MASTERCLASS Investment – What is Return on Assets (ROA) – what it means and how to calculate

MASTERCLASS Investment – What is Return on Assets (ROA) – what it means and how to calculate

Investment – What is Return on Assets (ROA) – what it means and how to calculate

Return on Assets (ROA), is a ratio (which means one figure divided by another) measuring the profitability (return) as a percentage of the operating assets – it means we are comparing profit to assets. ROA is an indication of a firm’s efficiency to allocate and manage its resources and return a profit, but unlike Return on Equity, ROA ignores the firm’s liabilities. It is also called Return on Total Investment (ROTI).

The formula for how to calculate ROA is:

ROA = Profit (Net Operating income) ÷ Total (Operating) Assets.

ROA is displayed as a percentage. Sometimes this is referred to as “return on investment”. Sometimes interest expenses are added back into net income when calculating because they’d like to use operating returns (operating profit) before cost of borrowing is taken into account.

ROA reveals what earnings were generated from invested ASSET capital. ROA for public companies can vary substantially and is very dependent on the industry of the business, so it is best to compare it against a company’s previous ROA numbers or the ROA of a similar company in that industry.

The assets of the company can be expressed as containing both debt and equity. Both of these are types of financing and are used by business managers to fund the operations of the company. The ROA figure gives investors an idea of how effectively the company is converting the money it has to generate into profit/net income return. The higher the ROA is, the better, because the company is earning more money on the assets (investment).

To give an example:

  • One company A has a net income of $0.5 million and total assets of $2.5 million,  hence 0.5/2.5 and its ROA is 20%;
  • Another company B earns the same income amount $0.5 million, but has total assets of $10 million, it has an ROA of 5%.

Comparing these examples in the same industry, company A is better at converting its investment into profit.

One would also look at the ROA of each company over the last 3-4 years to see what the trend is – the aim is for managers to excel at making better profits with little investment. That can indicate a good company that is worth investing our money in.

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.

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Pensions Centrelink – Pension Loans Scheme has changed 1 July 2019

Pensions Centrelink – Pension Loans Scheme has changed 1 July 2019

Centrelink – Pension Loans Scheme has changed 1 July 2019

As of 1 July 2019, the human services websites says you can apply for the Pension Loans Scheme (PLS) even if:

  • You’re getting the maximum rate of pension;
  • You have a payment rate of $0 under both the income and assets tests.

You must still qualify for an eligible pension to access the PLS.

The fortnightly loan amount you’ll be able to get has also changed. It’s increased from 100% to 150% of the maximum fortnightly rate of your eligible pension. In other words, you can get up to 1.5 times the maximum rate of pension each fortnight as a loan.

If you currently get a pension, the combined pension and loan amount can’t exceed 1.5 times the maximum pension rate.

Example

Kim currently gets the Age Pension. She gets the maximum single rate including supplements. This means Kim gets $926.20 a fortnight. Under the rules in place before 1 July, Kim couldn’t get a loan under the PLS. This was because she was already getting 100% of the maximum pension rate.

However, Kim can now apply for a loan of 50% of the maximum pension rate. This means her combined pension and loan amount will be 150% of the maximum pension rate. Her fortnightly rate will increase from $926.20 to $1,389.30.  

Other changes to the Pension Loans Scheme

There are also additional obligations you must comply with. You need to:

  • Have enough insurance covering the real estate used as security for the loan;
  • Not be bankrupt or subject to a personal insolvency agreement.

You’ll also be able to apply for the PLS online with a Centrelink online account through myGov.

Repaying your loan

Repaying your loan hasn’t changed. You must repay your loan under the Pension Loans Scheme to the Commonwealth. We charge 5.25% compound interest per annum. We charge the interest on the balance of the loan each fortnight. Compound interest increases the amount you must repay.

Next steps

Remember, always seek advice from a financial advisor or lawyer before making any decisions about the PLS. This includes if you’re currently in the Pension Loans Scheme and you’d like to increase the loan amount you get. If you decide to do this, contact us on the Older Australians line.

