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Glossary
Financial speak demystified
This website has been designed to be as accessible as possible.
However, sometimes the use of some financial and legal terms is
unavoidable. With this in mind, we hope you’ll find the following
glossary useful.
Allocated Pension
An Allocated Pension is a superannuation investment account which
pays regular ‘pension’ payments to the investor. The investments in
the superannuation fund which are used to pay the pension have the
potential to grow in value depending on the underlying investment
mix (e.g. shares, property, interest-bearing investments, capital
guaranteed investments). However, the regular pension payments –
which can be annual, quarterly or monthly – reduce the value of the
account over time. The amount of each payment is flexible within
certain limits depending on your age and the account balance. The
investment earnings in the account accrue tax free. You pay tax only
on the pension payments as you receive them, usually with the
benefit of a 15% tax rebate and possibly a tax free component. Apart
from the flexible pension payments, you can withdraw in cash
(‘commute’) any part of the remaining balance at any time.
All Industrials Index
An index that measures the price of shares in sectors such as
infrastructure and utilities, banking, chemicals, retail, transport,
property, tourism and leisure listed on the Australian Stock
Exchange.
All Ordinaries Index
An index that measures the movements in the major shares listed on
the Australian Stock Exchange (ASX). The All Ordinaries is broken
into a series of sub-indices including the All Industrials and All
Resources Indices.
All Ordinaries Accumulation Index
An index that measures the movements in the major shares listed
on the Australian Stock Exchange (ASX), taking into account the
reinvestment of dividends.
All Resources Index
An index that measures the price of shares in sectors such as
gold, other metals, diversified resources and energy listed on the
Australian Stock Exchange.
Annuity
An annuity is a contract with a life insurance company under
which the life company pays a guaranteed income stream in return for
an initial lump sum investment. An annuity can be for a fixed term
(e.g. 10 years) or for life.
Assessable Income
Income for income tax purposes, including capital gains (i.e.
your total income before deducting allowable deductions).
Asset Allocation
The process by which you select how the amount of your
investment is spread over each of the asset classes. The main asset
classes are shares, property, bonds and cash in a managed
investment, this task can be the responsibility of the fund manager.
Average Weekly Ordinary Time Earnings (AWOTE)
AWOTE is a statistical series released by the Bureau of
Statistics each quarter and measures the average wage paid in
Australia (excluding overtime earnings). Changes in AWOTE are used
to index a number of thresholds in superannuation regulations.
Indexation by AWOTE is meant to help retain the “real value” of an
amount (e.g. RBL thresholds).
Balanced Fund
A balanced fund invests in a mix of different asset classes
including shares, property, bonds and cash.
Bonds
Bonds are issued by Governments and large corporations in return
for cash. The bondholder receives interest for the fixed term of the
bond, which can typically range from 2 to 20 years.
Capital Allowance
A tax deduction for the annual write-off of the shell of a
building used to produce assessable income. The rate at which a
building can be written-off depends on when it was first built.
Capital Gains Tax (CGT)
The tax payable on the disposal of an asset (e.g. shares and
investment properties).
Cash Management Trust (CMT)
A managed investment that invests in high-yielding money market
securities. CMTs tend to provide a flexible, better performing
alternative to a bank account.
Compound Interest
A method of interest calculation where, in each period, interest
is calculated on both the principal and the interest previously
accrued.
Consumer Price Index (CPI)
The CPI is a measure of inflation taken each quarter. It
measures the price of a basket of typical household goods and
services.
Depreciation
For tax purposes, a deduction on the cost of income producing
assets. (e.g. office partitions, hotel décor, canopies).
‘Disposal’ of an Asset
This term relates to capital gains tax and refers to the sale or
transfer in ownership of an asset.
Diversification
A concept aimed at reducing investment risks (i.e. ‘not putting
all your eggs in the one basket’). You can diversify by spreading
your money across asset classes, sectors, markets and fund managers.
Dividend
Distribution of part of a company’s profits to shareholders
expressed as a number of cents per share. A dividend yield is the
dividend expressed as a percentage of the last sale price for the
share. Companies typically pay dividends twice yearly – an ‘interim’
dividend and a ‘final’ dividend.
Eligible Termination Payment (ETP)
An Eligible Termination Payment (ETP) is a lump sum received by
a person from a superannuation fund, other roll-over fund or certain
payments from an employer. An ETP is concessionally taxed and may
consist of a number of ‘components’, which are taxed at different
rates. If an ETP is taken as cash it will be taxed immediately. If
it is ‘rolled over’, some or all tax will be deferred until it is
ultimately withdrawn.
Franked Dividends
Dividends paid by a company out of profits on which the company
has already paid Australian tax, and which entitles shareholders to
a tax credit.
Gearing
Borrowing to invest. ‘negative gearing’ is when interest payable
exceeds assessable income from the geared investment, resulting a
deduction against other assessable income.
Immediate Annuity
An annuity which commences payment Immediately (as distinct from
a deferred annuity). Immediate annuities may be purchased with
either ETPs or with ordinary money. Many options are available, for
example: Fixed payment period, e.g. 10 years; Lifetime payment;
Indexed to CPI or a fixed amount, e.g. 5%; Frequency of payment –
monthly, quarterly, yearly etc.; Residual capital value – 0% to
100%; Reversion to surviving spouse at an agreed level, e.g. 85%.
