Category : Financial Updates

It was a year of extremes, with shares hitting record highs and interest rates at historic lows. Yet all in all, 2019 delivered far better returns than Australian investors dared hope for at the start of the year.

The total return from Australian shares (prices and dividend income) was 24 per cent in the year to December.ⁱ When you add in positive returns from bonds and a rebound in residential property, Australians with a diversified investment portfolio had plenty to smile about.

Humming along in the background, Australia entered a record-breaking 29^th year of economic expansion although growth tapered off as global pressures mounted.

Global economy slowing

The US-China trade war, the Brexit impasse and geopolitical tensions weighed on the global economy in 2019. Yet late in the year optimism grew that US President Donald Trump would sign the first phase of a trade deal with Beijing. The re-election of Boris Johnson’s Conservatives in the UK also raised hopes that the Brexit saga may finally be resolved.

The US economy is in good shape, growing at an annual rate of 2.1 per cent in line with inflation and a jobless rate of just 3.5 per cent. China has fared worse from the trade tensions, with annual growth of 6 per cent its weakest since 1992.

In Australia, growth slipped to an annual rate of 1.7 per cent in the September quarter. Inflation, at 1.7 per cent, is well below the RBA’s target and unemployment is stuck around 5.2 per cent.ⁱⁱ

Despite the global slowdown, higher commodity prices were a major contributor to Australia’s healthy trade surplus in 2019.ⁱⁱⁱ

Australian Key Indices as at 31 Dec 2019		Share Markets (% change) Jan – Dec 2019
GDP annual growth rate*	1.7%	Australia ASX 200	18.4%
RBA cash rate	0.75%	US S&P 500	28.6%
Inflation	1.7%	Euro Stoxx 50	24.5%
Unemployment	5.2%	Shanghai Composite	22.3%
Consumer confidence index	95.1	Japan Nikkei 225	17.8%

* Year to September 30,2019 Sources: RBA, Westpac Melbourne Institute, Trading Economics

Commodities prices mixed

Iron ore prices rose 28.7 per cent in 2019 following a mine disaster in Brazil which reduced global supply. Other major Australian exports to receive a boost were gold, up 18.5 per cent, and beef, up 32 per cent.^iv

At the other end of the scale, thermal coal prices fell 34 per cent and liquefied natural gas (LNG) was down 44 per cent.^v

Middle East tensions and tighter supply led to a surge in crude oil prices, with Brent crude up almost 21 per cent.^vi As Australia is a net importer of oil, a jump in oil prices coupled with a fall in the Aussie dollar filtered through to higher petrol prices for motorists.

Interest rates at new lows

In an effort to stimulate the economy, the Reserve Bank cut the cash rate three times in 2019 to an historic low of 0.75 per cent. The US Federal Reserve also cut rates to a target range of 1.50-1.75 per cent. This was the main reason the Australian dollar lifted from its decade low of US67c in October to finish the year where it started, around US70c.^vii

Rate cuts flowed through to yields on Australian 10-year government bonds which fell to just 1.37 per cent.<supviii< sup=””> However, falling bond yields result in higher bond prices and this lifted total returns from government bonds by around 8 per cent.^ix

Retirees and others who rely on income from bank term deposits had another difficult year, with interest rates generally below 2 per cent. After inflation, the real return was close to zero.^x It’s little wonder then that many looked elsewhere for a better return on their money.

Bumper year for shares

The hunt for yield was one reason Australian shares jumped 18.4 per cent in 2019, the best performance in a decade.^xi The market climbed a wall of worries to hit a record high in November on optimism about a US-China trade deal, then eased back on concerns about slowing economic growth.

Despite low interest rates and personal tax cuts, consumers are reluctant to spend. The Westpac/Melbourne Institute survey of consumer sentiment fell to 95.1 in December – anything below 100 denotes pessimism.^xii

Property prices recovering

Australian residential property prices rebounded strongly in the second half of 2019, driven by lower mortgage interest rates, a relaxation of bank lending practices and renewed certainty around the taxation of investment property following the May federal election.

According to CoreLogic, property prices rose 2.3 per cent on average, led by Melbourne and Sydney, both up 5.3 per cent. Also up were Hobart (3.9 per cent), Canberra (3.1 per cent) and Brisbane (0.3 per cent). The only capitals to fall in value were Darwin (-9.7 per cent), Perth (-6.8 per cent) and Adelaide (-0.2 per cent).

When rental income is included, the total return from residential property was 6.3 per cent.^xiii

Looking ahead

Property prices are expected to recover further this year but with shares looking fully valued and bond yields near rock bottom, returns could be more modest.

The Australian government is under pressure to do more to stimulate the economy in the short term to head off further rate cuts by the Reserve Bank. More fiscal stimulus could inject fresh life into the local economy and financial markets.

Overseas, the US-China trade war is far from resolved and could remain up in the air until after the US Presidential election in November. There is also uncertainty over the Brexit deal and its impact on trade across Europe.

The one thing we do know is that a diversified investment portfolio is the best way to navigate unpredictable markets.

