Insights

From a tax and investment perspective, depending on what is appropriate, investors generally consider strategies that defer income to the new financial year, bring forward deductible expenses and minimise capital gains.

Claiming all available tax deductions

Prepaying interest on an investment loan is a popular strategy as it brings forward 12 months’ worth of deductions into the current financial year. It's also a practical strategy when considering your cashflow for the new financial year.

However, remember you are 'locking in' the interest rate for the next 12 months so if interest rates drop during the year you will not receive any reduction in rates. Similarly, if interest rates rise you will not have to pay a higher rate.

If you worked from home due to COVID-19 restrictions at any time during this financial year the ATO has set a flat rate of 80 cents per work hour for running costs (electricity, phone, internet, etc) for each day you are required to work from home up to 30 June 2021. Make sure you keep a diary or timesheet of your hours each day.

If you have incurred expenses that are directly related to earning your income whilst working from home you may prefer to claim these actual expenses as a tax deduction rather than using the flat 80 cent rate. We recommend you speak to your accountant to work out which method best works for you.

Franking credits

Investing in listed shares that pay 100% franked dividends is an effective income strategy used by many investors, particularly those on a low marginal tax rate.

The grossed-up value of franking credits provides a more tax-effective return than normal bank interest rates. Any surplus franking credits are refunded to the investor.

Capital gains and losses

Do you know the capital gains and/or losses position of your investment portfolio? Have you sold investments during this financial year that realised a capital gain, or loss?

Losses can be carried forward (including from previous years); however, capital gains must be declared in year-end returns for the financial year the gain was made. You may be eligible for a discount on any assessable capital gain if you have held the asset for more than 12 months.

Tip: Speak to your adviser to learn how you might be able to utilise contributions to super to help offset capital gains if you are eligible.

Share Purchase Plans and Rights Issues

Have you participated in share purchase plans this year as part of capital-raising strategies offered by listed companies?

If you have purchased additional shares as a result, make sure you retain your records for cost base purposes. You will need this information should you decide to sell the shares in the future.

Private companies and trusts

Don’t get caught under Division 7A rules which refers to the use of company assets by shareholders, their family members and associated entities such as trusts. The ATO will treat withheld trust income as a loan back to the trust.

This will apply where the income has been allocated to beneficiaries, but no actual distribution has been paid. In relation to family trusts make sure distributions for the financial year have been resolved and documented by 30 June.

Tip: Seek specialist tax advice from a registered tax agent if you would like more information on whether the above issues are relevant to you.

Afterpay Limited (ASX:APT) recently shared its 3Q21 business update, unveiling key performance metrics and strategic moves that warrant a closer look.

Impressive Growth

Group sales surged to A$5.2bn, marking an impressive 100% increase on a year-on-year (pcp) basis. However, a sequential dip of 9% was noted from the seasonally robust 2Q21.

Robust Customer and Merchant Growth

Group customers and merchants witnessed substantial growth, soaring by approximately 75% on pcp. Sequentially, both customers and merchants demonstrated notable increases of 11%-15% compared to 2Q21.

Stable Margins and Loss Rates

Management emphasized the stability of group margins, remaining firm despite market fluctuations. Additionally, loss rates continued to stay below historical levels, contributing to Afterpay's resilience.

Strategic Moves and Initiatives

Exploring a US Listing

Recognizing the North America division as the largest contributor to the group, Afterpay is set to explore the possibility of a US listing. This move reflects the company's commitment to harnessing the vast potential of the North American market.

Financial Services Expansion

Afterpay's foray into financial services includes the exploration of APT Money, expected to launch in 1H22, with ongoing testing of deposit and savings accounts. This diversification aligns with Afterpay's growth strategy.

Global Expansion

Afterpay's global footprint expanded with launches in Spain, France, and Italy during 3Q21. Clearpay is on track to launch in Germany in 1H22, underscoring the company's commitment to worldwide market penetration.

Performance Evaluation

Amidst the dynamic landscape, revenue margins in 3Q21 remained robust, consistent with 1H21 levels. Customer transaction frequency surged globally, with the top 10% of customers transacting 33 times a year, showcasing a loyal and engaged customer base.

North America emerged as a powerhouse, reporting a remarkable 167% growth on pcp. This region's sales, coupled with strong merchant growth and in-store momentum, solidify North America's position as the leading contributor to group sales.

