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Bitcoin and The Basics Of Cryptocurrencies

Three years ago Bitcoin was $250AUD. With a 10,000% increase in price since then, it is starting to generate significant buzz with the everyday investor, as is the underlying technology driving it, “blockchain”. But what are digital currencies and should you be investing in them? We asked renowned technologist and futurist, Mark Pesce to take us on the bitcoin / blockchain journey.

“Never invest in a business you don’t understand.” A simple bit of advice from the Sage of Omaha, Warren Buffet, largely responsible for turning him into the most successful investor in history.

Very few people understand cryptocurrencies, but many see the meteoric rise in the valuation of Bitcoin – over AUD $20K as this is written – and feel as though they should be investing. But why? What is it – other than the pile-on of investor interest – that makes Bitcoin or any other cryptocurrency worth investing in?

The qualities of cryptocurrencies mirror the qualities of ‘normal’ currencies in two key features: they’re difficult to counterfeit and you can’t spend the same currency twice. In subsequent articles we’ll look at the mechanism making all of this possible – the blockchain – but for now it’s enough to know that every cryptocurrency fulfills these conditions.

The original cryptocurrency, Bitcoin (symbol: BTC), for many years looked like a solution in search of a problem, but as it found uses and gained users, its exchange value increased. Investors began to think of it as a store of value. The first Bitcoin price spike accompanied the ‘haircut’ Cyprus imposed on bank deposits, as depositors used Bitcoin to spirit funds out of the country. The acceleration in the value of Bitcoin began there, as more investors came to appreciate Bitcoin as both a store of value, and as a mechanism to avoid currency exchange fees.

If Bitcoin retains its status as the ‘store of value’ cryptocurrency, it could evolve into a role similar to that of gold, which possesses an intrinsic less than its exchange value. (As to whether Bitcoin can maintain this role indefinitely, that’s a question to ask a psychic – not a futurist!)

Together with Bitcoin, there are three more cryptocurrencies that are interesting because they follow Warren Buffet’s rule – you can understand them.

Ethereum (symbol: ETH) is the next most valuable cryptocurrency after Bitcoin, but it’s unlikely anyone will use Ethereum simply as a store of value. Ethereum is ‘smart money’ – a cryptocurrency that’s also a computer program. This means you can use Ethereum to create ‘smart contracts’ – for example, a simple escrow contract that automatically transfers funds from one party to another when a particular condition is fulfilled. That contract can be written into Ethereum, rather than on paper – and it allows parties to enter into contract relationships with great ease. Ethereum may find its greatest value enabling international trade finance, and for that reason it’s viewed as a cryptocurrency with a bright future.

Ripple (symbol: XRP) was originally created to provide a settlement mechanism between banks. That’s happening – but very slowly, as that is both a very conservative and very carefully regulated area of banking. More recently, the Gates Foundation selected Ripple to be used in a project that enables billions of unbanked and underbanked people to have access to an advanced set of mobile banking, payments, credit and investing services. That should give Ripple billions of users, and create a fair bit of demand for the cryptocurrency.

Finally, the Basic Attention Token (symbol: BAT) allows Web users (that’s all of us) to pay publishers directly for their content, rather than forcing those publishers to rely on advertisers. It’s a new model for funding content on the Web, and it also means advertisers can pay Web users directly for putting ads into our Web browsers. We’ll get paid for surfing the Web – and can pass those payments along to our favourite websites.

Bitcoin, Ethereum, Ripple and the Basic Attention Token all do things that are easy to explain – and understand. The same can not be said for many of the 900-plus other cryptocurrencies flogged by speculators. Be like Buffet: if you can’t understand it, why would you invest in it?

Mark Pesce is a futurist, inventor, writer, entrepreneur, educator and broadcaster with 35 years experience working in technology, He holds honorary appointments at the University of Sydney and UTS.

Original article courtesy of Adviser ratings, December 2017

Yes, Virginia, There is a Banking Royal Commission – Unfortunately

In a matter of days, Santa will be putting the finishing touches on his “Naughty” and “Nice” lists and it remains unclear on which side of the ledger the banks will sit.

It’s an understatement, of course, to suggest the big four (CBA, Westpac, ANZ and NAB) won’t be expecting an outpouring of festive cheer and goodwill from their 17+ million customers this year.

Despite holding around 2.5 trillion of our money, collectively – (and 80% of the nation’s loans) – it’s become almost a national sport to criticise the banks. And, it’s got to be said, with some good reason.