If you would like to speak to us about your overall investment strategy, give us a call.

i Econonomic Insights: Sharemarket winners and losers, CommSec Economics, 2 January 2019

ii Trading Economics, viewed 1 Jan 2020, https://tradingeconomics.com/indicators

iii https://dfat.gov.au/trade/resources/trade-statistics/Pages/australias-trade-balance.aspx

iv Trading economics, as at 31 Dec 2019, viewed 1 Jan 2020, https://tradingeconomics.com/commodities

v Econonomic Insights: Sharemarket winners and losers, CommSec Economics, 2 January 2019

vi Trading economics, as at 31 Dec 2019, viewed 1 Jan 2020, https://tradingeconomics.com/commodities

vii Trading economics, as at 31 Dec 2019, viewed 1 Jan 2020, https://tradingeconomics.com/currencies

viii RBA, https://www.rba.gov.au/statistics/tables/#interest-rates

ix Economic Insights: Year in Review; Year in Preview, CommSec 2 January 2020.

x Canstar, https://www.canstar.com.au/term-deposits/highest-term-deposit-rates/

xi Trading economics, viewed 1 January 2020 https://tradingeconomics.com/stocks

xii https://www.westpac.com.au/content/dam/public/wbc/documents/pdf/aw/economics-research/er20191211BullConsumerSentiment.pdf

xiii https://www.corelogic.com.au/news/corelogic-december-2019-home-value-index-strong-finish-housing-values-2019-corelogic-national

December is here which marks the official start to summer. Unfortunately, the bush fire season is already underway. We would like to take this opportunity to express our heartfelt thanks to the firefighters, emergency services personnel and community members who have been working tirelessly to save lives and property.

After keeping interest rates on hold at 0.75 per cent in November, Reserve Bank Governor Philip Lowe said in a speech he would only consider unconventional measures to stimulate the economy if rates fell to 0.25 per cent. He ruled out negative interest rates but said he might consider buying government bonds.

Economic activity remains patchy. The Reserve Bank forecasts Australia’s economy will stay flatter for longer with growth of 2.25 per cent this year rising to 2.75 per cent by the end of 2020. Business and consumer confidence remain weak, which was reflected in a 0.2 per cent decline in retail sales in the year to September, the biggest fall in 28 years. New vehicle sales followed the trend, down 9.1 per cent in the year to October, the biggest fall in a decade. Residential building was also down, by 10.6 per cent in the year to September, the biggest fall in 18 years. Unemployment rose slightly from 5.2 per cent to 5.3 per cent in October as the number of people in work fell for the first time in 17 months.

On a brighter note, Australia trade surplus rose for the 21st successive month in September, as our annual trade surplus with China hit a new record of $67.3 billion. Our exports have been supported by the weaker Aussie dollar which eased in November from US69c to US67.7c.

Our retirement system: great, but room for improvement

You could be forgiven for thinking Australia’s superannuation system is a mess. Depending who you talk to, fees are too high, super funds lack transparency and Governments of all political persuasions should stop tinkering.

Yet according to the latest global assessment, Australia’s overall retirement system is not just super, it’s top class.

According to the 11th annual 2019 Melbourne Mercer Global Pension Index, Australia’s retirement system ranks third in the world from a field of 37 countries representing 63 per cent of the world’s population. Only the Netherlands and Denmark rate higher.ⁱ

What we’re getting right

While super is an important part of our retirement system, it’s just one of three pillars. The other two pillars being the Age Pension and private savings outside super.

Writing recently in The Australian, Mercer senior partner, David Knox said one of the reasons Australia rates so highly is our relatively generous Age Pension. “Expressed as a percentage of the average wage, it is higher than that of France, Germany, the Netherlands, the UK and the US.”ⁱⁱ

As for super, we have a comparatively high level of coverage thanks to compulsory Superannuation Guarantee payments by employers which reduces reliance on the Age Pension. In fact, Knox says Australia is likely to have the lowest Government expenditure on pensions of any OECD country within the next 20 years.

Superannuation assets have skyrocketed over the last 20 years from 40 per cent of our gross domestic product (GDP) to 140 per cent. “A strong result as funds are being set aside for the future retirement benefits of Aussies,” says Knox. Even so, on this count we lag Canada, Denmark, the Netherlands and the US.

Room for improvement

For all we are getting right, the global report cites five areas where Australia could improve:

• Reducing the Age Pension asset test to increase payments for average income earners

• Raising the level of household saving and reducing household debt

• Require retirees to take part of their super benefit as an income stream

• Increase the participation rate of older workers as life expectancies rise

• Increase Age Pension age as life expectancies rise.

Retiree advocates have been asking for a reduction in the assets test taper rate since it was doubled almost three years ago.

Since 1 January 2017, the amount of Age Pension a person receives reduces by $3 a fortnight for every $1,000 in assets they own above a certain threshold (singles and couples combined).ⁱⁱⁱ

Other suggested improvements, such as increasing the age at which retirees can access the Age Pension, present challenges as they would be deeply unpopular.
The Retirement Income Review

One roadblock standing in the way of ongoing improvements to our retirement system is reform fatigue.

In recent years we have had the Productivity Commission review of superannuation, the banking Royal Commission which included scrutiny of super funds, and currently the Retirement Income Review.

