What are “returns”?

What are “returns”?

What are “returns”?

 You’ve heard people brag about the great “returns” they may be earning, but there is more than meets the eye when it comes to talking about returns.

Just as the word suggests, returns are what comes back to you from your investments or savings.

So if you’ve put money in the bank, your returns will include the interest you’ve earned over and above the money you invested.

Total returns

If you have successfully invested in property or shares, you will get back two types of returns, which together make up your total return.

First, there’s the capital growth. That is, the increase in value of the asset over time. For a property, it will be the difference between the price you can get for your property in the market at present, less the price you originally paid for it, your real estate agent’s commission, stamp duties and any large renovation costs.

For shares, it will be the value you can sell your shares for on the stock exchange, less your original purchase price.

Second is the income you generate from your investments, less expenses.

For property, that income may include the rent received, less any expenses such as mortgage payments, rental agent’s commissions and any small repairs you’ve made.

For shares, it includes the dividends the listed company pays out less brokerage costs. Dividends depend on the earnings of the company and the proportion of those earnings the company decides to distribute to its shareholders.

But that’s not the end of the story.

The ATO awaits

As we know, nothing is certain in life, but death and taxes, and the Australian Taxation Office (ATO) certainly expects to receive a slice from your returns in two ways.

Income

Firstly, depending on your marginal tax rate, you could pay tax on your investment income, including on any interest earned, rent, dividends from your shares and distributions from managed investment funds. Superpensions and trusts also have different tax rates.

Remember, some dividends have an imputation or franking credit attached to them. This represents the amount of tax the company has already paid. If your top tax rate is less than the company’s tax rate, the ATO will refund you the difference.

Capital gains tax (CGT)

This is a tax on your capital growth. You need to report any capital gains and losses in your income tax return and are likely to pay tax on your capital gains. Although it’s referred to as CGT, this is actually part of your income tax, not a separate tax.

So don’t forget taxes when talking about your returns. The taxes you pay on them reduce your final returns.

Real returns

What interest rate is your bank paying you at the moment on your savings? 1.8%, 2%, 2.2%, 3%?

That might sound great, but did you know that the inflation rate or Consumer Price Index (CPI) rose by just 1.9% through the year to June quarter 2017, according to the Australian Bureau of Statistics.

That means a big chunk of what you may have earned in interest has been eaten away by inflation, leaving the true value of your assets almost where you started from. If you are then taxed on your interest earnings, the returns from your savings may have even gone backwards.

It’s the same story with your gains from other investments such as property, shares or managed investments.

The savings example shows how important your real rate of return is – that is, your rate of returns after inflation. Without assessing this, you may be earning less than you think on your investments or even getting poorer over time.

Why not talk to a CERTIFIED FINANCIAL PLANNER® professional to ensure you are earning the best returns possible in your circumstances and that the word “returns” don’t mean you are moving backwards?

 

Online source: Produced by The Financial Financial Planning Association of Australia and published on 12 October 2017.  Original article.

Money & Life By The Financial Planning Association of Australia