Concerns involving the banking sector date back at least three years, when a Senate committee recommended a royal commission into the Commonwealth Bank’s financial planning scandal. Last year, more wrongdoing was uncovered at CBA’s insurance arm (CommInsure) as well as allegations made against the other majors – ANZ, NAB and Westpac.

But – without trivialising the impact of those scandals on the industry and, more importantly, the individuals and families affected – an expensive and lengthy royal commission is NOT the answer.

The sector is already one of the most highly regulated in the world. Since the financial crisis banks have cooperated with 37 separate reviews, investigations and inquiries, leading to a raft of reforms from FoFA to Professional Standards to name a few.

The current commission – which will run for 12 months, delivering a final report in February 2019, at an estimated cost of $75 million – is unlikely to unearth anything new.

Let’s not be fooled.

This is nothing more than a quick political fix, hastily thrown together by an under-pressure Government at the eleventh hour, to appease disgruntled Nationals senator Barry O’Sullivan and other backbenchers who were prepared to cross the floor and side with Labor and the Greens to pass legislation for an inquiry.

It was inevitable. They knew it. The PM knew it.

Despite spending a year and a half categorically, unequivocally ruling out a royal commission – an inquiry former PM John Howard warned would be “rank socialism’’ – the only option left was to make the best out of a bad situation and set its terms of reference and try to control the mandate.

Malcolm Turnbull, already deeply bruised from the Dual Citizenship fiasco (at the time of writing the Opposition is now in damage control itself over the issue with several of its members potentially being referred to the High Court) appeared weak and out of touch with both his party and the electorate.

Perception is everything in politics and the Prime Minister still appears to be in the pockets of the banks, because the backflip came precisely the day after the banks themselves signed the “permission slip” gifting the PM political cover.

Politics has trumped economics yet again.

On the positive side, the commission has promised a deep dive into more than just the banks and it looks like industry funds could be subjected to some unwelcome scrutiny. In its infamously titled “Rivers of Gold” report released last month, the Institute of Public Affairs found monetary links between a number of industry super funds and the Labor movement, with more than $18 million flowing to trade union organisations over a three-year period. Needless to say it has people talking.

The problem is, there’s always a bigger picture. The risks of staging this inquiry in the full glare of the public spotlight is that you diminish the standing and strength of the banks, and undermine our economy with it.

Granted, the big four are corporate powerhouses, earning billions in profits, but let’s not forget the old State Banks of Victoria and South Australia which collapsed, robbing thousands of customers of their life savings. A strong financial and banking sector provides a significant and crucial buffer to protect us all if the economy experiences a downturn, or worse. It was one of the key reasons Australia was able to withstand the GFC crisis, which forced the closure of 465 banks in the United States alone.

Secondly, some will argue the Tall Poppy Syndrome is alive and well in Australia. We do seem to have a propensity to go after anything that is successful. Look what the mining tax did to the resources industry – our mining companies stopped investing in Australian projects and retreated overseas.  The carbon tax hamstrung the automotive industry, with utilities costs an enormous burden.

Thirdly, banks are the highest taxpayers in Australia – injecting around 14 billion into the government’s coffers each year.

Finally, we simply can’t afford for world markets to lose faith in the big four. The flow-on effects would be disastrous, fuelling potential interest rate rises, asset contraction and a slowing economy.

Even David Murray who led the last extensive review into the financial sector agrees. He has hit out at politicians and regulators fearing that “if the commission forces banks to grant widespread forgiveness of soured loans, it could undermine the entire system”. The Australian Financial Review, 6 December – Bank probe ‘threat to the system’.

It’s a sobering thought.

This may not be a royal commission we had to have, but we’ve got it. And only time will tell what lasting impact it will have, both financially and politically.

As we hang our stockings and trim the tree this time next year, Chief Commissioner Kenneth Hayne will be close to wrapping up the inquiry, putting the finishing touches on the final report for public consumption.

The proof, as always, will be in the pudding.

Bitcoin: the very definition of a bubble

Legend has it that Joe Kennedy, father of former President John F Kennedy, avoided the stock market crash of 1929 by selling his entire portfolio just days before prices collapsed. He did this, the story goes, after receiving a share tip from a shoeshine boy. When taxi drivers, lift attendants and young lads on the sidewalk are speculating in stocks, he concluded, “the market is too popular for its own good”.

The stock market is riding high today but I’d be amazed if your next cab ride results in a share recommendation. This unloved bull market has failed to generate much excitement. It’s quite unlike the explosion of interest in shares in the late 1990s when everyone knew someone who had made a killing in some obscure internet stock and fear of missing out was intense.

