Frequently Asked Questions
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I have summarised Frequently Asked Questions by investors from posts on social media. The list of the FAQ and my responses are outlined in the fields below. I note that these responses are my personal opinion and should not be considered financial advice.
1. What are the tax implications of being paid dividends vs. selling shares?
Dividends and capital gains on the sale of shares should be treated separately. Dividends are added to your taxable income in the year they are paid to you (as the shareholder). You may receive a tax benefit on the dividends received if the company has paid out fully franked dividends.
Firstly, the tax paid by the company would be passed onto you through franking credits to avoid you being tax twice on the same income. Secondly, capital gains are recorded when you sell/dispose of a parcel of shares. You may need to do a cost base calculation to determine the capital gain or loss on the disposal of these shares. Shares that are held for more than a year are entitled to a 50% CGT discount for individuals. Any capital gain remaining would then be added to your taxable income in the year that they were sold. The capital gain could also be reduced if you had capital losses carried forward from prior years.
2. What online share broker is the best for investing in Exchange Traded Funds?
SelfWealth at $9.50 brokerage per trade is great for lowering your brokerage fees and still trading under your own Holder Identification Number (HIN). Super Hero operates under a custodian model and is the reason why they can offer such low brokerage fees at $5 a trade on shares and no brokerage fee for ETFs. Pearler is a new investment platform that offers free brokerage on a limited range of ETFs. The other option you may consider is the Vanguard Personal Investor account that charges a percentage based on an account fee of about 0.2% per annum on the value of your portfolio up to a max of $600 p.a. If you are wanting more info on comparing online brokers I have analysed this area in greater detail in a separate blog.
3. Is there such as a thing as a good value Exchange Traded Fund?
The simple answer is yes. First research some popular funds on the share market to get a better understanding of different Exchange Traded Fund’s total returns. There are many managed funds that offer their own comparison tools. For example, if you want to invest in a Vanguard product they offer investors a comparison tool that analyses multiple funds. This comparison tool can offer a breakdown of the historical performance and management fees charged by the fund. For instance:
Vanguard ETF’s 3-year performance per annum (as at February 2021)
- VAS’s 7.09% (mgmt fee 0.1%p.a)
- VGS 10.45% (mgmt fee 0.18%p.a)
- VDHG 8.09% (mgmt fee 0.27%).
Note that past performance doesn’t always reflect future performance. I’m not recommending you specifically buy any of these as I’m not a financial advisor. This is purely an example of some ETFs that you can compare using the Vanguard Comparison Tool.
4. Should I invest in 1 ETF 6 times a year or 6 different ETFs once a year using Dollar-Cost Averaging?
That depends on your personal investing strategy. Firstly, both options would allow for using the Dollar Cost Averaging Method. Both strategies are investing your funds periodically throughout the year. Greater consideration is based on what you want to have exposure to and how much risk you are willing to adopt. Do you want to invest in international bonds? Are the shares domiciled in Australia or is it big US companies that you are seeking?
Some Exchange Traded Funds provide very different exposure to investments and other ETF’s a very similar investment option. For example, you wouldn’t invest in BetaShares Australia 200 (A200) ETF and Vanguard Australian Shares Index (VAS) ETF because they track the same index. For diversification consideration to Vanguard MSCI Index International Shares (VGS) ETF could offer exposure to international shares as this fund is invested in some of the world’s largest companies. I’m not a financial advisor and therefore not suggesting you buy these ETF’s I have just used them as an example. Investing in shares and ETFs ideas to boost your passive income and streamline your path to financial independence.
5. What is the advantages/disadvantages of buying through the Vanguard Personal Investor account vs setting up a portfolio through say an online broker:
Vanguard Personal Investor account has a $500 minimum investment amount. No brokerage fees charged on Vanguard ETFs acquired through the Vanguard Personal Account and other investments brokerage is charged at the greater of $19.95 per trade or 0.15%. Vanguard personal account charges an annual account fee being 0.2% per annum of your portfolio value up to a maximum of $600 per annum. Be wary that managed funds and EFT’s also have a management fee that varies based on the product selected. For further information, I have written a blog comparing the pros and cons for the other online brokers here.
6. I am keen to start investing in shares outside super, but we have no idea where to start. We would just invest an extra $500 or so every month, does anyone have recommendations?
