MASTERCLASS Investment – What is Return on Capital – ROC – What does it mean and how to calculate return on capital?

Investment – What is Return on Capital – ROC – what does it mean and how to calculate return on capital?

Return on Capital (ROC) is similar to Return on Equity, ROE which we covered before, but ROC also includes capital costs as well as Equity. So what is Return on Capital and how do you calculate this rate of return?

Return on capital is the same formula as return on equity ROE, but in addition to the value of ownership in a company (equity), we include the capital employed such as the total value of debts owed by the company in the form of loans and bonds.

The Formula is:
ROC =             Net Income (profit/earnings) EBIT

                      (Shareholders’ Equity + Total Liabilities)

How It Works/Example:

Let’s assume Company ABC generated

1. $5,000,000 in net income last year
2. Shareholders’ equity equaled $20,000,000 last year, and
3. Total debt or total liability $10,000,000,

then we can calculate ROC as:
ROC = $5,000,000/($20,000,000+10,000,000) = 0.17 or 17%
This means that Company ABC generated $0.17 of profit for every $1 of capital.

Why It Matters:

ROC is a measure of profit against capital as well as a measure of “efficiency”, which takes into account debt/borrowings.

If there is NO debt, the result will be the same as return on equity (ROE), however, when there is debt, the denominator (bottom) figure is larger, resulting in a lower ratio figure than the ROE.

Want to learn the core issues of share investing?

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Pensions – Budget April 2019 – Raising the age for the Work Test to apply – and other changes at a glance

Budget April 2019 – Raising the age for the Work Test to apply – and other changes at a glance

Changes to the age for the Work Test was one of the superannuation announcements made by the Government ahead of the release of the 2019 Budget. The Government proposes that, from 1 July 2020, people aged 65 or 66 will be able to make voluntary superannuation contributions – both concessional and non-concessional – without having to meet the ‘Work Test’.

The Work Test restricts older Australians from making voluntary super contributions unless they have had 40 hours of gainful employment in 30 consecutive days.

“This means that Australians aged 65 or 66 years who don’t meet the work test, because they may only work one day a week or volunteer, will now be able to make voluntary contributions to their superannuation,” said Treasurer Josh Frydenberg.

“This will align the Work Test with the eligibility age for the Age Pension, which is scheduled to reach 67 from 1 July 2023.”

Around 55,000 Australians are expected to benefit from this change in 2020/21.

The Coalition had announced a complete repeal of the Work Test in a previous budget, but this was dropped to raise money for other measures. More recently the Government implemented a limited exemption from the Work Test.

“The Morrison Government is taking action to help Australians boost their retirement savings by giving them greater flexibility as they near their retirement years,” said Frydenberg.

Other changes to superannuation in the 2019/20 Budget at a glance:

• Raising the age at which the Work Test applies
• Extending non-concessional contribution bring-forward to ages 65 & 66
• Raising age limit for spouse contributions
• Streamlining ECPI
• SuperStream for rollovers for SMSFs delayed, rollover standard to be expanded
• Delayed start for Protecting Your Super insurance changes
• Extra funding for ATO to chase unpaid super
• Super fund merger tax relief to be made permanent
• Superannuation Consumer Advocate
• Funding for SCT to complete casework
• Choice for ADF Super members leaving forces

To read more, click see Sole Purpose Test

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Basics about Super – Paying Super for Small Business – Small Business Superannuation Clearing House (SBSCH)

Basics about Super – Paying Super for Small Business – Small Business Superannuation Clearing House (SBSCH)

The Australian Tax Office (ATO) has a service called the Small Business Superannuation Clearing House, designed to help small business (with less than 19 employees) meet their super obligations as employers. Here is what the ATO site says –

The Small Business Superannuation Clearing House (SBSCH) is a free service you can use to make Super Guarantee (SG) contributions. Eligible businesses are those with 19 or fewer employees or an annual aggregated turnover of less than $10 million.