So, if Joe Kennedy were having his shoes polished today he would not be talking equities. What he might well be steered towards, however, is an investment in bitcoin, the crypto- currency which is tracing the classic parabola of every bubble in history, from tulips to internet incubators.

Two years ago, you could have bought a bitcoin for $300; today, it would set you back $7,000. Its price has doubled in six weeks. It’s not just the price of bitcoin that is increasing but the speed of the gains is accelerating. The chart is turning left and heading straight up the page as asset prices always do in the final stages of an irrational mania.

Perhaps unsurprisingly, the exponential rise in the price of bitcoin is setting alarm bells ringing. Tidjane Thiam, the chief executive of Credit Suisse, said this week that the speculation around the alternative currency is ‘the very definition of a bubble’. As he observes, the only reason to buy or sell bitcoin is to make money, ‘which is the very definition of speculation and has rarely led to a happy end’.

His comments echo those of JP Morgan boss Jamie Dimon who recently described bitcoin as a ‘fraud’. He said that anyone ‘stupid enough to buy it’ will pay the price for it in future.

I don’t know whether Thiam and Dimon are right. In fact I don’t really know much for sure about bitcoin and it’s this lack of clarity that makes me think they are both right. I’ve been trying to get my head around bitcoin for a while and I’m frankly none the wiser.

I’m not even terribly sure what bitcoin is: a currency or a commodity? It sounds like the former but it fails to exhibit the essential characteristics of money.

It can hardly be viewed as a store of value. That requires at least a modicum of stability. Unlike the pound in my pocket, however, I can have no idea what a bitcoin will be worth tomorrow or in a year’s time. That, in turn, reduces its value as a unit of account. Why would another individual be prepared to accept my bitcoin for a good or service when its future value is so uncertain; for the same reason, why would I want to spend my volatile bitcoin rather than hoard it in the hope of further appreciation.

So bitcoin is a poor currency. But neither is it really like gold or any other physical commodity. Gold may not generate an income – it’s value is only what someone else is prepared to pay me – but it does at least have some decorative and industrial uses.

When it comes to bitcoin, people really are buying it solely because they expect other people to take it off them later for an even higher price. There is no better definition of the ‘greater fool theory’ than this.

As with every asset price bubble, of course, it is not wholly groundless. Ever since President Nixon broke the link between paper currencies and gold in 1971, dollars, pounds and euros have been little more than an act of faith. The value of a bitcoin is no more illusory really than a currency that depends on our collective trust in political leaders and central banks. Like gold, crypto-currencies are free from political interference, regulation, confiscation, inflation or debasement.

It may be that, as electronic commerce becomes the norm, cryptocurrencies will become viable mediums of exchange. The blockchain technology that underpins them may well be the future.

But I’m prepared to wait and see. I will not be risking my savings on what looks remarkably like the tulip mania of the 1630s. By the peak of the madness in 1637, the price of a single bulb was worth ten times a craftsman’s annual income. In three years, bulbs had soared in value sixty-fold.

Like all bubbles, Dutch tulips ended badly. A default on a bulb by a buyer in Haarlem was the bubble-popping catalyst and the implosion was savage. Within a matter of days, prices had fallen to a hundredth of their previous levels.

Peter Lynch said he would only invest in companies if he could ‘draw their business models with a crayon.’. Warren Buffett also famously warned against investing in businesses you cannot understand. If ever there were an investment that fits this description, bitcoin is surely it.

While bitcoin is soaring, the greater fools look like those of us refusing to follow the siren calls of the latter-day shoe-shine boys. Like Joe Kennedy, however, I’m pretty relaxed about who will have the last laugh. What goes up like a rocket comes down like a stick.


Article Source: Fidelity Australia – Tom Stevenson, Investment Director

This document is issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (“Fidelity Australia”). Fidelity Australia is a member of the FIL Limited group of companies commonly known as Fidelity International. Investments in overseas markets can be affected by currency exchange and this may affect the value of your investment. Investments in small and emerging markets can be more volatile than investments in developed markets.