Forecast Adjustments

Despite the positive momentum, Afterpay adjusted its FY21F/FY22F EPS forecasts, lowering them by 7%-8% due to slightly revised sales growth assumptions.

Investment View

While Afterpay is acknowledged as a quality business, the current valuation prompted a Hold recommendation. Analysts remain vigilant on valuation grounds, recognizing the dynamic nature of the market.

Afterpay's 3Q21 update reflects a blend of remarkable growth, strategic exploration, and market resilience. The company's agility in adapting to market shifts and its ambitious global expansion plans position it as a notable player in the evolving landscape of the fintech industry.

We all want the very best for our children. We know that a good education not only provides them with qualifications it also provides them with opportunities. Knowing they were given every possible chance to express themselves and learn is probably the best gift you can give a child or grandchild.

We also know that a good education can be expensive.

What education savings choices do you have to ensure your “investment” does not become a financial burden? We list three options below:

• Australian share investment
• Managed funds / Listed investment companies (LICs)
• Investment bonds - Insurance bonds & friendly society bonds

Listed Australian Shares

Investment in Australian shares, which pay fully franked dividends, is one option. Imputation credits currently provide a rebate of 30 cents in the dollar which means you pay less tax on your dividend income.

Shares are one of the highest performing investment sectors over the longer term; that is, five or more years, which is the typical time frame most people are considering for education funding.

It is important to note that children under the age of 18 are by law not able to enter into a contract. Therefore, in most circumstances the account is opened in the adult's name (i.e. one or both parents, or grandparents) as trustee for the child or children.

This is generally known as an "informal trust". From a tax perspective, it is important you seek professional tax advice to determine which type of ownership will provide the most tax-effective outcome for you and your child.

This is because the trustee, or parent/guardian, could be liable for income and capital gains tax liabilities as a result of presumed ownership.

The other drawback with investing in direct holdings is that you can't establish a regular "top up" scheme, or savings plan; unless you invest via a company’s Dividend Reinvestment Plan, if available.

Considering most initial amounts gifted to children are fairly modest it is hard to achieve cost-effective diversification without at least $50,000 to invest.

So placing small amounts in a choice of one or two or three companies leaves you exposed to a higher risk if one or more of these investments fails or underperforms.

Managed funds / Listed investment companies (LICs) / ETFs

To overcome the issue of diversification many advisers suggest using a managed vehicle for children's investments. An unlisted managed fund or a listed investment company (LIC) are popular choices.

The advantage for both of these types of investments is that a manager makes all investment decisions for the investor and handles all administration matters (including detailed taxation statements).

Managed funds

Managed funds are a useful investment tool because you can establish an effective regular savings scheme; starting with a modest sum, typically $1,000, and investing as little as $100 on a regular monthly basis.

This approach also takes advantage of the dollar-cost averaging principle to reduce the market timing risk associated with investing in growth investments such as shares.

From a tax perspective actively managed share funds do tend to deliver realised capital gains on a regular basis although this is probably less critical under the current capital gains tax regime.

For investments held for more than 12 months only 50% of any realised capital gain is added to your taxable income and taxed at your marginal tax rate.

LICs

LICs often show more transparent value than a managed fund. An investor can see this value in the listed share price whereas a managed fund has a more complicated buy and sell "spread" value and a longer redemption period when withdrawing funds.

LIC annual management fees can also be lower than annual managed fund fees. Unfortunately, as with listed shares, LICs do not offer regular savings schemes.

ETFs

Exchange-traded funds, or ETFs, are becoming more popular and like LICs, provide the investor with an opportunity to access various markets with a smaller amount of money. ETFs are investment vehicles that provide exposure to a basket of shares, listed property, commodities or currencies.

They have a slight advantage over LICs in that they can be bought and sold for close to the value of the underlying asset (i.e. index).

This usually results in the ETF price very closely matching the performance of the index.

If the ETF’s underlying assets produces income, investors will receive regular income distributions. ETFs pass on this income untaxed and franking credits are also passed through.

Management fees are quite low compared to managed funds, ranging from as little as 0.15% to 0.8% for some international share offerings.

Investment bonds (Insurance bonds & friendly society bonds)

Investment bonds can be a useful vehicle when saving for education purposes. With many investments such as shares and unit trusts, responsibility for the payment of tax is passed on to the investor.

