had to throw in about $30K extra to add to the loans. I really didn’t want to have to do this but the rate was really good and I was looking at finishing things up with CBA anyway.
They also required the loan to be P&I, not IO. So whilst I don’t really want to pay down the IP’s loans, the rate difference is past the tipping point and it’s more attractive for us to get the cheaper rate vs staying IO (good job APRA).
As a result, you will notice that the pie chart for our net worth has added $30K to real estate equity and our cash holdings have dropped by the same amount.
It’s what happens when the real estate market is going through a downturn. Even though our properties are in Queensland, the major capitals (Melbourne and Sydney) have taken a hit and the banks are being extra cautious.
We will wait for the market to bounce back whenever the hell that is and then sell the IP’s as per the strategy. They are cash flowing nicely so no stress on that part.
*DISCLAIMER* Various data sources (RP data, Domain.com etc.) are used in combination of what similar surrounding properties were sold for to calculate an estimate. This is an official Commonwealth bank estimate and one which they use to approve loans.
ETFs/LICs
We continue our trend of pouring money into A200 in April with another $18K added.
This is diverting from Strategy 3 where we were originally planning to buy LICs if they were trading at a discount (which they are), but I just keep coming back to regulatory changes (the franking refund being axed) that would severely impact this strategy. I’m a big believer in not speculating potential future changes but I just feel more comfortable buying the vanilla index.
There’s plenty of ways around what’s being proposed but for my sleep at night factor, the A200 just sits better.
This article is not going to go into whether the changes are good or bad, or even a technical breakdown of the franking system and how it works. In fact, the target audience for today’s article are people who understand the franking system and what the changes propose to do.
What I’m going to cover is the strange phenomenon I’m seeing more and more of as we inch closer and closer to the election.
Let me introduce you to ‘The Curious Case of Franking Credits and The FIRE Community’
What’s Being Said
Assuming that you’re up to speed with the debate at hand, I’m going to go over the most common arguments I’m seeing online and give my take.
“Franking was introduced to stop double taxation not to give refunds. Howard–Costello changed it in 2000. It was never meant to have refunds”
The reason that the franking system came about in the first place was from an independent review into the Financial System in the 1979 commission by the Fraser Government. This resulted in the ‘The Campbell Report’.
The fundamental principle behind dividend imputation is to ensure that income is taxed once by those obliged to pay it.
If someone does not receive the franking credit when their tax obligation is zero, they have paid additional tax when they should not have. This means that they have paid more tax than others who earn the same amount but through other means of incomes such as rental, PAYG, sole trader business, bonds etc.
For example:
Person A works part-time and grosses $16,000 a year. They are under the tax-free threshold and don’t pay any tax.
Person B operates a small sole trader business that nets $16,000 a year. They have no tax obligation.
Person C is retired and owns part of an Australian company through shares that bring in $16,000 a year. Person C receives a fully franked dividend of $11,200. Person C at this point has effectively paid $4,800 in tax on their $16,000 income. Under the current law, the ATO refund the $4,800 to keep things at an even playing field and treat all income fairly no matter how it was earnt.
If you remove the refund, Person C has to pay $4,800 in taxes when they are only receiving an income of $16,000.
Now back to the point.
The Campell Report did, in fact, have refunds included in it!
Cambell Review – 14.40
“Lower income shareholders would not be disadvantaged compared to present arrangements. Assuming company distribution policy remained unchanged, they could expect to receive the same distributed ‘income’ as at present; moreover, additional after-tax ‘income’ would be forthcoming where the tax withheld at the company level exceeded the tax applicable to the individual.”
AKA a refund!
What actually happened was the Hawke-Keating Government in 1987 implemented the ‘interim’ recommendation of the Campbell Review. This was not the original recommendation and ended in 1999 following the Ralph Review which introduced the refund of excess franking credits under the Howard Government.
The current system we have (which includes franking credit refunds) was designed by an independent body and was implemented with the support of both houses!