The Retirement Income Review will focus on the current state of the system and how it will perform as we live longer. It will also consider incentives for people to self-fund their retirement, the role of the three pillars, the sustainability of the system and the level of support given to different groups in society.
The fourth pillar

One issue that the Government has ruled out of the Review is the inclusion of the family home in the Age Pension assets test.

Australia’s retirement income system is built around the assumption that most people enter retirement with a home fully paid for, making it a de facto fourth pillar of our retirement system.

With house prices on the rise again in Sydney and Melbourne and falling levels of home ownership, there are growing calls for more assistance for retirees in the private rental market.
The big picture

Despite the challenge of ensuring a comfortable and dignified retirement for all Australians, it’s worth pausing to reflect on the big picture. The Global Pension Index is a reminder of how far we have come even as we hammer out ways to make our retirement system even better.

If you would like to discuss your retirement income plan, give us a call. 
i https://info.mercer.com/rs/521-DEV-513/images/MMGPI%202019%20Full%20Report.pdf

ii https://www.theaustralian.com.au/commentary/our-retirement-system-is-far-from-perfect-but-its-still-better-than-most/news-story/d3db43e68b3b93d8c6d6e8a8c17a491d?btr=4ff6fe5e96c92f060a779127475fa258

iii https://guides.dss.gov.au/guide-social-security-law/4/2/3

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Tax Alert December 2019

If the introduction of Single Touch Payroll (STP) wasn’t a big enough challenge, small businesses can now look forward to the arrival of e invoicing and changes to the Superannuation Guarantee (SG) rules.

Here’s a roundup of some of the latest tax developments.
E-invoicing to be rolled out

Small businesses can look forward to increasing use of e-invoicing following the ATO’s appointment as the local Peppol Authority. Currently being used in 34 countries, the Peppol framework provides a standardised e invoice for both domestic and international trade.

With e-invoicing, invoices are directly exchanged between the supplier’s and the buyer’s accounting systems – even if they use different software.

According to the ATO, by adopting e-invoicing businesses of all sizes can expect to see improved cashflow and quicker payments, easier processing and cost savings, fewer errors and reduced risk of compromised invoices.

The ATO will now work with digital service providers to deliver a range of e invoicing products for local businesses.
Inactive ABNs will be cancelled

Inactive Australian Business Numbers (ABNs) are an increasing area of interest for the ATO. If the tax man believes your business is no longer carrying on an enterprise, you face the risk it could decide to cancel your ABN.

To determine if an ABN is still being used, the ATO is checking the ABN holder’s tax return, whether their compliance and lodgement documents are up-to-date and a range of third party information.

If your ABN is mistakenly cancelled, you can reapply for the same ABN if your business structure remains the same. But if the structure is different – such as a sole trader now operating as a company – you will receive a different ABN.
Rule change for salary sacrifice and SG

Legislation to prevent employers from using employee salary sacrificed amounts to reduce their minimum Superannuation Guarantee (SG) payments has passed Parliament and will apply from 1 July 2020.

The new rules mean an employer can no longer count the amount salary sacrificed by an employee as part of the amount the employer is required to pay in SG contributions.

Also, the base amount on which SG contributions are calculated can no longer be reduced by any salary sacrificed amounts.
Limiting deductions for vacant land

Tax deductions for losses or outgoings (such as interest costs) incurred when holding vacant land not genuinely being used to earn assessable income have been reduced under new legislation.

The changes limit the claimable deductions for holding vacant land on or after 1 July 2019 – even if the land was held prior to that date.

Tax deductions are not affected if the land is held by a corporate tax entity, used for carrying on a business, used for primary product and leased, or where exceptional circumstances have affected a permanent structure on the land.
ATO tip-offs on the rise

Small businesses in the café and restaurant industry are more likely to be subject to a tip-off and subsequent investigation by a specialist team, according to the ATO’s Tax Integrity Centre (TIC).

There are also high volumes of tip-offs about black economy behaviour in the hairdressing and beauty, building and construction, and cleaning industries.

The TIC is receiving 230 tip-offs a day about black economy activities by small businesses such as undeclared income, paying workers cash in hand and not reporting sales.
Tax man focussing on SG compliance

With the tax man currently checking SG contribution payments for around 400,000 employers for the 2018-19 financial year, small businesses will need to stay on top of their obligations in this area.

The ATO is now “heavily focused on reducing the incidence of non payment of SG” courtesy of new Single Touch Payroll information, according to deputy commissioner, James O’Halloran.

With an “unprecedented level of ‘visibility’ of super information at the account and transaction level”, the tax man plans to increase checks of SG payments and follow up employers not paying on time.

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Unwrapping the joys and pitfalls of giving

Christmas is a time of giving, when thoughts turn to family and to helping those less fortunate. To gift in a meaningful way that maximises the benefits, it’s important to consider tax.

While Australia doesn’t have a gift tax, there are tax considerations nonetheless for both the giver and the recipient.

Buying a toy for your grandchild is one thing but many parents wish to help their adult children or grandchildren with more substantial gifts such as a home deposit or a car. If you receive a Centrelink age pension now or are within five years of retiring, that “gift” will be counted as an asset and could affect your pension.
Helping family

Gifting with the potential to impact your Age Pension entitlements comes in many guises. It might be donating 10 per cent of your salary to your church, buying a car for your daughter or selling her a rental property you own for less than market value.

