Insights

In the hustle and bustle of running a small business in Australia, it's easy for owners to get caught up in day-to-day operations and overlook critical aspects of their financial future. One such aspect that often takes a backseat is superannuation contributions and retirement planning. Ignoring these crucial elements can have profound implications for the financial well-being of small business owners in their golden years.

The Pain of Neglecting Superannuation

1. Insufficient Retirement Funds.

 Small business owners frequently invest heavily in their ventures, often at the expense of adequately funding their superannuation. As a result, they risk reaching retirement age with insufficient savings, leaving them financially vulnerable in their golden years.

2. Dependency on Business Success:

Relying solely on the success of your business as your retirement plan is a high-stakes gamble. Economic downturns, industry changes, or unforeseen circumstances can impact your business, potentially threatening your retirement funds.

3. Limited Investment Diversification:

Neglecting superannuation means missing out on the opportunity to diversify your investments. A well-managed superannuation fund allows for a broader range of investment options, reducing risk and increasing the potential for long-term growth.

The Tax Benefits of Superannuation

1. Concessional Tax Contributions:

One of the key advantages of making superannuation contributions is the concessional tax treatment. By contributing to your super, you can potentially reduce your taxable income, allowing you to keep more of your hard-earned money.

2. Tax-Free Retirement Income:

Upon reaching retirement age, the earnings from your superannuation fund become tax-free. This tax benefit can significantly boost your retirement income, providing you with a more comfortable and financially secure future.

3. Capital Gains Tax Exemptions:

Superannuation funds enjoy certain exemptions from capital gains tax, providing small business owners with an opportunity to optimise their investment returns while minimising tax liabilities, particularly when selling or restructuring a business.

Tips for Proactive Retirement Planning

1. Regularly Review and Adjust Contributions:

Stay proactive by regularly reviewing and adjusting your superannuation contributions based on your business performance and financial goals. A small, consistent effort can make a significant impact over the long term.

2. Seek Professional Advice:

Consult with financial advisors or tax professionals to ensure you're making the most of available tax benefits and optimising your retirement strategy. Their expertise can help you navigate the complex landscape of superannuation regulations and investment options.

3. Diversify Investments:

Embrace the opportunity to diversify your investments through your superannuation fund. This not only mitigates risk but also enhances the potential for steady, long-term growth.

As a small business owner in Australia, safeguarding your financial future requires a holistic approach that includes proactive superannuation contributions and retirement planning. By addressing these critical aspects now, you not only mitigate potential pain points in the future but also unlock valuable tax benefits that can significantly impact your overall financial well-being. Take the time to prioritise your superannuation contributions and embrace the peace of mind that comes with a well-prepared retirement plan. Your future self will thank you.

If you would like to discuss your superannuation and overall financial strategy please contact Simon at [email protected] or via (02) 4325 0884.

Simon Tarrant (AR: 001270872) is a Private Client Adviser at Morgans Financial Limited (AFSL 235410 / ABN 49 010 669 726). Simon is passionate about creating quality financial strategies that are tailored and customised to a clients’ lifestyle, financial goals and risk profile.

Reviewing our coverage of residential developers, real estate credit providers and building materials businesses, the consistent theme is that Australia is on the cusp of a significant building boom, with record immigration levels and population growth exacerbating an already chronic housing undersupply issue. This month we add several names with leverage to this theme.

Additions: This month we add Maas Group (MGH), Qualitas (QAL), Cedar Woods Properties (CWP) and Coles Group (COL).

Removals: This month we remove Helloworld (HLO) and Pilbara Minerals (PLS).

May best ideas

Maas Group (MGH)

Small cap | Industrials sector

Although the residential division remains impacted by an uncertain interest rate environment, the investment thesis for MGH remains mostly unchanged, in that ‘infrastructure spend in the regions drives job creation and residential housing demand’. MGH’s vertically integrated model allows the business to capture margin through the whole supply chain and control costs, where possible.

Qualitas (QAL)

Small cap | Real estate sector

Industry fundamentals and operational excellence sees continued growth in 1H24, with FUM growth of 41% (yoy) and Fee Earning FUM increasing 25% (yoy), leaving ~$2.1bn of dry powder to underpin future earnings growth in a sector that is experiencing increased demand, all while banks continue to retreat from the space.

Cedar Woods Properties (CWP)

Small cap | Real estate sector

CWP is a volume business and the demand for lots looks to be improving, with margins to invariably follow. CWP's exposure to lower priced stock in higher growth markets sees further potential to drive earnings. On this basis, we see every reason for CWP to trade at NTA and potentially at a premium, were the housing cycle to gain steam through FY25/26.

Coles Group (COL)

Large cap | Consumer staples sector

In our view, the ongoing scrutiny on the supermarkets has affected short term sentiment in the sector, which we believe creates a good buying opportunity in COL. While Liquor sales remain soft, we expect the core Supermarkets division (~92% of earnings) to continue to be supported by further improvement in product availability, reduction in total loss, greater in-home consumption due to cost-of-living pressures, and population growth.