Find out more about the Pension Loans Scheme.

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NEWS – New Audit Information required on SMSF Tax Returns

NEWS – New Audit Information required on SMSF Tax Returns

New Audit Information required on SMSF Tax Returns

New mandatory audit information will be required for the first time from this year. SMSFs completing their annual return will need to include mandatory auditing information, which up until now was only required in limited circumstances.

Hrishikesh Joshi at Self Managed Super website, writes –

Smarter SMSF chief executive Aaron Dunn said SMSFs will now be required to complete both Part A and B qualifications in the SMSF annual return (SAR), instead of only Part B as has been the case in the past.

Dunn described the change as the “biggest shift” in reporting for the 2019 SAR, adding Part A will have focus on the financial audit and require an auditor to form an opinion as to whether the financial statements of an SMSF are a fair presentation of the financial position of a fund for that income year and the results of its operations.

“As a result, the auditor needs to be satisfied through obtaining evidence that supports the assets and liabilities of the fund,” he said in a blog post on the Smarter SMSF website.

“This can include correct ownership of fund assets, ensuring that fund assets are valued to their market value using the valuation guidelines provided by the ATO or according to relevant accounting standards.”

He pointed out Part A of the audit report has become more important since 1 July 2017 as a result of the introduction of the transfer balance cap for retirement phase and a member’s total superannuation balance (TSB), which impacts on a variety of measures such as contributions and how a fund may be able to claim an earnings tax exemption.

In the past, funds have been required to report qualifications to Part A of the audit only where the auditor could not verify the existence of a fund asset without a physical inspection or where the fund invested in assets where the value of recoverability could not be determined without formally valuing the entity or having it audited.

The latest SAR changes also include a new labelOutstanding Limited Recourse Borrowing Arrangement (LRBA) Amount – which has been added to sections F and G of the SAR to report outstanding limited recourse borrowings for each member.

Dunn said there was no point in a fund adding this data to the report as the reasons for its inclusion had not yet passed into law.

“This information was to assist the ATO in calculating a member’s TSB for any new LRBAs that were entered into from 1 July 2018 – effectively adding any outstanding loan balance to determine a member’s TSB,” he added.

The proposed measure, however, lapsed when the Treasury Laws Amendment (2018 Superannuation Measures No 1) Bill 2018 did not pass both houses of parliament before the recent federal election.

“Therefore, at this time the data within label Y has no relevance for the completion of the SMSF annual return,” Dunn said.

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Masterclass – Ultimate Year End Checklist – 12+12 Tips for EOFY End of Financial Year – start now!

Masterclass – Ultimate Year End Checklist – 12+12 Tips for EOFY End of Financial Year – start now!

Ultimate Year End Checklist – 12+12 Tips for EOFY End of Financial Year – start now!

Time is running out – only days left to the End of Financial Year (EOFY).

Here is a recap of our posts last and this month, for SMSF and Personal checklists, with an extra notice about cut off dates (item 1 below) for end of year steps to consider:

Here is an SMSF checklist for end of year steps to consider:

1.     Super Contributions in the SMSF bank accountIf you want to claim super contributions in this tax year, they need to be DEPOSITED in full as cleared funds – act soon if you want to claim super by 30 June!

2.     Contribution Caps

The concessional contribution (tax deductible / employer) caps vary some years for ALL individuals, regardless of age (earlier years were higher). Take care – if you have more than one fund, ALL concessional contributions made to ALL your funds are added together and are counted towards the cap. MORE HERE

3.     Minimum Pension Taken

If there are members in the pension phase, ensure they have received the required minimum pension amount by 30 June. Failure can result in the investment income derived from your assets supporting that pension no longer being exempt from tax and other penalties could apply. MORE HERE

4.     Claim Tax Deductions for Personal Contributions (Non-Concessional)

If you are claiming a tax deduction for your superannuation contributions, make sure you are eligible to claim the tax deduction – seek advice if you’re unsure. An error in over-contributing or claiming a tax deduction for personal superannuation contributions could have excess tax consequences.