This means any profits or losses you make must be included in your annual tax return for the year in which you earn them. With investment bonds, earnings are retained within the investment funds and tax is paid by the provider.

Investors do not need to declare any income on their tax return until a withdrawal is made. If the investment is held for 10 years or more, there is no additional tax to pay. If funds are withdrawn before 10 years, the investor will receive a rebate which can be used to offset additional tax payable.

For this reason, investment bonds are a popular choice for education savings. Specific education savings funds are available, modelled via the investment bond structure, although provider choice is limited.

Education savings bonds are particularly designed for education expenses; however, some providers allow flexibility to use the bond for non-education expenses.

They are often cheaper than other alternatives, particularly where investments are restricted to cash or fixed interest. They can also be quite inflexible if your need for these funds change, so any decision to use them should be carefully considered.

Tax is paid by the bond provider at the rate of 30%. However, the actual tax rate can be lower due to franking credits if the fund invests in listed equities.

Tax benefits can be enhanced further for education related expenses as the tax is claimed back by the provider from the ATO and is included in withdrawal proceeds to the student.

Summary of education funding options

The investment option you choose, should best match your investment objectives and risk profile.

Tax may also play an important role when deciding which investment strategy to use. In that regard, it is important you seek qualified tax advice before implementing your strategy.

Contact your Morgans adviser or nearest Morgans office for more information.

In its latest 3Q21 trading update, Zip Co (ASX:Z1P) demonstrated yet another strong quarter, with group revenue, merchants, and customers all experiencing a substantial 10%-20% increase on the previous quarter, showcasing consistent growth trends.

Quadpay's Standout Performance

Quadpay, Zip Co's US-based business, emerged as the star performer, exhibiting impressive sequential growth in revenue, transactions, and customers. With an annualized transaction volume reaching US$2.8bn, Quadpay's resilience stood out in the seasonally weakest quarter.

Credit Quality and Global Expansion

Maintaining sound credit quality, Zip Co's net bad debts reduced from 1.93% to 1.78%, underscoring a healthy global merchant pipeline. The company is making strategic strides in global expansion, with initial merchant signings in the UK, a soft launch in Canada, and strategic investments in BNPL players in South East Asia and Eastern Europe.

Performance Analysis

Dominance in the US Market

In what is typically its weakest quarter, Zip Co's Quadpay reported impressive sequential growth, with substantial increases in revenue (+16%), transactions (+7%), and customers (+19%). Quadpay's merchant base witnessed a remarkable 55% sequential growth.

Solid Results in ANZ

Zip Co's results in the Australia and New Zealand (ANZ) region, while meeting expectations, revealed a 61% year-on-year increase in transaction volume. However, the sequential decline of 8% aligned with seasonal trends.

Forecasts and Outlook

Minor adjustments to sales and profit margin forecasts led to a modest 2%-4% downgrade in Zip Co's FY21F/FY22F earnings per share (EPS).

Investment View

Despite the adjustment, Zip Co continues to execute well, delivering strong growth metrics across the board. The company's ambitions to become a global payments player position it for long-term upside, especially considering its significant discount to Afterpay Ltd (ASX:APT) in the EV-to-sales multiple.

This comprehensive performance overview reinforces Zip Co's resilience and strategic positioning in the dynamic buy now, pay later (BNPL) landscape.

Is it better to invest directly into listed securities or into unlisted managed funds? There is no correct answer as it depends on your personal investment needs and objectives and, importantly, which strategy you are comfortable with.

The benefits of investing in shares

Why are shares so popular?

• Shares have historically outperformed all other assets classes over the long term.
• Shares can provide long-term capital growth.
• Shares can provide a strong and growing income stream.
• Tax benefits might be available via franked dividends.

What can change?

Change has been a major component across investment markets over the last 50-odd years. From the 'Black Monday' crash in 1987, to 18% interest rates in the late 80’s and early 90’s, through to the 1997 Asian crisis, the tech and internet stock boom and bust in 2000, and of course who could forget the GFC in 2008.

More recently, of course, investors are experiencing the impact of Coronavirus. In this respect, COVID-19 has had an impact on life in general, not just investment markets, which makes its disruption extraordinary.

Key points to remember

The market has never failed to rise above its previous high following a major correction. Shares are often considered risky due to potential short-term performance volatility. Over the long term, however, shares have provided consistent investment returns.