If you gift more than $10,000 a year or a total of $30,000 over a five-year period, then the excess will be counted as an asset by Centrelink for five years, when it assesses your eligibility for an aged pension.

Your gift won’t just count in the assets test but deeming may also be applied under the income test. Deeming rules are used to work out how much income you earn from your financial assets, irrespective of their actual earnings.ⁱ
How do the gifting rules work?

Say you lend your daughter $50,000 to buy a home two years before you retire. Centrelink would view the first $10,000 as an allowable gift and it would make no difference to your situation. However, it would treat the remaining $40,000 as a deprived asset subject to the gifting rules.

What’s worse, if your daughter were to repay $40,000 in two years, then not only would the original $40,000 be counted in the assets test and deemed under the income test but now the $40,000 she repays would be added to this sum.
Can you afford to give?

Clearly, it’s wonderful to give with a warm heart and help relatives when they need it and you can see the joy it brings. Even so, you need to be very mindful of the repercussions for your own wellbeing.

It may be that you don’t qualify for a pension on retirement, but what if you give away a sizeable sum and then need to fall back on the pension sooner than anticipated? If the help were needed within five years of your gift giving, then the amount would be subject to the gifting rules.
Tax implications for children

It’s not just the giver who can run into problems. You need to be mindful of any repercussions for the recipient of your generosity. It’s natural to want to give money to your grandchildren, but there may be tax implications if they’re under 16.

Depending on your circumstances, we may be able to help you find a more tax friendly investment to suit the needs of both you and your young family members.
Giving to charity

Giving to charity is often top of mind at Christmas too. Any donation over $2 is tax deductible but this has no bearing if you are retired and not paying tax. Of course, the reason for giving should never be predicated on tax considerations, although it may be handy.

A tax deduction only applies if the charity is a deductible gift recipient (DGR) endorsed by the ATO or listed by name in the tax law, so you need to check that the charity has DGR endorsement.

Giving to those in need or to those you love can be a rewarding experience no matter what time of year, but it’s important to understand the implications for both giver and receiver.

If you would like to know more about how gift giving will impact on your financial wellbeing and that of your family, then give us a call.
i https://www.humanservices.gov.au/individuals/topics/deeming/29656

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It’s September and spring is in the air. It’s time to shake off the winter cobwebs, get out into the garden or the great outdoors. It’s also a good time to plan your summer break.

August was a challenging month for investors. Global markets reacted negatively to an escalation in the US-China trade war and the looming no-deal Brexit. US economic growth slowed to an annual rate of 2 per cent in the June quarter, down from 3.1 per cent the previous quarter. China’s economy is also slowing – industrial production, retail sales and fixed asset investment all recorded lower growth in the year to July.

To stimulate the US economy, the US Federal Reserve cut rates by 25 basis points, the first cut since 2008. US short-term bond yields rose as did the US dollar, but shares fell around the globe. In the US, shares were down around 2 per cent for the month while Australian shares shed 3 per cent. The Hong Kong market fell more than 7 per cent as protests continued and UK shares fell 5 per cent on Brexit worries.

In Australia, most companies reported positive earnings for the 2019 financial year, but only a little over half managed to lift profits. One challenge is retail spending, up 0.2 per cent in the year to June, the weakest in 28 years. The NAB business confidence index rose in July, but the business conditions index fell to 2.4 points (the long-term average is 5.8 points).

On the bright side, Australia’s trade surplus hit a new record high of $49.9 billion in the year to June. The Australian dollar finished the month lower at around US67c, which should support our exporters.

Positives and negatives of gearing

Negatively gearing an investment property is viewed by many Australians as a tax effective way to get ahead.

According to Treasury, more than 1.9 million people earned rental income in 2012-13 and of those about 1.3 million reported a net rental loss.

So it was no surprise that many people were worried about how they would be affected if Labor had won the May 2019 federal election and negative gearing was phased out as they had proposed. With the Coalition victory, it appears negative gearing is here to stay.

While that may have brought a sigh of relief for many, negative gearing is not always the best investment strategy. Your individual circumstances will determine whether negative gearing is advisable. For many, it may pay to positively gear.

So, what is gearing?

Basically, it’s when you borrow money to make an investment. That goes for any investment, but property is where the strategy is most commonly used.

If the rental returns from an investment property are less than the amount you pay in interest and outgoings you can offset this loss against your other assessable income. This is what’s called negative gearing.

In contrast, positive gearing is when the income from your investment is greater than the outgoings and you make a profit. When this occurs, you may be liable for tax on the net income you receive but you could still end up ahead.

While negative gearing may prove tax effective, it’s dependent on the after-tax capital gain ultimately outstripping your accumulated losses.

The importance of capital gains

If your investment falls in value or doesn’t appreciate, then you will be out of pocket. Not only will you have lost money on the way through, but you won’t have made up that loss through a capital gain when you sell.

That’s the key reason why you should never buy an investment property solely for tax breaks.

But if the investment does indeed grow in value, then as long as you have owned it for more than 12 months you will only be taxed on 50 per cent of any increase in value.