“A company and an individual are separate legal entities. A profitable company should always have to pay some tax. The franking credit refund is a loophole where the share payers can potentially pay no tax”
This is very clearly addressed in the Campbell Review.
Cambell Review – 14.6
“The fact that companies and their shareholders are separate legal entities is sometimes held to justify treating them as separate taxation entities as well. The Committee is not disposed to accept this view. It is not convinced that those who own or operate enterprises conducted under limited liability should pay extra tax for that privilege. Ultimately all taxes fall on individuals and, in the words of the Asprey Committee, it is ‘necessary to go behind the veil of separate legal personality which the company enjoys and translate the tax formally imposed on company income into a set of individual tax ‘burdens'”
Pretty straight forward. They might be separate legal entities but all tax eventually falls on individuals!
The company is simply prepaying tax for the shareholders.
If you accept that franking credits can offset an individuals income to $0, you must accept the refund as the shareholder has prepaid more tax than they should have.
If you want to still argue this point. I’m assuming that you’re in favour of completely eliminating imputation credits altogether right…? Tax will be paid twice, once for the company and once for the individual. They are separate after all, right???
“These refunds are costing taxpayers billions each year. That money could be spent on schools, hospitals and roads. Why should the rich get a refund from the taxpayers?”
This is one of the first arguments from people who don’t understand how franking works. To be fair, most of the FIRE community-related arguments on this matter don’t raise this point. Because we fully know that the refund has absolutely nothing to do with other taxpayers and is simply returning money that is rightfully owed to the shareholders from which the money was earnt in the first place through the company!
I’ve yet to see anything that specifically stipulates that the ALP will use any revenue received by these changes on schools/roads/hospitals etc. What most likely will happen is any extra revenue will be added to the Federal government’s coffers where god knows what it will be allocated to.
Let’s take a little look at the fiscal management of the Government, shall we?
Same-sex marriage plebiscite for $80 Million – Clearly a stalling tactic the government used to postpone the inevitable. All good though, getting into power is much more important than using taxpayers dollars wisely.
$4 Billion Victorian desalination plant that’s hardly been used – To add insult to injury, it’s costing the taxpayers $649 million a year to keep this plant open even if it’s not producing water! I personally had a lot of friends work on this project and let me tell you, taking the piss doesn’t even begin to describe how much money was being thrown about on that job site. I’m all for unions fighting for their worker’s rights but c’mon… some of my apprentice mates were clearing $2,500 a week after tax whilst also getting $800 a week travel allowance and living away from home pay plus god knows what other EBA entitlements. Four or so of my mates were renting out a beach house in Inverloch and getting $800 a week each for travel pay… Inverloch to Wonthaggi (site of desal) takes 13 minutes 😐 I’m all for tradies earning as much as they can but when taxpayers dollars are used we need to look at the fiscal management of these projects… some of what was happening was a complete waste of money. This was one desal project, Sydney also have one that cost $1.8 Billion and is currently costing taxpayers $535 million a year to keep it in a state of hibernation. Other states have them too but you get the idea.
So what are we at now… around $20+ billion of wasted taxpayers money without even really trying (I’m allowing for some actual value of these projects to be returned).
Seriously.
These projects were off the top of my head and I did a bit of Googling to fact find. I’m sure there’s plenty of others out there that cost even more.
I have worked for the government for over 7 years and trust me when I tell you, we are not good at managing money/projects.
The late Kerry Packer summed it up best in 1991:
‘I am not evading tax in any way, shape or form. Now, of course, I am minimising my tax, and, if anybody in this country doesn’t minimise their tax, they want their heads read because, as a Government, I can tell you you’re not spending it that well that we should be donating extra.’
“Australia is the only country in the world that have franking credit refunds”
My response to this one has always been… so what?
I actually think it shows a sign of weakness from that side of the argument. I mean, what has that got to do with anything? There’s plenty of things unique to Australia.
Does that make us wrong?