Your business can pay your SG contributions as a single electronic payment to the SBSCH. If you make super payments by EFT or BPAY using your credit card account, you may be charged a fee by your financial institution.

The SBSCH will then distribute the payments to each employee’s super fund. Your SG obligations are met as soon as your payment and instructions are accepted by the SBSCH. The SBSCH is SuperStream compliant.

Accessing the SBSCH

How you access the SBSCH depends on your business situation. The clearing house can be accessed via:

• The Business Portal (BP) if you are a business with an ABN and BP account;
• ATO Online Services via myGov if you are a business or sole trader with an ABN or withholding payer number (WPN) but no BP account. Please note you should log in using your business account (ABN), not your personal account (TFN);
• The Tax Agent and BAS Agent Portals if you’re a tax professional.

Next steps:

• Use the SBSCH flowchart to work out which online service and authentication credential fits your business situation or read How to access theSBSCH depending on your situation;
• From our home page banner choose who you want to log in as, and then select the yellow ‘Login’ button.

Features of the SBSCH

The SBSCH allows you to:

• Pay super the SuperStream way – money and data is sent electronically in a standard format;
• Nominate a regular contribution amount for an employee;
• Make all your super contributions in one transaction – the SBSCH distributes super contributions to your employees’ nominated super funds securely;
• Ensure your SG obligations are met as soon as your payment and instructions are accepted by the SBSCH (please refer to the terms and conditions);
• Access your transaction history.

Note: Any employee you have paid super for will remain on your SBSCH account for historical purposes. If you are no longer required to pay super for an employee you should go into the system and add an end date against that employee’s record. This will make them ‘inactive’ in the SBSCH.

See also –

• Using the SBSCH
• Help using the SBSCH

Got questions? If you want experts who have years of helping others, without the hype – then call for a FREE strategy session today and also get your FREE Expert Guide – Self-Managed Super and You – top right hand side above.

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Masterclass SMSF – What does an “In Specie” Transfer or Contribution mean?

SMSF – What does an “In Specie” Transfer or Contribution mean?

An “In Specie” transfer or contribution is a way of moving an asset into a Self-Managed Super Fund by ownership without having to actually sell the asset for cash. “In Specie” is a Latin term meaning “in the actual form”. Transferring an asset in specie means to transfer the ownership of that asset from one person/company/entity to another person/company/entity in its current form/as is, meaning without the need to convert the asset to cash.

Members of a SMSF usually make contributions in cash or employers pay in cash the SG (Super Guarantee) concessional super obligations. Importantly only certain assets listed in the Super Laws can be transferred in specie from a Member who owns the asset, otherwise the transfer is a legal breach.

Assets Allowed for In Specie Transfer

The only assets currently allowed to be transferred to a SMSF from a Member (or an associate of an SMSF Member by blood relation or marriage or entity controlled by a Member) are as follows:

• ASX Listed Securities;
• Widely Held Managed Funds;
• Business or Commercial Property;
• Cash Based investments such as Bonds and Debentures.

Residential Property Note – whilst a SMSF can purchase Residential Property from a person who is not a Member (or an associate/relative of a Member) a SMSF cannot purchase Residential Property from a Member (or an associate/relative of a Member) even if the purchase is at market value, otherwise it is a legal contravention.

How to Transfer Allowable Assets

To transfer ASX Listed Securities from your personal name to the name of the SMSF, an Off Market Transfer Form must be completed and lodged where you list the purchaser of the Shares as your SMSF.  You will not need to specifically state which Member the shares are being allocated to until the year end accounts are prepared.

To transfer Widely Held Managed Funds (such as large commercial managers like AMP, Platinum, Colonial  etc.) from your personal name to the name of the SMSF, an Off Market Transfer Form is completed and lodged with the Fund Manager directly. 

To transfer Commercial Property from your personal name to the name of the SMSF, you will need to execute a Contract of Sale and will need a solicitor to prepare the required documentation including lodging the transfer documents with the relevant State Revenue Office.  You will need to list the Purchaser of the Commercial Property as your SMSF.