First, you may want to consider whether investing in shares vs property will best suit your investing strategy. If you want to invest in the share market but are unsure where to start, investing in Exchange Traded Funds (ETF’s) may be a good option to consider. The reason being that they are diversified, low cost, and lower risk than if you were to invest all your funds into one individual share in the share market. The next question you would naturally ask is which EFT should I invest in, there are so many! That depends on your risk preference, what type of market you would like to get exposure to (Australia, US, World Index).
As an example, A200 or VAS would allow you to invest in the Australian Index whereas NDQ and VGS would look more broadly at investing in overseas indexes. If you are risk-averse you may consider apportioning a part of the ETF to bonds as opposed to purely shares. This could help to balance the volatility of the ETF however may not deliver the same returns.
7. What would be my best choice to lower capital gains tax for a long-term investment. I’m currently looking at an ETF long-term for 30 years and adding to it monthly. Is there something I should know tax-wise that will ensure I’m doing it the “smart” way?
If you want to know how to avoid a large capital gains tax bill upon the disposal of the ETFs in the future there are some points you should consider:
1) Your taxable income in the year you choose to sell the ETF’s. Have you considered spreading the sale of the ETFs across multiple financial years thus lower the overall capital gain that would be added to your taxable income in a single year (potentially pushing you into a higher tax bracket)?
2) Utilise any carried-forward capital losses alternatively you could sell some ETFs that are in a loss position to offset the capital gains.
3) Structure your investments in a trust to stream capital gains to beneficiaries of a trust (an accountant/financial advisor would be best to assist with this if that is a path you were considering). This is not financial advice merely some examples of tax planning for the future.
8. What are some pros and cons of using credit cards for daily bills? I have never owned a credit card and was planning to get one. I’d like to know what the advantages/disadvantages are acquiring a credit card.
Owning a credit card can have some nice perks including the ability to earn yourself a cheap holiday. However, ensure you have considered the following pros and cons before rushing out to get yourself a new credit card:
The pros to holding a credit card are:
1) You can delay repayments on goods and services acquired through the credit card.
2) Low or no interest if paid off in full by the terms specified by the credit card.
3) Reward Program Points with Airlines or other programs to be traded for rewards discounted flights.
4) Large sign-on bonuses to join with a credit card meeting their minimum spend requirements.
Cons to holding a credit card are:
1) Can incur large interest penalties if not making repayments on time.
2) Some cards have a high annual card fee outweighing the benefits received.
3) Temptation to spend money that you cannot repay immediately causing cash flow issues and financial stress.
4) Can negatively impact short-term credit score if applying for a home loan if flipping multiple credit cards creating credit inquiries.
9. If you had extra cash flow, would you rather contribute to super or invest in shares?
That is a good question and one that requires a look at your individual circumstances. Whether to invest in or outside of super depends on your need to use the funds in the short term. You may require funds for a mortgage, school fees, or credit card repayments. Therefore, it may better suit having a liquid option to access the funds quickly. This would also act as a financial buffer in uncertain times. If unforeseen circumstances arose and you needed to access the funds you could sell the shares. However, if you decided to contribute the funds into super you would not be able to access your super until retirement. I have also written a blog detailing the pros and cons of investing in the share market.
10. Property Investors: What are you using to track your property?
Income and expenses I would use a summary of income and expenses similar to the following ATO Rental Schedule on page 35. For the depreciation, you can use services such as DEPPRO Report or BMT Depreciation. These reports will track the depreciation of plant and equipment as well as capital allowances on the property. Capital Gains is a calculation that is done upon the sale of the property. However, you could get a valuation done for an estimate of the value of the property and work out the estimated capital gain/loss from there. For information on comparing shares vs property, I have included the article here.
How do I budget money on a low income?
The easiest way would be to use an excel sheet (or app such as pocketbook) and categorise your spending into different income and expenses:
- Create rows for the different income (salary) and expenses Water, Electricity, Gas, telephone, internet, Rent, Groceries, Entertainment, Travel and Holiday.
- Once you have created each category estimate the annual cost of each expense.
- You could also show this as a month-to-month expense by dividing the annual cost by 12 in the column next to the annual cost.
- Now you know your estimated expenditure you can compare this to actual expenses by tallying a month from your bank statement.
- This will show you the difference between estimated vs actual spending to see if your estimates are accurate.
- Now you have a starting point to identify where your money is being spent and what expenses you can reduce to improve your cash flow and saving for the future.
If you already have some money saved and want to create a passive income stream. Have a read of some ideas to boost your income.