5.     Off-Market Transfers

You are still eligible to conduct in specie contributions of shares to your fund. Listed stock held in your personal name can be transferred to your fund as non-concessional or concessional contributions (if eligible) to your SMSF. Consideration should be given to capital gains tax, contribution caps and the off market transfer procedures.

6.     Bring Forward rule

If you are under the age of 65, you can bring forward up to two years’ worth of non-concessional contributions, in one year, representing your non-concessional (after-tax) cap over a three-year period. SEE HERE

7.     Government Co-Contribution

Remember to take advantage of the Government co-contribution by making a non-concessional (after tax) super contribution before the end of the financial year. For every dollar of eligible contributions, the Government contributes 50 cents to your superannuation up to a maximum government co-contribution of $500. See Co-Contribution.

8.     Investment Strategy was followed

Review your investment strategy and ensure all investments have been made in accordance with it, and the SMSF trust deed. Also, make sure your investment strategy has been updated to include consideration of insurances for members.

9.     Valuation of Investments

Ensure the assets in your fund have a current value. If you hold unlisted investments such as property or unit trusts, make sure you have documented a process of valuing the assets. It is best to have an independent valuation where possible. See the ATO’s Valuation guidelines for SMSF’s” for further information. 

10.   Insurance Policies

Since 1 July 2014, new rules come into effect that will prohibit superannuation fund trustees from providing an “insured benefit” in relation to a member unless the insured event is entirely consistent with a superannuation condition of release. This means that Trauma policies and own occupation Total and Permanent Disability (TPD) policies will not be permitted. However, it is important to note these new rules will not apply to policies taken out prior to 1 July 2014.

11.   In-House Assets

If your fund has any investments in in-house assets you must make sure that at all times the market value of these investments is less than 5% of the value of the fund. Do not take this rule lightly as the new SMSF penalty powers will make it easier for the ATO to apply administrative penalties (fines) for smaller misdemeanors ranging from $820 to $10,200 per breach, per trustee!

12.   Estate Planning

Review what will happen should a member prematurely die. Ask yourself how will the fund continue? What death benefit nominations are in place? Are the investments able to be quickly cashed? If the fund has life insurance policies, are they appropriate for the members needs, and are the policies correctly set up in the fund? 

Here is a personal checklist for end of year steps to consider –

1.     Super Fund Contributions cut-off dates some large commercial super funds are requiring contributions by June 20-24th. This is to allow processing in time with this busy end of year period – act fast if you want to claim super by 30 June!

2.     Contribution Caps

The concessional contribution (tax deductible / employer) cap from 1 July 2017 is $25,000 for ALL individuals, regardless of age (earlier years were higher). Take care – if you have more than one fund, ALL concessional contributions made to ALL your funds are added together and counted towards the cap. MORE HERE

3.     Claim Tax Deductions for Personal Contributions (Non-Concessional)

If you are claiming a tax deduction for your superannuation contributions, make sure you are eligible to claim the tax deduction – seek advice if you’re unsure. An error in over-contributing or claiming a tax deduction for personal superannuation contributions could have excess tax consequences.

4.     Minimum Pension taken

If there are members in the pension phase, ensure they have received the required minimum pension amount by 30 June. Failure can result in the investment income derived from your assets supporting that pension no longer being exempt from tax and other penalties could apply. MORE HERE

5.     Claim Tax Deductions for Personal Contributions (also called Non-Concessional)

If you are claiming a tax deduction for your superannuation contributions, make sure you are eligible to claim the tax deduction – seek advice if you’re unsure. An error in over-contributing or claiming a tax deduction for personal superannuation contributions could have excess-tax consequences.

6.     Government Co-Contribution

Remember to take advantage of the Government co-contribution by making a non-concessional (after tax) super contribution before the end of the financial year. For every dollar of eligible contributions, the Government currently contributes 50 cents to your superannuation up to a maximum government co-contribution of $500. It is income-dependent and drops on a sliding scale, so check the latest with the ATO site. See Co-Contribution.