This document is intended for use by advisers and wholesale investors. Retail investors should not rely on any information in this document without first seeking advice from their financial adviser. This document has been prepared without taking into account your objectives, financial situation or needs. You should consider these matters before acting on the information. You should also consider the relevant Product Disclosure Statements (“PDS”) for any Fidelity Australia product mentioned in this document before making any decision about whether to acquire the product. The PDS can be obtained by contacting Fidelity Australia on 1800 119 270 or by downloading it from our website at This document may include general commentary on market activity, sector trends or other broad-based economic or political conditions that should not be taken as investment advice. Information stated herein about specific securities is subject to change. Any reference to specific securities should not be taken as a recommendation to buy, sell or hold these securities. While the information contained in this document has been prepared with reasonable care, no responsibility or liability is accepted for any errors or omissions or misstatements however caused. This document is intended as general information only. The document may not be reproduced or transmitted without prior written permission of Fidelity Australia. The issuer of Fidelity’s managed investment schemes is FIL Responsible Entity (Australia) Limited ABN 33 148 059 009. Reference to ($) are in Australian dollars unless stated otherwise.

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Changes to the Assets Test for Age Pensions came into effect on January 1 – Ensure Centrelink have your correct numbers


Last years Federal Budget included a number of significant changes to means testing for the Centrelink age pension, these changes came into effect 1 January 2017.

Over the last couple of months Centrelink began communicating with those that will be affected. As a consequence of this communication we have had a number of clients report that their asset numbers seem to be inflated, which if left uncorrected will result in a lower pension entitlement under the new rules.

Should this occur, it is best to assume:

  • that you will receive less in pension benefits until the true value of your asset pool is established
  • that a refund will not be provided.

What you need to do

You must ensure Centrelink has the correct information with regard to your current asset portfolio.

If you have a My Gov account you can check the asset values Centrelink currently hold against your records by visiting

Alternatively if you are at all concerned about how the changes to the age pension will affect you, please contact a Finsec Partners adviser to discuss in more detail.
Information regarding the new legislation is summarised below.

Who is affected by the changes to the assets test for Age Pensions?

Australians over the age of 65, currently receiving a part or full age pension, will incur a $3 reduction per fortnight (currently $1.50 per fortnight) to their pension for every $1000 in assets owned above the ‘assets test free’ threshold.
The new thresholds are dependent on whether you are single or a couple and rent or own your own home. The below table outlines the new asset threshold limits (the number at which the pension starts reducing) for each scenario.

What assets are included in the threshold?

The market value of most assets are considered when calculating your age pension. This includes but is not limited to:

  • Property (excluding your home)
  • Motor vehicles, boats and caravans
  • Financial investments
  • Superannuation if you’re over age pension age
  • Business assets
  • Household contents and personal effects

Please note: there are different rules for contributions paid to live in a retirement village. Some farm related assets, funeral plans and carer payments may also be exempt.

In hindsight Hillary didn’t stand a chance


Republican presidential candidate Donald Trump speaks during a campaign rally, Monday, Oct. 24, 2016, in St. Augustine, Fla. (AP Photo/ Evan Vucci)

Scene from the 1976 film, Network.

“I don’t have to tell you things are bad. Everybody knows things are bad. It’s a depression. Everybody’s out of work or scared of losing their job. The dollar buys a nickel’s worth. Banks are going bust. Shopkeepers keep a gun under their counter. Punks are running wild in the street. There’s nobody anywhere that seems to know what to do, and there’s no end to it … but there’s at least one thing you can do. Get out of your chairs, head to the windows, and shout, I’m as mad as hell, and I’m not going to take it anymore!”

Sometimes, you get the feeling that life really does imitate art. Network may have been a satirical film made 40 years ago, but yesterday it hit rather close to home. We are living in a time when outrage and sensation are the dominant impulses in our media, when our politics feeds off the anger and fear people have about their society and way of life.

Few of us can imagine seeing a major political party adopt as its slogan: “I’m as mad as hell, and I’m not going to take it anymore!” Even fewer would have believed that celebrity Donald Trump would become the 45th president of the United States of America.

These are populist times but what does this mean and why?

Author Benjamin Moffit helpfully describes the global rise of populism as featuring an appeal “to the people” versus “the elite”, through “constant evocation of crisis, breakdown and threats” rather than the decorum of orthodox politics.

Conventional wisdom runs that this populism if fuelled on economic insecurity, by tapping into the anxieties of the working class. Whilst there are elements of truth in this perspective, as one political writer has noted, the average Trump-supporting household draws a median income of $72,000, which is $16,000 greater than that of the average American and also higher than the median income for Hilary Clinton supporters (around $61,000). It is not just about the money!

Others view this new populism (spreading across the western world) as married to an aggressive nationalism. People have become hostile towards immigration and multiculturalism, which some blame for a pseudo “political correctness”. Others are developing an increasing protectionist attitude towards global trade and foreign investment. This has certainly buoyed populist figures including Donald Trump, Britain’s Nigel Farage, France’s Marine Le Pen and Pauline Hanson. 