No!
In fact, I’d wager that Australia must be doing a lot of things right as we are consistently ranked as one of the best countries to live in on the planet and our citizens are some of the richest in the world. There’s plenty of factors to attribute to these claims but it just strikes me as odd when people bring this point up as if it’s a bad thing 😕
The Propaganda Machine In Full Swing
The ALP are clearly trying to win votes from the working class by exploiting on their lack of knowledge around a policy they want to change (franking credits this time around) which is how politics have worked since the beginning of time.
They are spinning this debate into:
‘The rich aren’t paying their fair share’
Check out some of their propaganda.
I have no idea who ‘The Australian Institute’ is but they call themselves a ‘think tank’ but are clearly a propaganda machine.
I really enjoy the play on words with the poster insinuating that the taxpayers are somehow ‘spending’ $5B to refund franking credits whereas we know perfectly well that the taxpayers don’t have to pay for anything. The refund is simply returning the tax paid by the shareholder if they paid too much tax that year…like … you know… how it works with every other form of income.
But hey, good job PR team! Nothing is more likely to get votes than if you pretend you’re fighting for the working class and trying to get the rich to pay more tax so you can fund more public services.
So Robin Hood of you. In fact, Robin Hood is almost a perfect analogy because this policy is indeed stealing from the rich but I’m not sure about giving to the poor. As I’ve covered above, the government sorta sucks with money and to quote Mr Packer again, if you think that the money that is retained by this policy (assuming they are able to retain any money, which is highly debatable) will be going to these public services … ‘You’d want your head read‘
There are also other countless articles written by prominent financial figures with large followings that also raises eyebrows about the sincerity or purpose of some of the content that’s published.
The real issue with this whole debate is the tax-free pension with Super. When you start to receive an income from your Super (pension mode) you don’t have to pay a single cent of tax on that income up to $1.6M. This means that because your taxable income is $0 if you receive Aussie dividends with franking credits attached… you guessed it, you will receive a refund!
The unsustainable tax-free pension mode of Super has been debated countless times and I’m not going to go into it.
But make no mistake about it, the ALP are targetting this and the FIRE community is getting caught in the crossfire.
‘But why wouldn’t they just change the law so there’s not a tax-free pension mode’
Because that’s not smart politics!
Does anyone honestly think that this move to axe franking credit refunds wasn’t strategic? Hell, half of the FIRE community doesn’t understand it well, how are we to expect that the general public will get it? The answer is they probably won’t. And I don’t blame them, it’s complicated and confusing. They are sold the dream that the wealthy will have to pay more tax (which will be 100% true) and that money will be used to fund public services (lol).
That’s a great PR campaign if you ask me. And incredibly hard to argue against because it’s so confusing.
Nevertheless.
Everything I’ve covered so far is pretty stock standard on the battlefield of the political juggernaut trying their best to win all of our precious votes.
But there’s something else afoot that I can’t figure out…
Where It’s Getting Weird
To summarise everything I’ve covered so far:
Franking credit refunds make perfect fiscal sense. They were designed by an independent body and implemented with bipartisan support
ALP want more revenue
They won’t directly tax Super pensions because that would be political suicide so instead, they have gone after Franking credit refunds and are exploiting the general publics lack of knowledge about how they work
Here’s my beef.
The entire reason this article exists is that I’m noticing a trend amongst the FIRE community where an uncomfortable number of members are not only in support of this change but are actively campaigning for it to go through.
This change directly affects the FIRE community!
If you are planning on retiring from Aussie dividends, you could be set back years until you reach freedom if this goes through.
Yeah yeah yeah I know you can tweak your investments to get around it and people did just fine without franking and all that but that’s not the point I’m making here.
My point is that a lot of the community is not taking an IDGAF approach. They are trying to argue for the changes that will directly disadvantage them and it’s doing my head in.