7.     Self-Employed? Pay April-June quarter super early if in good profits

If you have a business or company and you are making good profit, discuss with your advisor or tax agent – it may help to pay the quarterly (or monthly) super BEFORE June 30 to get the full tax deduction to reduce profit.

8.     Boost your partner’s super

If your partner earns under $40,000, you can contribute some of your after-tax (savings) up to $3000 to their super fund. You in return get a $540 tax offset against your tax.

9.     Selling a small business – reduce Capital Gains by contributing some to super

If you are selling your small business (subject to current limits and criteria) seek advice whether there is a chance some of the proceeds could be contributed to your super – it may save some Capital gains tax with the small business capital gain concessions.

Get your FREE 5 Easy Steps to Plan Retirement One-Page planner from the Resources

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What are your thoughts? Start or continue the conversation here!

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Basics about Super – EOFY – End of Financial Year – Personal Checklist!!

Basics about Super – EOFY – End of Financial Year – Personal Checklist!!

Basics about Super – EOFY – End of Financial Year – Personal Checklist!!

Time is running out – as the End of Financial Year (EOFY) approaches, it’s time to use a checklist to have a review and ensure all is in order and all ACTIONs taken by 30 June deadline, as well as collecting the papers and documenting all transactions during the year for good records.

Here is a personal checklist for end of year steps to consider –

1. Super Fund Contributions cut-off datessome large commercial super funds are requiring contributions by June 20-24th. This is to allow processing in time with this busy end of year period – act fast if you want to claim super by 30 June!

2. Contribution Caps

The concessional contribution (tax deductible / employer) cap from 1 July 2017 is $25,000 for ALL individuals, regardless of age (earlier years were higher). Take care – if you have more than one fund, ALL concessional contributions made to ALL your funds are added together and counted towards the cap. MORE HERE

3. Claim Tax Deductions for Personal Contributions (Non-Concessional)

If you are claiming a tax deduction for your superannuation contributions, make sure you are eligible to claim the tax deduction – seek advice if you’re unsure. An error in over-contributing or claiming a tax deduction for personal superannuation contributions could have excess tax consequences.

4. Minimum Pension taken

If there are members in the pension phase, ensure they have received the required minimum pension amount by 30 June. Failure can result in the investment income derived from your assets supporting that pension no longer being exempt from tax and other penalties could apply. MORE HERE

5. Claim Tax Deductions for Personal Contributions (also called Non-Concessional)

If you are claiming a tax deduction for your superannuation contributions, make sure you are eligible to claim the tax deduction – seek advice if you’re unsure. An error in over-contributing or claiming a tax deduction for personal superannuation contributions could have excess-tax consequences.

6. Government Co-Contribution

Remember to take advantage of the Government co-contribution by making a non-concessional (after tax) super contribution before the end of the financial year. For every dollar of eligible contributions, the Government currently contributes 50 cents to your superannuation up to a maximum government co-contribution of $500. It is income-dependent and drops on a sliding scale, so check the latest with the ATO site. See Co-Contribution

7. Self-Employed? Pay April-June quarter super early if in good profits

If you have a business or company and you are making good profit, discuss with your advisor or tax agent – it may help to pay the quarterly (or monthly) super BEFORE June 30 to get the full tax deduction to reduce profit.

8. Boost your partner’s super

If your partner earns under $40,000, you can contribute some of your after-tax (savings) up to $3000 to their super fund. You in return get a $540 tax offset against your tax.

9. Selling a small business – reduce Capital Gains by contributing some to super

If you are selling your small business (subject to current limits and criteria) seek advice whether there is a chance some of the proceeds could be contributed to your super – it may save some Capital gains tax with the small business capital gain concessions.