If we are to explain the contemporary rise of populism, especially that of the right-wing variety, we are safest to say that the sources are multiple. The resounding motivation seems to be a hunger for change, and a 24 hour news cycle provides the perfect platform for populist politicians to tell people they can have it.

Yesterday’s result is just another confirmation that a new style of politics is afoot. ‘Vox Populi’, or the voice of the people has changed the game – ‘they’re as mad as hell and they’re not going to take it anymore’.  It would seem the Clinton campaign based on ‘more of the same’, never stood a chance.

The Market Reaction

Markets went into immediate meltdown as they tried to factor in the news, but with the US Federal Reserve now unlikely to raise interest rates next month, rallied again overnight. We expect markets to remain volatile, particularly over the short term as we work through a period of policy uncertainty.

Beyond this initial reaction, share markets are likely to settle down and get a boost to the extent that Trump’s stimulatory economic policies look like being supported by Congress, but much will ultimately depend on whether we get Trump the pragmatist or Trump the populist. We suspect that now he has been elected he will present a far more mellowed persona, as we witnessed in his victory speech last night. Congress, along with economic and political reality, can probably also be relied on to take some of the edge off his policies.

All this said, he is Trump and anything could happen. So, its with bated breath that we will watch this next chapter unfold – we can’t help but think perhaps we should be ‘getting to know’ Mike Pence, he may yet get a run…


Federal Budget 2016/17 Our Verdict: The Less is More Budget

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Scott Morrison’s maiden budget speech was the first since Peter Costello’s debut 20 years ago that did not include the word ‘surplus’ an unreported, but perhaps telling, fact. It is no secret that the 2016 Federal Budget made negligible progress on improving Australia’s bottom line. Projecting a small surplus way out in 2020/21 it has experts concerned about the future of Australia’s AAA credit rating. But, to its credit, this pre-election budget didn’t make things worse. Debt accumulation seems to be held and (retrospective super tinkering aside) policies are, for the most part, “harmless”.

So let’s talk motive for this seemingly benign budget. ‘Quintessentially political’ and a ‘bow to the altar of fairness’ is, of course, the popular view. Morrison claims it is all about the economic plan and, more specifically, Australia’s transition from the mining investment boom to a more diversified economy. This is a formula he hopes will restore credibility in terms of both the Coalition’s promises and their traditional strength of economic management.

True motive unknown, one thing is certain: the government wants this budget to appear calm on top while working hard underneath. The judgment here is less about ‘who’ the government has gone after and more about its modest proposals. And with the word ‘surplus’ conspicuous by its absence, perhaps debt is one of the driving forces behind this modesty.

A debt of global proportions

The world is staggering under a record amount of debt. Household, corporate and government debt are at unmatched levels in absolute and relative (to GDP) terms. According to a McKinsey Global Institute report on debt levels across 47 countries, it is estimated that global debt soared from US$142 trillion (A$187 trillion) in 2007 to US$199 trillion in 2014. Over these seven years, the ratio of debt to global output climbed from 269% of world GDP to 286%.

The report found that, over the past seven years, no major economies and only five emerging countries, (Argentina, Egypt, Israel, Romania and Saudi Arabia) have reduced relative debt. Concurrently, 14 countries boosted total debt by more than 50 percentage points. During this period, Australia’s total debt climbed 33 percentage points to 213% of GDP. The report also found that household debt has climbed to concerning levels in Australia (no surprise), Canada, Denmark, Malaysia, the Netherlands, South Korea, Sweden and Thailand. China has a special case of debt addiction all of its own. From 2007, Beijing instructed state banks to commence a lending frenzy that resulted in total debt jumping 82 percentage points to 217% of output (and more recent studies put it at 240% of GDP).It is no surprise that all this debt poses an unprecedented threat to the world economy and long-term financial stability. The probability that vast sums of the money will never be repaid (and will need to be written off) is high. Such an outcome could trigger systemic banking failures and, as the saga of Greece shows, without a global mechanism for dealing with sovereign default, any government bankruptcies will be messy.

But there is a flip side to debt. Borrowing is not a bad thing in itself and, in fact, debt is often referred to as the lifeblood of capitalism: the driving force that has lifted living standards for decades. At a micro level, debt enables people, companies and governments to manage cash flows over time. Sovereign debt, in most cases, provides investors with haven investments. Governments can safely borrow unceasingly if their fiscal deficits, as a percentage of GDP, are below the rate of economic growth. The problem is, there is no definitive point where debt can be categorised as ‘too high’ and hence ‘too risky’. It’s a balancing act and, at some point, the accumulation and risk have to be managed.