Market Value of In Specie Assets

It is important to note that all In Specie Transfers of assets from a Member (or an associate/relative) must be transferred at Market Value.  The Market Value must be clearly detailed in the forms for ASX Listed Securities or Managed Funds or in the event of Commercial Property in the Transfer Documentation. 

How the In Specie transfer is treated in the accounts

When an In Specie Transfer occurs in an SMSF, it can be treated in one of two ways – either as a Contribution or alternatively as an Asset Purchase by the SMSF.

Accounting for an In Specie Transfer as a Contribution (to a member)

If you want the transfer to be treated as a contribution you will need to elect which Member will be allocated the contribution and the type of the contribution to be allocated, namely Non Concessional (no tax deduction claimed) or Concessional (tax deduction claimed, eg employer). Once the election is made, the value of the asset (not the asset itself) will be allocated to the Member when preparing the annual compliance documents for the SMSF.  Remember the Contribution Limits will need to be watched under this option.

Treating In Specie Transfer as an Asset Purchase (to pooled funds)

In this case the value of the asset (not the asset itself) will be allocated on a proportional basis to each Member based on that Member’s existing ownership of the SMSF at the time of the transfer, when preparing the annual compliance documents for the SMSF.

Note – The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. Ask us to refer the appropriate professional you can obtain advice from, no obligation.

Want to know the options and how property works in SMSF? See our FREE slides SMSF & Property Overview

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NEWS – Pension phase to become redundant??

NEWS – Pension phase to become redundant??

A sector strategist has suggested drawing a pension from an SMSF may no longer be necessary if Labor’s change to refundable imputation credits is introduced.

“I Love SMSF” founder Grant Abbott told delegates at his recent strategy session in Sydney SMSF members currently entirely in pension phase with a significant level of franking credit refunds they may be about to lose, should consider abandoning their pension completely.

Abbott said this was particularly the case if the member was unhappy with having to adhere to the minimum pension drawdown payment.

He noted an SMSF trustee he recently spoke to was in this exact predicament – receiving $140,000 in franking credit refunds, having to begrudgingly draw down a minimum pension amount, with the fund having only a pension account.

“I said to him ‘you do realise that you don’t need to be in a pension anymore’. His response was ‘that’s not possible because my accountant said I have to take a pension’,” he said.

“If the Labor changes come through and you’ve got excess franking credits, why would you be in a pension because a pension is forcing you to draw down a certain amount?

“If you’ve got plenty of tax credits to wipe out and you don’t want to bring your children into the fund to utilise those credits, why be in the pension system?

“Everyone is saying this is a disaster, but if it’s going to happen, let’s move out and set up accumulation funds.”

Excert form article by Darin Tyson-Chan at smsmagazine.com.au. Read more Here

Want to learn the core issues of share investing?

See our slides SMSF & Shares Overview to get a quick session where you can learn to easily understand Company Financial Statements, how to find healthy companies, what Tools and Ratios to use, work on examplesand also includes how to get better investment outcomes.

If you have questions, call 0407 361 596

MASTERCLASS Investment – How to avoid companies with low Return on Equity (ROE)

Investment – How to avoid companies with low Return on Equity (ROE)

Each year, in his annual report to shareholders in Berkshire Hathaway, Warren Buffet tells of the type of companies he is looking for, one of which is “businesses earning good returns on equity while employing little or no debt”.

He says companies with LOW Return On Equity (ROE) are best to avoid.

Professor John Price of Teaminvest, tells us to think of ROE as a measure of how well management is using the money (or equity) that they have.

As a shareholder, this is very important – why would you want to align your investment growth with management that only produces a low return on what they have to work with.

Note though, that companies with low ROE are very common on the ASX. For example with a healthy ROE, ABC Learning Centres was listed in 2001. Over the next few years more debt and equity was raised (and used to pay inflated prices for more child care centres in Australia and USA. ROE fell to single digits, but was not the reason the company went into liquidation, however, the ROE showed this was unlikely to be a satisfactory investment!

