During the decade leading up to the Global Financial Crisis (GFC), the world was awash with greed and debt, both corporate and personal. Stories abounded in the ADF and the wider community of ordinary Australians who had borrowed heavily to purchase real estate. It was not uncommon to hear stories about young couples who owned 10 to 15 highly geared properties where their ownership equity in the total portfolio was 5% or less.
These eternally optimistic people with nerves of steel and sincere (if not naive) conviction about their financial position, owed millions of dollars, were paying a small fortune in mortgage insurance (required to protect the lenders) and were receiving rental income that was nowhere near the monthly payments that they were making on interest only loans from lenders at a rate of about 7.5% per annum.
Being fixed interest loans, the borrowers were comforted to know that their interest payments wouldn’t change during the terms of their loans (3-5 years), but they also knew, unlike variable interest rate loans, that the principal of their loans (the original amounts borrowed) were not reducing.
As a result, these investors were claiming an annual tax deduction for a real and substantial annual loss, being the difference between the incoming rents and the outgoing interest, council rates, repairs, insurance, depreciation and other expenses. This practice is known as “negative gearing”. It’s a tax-subsidised arrangement that has been a mainstay of Australian property investors and promoters for decades. It still is.
The investors hope, based on historical data and their love of real estate investing, that the properties on which they have borrowed will increase in value (after capital gains tax) to such an extent as to make their losses irrelevant and the investment risks worthwhile. History shows that many people have done well using negative gearing. Many have not.
Typically, the investors described in this article were convinced that they were on a winner. They expressed no concerns about the serious risks that most people would perceive in such a highly geared structure, so convinced were they about the future of Australian real estate which they believed would rise in value forever, thereby creating the financial independence and early retirement that they were seeking.
Then came the GFC in 2008 accompanied by a frightening economic downturn. A 1929-style depression was predicted, but the worst consequences of the worldwide downturn were avoided in Australia, thanks principally to urgent financial stimulus by government (as during the recent pandemic). Nevertheless, many investors lost their jobs, resulting in significant reductions in family income.
The value of real estate dropped which meant that many highly geared investors were left in a position where their mortgages exceeded the value of their properties (in investment jargon, that’s described as being “underwater”). Some of their tenants failed to pay the rent and did not renew their tenancies. And lenders became understandably nervous about their customers’ capacity to make payments on their fixed interest rate loans.
ADF members in that position were fortunate because even though many of their partners lost their private sector jobs, our members retained their secure employment in the ADF which provided a regular income to partly service their loans. In many cases, this bought time to renegotiate with lenders, thereby staving off forced fire sales until the market lifted enough to consider rationalising their portfolio without extreme financial pain.
The mental strain of these experiences was immense. People who went through them learned two important lessons (sadly, in the hard way) about borrowing money:
Lesson 1: Ask the “What if” questions
Before taking the plunge into debt, ask yourself:
Lesson 2: The importance of a “Nest Egg”
Consider setting aside a “nest egg” bank account of, say, 3 to 6 months in easily accessed funds to pay the bills in the event of that unexpected “rainy day”.
Our purpose here is not to dissuade you from borrowing money. On the contrary, borrowing to acquire growth assets like real estate, especially whilst an ADF member, can be a sensible decision. That’s because our members are (generally speaking) not only younger and fitter than the rest of the Australian community, they have considerable job security and receive a regular fortnightly income.
These characteristics make them highly desirable potential customers of motivated lenders. Therefore, when you decide to explore your borrowing options, don’t take the first offer that comes along. The real estate lending market is highly focussed on attracting customers like ADF members, so do yourself a favour…take your time and shop around for the best deal.
If you’d like to know more about sensible borrowing and investing, go to the Money Guides section on our website and consult moneysmart.gov.au.
If you have any questions about any of the issues in this article or you have serious financial difficulties, especially with excessive levels of debt, please contact us. We’ll provide you with additional resources or put you in touch with financial counsellors who will offer you options and advice, free of charge.
Super can be much harder to quantify if you are a member of MSBS or DFRDB, known as defined benefit schemes. This is because the bulk of your super benefit will likely be in the form of a lifetime indexed pension, based on your years of service and final average salary. The longer you stay in Defence, the larger your lifetime pension. This cannot easily be compared to a standard accumulation super fund. Please contact the Commonwealth Superannuation Corporation (CSC) for an estimate or your current benefit.
If you have an accumulation super fund, like ADF Super, it’s much easier to compare the superannuation you get from Defence with that of a civilian employer. Generally employers pay super at a rate of 9.5% of your ordinary salary and allowances, Defence pays super to accumulation fund members at a rate of 16.4%, well above the minimum requirement.
You may not appreciate the value of your generous superannuation benefits now, but you certainly will in years to come.
ADF members receive, statutory death and invalidity cover, and rehabilitation services if needed. To replace this cover in civilian employment, you may need to take out personal insurance, such as death, disability, trauma and income protection. The cost would depend on your age and personal circumstances but could cost thousands of dollars a year.
The ADF offers free education and training and/or study assistance schemes. If you’ve been receiving tertiary education at no cost or received any form of study assistance, consider what it might cost to continue your education outside Defence.
Take some time to think about these and any other benefits provided to you by Defence to get a better understanding of the real value of your employment package.
As an ADF member you will usually receive subsidised housing or rental assistance if you are not living in your own home. If you buy a home to live in you may be eligible for a range of other assistance schemes.