When it pays to think positive

If you are retired and have most of your money in superannuation, negative gearing may not be so attractive. This is because all monies in your super are tax-free on withdrawal. And thanks to the Seniors and Pensioners Tax Offset (SAPTO), you may also earn up to $32,279 as a single or $57,948 as a couple outside super before being subject to tax.

It makes more sense to negatively gear during your working years with the aim of being in positive territory by the time you retire so you can live off the income from your investment.

While buying the right property at a time of your life when you are working and paying reasonable amounts in tax may make negative gearing a good option, sometimes positive gearing may still be a better strategy.

Case study

ASIC’s MoneySmart website compares two people each on an income of $70,000 a year. They each buy an investment property worth $400,000, paying 6 per cent interest. Additional expenses are $5000 a year while the rental income is $500 a week.

Rod negatively gears, borrowing the full purchase price; Karen is positively geared with a loan of $100,000. In terms of annual net income, Rod who negatively geared is worse off than if he had not invested in a property at all, with net income of $52,868.

Positively geared Karen ended up $10,000 ahead, with net income for the year of $64,433.

Of course, if his property grows in value over time, Rod should ultimately recoup some or all these extra payments.

Claiming expenses

If you do negatively gear, then it’s important that you claim everything that’s allowed and keep accurate records.

For investment property, this includes advertising for tenants, body corporate fees, gardening and lawn moving, pest control and insurance along with your interest payments.

If you want to know whether negative gearing is the right strategy for you, then call us to discuss.

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Tax Alert September 2019

The landscape of Australia’s personal income tax system has changed significantly following the passage of the Morrison Government’s tax legislation through the Parliament.

Here’s a roundup of some of the other recent developments in the world of tax.

Tax reform legislation passes

Many Aussies are receiving a larger tax refund following passage of The Treasury Laws Amendment Act 2019, which made law the three-stage income tax cuts announced in the 2019–20 Federal Budget.

The new legislation increases the base and maximum amounts of the Low and Middle Income Tax Offset (LMITO) for the period 2018-19 to 2021-22.

It also lifts the top threshold of the 19 per cent income tax bracket from $41,000 to $45,000 from 2022-23 and reduces the 32.5 per cent tax rate to 30 per cent from the 2024-25 financial year.

Guidance on FBT exemption for taxis

Employers need to take note of new guidance released by the ATO clarifying that the existing FBT exemption for employee taxi travel does not extend to ride-sourcing services such as Uber. Unlike its previous view, the ATO has now stated the FBT Assessment Act limits the definition of ‘taxi’ to a vehicle licensed to operate as a taxi by the relevant state or territory. This definition of taxi travel is different to the one used for GST purposes.

Employee travel is still eligible for FBT relief if it involves a traditional taxi service used for a single trip beginning or ending at the employee’s place of work, or if the travel is due to employee sickness or injury.

Tip-offs likely to grow with new hotline

After a record 70,000 tip-offs were received by the ATO during 2018-19, the introduction of its new Black Economy Hotline and Tax Integrity Centre (TIC) is likely to see this number rise further.

From 1 July 2019, Australians can report known or suspected tax evasion, black economy and phoenix activities via an ATO website tip-off form, the ATO app, or the new Black Economy Hotline (1800 060 062).

Behaviours such as demanding or paying for work cash-in-hand to avoid tax, not reporting or under-reporting income, underpayment of wages, ID fraud, sham contracting arrangements, GST fraud and money laundering can all be reported.

No deductions for unreported employee payments

The tax man is reminding employers that unreported cash-in-hand payments made to workers after 1 July 2019 are no longer eligible for tax deductions. In addition to the loss of a tax deduction, employers not complying with their PAYG withholding obligations may be penalised.

The new rules cover payments to employees not complying with PAYG withholding obligations as well as payments to contractors who do not provide an ABN where tax is not withheld. The change affects payments made during 2019-20 and all subsequent financial years.

As an employer, if you fail to withhold or report your PAYG obligations and voluntarily disclose this before any compliance action is taken, you won’t lose your deduction. You may also be entitled to reduced penalties.

New luxury car tax thresholds

The luxury car tax (LCT) thresholds for cars imported, acquired or sold during 2019-20 have been announced by the ATO. If you buy a car with a GST inclusive value over the LCT threshold, the purchase attracts the 33 per cent tax.

For the 2019-20 financial year, the new threshold for fuel-efficient vehicles is $75,526, which is the same as in 2018-19. The LCT threshold for other cars is $67,525, up from the 2018-19 limit of $66,331.

Escape Australia, not your student debt

Expats are being contacted by the tax man to remind them that heading offshore doesn’t mean leaving their student loans behind.

Under new rules, student debtors with an income contingent loan travelling overseas need to notify the ATO of their new address and lodge an overseas travel notification. They are also required to report their worldwide income if they earn $11,470.

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How super is your life insurance?

For most people, life insurance provides a safety net against unexpected events. This is particularly the case if you have a mortgage, debts or family who are dependent on you earning an income.

In many cases, life insurance has been automatically offered through superannuation. Although 85 per cent of people hold life insurance this way, a recent survey found one third of them don’t even realise.ⁱ

Now some super members may have lost their insurance cover and may not be aware of it.

Millions could lose cover

Concern that super balances were being eroded through insurance premiums and fees has led the government to introduce Protecting your Superannuation legislation.