Investment Bond
A type of managed investment, which provide investors with
access to a range of underlying assets.
Tax is paid by the issuing life insurance company at a flat rate of
30%.
Liquidity
The capacity of an investment to be readily converted into cash.
Shares, for example, are relatively liquid because they can be
easily sold on the market.
Listed Company
A company whose shares are listed on the stock exchange and
which are available to be bought and sold.
Managed Investment
A managed investment (or ‘managed fund’) is the collective term
given to investments that pool your money with the money of other
investors to form a fund which is then invested into assets based on
set investment objectives. A ‘specific sector’ fund invests in only
one asset class (e.g. global shares) while a ‘multi-sector’ (or
diversified’) fund invests in a number of asset classes.
Management Expense Ratio (MER)
The MER is the total annual fees and expenses of a fund divided
by its average net assets.
Margin Call
In a margin loan the lender is prepared to lend up to a maximum
limit (expressed as a ratio of equity versus borrowings). When you
exceed this limit, you will be required to make a ‘margin call’
which means you must either repay part of you loan or increase your
loan limit by providing further security.
Margin Lending
A means of borrowing money in order to increase your investment
into growth assets such as shares. The geared asset (e.g. the
shares) becomes the security for the loan.
Marginal Tax Rate
The stepped rate of tax that you pay on your ‘taxable’ income.
Market Value
The price you would get if you sold your asset. The market value
of a share would be the last price at which the share traded on the
stock exchange.
Portfolio
A ‘basket’ of investments. A managed investment contains a
portfolio of investments, which is managed by a portfolio manager.
Property Securities
Property securities, which include shares in listed property
companies or units in property trusts, are an alternative to
investing in property directly because of greater liquidity and
diversification.
Prospectus
A document that describes the investment being offered (hence
the general term ‘offer document’). Prospectuses must be registered
with ASIC. You must complete an application form attached to a
current offer document in order to invest in shares, and managed
funds.
Real Rate of Return
The return from an investment after taking account of inflation.
For example, if your investment pays 5% and inflation is 4%, your
real rate of return is 1%.
Reasonable Benefit Limit (RBL)
A person’s RBL is the amount of concessionally taxed
superannuation and roll-over benefits that the person can receive.
Most Eligible Termination Payments count towards a person’s RBL.
Amounts received over the RBL limit are called ‘excess benefits’ and
are taxed harshly. The standard lump sum RBL is $648,946 for
2005/2006. The Pension RBL is $1,297,886 for 2005/2006. Some people
have higher RBL’s called transitional RBL’s. The pension RBL is
available if at least half of the lesser of benefit or the pension
RBL is taken in the form of a ‘complying pension/annuity’.
Reinvestment
The process by which investors entitled to receive dividends
from shares or distributions from managed investments automatically
reinvest the amount to purchase additional shares or units.
Risk
Put simply, risk means the chance of losing money or not having
your expectations met. Risk can means different things to different
people. An investment considered risk-free because the capital is
protected (e.g. fixed term deposits) may still involve the risk of
not keeping up with inflation.
Risk-averse
Someone who adopts a conservative approach with their money is
considered ‘risk-averse’.
Roll-over
Investment of an ETP into a roll-over fund. Instead of making a
cash withdrawal, an ETP can be rolled over (subject to certain
restrictions) to a roll-over fund. Tax on the ETP will then be
deferred until final withdrawal from the roll-over fund.
Roll-over Fund
A roll-over fund is a concesssionally taxed investment vehicle.
By rolling over, lump sum tax payable on an ETP is deferred and the
earnings on the ETP in the roll-over fund are taxed at the
concessional rate of 15%. Types of roll-over funds include: -
Approved Deposit Funds; - Deferred Annuities; - Rollover (or ETP)
Annuities; - Superannuation Funds.
Stock
Another term for shares.
Taxable Income
Your total income (assessable income less deductions) that is
subject to marginal tax, and the Medicare Levy.
Tax Deduction
An amount that is deducted from your assessable income before
tax is calculated. You can claim deductions in your annual tax
return or, if your total deduction is significant, you can apply to
the Tax Office for a variation of PAYG tax (section 221D) of the
Income Tax Assessment Act.
Tax-effective
The term given to a strategy or investment that provides a
return that may lead to a tax benefit, such as a tax deduction or
tax rebate.
Tax Rebate or Tax Offset
An amount deducted off the actual tax you have to pay. You can
claim a tax rebate in your annual tax return.
Term Deposit
An account that pays a fixed rate of interest over a fixed term,
usually from one to three years. Funds are not ‘at call’ and a
penalty can apply if the term is broken.
Vesting Age
Age at which ownership of an investment bond transfers under a
‘child’s advancement policy’.
Volatility
Refers to the fluctuating value of an investment. A share is
said to be volatile if its price moves up and down frequently over a
short space of time.
Yield
The annual return on an investment expressed
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