Morgans clients can download our full list of Best Ideas, including our large, mid and small-cap key stock picks.

Assessing the Australian Banking Landscape

The major domestic banks are a core holding in the portfolios of many Australian investors. All four of them have outperformed the broader market since the start of 2024.

Our banks analyst Nathan Lead recently had a close look at the valuations of the banks to see if their recent share price strength could be justified by fundamentals. His conclusion was that it could not, particularly given an outlook for flat if not declining earnings (at least in the short term) driven by weaker net interest margins and higher costs. In his view, all four of the major Australian banks (and Bank of Queensland) are now trading above their intrinsic value, with CommBank and Bank of Queensland looking especially stretched. Dividend yields, so often an argument for investing in banks, are relatively low compared to history, as well as to their own term deposit rates and hybrid capital yields.

We think now is a good time to consider trimming some positions in the banks. Nathan does not have an ADD rating on any of the major banks, rating all of them HOLD except for Commonwealth Bank (REDUCE). With Bank of Queensland also rated REDUCE, the only bank Nathan sees as offering value at current levels is the smaller and arguably higher-risk Judo Capital (ADD).

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Looking at the major banks in turn

ANZ (HOLD)

ANZ's Australian loan growth has outperformed its peers over the past 6 months. It is awaiting final approvals to complete the acquisition of Suncorp Bank. Our forecasts are above consensus for this year and next, but this may be because other analysts have not properly factored in the acquisition.

Commonwealth (REDUCE)

Trading at 2.7x book, it is the elevated valuation of CBA that keeps us on a REDUCE rating. It has been trying to protect margins during a period of intense home loan competition, which has resulted in its loan book growing less than others. CBA is the highest quality bank for our money, but we just think it's overpriced.

NAB (HOLD)

We have higher forecasts than the street because we think net interest income growth will be higher and loan losses lower than market expectations. We do expect cash earnings per share to decline this year, though, as costs increase.

Westpac (HOLD)

Westpac has been growing its Australian loan book at a similar rate to that of NAB (0.9x system). The shares have done well, which we believe stretches the valuation enough to make it hard to see further share price upside.

If you agree that the time is right to trim some of your positions in banks, you might want to think about alternative equities with broad exposure to the Australian economy and decent dividend yields. Within the insurance sector, consider QBE. Or within Diversified Financials, our analysts prefer GQG and WH Soul Pattinson.

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Morgans clients receive exclusive insights such as access to the latest stock and sector coverage featured in the Month Ahead. Contact us today to begin your journey with Morgans.

We all know that the world is changing rapidly, and this has seen a flow-on impact on how society thinks about charitable giving. Social media, technological change and our day-to-day cost of living means that Not-for-Profits need to think differently to ensure they remain relevant to this new socially conscious generation and how Not-for-Profits invest their funds to continue to benefit their ongoing mission and values.

According to the 2020 Australian Communities Report, Australian givers are looking for a more personalised experience and to build relationships with organisations that they donate to or partner with. This may mean being practically involved in the organisation (volunteering) or even as simple as understanding the impact that their donation makes.

The 2019 Community Trends Report shows that Australians seek transparency and impact from charitable organisations. The key issue that Australians want transparency over is administration costs with seven in ten Australian givers rating this as an extremely important charity essential. Most believe that charity administration costs should comprise 20% or less of the organisation’s total revenue. For those younger Australian givers, having a website is also seen as an important part of the engagement and communication process when dealing with a charity.

The report also highlighted how much the cost of living is impacting on Australians’ ability to donate to charities. More than half of Australian givers agree that the cost of living and changes to housing prices have significantly or somewhat decreased their ability to give to charities.

Some key takeaways from these reports that NFPs should consider:

• Focus on local causes as Australians prefer to support charitable organisations with a local/national focus

• Consider how your charity can highlight a specific issue that people can directly donate to, rather than just raising awareness generally of an issue

• Ensure you can provide givers with a detailed breakdown of where donations are allocated

• Consider how you currently report on the impact donations are having on your charity’s goals and mission, can you improve or change the way you report?

• Simplify your organisation’s mission and ask “will this help achieve our purpose?”

• Where possible, invest in developing effective leaders and communicate leadership wins of the organisation to donors

Investment Watch is a quarterly publication produced by Morgans that delves into key insights for equity and economic strategy. This latest publication will cover;

• Asset allocation – Migrating toward a risk-on strategy
• Economic strategy – The view from the FED
• Equity strategy – Preferencing cyclicals and small-caps
• Updated Morgans Best Ideas
• … and much more

Morgans clients receive exclusive insights such as access to our latest Investment Watch publication. Contact us today to begin your journey with Morgans.

Preview

In recent months, debate has shifted away from ‘recession risks’ towards expectations for a ‘soft landing’ or even the possibility of a ‘no landing’ scenario for the US economy. Inflation has remained on a mild downward trend, there is better visibility on the US rate cutting cycle and China’s increased stimulus is reducing downside risks both domestically and globally.