If you are receiving rental assistance you can calculate the value by multiplying the fortnightly assistance amount by 26 to get an approximate annual benefit.
If you’re in service housing you can estimate your benefit by deducting the rent contribution taken out of your pay, from the amount of rent you would pay each fortnight for a similar property in the same area. Multiply the result by 26 to estimate your annual benefit.
Housing assistance schemes for members buying a property include the Defence Home Ownership Assistance Scheme (DHOAS), Home purchase assistance scheme (HPAS) and Home purchase or sale expenses allowance (HPSEA)
Serving ADF members receive a range of healthcare benefits, including free medical and dental treatments, rehabilitation services, psychological support and access to fitness facilities like gyms, pools and sporting fields.
To put a value on these benefits, think about what you might be paying for if you were not an ADF member. For example, what would it cost you for private health insurance, prescriptions, physiotherapist, dentist, specialist visits, gym membership or other fitness related costs?
Medicare covers the costs of being admitted to hospital as a public patient, some of the fees charged by GPs and other medical professionals, and subsidised prescription costs for medicines listed on the Pharmaceutical Benefits Scheme (PBS). ADF members don’t pay the Medicare levy, currently 2% of taxable income.
Private health insurance covers some or all of the cost of a range of services not covered by Medicare, for example, a private hospital and the doctor of your choice, as well as ancillary services such as dental, optical and physiotherapy, not covered by Medicare.
Your pay consists of a base salary, with the addition of employment-related allowances. Your base salary can be found at the top of your payslip on the right, listed as ‘Annual salary’. If you need help reading your payslip, see the ADF guide on Pay and Allowances.
Note: From 13 May 2021, service, trainee, reserve and uniform allowances will be rolled into a single ‘Military salary’.
The earnings section of your payslip lists any allowances you receive. The amount in the ‘Current’ column is the amount you get every fortnight for each allowance. You can add allowances by typing in the name of the allowance in the ‘Add allowance’ box and clicking the + symbol.
A deployment provides some ADF members with additional allowances that are not part of regular pay. We have not included these allowances in the calculation of your remuneration package, however, you may want to take the additional deployment allowances into account if you are comparing your ADF remuneration with civilian employment.
Medium-term goals are those that you want to achieve in 3-6 years. This could include saving for a home deposit, paying off your car or paying down all your loan debts. Having a budget and your goals written down.
Long-term goals are plans you want to achieve in around 7 years or more. This could include buying a home or paying off your mortgage, paying for your children’s education or saving for retirement.
For long-term goals think about investing some of your money. Get some financial advice to work out a good investment strategy to reach your goals.
Be financially fit from ADF Consumer Centre on Vimeo.
MSBS is a hybrid defined benefit and accumulation super scheme which closed to new members on 30 June 2016. If you are an MSBS member, your benefit will consist of a lifetime indexed pension (employer component) based on your final average salary and years of service. Some or all of this benefit can be taken as a lump sum when you have met a condition of release (the defined benefit). The scheme also has a member component made up of your compulsory and voluntary personal contributions, ancillary contributions and investment returns, that you will also receive as a lump sum when you have met a condition of release (the accumulation benefit).
The pension component can be taken from age 55. If you are retiring or resigning from the ADF after reaching age 55 or are entitled to a Class A or Class B invalidity pension, you will be eligible for a pension when you leave the Service. For all other members, your employer benefit will freeze and be preserved, increasing with CPI each year, until you are eligible to receive it.
The member component of your benefit may be left in MSBS, where it will increase with investment returns each year until you access it, or it can be rolled over to another complying super fund.
For more information contact the Commonwealth Superannuation Corporation (CSC).
If you joined the ADF for the first time after 30 June 2016, you will fall under the ADF superannuation arrangement, and will be a member of an accumulation fund, such as ADF Super. If you had previously served, and are a member of MSBS, you will be re-entered into MSBS on rejoining the Service.
For accumulation fund (eg. ADF Super) members, your benefit will be a lump sum based on contributions and investment returns. When you leave Defence, your money can be left in the fund, where it will continue to grow with investment returns until you meet a condition of release, or it can be rolled into another super fund.
If you’ve been in the Service for more than 12 consecutive months, you can keep your ADF Super account when you transition out and your new employer can contribute to ADF Super. In this case your insurance cover will change so contact the Commonwealth Superannuation Corporation (CSC) to find out what you need to know.
DFRDB is a defined benefit super scheme which closed to new members on 30 September 1991. If you are a DFRDB member, you will receive a lifetime indexed pension based on your final salary and years of service. Part of your benefit may be commuted into a lump sum, and you may receive an additional lump sum from your MSBS ancillary account, made up of voluntary personal contributions, amounts transferred in from other funds and other contributions, plus investment returns.
For more information contact the Commonwealth Superannuation Corporation (CSC).
Short-term goals are things you want to achieve within the next couple of years. These goals could be to pay off your credit card debt, buy a new TV, go on a holiday or buy a car. Whatever you have in mind, set yourself a realistic timeframe. The best way to save for short-term goals is to reduce your spending on non-essential items, like entertainment, dining out, memberships or subscriptions. It is often easier to stay on top of your spending if you use cash, EFTPOS or a debit card when shopping instead of using your credit card.
Make your savings work for you by putting your money into an account where it will grow. Savings accounts are great because you can earn compound interest on your savings. If you’re on a low income, you may qualify for one of the savings programs offered by some charitable organisations.