As a result, from July 1 this year your insurance cover is to be cancelled, if your fund has been inactive for more than 16 months.ⁱⁱ

Letters were sent towards the end of the financial year to those with inactive funds, advising you to contact your fund to make a contribution or risk losing your life cover.If you didn’t respond, your life insurance policy may have been cancelled.

It’s estimated that up to 3 million super members may have been affected.ⁱⁱⁱ And while you can buy a new life insurance policy, you may not be able to reactivate your previous one unless your fund offered an extension of the deadline to reactivate cover. If not, you may have to face a medical examination and/or pay higher premiums in order to take out a new policy.

Younger members to opt-in

It is also proposed (although not yet legislated) that new superannuation fund members who are aged under 25 will no longer be given automatic life insurance cover as they have in the past. Instead, they would be given the opportunity to opt in to cover.

The argument in favour of this move is that young people with no responsibilities, have nothing to insure. But once you buy a home, get married or become a parent, the need for life insurance becomes paramount.

As you get older, once the family has flown the nest and you have paid off all your debts, the need for life insurance may reduce. However, with a blended family, a life insurance policy in super can prove a good financial strategy to ensure the right beneficiaries receive your money. That’s because superannuation ‘death benefits’ don’t form part of your Will but are paid out separately to your nominated beneficiaries.

SMSFs may also be caught out

Up until now, some self-managed super fund members have deliberately kept a public offer super fund active to take advantage of the cheaper insurance. But as stated above, if that public offer fund is inactive and an election to maintain cover has not been made, then cover may be lost.

The beauty of having life insurance in super is that the premiums are generally cheaper because you are charged at a group rate. In addition, it won’t affect your cashflow as premiums come out of your super. Of course, that is the point of this legislation. The monies available for investment to build your balance for retirement may be eroded through those very premiums.

Another precautionary note is that it may be harder to access a payout through super if you need to make a claim. If you haven’t correctly nominated a beneficiary in your super, then it is the trustees who decide who receives the payout. And because the insurer makes the payment via the fund, this can also take longer.^iv

What happens next?

As part of the Protecting your Super changes, inactive funds with balances less than $6000 will see the monies transferred to the Australian Taxation Office. The ATO will then endeavour to amalgamate this money with an active superannuation fund of yours or hold the money for you until it is claimed.

If this happens, investment returns on the money held by the ATO may be significantly less than if you invested through your super.^v

Don’t wait until you need to make a claim to discover you don’t have any insurance cover after all. If you have any questions about the changes or your insurance needs in general, give us a call.

i https://www.superannuation.asn.au/media/media-releases/2019/joint-media-release-10-june-2019

ii https://firststatesuper.com.au/member/super/manage-super/protect-your-super

iii https://www.superannuation.asn.au/media/media-releases/2019/joint-media-release-10-june-2019

iv https://www.moneysmart.gov.au/superannuation-and-retirement/how-super-works/insurance-through-super

v https://www.ato.gov.au/Individuals/Super/Growing-your-super/Keeping-track-of-your-super/ATO-held-super/

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Paving the way to an election
Treasurer Josh Frydenberg has delivered a ‘back in the black’ Budget aimed squarely at voters, stressing the Morrison Government’s commitment to financial discipline and low taxes.

As expected, the Treasurer signaled sweeping tax cuts and major infrastructure spending if the Coalition wins the upcoming federal election widely expected to be held in May.

This largesse is made possible as the Budget heads towards surplus for the first time in 12 years. Extra revenue has flowed into the Government’s coffers from a surge in company tax on the back of higher commodity prices, and a higher personal tax take as more Australians find work.

The Big Picture

The Federal Budget is all but balanced. The Government expects a small underlying Budget deficit of $4.2 billion this financial year, unchanged since the mid-year Budget update in December, before moving to a $7.1 billion surplus in 2019-20.

The Budget’s big spending promises come despite a worsening economic outlook over the past six months. The Treasurer forecast growth of 2.25 per cent this year rising to 2.75 per cent in 2019-20 and 2020-21, slightly lower than the 3 per cent forecast in the mid-year update.

Growth could also suffer from a cut in the permanent migrant intake from 190,000 to 160,000 a year. The Government predicts current net debt of $370 billion will fall to 18 per cent of GDP in 2019-20 and be wiped out in 10 years.

Bigger tax cuts

The centerpiece of the Budget is an extension of the already announced multi-year tax package. Low and middle-income workers will receive immediate income tax relief of up to $1080 for single income families and up to $2160 for dual income families from 2018-19.

By 2024-25, 94 per cent of taxpayers on incomes below $200,000 will pay no more than 30c tax in the dollar. Incomes above $200,000 will pay 45c in the dollar.

The Low and Middle Income Tax Offset (LMITO) will almost double from $530 to a maximum of $1080 a year for people earning between $48,000 and $90,000, to be received after people submit their 2018-19 tax return. People on income below $37,000 will receive an offset of up to $255.

The popular instant asset write-off for small business has been increased from $25,000 to $30,000 a year, extended to businesses with turnover up to $50 million (previously $10 million) and will apply as of 2 April 2019. This allows small and medium size businesses to deduct the cost of assets such as cars and equipment.