These are all ingredients supporting the market’s migration toward a risk-on footing. We saw this in the February reporting season via a broad rotation from expensive defensives toward more economically leveraged cyclical industrials and small-caps. We discuss opportunities to put cash to work in global equities, real assets, and fixed income. In Australian equities we favour the healthcare, financials, retail, travel, resources and energy sectors, and we also call out several small-caps via our Best Ideas report.

Shares represent your part ownership (or share) in a business.

Companies can raise money to finance their business by 'going public'. Going public means being listed on a stock exchange and issuing shares to investors.

By paying for the shares, each investor buys part ownership of the company's business and becomes a shareholder in the company.

The money that a company raises in this way is called equity capital. Unlike debt capital which is borrowed money, equity capital does not need to be repaid as it represents continuous ownership of the company.

In return for investing in the company, shareholders can receive dividends and other benefits. A dividend is the distribution of a company's net profit to shareholders.

Shares that have been issued to investors by a listed company can be sold to other investors on the sharemarket. You make a profit when you sell your shares for more than you paid for them.

Buying and selling shares

Your adviser can buy and sell existing shares on your instruction on any business day on one of the recognised Australian securities exchanges (ASX or Cboe).

Orders to buy and sell shares are entered into a computerised trading system by your broking firm (e.g. Morgans). Buy and sell orders are matched by price in the order they were entered into the system.

That way, every order is processed by price and on a first in, first served basis. Larger orders do not have any priority. A trade occurs whenever a buy order is matched with a sell order.

Trades are settled on the second business day after the trade takes place. This means ownership of the shares and related payments between the buyer's broker and the seller's broker are transferred on that day.

All Australian listed shares are registered electronically on either the Clearing House Electronic Sub-register System (CHESS) operated by a subsidiary of the ASX Group, on behalf of listed companies, or on the companies' own sub-registers.

New shares

Alternatively, you can buy new shares that are issued by companies from time to time by applying to participate in a float or initial public offering (IPO). Shares you buy through an IPO are registered as Issuer Sponsored Holdings. The price of shares issued in a float is generally specified in the prospectus.

If you wish to buy shares in the float, you should first review the prospectus then fill out the attached application form specifying the number of shares you wish to buy and lodge it with your adviser before the application deadline.

Once new shares are issued and listed on a recognised Australian securities exchange, they may trade at a market price substantially different from the issue price (either higher or lower). This is due to supply and demand for the shares in the company.

Share performance

Sharemarket indices represent the overall performance of companies listed on a stock exchange. Investors can use these indices to track how an investment is performing by watching its share price.

The key sharemarket indices in Australia are the Standard & Poor's (S&P)/Australian Securities Exchange (ASX) indices.

These include the All Ordinaries Index (All Ords), which is a market capitalisation index comprising the 500 largest companies listed on the Australian Stock Exchange, and segments of the ASX, called:

• S&P/ASX20 – Top 20 stocks
• S&P/ASX50 – Top 50 stocks
• S&P/ASX100 – Top 100 stocks
• S&P/ASX200 – Top 200 stocks
• S&P/ASX300 – Top 300 stocks

Another way to track your shares' performance is to calculate the dividend yield from your portfolio on an annual or more regular basis. This can be a more reliable measure because share prices rise and fall on a daily basis, whereas dividend income is usually much steadier and often grows over time.

Risk and benefits

Capital growth

As a longterm investment, shares have the potential to provide better returns after tax than any other major investment. However, past performance is no guarantee of future returns.

Although share values have risen over the long-term, this has been punctuated with periods of short-term volatility, where prices can go up or down very quickly. For this reason, it is usually important to adopt a medium to longterm investment view of five years or more.

Dividend income

Another benefit of being a shareholder is dividend income, although dividend yields vary greatly from company to company.

Companies trying to grow their business might provide a low dividend yield (perhaps 2-4%) while other, more established companies might provide a higher dividend yield (potentially between 6-8%).

Tax benefits

Shareholders have to pay Capital Gains Tax on any net capital gains made by selling shares; however, their income tax liability can be offset through dividends they receive with franking credits.

Franking credits pass on the value of any tax that a company has already paid on its profits. A company can pay a fully franked dividend if it has paid full corporate tax on the profits distributed as dividends. A partly franked dividend would be paid if the balance of the franking account was not sufficient to pay a fully franked dividend. An unfranked dividend is declared where there is nothing in the franking account.

A company will advise shareholders of the status of the dividend at the time of payment. If you receive franked dividends, you must declare both the cash amount and any franking credits as assessable income in your tax return. Then you can apply the franking credit amount to reduce your income tax liability.

Risks

Share prices of any company, even a blue chip, are always subject to change. Some investors fall into the trap of putting all their money into one asset class – usually at its peak, and then watch as another asset class takes off without them. It is important to have a number of different shares in your portfolio to reduce the risk inherent in share investing.