Here is what I’m talking about and I want to preface this by acknowledging that every single one of the screenshots below is from a FIRE or financial independence community group (Facebook, Reddit, forums etc). I have not included the whole quote or comment in some of the screenshots FYI.
From /r/fiaustralia
The first comment pretty much sums up view spot on. I’m glad to see it sitting on 10 points (basically an agreement for those who don’t use Reddit). But the response has nearly the same number of upvotes which would indicate that a significant amount of the sub (which was small when this was posted) would disagree.
*(this edited screenshot is not the whole post, just the part I’m highlighting)
Same sub as above. 27 upvotes for a post that clearly states that they won’t benefit financially from these changes but will be voting for them anyway. This was posted on a financial independent specific forum. When another member replies with what I would consider a pretty reasonable response, they get downvoted and are currently sitting on -7 points.
Another forum member glad that these changes will go through. But the community is really getting behind this comment with 22 points.
FFS Maureen
Some ALP propaganda posted on the ‘Mustachians Australia’ group.
19 Likes and 3 Loves.
The first comment is even a clapping hands emoji.
PEOPLE ARE CLAPPING ABOUT THESE CHANGES IN A FIRE GROUP.
Australian Facebook group specifically geared towards reaching financial independence has the ALP propaganda we seen posted above… And wouldn’t believe it… It has 10 Likes and 2 Love reactions. People who are trying to reach FI are loving the fact that they will have to pay more tax… 🤔
Excuse me…
But what the actual fuck is going on?
I fully expect to see these sort of posts and more importantly, responses from any other group in Australia. I think it’s unrealistic for the general public or anyone who these potential changes won’t affect to give two shits. But a good percentage of the FIRE community actively promoting and wanting these changes to go through is… confusing me.
Why Is This Happening?
I don’t really know but I have four theories.
The most likely theory I have is that there is still a decent amount of people in the FIRE community that still don’t quite know how franking works. The refund can be confusing to understand. Combine this with a slightly naive attitude towards how tax dollars are spent and what you have is a genuinely good-hearted person who just wants to spread the wealth around. All I would say to anyone who falls in this category is please consider direct donations to good charitable organisations. I have worked for the government for over 7 years. Trust me when I say that you are 100% better off directly helping out the less fortunate than you are by paying more taxes in hopes that it will be put to good use.
The FIRE community was once a smallish niche group that all had aspirations of escaping a lifetime of working a job they didn’t particularly enjoy. And then the word got out, and what started off as a relatively small group has grown exponentially. I suspect that there are a lot of people out there that are apart of FIRE groups, forums and pages that have no intention of doing what’s necessary in order to FIRE. Maybe the influx of FIRE phonies are delighted with this speed bump in our road to FIRE. This can best be described as Tall poppy syndrome.
Some out there have been drinking the ALP ‘Kool-Aid’ and actually think that franking credit refunds don’t make for a good fiscal policy.
And now it’s time to put your tin foil hats on…Although highly unlikely, is it possible that members of the ALP have infiltrated the FIRE community? I honestly don’t think we’re big enough for any political party to really care about, but maybe there are a few interns out there pushing their parties’ agenda… Stranger things have happened!
Conclusion
Guys, I get it.
You should never base your strategy around tax laws. The most important rule for investing should always be to invest in great assets (whether that’s locally or internationally). Tax strategies should come later down the track and we shouldn’t get too upset when they change or are abolished. This is to be expected at some point after all.
I’m not saying we need to band together to fight this (I’ve got better things to do), but for the love of God, we don’t need to be actively campaigning to disadvantage ourselves.
Maybe I’m missing something here, but I can’t work out why so many of us are happy to pay more tax to a government who has consistently shown its incompetency to spend money wisely.
I’m really interested to know what the community thinks.
Are you picking up what I’m putting down? Or maybe I’m just out of touch and need more faith in the government?
Please let me know what you think down below 👇.
Spark that 🔥
*Credit to these two Cuffelinks articles for most of my research around the history of franking. Article 1, article 2.