Major infrastructure spending

The Government’s other signature spending initiative is a $100 billion boost to infrastructure spending over the next decade, an increase of about one third on last year’s Budget.

This includes $2 billion for a fast rail link from Melbourne to Geelong. The Government will also co-fund five business cases with state governments for fast rail from Sydney to Wollongong, Sydney to Parkes (via Bathurst and Orange), Melbourne to Albury Wodonga, Melbourne to Traralgon, and Brisbane to the Gold Coast and will build on projects already underway.

There is also a $3 billion increase (to $4 billion) in the Urban Congestion Fund, including $500 million for a commuter carpark fund.

A further $1 billion will be invested to improve the Princes Highway in NSW, Victoria and South Australia, with additional funding for road and rail projects in all states and territories.

Beefed up regulation and compliance

In the wake of the Banking Royal Commission, financial regulators Australian Securities and Investments Commission (ASIC) and Australian Prudential Regulation Authority (APRA) will be given a boost of more than $550 million to clamp down on misconduct.

The Australian Taxation Office will be given extra funds to crack down on welfare cheats and tax dodging.

Healthcare and welfare

The Government has pledged $527.9 million for a Royal Commission into the abuse of people with disabilities. It has also recommitted to fully funding the National Disability Insurance Scheme, but a slow take-up of the NDIS has delivered a $1.6 billion saving to the Budget’s bottom line and contributed to the projected Budget surplus.

In response to the national crisis in mental health and youth suicide, $461.1 million will go to prevention and treatment programs.

The creation of a new $337.2 million drug strategy to address harmful opioid use, improve family support services and increase capacity of drug and alcohol services in remote and regional areas.

The cashless welfare card will be extended to all the Northern Territory and Cape York communities in Queensland at a cost of $129 million.

Aged care services will receive a further boost of $282.4 million to fund 10,000 new home care packages and increasing home care supplements for dementia and cognition.

Superannuation sweetener

In a bid to help older Australians boost their retirement savings, the Government intends allowing 65 and 66-year-olds to make voluntary contributions to their super from 2020-21 without meeting the work test.

The same group will also be allowed to make three years’ voluntary non-concessional (after tax) contributions, currently capped at $100,000 a year, in one year.

Education

There are no big-ticket announcements for schools or universities, but $453 million will go to extend pre-school education in the year before school.

The focus instead is on a new $525.3 million skills package to provide vocational education and training that will fund 80,000 new apprenticeships and double incentives to employers to $8000 per placement.

Training hubs will be established in 10 regional areas with high youth unemployment.

Environment and energy

The Government hopes to shore up its climate and energy credentials with $3.5 billion for a new Climate Solutions Package, including $2 billion for the Climate Solutions Fund (previously called the Emissions Reduction Fund).

Pensioners, carers and veterans will receive a one-off cash payment to help with energy bills. The Energy Assistance Payment is worth $75 for singles and $125 for couples.

It has also previously announced $1.4 billion for Snowy Hydro 2.0 and a $56 million Battery of the Nation in Tasmania.

Regional communities will receive $6.3 billion in drought support and $3.3 billion in flood support. A $3.9 billion Emergency Response Fund will be set up to help with future natural disaster efforts.

National security

There will be a continued focus on national security, with $512.8 million for the Australian Federal Police and $58.6 million to the Australian Security Intelligence Organisation.

The Government will also spend $34.8 million over four years to counter foreign interference.

Looking ahead

This is an unusual Budget as there will be little chance of legislating most of the spending measures before a federal election in May.

The biggest risk to the Budget forecasts for growth is the falling property market and concerns that it could flow through to the broader economy. According to CoreLogic, national house prices are down 7.4 per cent since their 2017 high, with most pundits predicting further falls this year.ⁱ

Monetary support could come from the Reserve Bank which announced yesterday the official cash rate will remain on hold at a record low of 1.5 per cent while also signaling it is prepared to cut rates this year to support growth if needed.

For its part, the Government’s proposed tax cuts and other stimulus measures could provide the kick the economy needs to get people spending, companies hiring and flat wages rising.

Labor has flagged it will deliver its own economic statement later this year if elected. We will have to wait until after the election to see whose policies will take Australia forwards.

https://www.corelogic.com.au/news/housing-downturn-loses-some-steam-corelogic-national-home-value-index-down-06-march

It is important to note that the policies outlined in this publication are yet to be passed as legislation and therefore may be subject to change.

 

Investors started 2018 full of hope, with the global economy and financial markets in good shape, but by year’s end they were uncertain and a little anxious about what lay ahead. Markets responded with last minute falls across all asset classes.

The issues that weighed heavily at the end of 2018 were the unresolved trade dispute between the US and China, confusion over the final Brexit deal, rising US interest rates, falling oil and commodity prices and the US government shutdown. Australians were also distracted by political instability and falling house prices in Sydney and Melbourne.

With so much focus on what may, or may not, lie ahead, it was easy to lose sight of the solid progress we’ve made.

Positive economic growth

The global economy grew at a steady clip of 3.1 per cent. However, the World Bank estimates global growth will ease slightly to 3 per cent this year and 2.9 per cent in 2020 as central banks remove monetary stimulus in place since the financial crisis.ⁱ

The US economy continued its strong recovery with growth of 3 per cent in the year to September.