Get your FREE 5 Easy Steps to Plan Retirement One-Page planner from the Resources

Got questions? If you want experts who have years of helping others, without the hype –

then call for a FREE strategy session today

No obligation call 0407 361 596, Paul

What are your thoughts? Start or continue the conversation here!

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MASTERCLASS Investment – ROC – Why Return on Capital Employed is Important

MASTERCLASS Investment – ROC – Why Return on Capital Employed is Important

Investment – ROC – Why Return on Capital Employed is Important

The formula (or ratio) for Return on Capital (ROC) is similar to Return on Equity (ROE) but ROC takes into account long-term debt. We wrote about this HERE. An investor looking for long term investments should consider quality, as well as value measures/ratios. In order to grow and compound earnings a company must generate capital returns higher than its cost of capital. Of course, the higher the returns over the cost of capital, the better.

Return on capital provides the investor with quality measures that can be employed with many other ratios. A long term investor aims to purchase assets at a discount, but also wants to buy companies that are earning excess returns on capital. This is the only way a company can sustain an above average growth rate.

A firm’s return on capital can be an indicator of the size and strength of its health. If a company is able to generate returns of 15-20% year after year, it has a great method for transforming investor capital into profits.

Return on capital is especially useful where companies invest a large amount of capital – oil and gas firms, computer hardware companies, and even big department stores. As an investor, it’s important to know that if a company uses your money, you’ll get a respectable return on your investment.

Note – if there is NO debt, the result for ROC will be the SAME as Return on Equity (ROE), however, when there is debt, the denominator figure is larger, resulting in a lower ROC ratio figure than the ROE.

ROC is most useful when using it to calculate the returns generated by the CORE business operation itself, not the short-lived results from one-time events. Gains/losses from foreign currency fluctuations and other one-time events contribute to the net income listed on the bottom line, but they’re not results from business operations. Try to think of what your business “does” and only consider income related to those core business operations.

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

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The ATO has updated its valuation guidelines in order to clarify when a reasonable estimate can be used for valuing pension assets when reporting to the ATO

The ATO has updated its valuation guidelines in order to clarify when a reasonable estimate can be used for valuing pension assets when reporting to the ATO.

The ATO has updated its valuation guidelines in order to clarify when a reasonable estimate can be used for valuing pension assets when reporting to the ATO.

SMSF Advisor reports – In an updated version of its valuation guidelines, the ATO has clarified that SMSF professionals and their clients can use a reasonable estimate for determining the value of assets that support a pension when reporting to the ATO. However, there are other situations where a reasonable estimate cannot be relied on.

The ATO reminded professionals and SMSFs that the market value of the assets that support a pension or super income needs to be determined on either the commencement day of a pension or, for ongoing pensions, 1 July of the financial year in which the pension is paid.

“Similar to valuing assets for the purpose of financial reports, the valuation can be undertaken by anyone as long as it is based on objective and supportable data,” it stated.

“Where the nature of the asset indicates that the valuation is likely to be complex, you may also consider the use of a qualified independent valuer.”

The ATO said it is expected that the SMSF trustees know the value of the assets in their fund.

“This does not mean that an external valuation needs to be performed for all assets each year. However, an external valuation of an asset such as real property may be prudent if you expect the valuation is now materially inaccurate or a significant event has occurred since it was last valued,” it said.

The ATO stated that it is acceptable to use a reasonable estimate of the value of the account when a pension is commenced partway through the year.

“It is also accepted that a reasonable estimate value of the account balance can be used when calculating the value of a pension for transfer balance cap purposes and the pension commenced on 1 July, you need to report the event to us by 28 October and a full valuation of the assets supporting the pension is not possible by this date,” it stated.

The ATO noted that it may be difficult to value assets such as private company shares by the date the TBAR is due.

“Although a reasonable estimate of the value of a pension can be used in the circumstances described above, you cannot rely on this reasonable estimate when preparing the SMSF’s financial accounts and calculating the SMSF’s entitlement to exempt current pension income (ECPI),” it warned.

What are your thoughts? Start or continue the conversation here!

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