Want to learn the core issues of share investing?

See our slides SMSF & Shares Overview to get a quick session where you can learn to easily understand Company Financial Statements, how to find healthy companies, what Tools and Ratios to use, work on examples and also includes how to get better investment outcomes.

If you have questions, call 0407 361 596

How to succeed with Transition to Retirement TTR or TRIS – Basics about Super

How to succeed with Transition to Retirement TTR or TRIS – Basics about Super

A TTR (Transition to Retirement) is a method for topping up your income as you approach retirement. It helps you supplement your work income with a super pension, enabling you to work less or part-time.

It is good to see if the strategy is worth it based on your numbers – so talk to your accountant or advisor who is licensed.

We looked at its viability with the new changes that began 2017 in January.

TTR, or also called transition to retirement income stream (TRIS) or income pension (TRIP) is a gradual move to retirement – a way to enable those aged over 55 to reduce their working hours without reducing their income. You can do this by topping up your full or part-time income with a regular ‘income stream’ (pension) from your super savings.

There are many reasons why people continue to work after 55 (minimum preservation age) or 67 (when you are eligible for the Government Age Pension (within certain asset and income tests)), such as the mental stimulation, social interaction or feeling of value to society.

The Australian Government has made it possible for you to keep working while drawing down some of your super benefits. This is called transition to retirement and allows you to supplement your salary and maintain a comfortable lifestyle if you want to reduce work hours. You can also use the policy to save tax and boost your super before you retire, if you continue full-time work. Once you hit preservation age (which is 55 for many people, a designated age when you can withdraw super depending on date of birth – watch for increases in time), you can draw down a pension from your super even if you are still working.

The government site Money Smart has a calculator to tell you what your preservation age is and also when you are eligible to receive the Age Pension.

The income stream assets earning a return will be taxed at 15% in the super fund if over preservation age. Concessional contributions (before tax and employer contributions) will also still pay 15% coming into the fund. The income stream is taxable in the hands of the receiver at their marginal rate (note – you get an offset of 15%, for the tax already paid), but over 60 the TRIS becomes a normal Income Stream and is tax free in your hands.

Once you reach age 60 you may no-longer need a TRIS, if you formally retire (condition of release) and you will receive the income stream tax free.

The main conditions for Transition to Retirement are –

• Must reach preservation age.
• No Lump-sum withdrawal is allowed while in TRIS.
• You must withdraw a minimum depending on age, up to a maximum of 10% in TRIS.
• Not all super funds allow TRIS, but many Self-Managed Super funds do, as long as the Trust Deed allows it.

Benefits –

• Chance to Boost Super up to the contribution limits.
• Pay less tax if salary sacrificing – depending on the numbers and age.
• Ease into retirement – for personal or financial reasons.

Example from Money Smart –

Andy is 55 and this is his preservation age. He earns $100,000 and wants to keep working, and has $220,000 in super. He speaks to an advisor to calculate the benefit of TRIS. He converts most of his super to a TRIS, leaving a small amount in accumulation that his employer can continue to contribute to (or he can start a new accumulation account). The employer is contributing the 9.25% – $9,250 up to June 2014, (9.5% from 1 July 2014).

He salary sacrifices $15,500 so he can maintain his take-home pay and draws an income stream/pension of $12,379. He will save $800 in tax which stays in his super.

Then, once he turns 60 the tax on earnings in the super fund will be zero while in TRIS, he will save over $3,600 in tax yearly. See table HERE.

The potential benefits of a TRIS strategy depend on –

• Age.
• Marginal tax rate.
• Salary Sacrifice amount.

It is important to seek advice and have the calculations prepared to see if the strategy will benefit you – why not call so we can arrange an advisor to sit and discuss you needs?

If you want experts who have years of helping others, without the hype – then call for a FREE strategy session today and see how our Super-Connector Service assists you to  find the right expert to answer your question – it’s FREE also!

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