China’s growth slowed to 6.5 per cent, still remarkably strong by global standards but its lowest since 2010, as the effects of its trade dispute with the US begin to bite.ⁱⁱ

Australia enjoyed steady growth of 2.8 per cent in the year to September as we notched up a world-beating 27 years without recession. Corporate profits are at record levels, inflation is a tame 1.9 per cent and unemployment fell to 5.1 per cent. While wages growth of 2.3 per cent was an improvement, it’s still well below the 20-year average of 3.25 per cent.

Yet consumers remain cautiously upbeat. The Westpac Melbourne Institute rose a percentage point over the year to 104.4 – anything over 100 is regarded as optimistic.ⁱⁱⁱ

 

Australian Key Indices as at 31 December 2018	Share Markets (% change) Jan – Dec 2018
GDP annual growth rate*	2.8%	Australia ASX 200	-6.9
RBA cash rate	1.5%	US S&P 500	-6.5
Inflation	1.9%	Euro Stoxx 50	-14.0
Unemployment	5.1%	Shanghai Composite	-25.5
Consumer confidence index	104.4	Japan Nikkei 225	-12.1

 

*Year to September 30, 2018 Sources: RBA, Westpac Melbourne Institute, Trading Economics

Focus on interest rates

The Australian dollar fell 10 per cent in 2018 to finish at US70c, due largely to US dollar strength and a widening of the gap between local and US interest rates. High US interest rates increase the global cost of borrowing and boost the value of the greenback.

The US Federal Reserve lifted rates four times to 2.5 per cent but indicated there may be only two more hikes in 2019, rather than three as previously forecast, due to the slowing economy. By contrast, Australia’s cash rate finished the year where it started at 1.5 per cent.

At the other end of the yield curve, US 10-year government bond yields were barely changed at 2.7 per cent, reflecting market fears of economic slowdown. Yields on Australian 10-year bonds eased to 2.3 per cent.^iv

Falling commodity prices

The lower dollar is good news for our exporters and should soften the impact of falling commodity prices which have been caught in the cross-hairs of trade wars and fears about an economic slowdown.

Iron ore was down 3 per cent to US$71.50 a tonne while oil, copper, aluminium, zinc and nickel prices dropped between 16 and 19 per cent. The one bright spot for local producers was wheat, up almost 20 per cent.^iv

Sharemarket correction

Global sharemarkets retreated as the year came to an end, with the MSCI World Index down 10.4 per cent on a world of worries.^v

US shares fell 6.5 per cent, their worst annual performance in a decade. In Europe, UK shares fell 12 per cent with no Brexit deal in sight while political and economic uncertainty also weighted heavily on share prices across the Eurozone. In Asia, Chinese shares suffered the heaviest losses (-25.5 per cent) while the Japanese market fell 12 per cent.^iv

Australian shares tapped into the global mood, with the ASX 200 down 6.9 per cent, its worst year since 2011. However, when you add dividends the total return from shares was down just 3.5 per cent, and closer to zero after franking credits are taken into account.^vi

Property market loses steam

The heat came out of Australia’s residential property market in 2018, with big falls in Sydney and Melbourne dragging the national market down 4.8 per cent according to figures from CoreLogic.^vii This is the biggest annual fall in a decade and follows tighter lending practices, rising supply, higher mortgage interest rate and falling investor demand.

After rental income is included, the annual return from property was down 1.2 per cent.

It was a case of the further they rose, the harder they fell. Sydney (-8.9 per cent) and Melbourne (-7 per cent) were hardest hit, while Perth (-4.7 per cent) and Darwin (-1.5) were also in retreat. Prices continued to climb in Hobart (8.7 per cent), Canberra (3.3 per cent), Adelaide (1.3 per cent) and Brisbane (0.2 per cent).^vii

Looking ahead

The late market reversals of 2018 were driven by gloomy expectations rather than the reality of solid economic progress. Future performance will depend on US interest rates, the resolution of trade tensions between the US and China and, to a lesser extent, the negotiation of a workable Brexit.

In Australia, uncertainty will persist until the Federal election is out of the way. Then investors can get back to focusing on fundamentals such as our solid economic growth, a strong corporate sector, resilient consumers, low interest rates and more affordable housing.

i World Bank, 5 June 2018, http://www.worldbank.org/en/news/press-release/2018/06/05/global-economy-to-expand-by-3-1-percent-in-2018-slower-growth-seen-ahead

ii Trading economics, as at September 2018, https://tradingeconomics.com/china/gdp-growth-annual

iii Westpac Melbourne Institute, 12 December 2018, https://melbourneinstitute.unimelb.edu.au/__data/assets/pdf_file/0009/2943036/PressReleaseCSI20181212.pdf

iv Trading economics.

v Financial Times, 1 January 2019, https://markets.ft.com/data/indices/tearsheet/summary?s=MS-WX:MSI

vi Year in Review 2018, CommSec Economic Insights, 2 January 2019

vii CoreLogic, 2 January 2019, https://www.corelogic.com.au/news/australian-dwelling-values-fell-48-through-2018-marking-weakest-housing-market-conditions-0

 

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