Shares are often considered risky due to potential short-term performance volatility. Over the long term however, shares have provided consistent investment returns.

Chart 1: Australian Shares (ASX200) vs Cash (90 day BB) : June 2000 to Feb 2021

Dividend yield & imputation credits

Many dividends paid to shareholders include 'imputation credits'. The imputation credit and resulting tax benefit available from the dividends means the actual return from a stock needs to be "grossed up" to reflect its true value.

A common mistake investors make is to compare bank rates with dividend yields. The cash rate is fully assessable whereas the dividend yield includes the imputation credits, so this tax concession should be taken into account. A 5% dividend yield would provide a similar return to a 7% bank rate.

Other tax issues

In addition to tax benefits arising from franked dividends, investors must also consider capital gains and/or losses and the tax implications as a result of investment decisions.

By investing directly into listed securities, it is the investor who controls the tax consequences of that investment.

That is, investments are bought and sold at the investor's discretion rather than at the discretion of a fund manager. Capital gains and losses can be managed to suit the investor's tax position.

In contrast, fund managers will usually turn over stocks within their investment portfolios (particularly Australian Equity funds) on a regular basis.

Distributions from managed funds include realised and unrealised capital gains or losses as a result of the higher level of trading, and is displayed as 'total return' . The investor has no control over the tax management of these distributions.

The resultant outcome generally means the investor has an unwanted or inconvenient tax consequence at the end of the financial year, which could have an impact on their overall tax position.

This lack of control is an influential factor that pushes investors to favour direct share investing over managed funds.

Access

One of the key advantages of investing in direct shares is the flexibility and liquidity it provides.

The ASX provides an environment for Australian investors to easily purchase or sell shares, or rebalance portfolios, in a timely and cost-effective manner.

The benefits of investing in managed funds

A managed investment combines an individual investor's money with the money of thousands of other investors to form an investment fund. Specialist investment managers then invest the pooled money on investors' behalf.

Benefits of managed funds

• Trained investment specialists: Constantly research and monitor investment markets to determine the best possible investment opportunities.
• Convenient and efficient: Paperwork and administration, regular information on the fund’s performance, annual tax statements and tax guides.
• Diversification: A truly diversified portfolio can be difficult for a direct investor to achieve. Managed investments make diversification easier.

Structure

Most managed funds are structured as unit trusts. When invested into the fund the investor's money buys units in that fund.

The unit price reflects the value of the fund's investments. If the value of the fund's investments rise, the unit price also rises. Conversely, if the value of the fund's investments falls, the unit price also falls.

Access

Managed funds provide access to investments in assets normally not available to individual investors (e.g. international emerging markets). Investing internationally via managed funds can provide greater diversification and investment opportunities compared to investing only in the Australian sharemarket.

The redemption process for managed funds is not as timely as it is with selling listed shares.

Fund managers must value all their assets at the prevailing market price. Depending on the unit price at the time of redemption an investor may be forced to sell a higher number of units to achieve a specific dollar value.

This means the portfolio's overall investment value is affected as there are less units remaining in the fund.

Dollar cost averaging via regular savings and compound growth

Investing in managed funds allows an investor to effectively reduce their investment cost (or capital) by dollar cost averaging.

Dollar cost averaging is simply purchasing investment units at differing prices on a regular basis (usually via a regular savings plan), which then reduces, or averages, the overall cost base of the investment unit.

This can help minimise potential capital gains tax when the units are eventually sold. Re-investing fund distributions into additional units provides a 'compound interest multiplier' effect.

That is, your investment capital benefits from the effects of compound growth as the distributions from your investment earn interest.

Diversification

Diversification of an investment portfolio across all asset classes allows an investor to 'hedge their bets'. By spreading the exposure and investing in different assets an investor can create a portfolio that can minimise to some degree the losses that may occur in one asset sector with gains in another.

The overall effect is that volatility is moderated, and investment returns can smooth out over time.

Investing in managed funds allows the investor to diversify funds over a basket of assets that may otherwise not be accessible. This is a key strength of funds as investors can spread their investments across a range of asset classes rather than having exposure to just one class.

The 'fee' factor

Having a team of specialist investment managers comes at a cost, as does the benefit of having an effective administration and reporting system. Fund managers can charge entry, exit, ongoing management and even performance fees.

Index fund managers traditionally charge lower fees than active fund managers as they have lower portfolio management costs. Retail funds are more expensive than wholesale funds, typically charging between 1-1.50% pa more.

An investor can access the cheaper wholesale funds, however, they must either have a larger initial investment (generally, from $20,000 up to $500,000), or they can invest via a platform (wrap) structure, which then charges its own administration fee.

It is this level of cost and complexity of fees that turn many investors away from investing in managed funds. Additionally, the level of fees charged by a fund manager can have a significant impact on the overall return of the investment, particularly over the long term.

So that like-for-like performance comparisons can reasonably be made between different funds, fund managers are required to display performance data as after-tax returns or 'net of fees'.

In conclusion

Regardless of preference, the winner here is the investor who can choose to invest in a manner that best suits his or her needs.

Whether direct investing is the preference or indirectly via a managed fund, the investor can decide based on their investment goals. A combination of both may be preferable so that the investor can fully appreciate the benefits of each strategy.

Understanding what you are investing in and why is the most important factor of all for any investor, regardless of how.

In the realm of financial analysis, Zip Co (ASX:Z1P) has recently disclosed its 1H21 financial results, stirring interest among investors and analysts. While the reported NPAT loss of approximately A$453 million reflects various one-off items, including a net revaluation of Quadpay (-A$306m) and performance shares issued due to met hurdles (~-A$64m), a deeper dive reveals an underlying loss of ~A$114 million, surpassing previous estimates due to increased expenses (-A$30m).

Strong Momentum in the US Market

Despite these financial intricacies, Zip Co's strategic investments to foster growth have exceeded expectations. Notably, the company is gaining significant traction in the United States market, indicating a promising trajectory.

Key Highlights and Achievements

Positive Developments

• Revenue Growth: Revenue stood at A$160 million (+131%), driven by robust year-over-year (yoy) Total Transaction Value (TTV) growth of 141% to ~A$2.3 billion.
• Effective Risk Management: Net bad debts were well-contained at 1.93%, down from 2.24% in the prior corresponding period (pcp).
• Operational Milestones: Australia remains cash Earnings Before Interest, Taxes, Depreciation, and Amortization (EBTDA) positive, achieving Cash EBTDA breakeven.
• Expansion Initiatives: Zip Co's entry into the UK market, accompanied by collaborations with prominent brands, signals a promising market entry strategy.

Quadpay Performance

• ‍Rapid Growth: Quadpay witnessed rapid growth in 1H21, with TTV reaching A$973 million and customer base expanding to 3.2 million, both reflecting over 200% growth compared to the pcp.‍
• Capital Efficiency: The net transaction margin for Quadpay remains above 2%, contributing to enhanced group capital efficiency and improved revenue yield.

Australian Market Dominance

• ‍Market Leadership: Zip Co's BNPL app emerged as Australia's most downloaded app in December 2020 and January 2021, underscoring its dominance in the domestic market.‍
• Robust Growth Metrics: Key performance metrics such as revenue and customer base witnessed substantial growth, ranging between 40% to 60% for the half-year period.

Areas of Concern

• ‍Increased Marketing Costs: Marketing expenses surged over fourfold (~A$26m compared to A$6m in the pcp), attributed to Quadpay integration, product launches (e.g., Tap and Zip), and heightened brand activities.‍
• Leverage Compression: Zip Co's high growth phase may lead to near-term compression in its cash EBITDA performance, evident in the 1H21 figure of A$0.2 million.

Revised Forecasts and Investment Strategy

Considering the evolving landscape, adjustments to forecasts are imperative. The FY21F/FY22F EPS is revised downwards by over 50% to account for current-year one-offs and increased investment across forecasted periods. Furthermore, a transition from a Discounted Cash Flow (DCF) valuation to a blended DCF/Price-to-Sales (PS) methodology has been made, resulting in a revised price target.

Navigating Towards Global Payments Leadership

Despite the challenges and adjustments, Zip Co maintains a significant PS discount compared to Afterpay (APT), indicating substantial growth potential. As the company continues to execute its strategy towards becoming a global payments leader, investors remain optimistic about its future prospects. With a strong foothold in the Australian market and promising growth trajectories in the US and UK markets, Zip Co stands poised for further expansion and market dominance in the evolving landscape of Buy Now Pay Later (BNPL) services.

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