Is there a solution?Current policy makers are tasked with the desperate need to devise new solutions to dilute the threat from too much debt. This is particularly so since much of the collateral people and companies have borrowed against are assets priced at apparently unsustainably high values.

The difficult task for policy makers now is to curtail debt the “right way”. The worst action they could take would be to taint debt as “bad” and encourage excessive repayments. This would serve only to threaten the consumption and investment needed for a functioning economy. Take, for instance, the experience of the Eurozone: austerity measures shrunk economies faster than they reduced debt, entrenching deflation and boosting the real value of debt. The fact is most Governments, households and businesses can manage their debt loads, provided economies continue to hum. Which brings us back to Morrison and his Budget.

Whether it was intentional or not, there is an underlying pragmatism that should be acknowledged. The proposed measures are certainly in sync with a strategy that aims to keep an economy ‘humming’. Debt accumulation is stabilised, with no demands for a return to surplus (over the short-medium term) and is therefore, void of those pressures. Morrison does not want a nation of panicked people. Ask ordinary voters if they are better or worse off as a result of this budget, and the answer is likely to be “no change”. Gone are the messy policy thought bubbles such as a higher GST, cracking down on negative gearing excesses, or major income tax changes. Most of those “bubbles” have been comprehensively pricked. This is a budget that, on the surface, the government wants perceived as tough on its own base, not ordinary taxpayers. But at a deeper level, is possibly more economically calculating and strategic than many give it credit for.

Will it be enough to ensure the re-election of the Coalition for a second term? We will have to wait and see. Of course the opposition and some segments of the media have it destined to an unhappy fate, but despite their best efforts this budget seems to have achieved the rare feat of keeping the harmful blows at bay. Perhaps in doing less, Morrison may actually have achieved more.

Click here to read our Budget Report

2016/17 Federal Budget Report



May 2016

For us, the big story out of Budget 2016 is of course Morrison’s crackdown on high-end super tax concessions. Ten years on from Costello’s tax-free super savings and now, on the other side of the resources boom, Morrison has redefined the purpose of super as a substitute or supplement to the welfare safety net of the aged pension, not a vehicle for wealth accumulation or bequests.

Whilst we welcome the fairness measures and in particular applaud those initiatives that help low-income earners and those with low superannuation balances, we do not look favourably on any announcement that proposes change retrospectively or that may be counterproductive to a person’s ability to save for a secure and dignified retirement.

It has now been three weeks since Budget night, but three eventful weeks in the context of understanding the motives and the landscape surrounding the proposals. We have heard from the various sides of the election campaign and now have a sense of what will go through and what might be ‘retrospectively argued away’.

As is customary at FinSec, we have opted to wait and deliver a succinct report, focusing only on the information relevant to the financial advice we provide. As always, if you have questions relating to your personal circumstances, we encourage you to contact us so that we can discuss the proposed changes in greater detail. But do not forget, at this stage the proposals are only announcements a lot may change as the legislation navigates both an election and the political process thereafter.

The Conversation: Superannuation and Tax

The Abbott government’s tax discussion paper released earlier this month, has thrown open the doors to a broad ranging debate on tax reform. One of the central themes is of course superannuation, can we expect to see it’s earnings kept tax free when the budgetary pressures created by an ageing population are considered? (Spending on the age pension is due to rise from the current 2.9 per cent of GDP to 3.6 per cent or approx. 180 billion dollars in 2054-55, source Intergenerational Report 2015). According to Joe Hockey “it will be difficult”.

The issue; the tax free nature of retirement incomes from super, have been labelled by many as unfair and nothing but a “tax cut for the rich”. We can only hope that the term “rich” is used with perspective and geared more towards the 475 Australians (out of 24 million) with superannuation account balances exceeding $10 million and not the masses in the middle who, in the past, were told to save for retirement, and accordingly did so responsibly and prudently.

The majority of Australians desire a superannuation system that is sustainable and equitable, but exactly how this is achieved promises to be a hot topic leading into the May Budget. The current system is complex and there is room for improvement but before the lobbyists and ‘experts’ dive in with their proposed reforms, perhaps as a nation we should first understand what it is we are trying to achieve – Is super  intended to replace, complement or improve upon the age pension? It is difficult to have the answer when we cannot agree on the question!

Following are some of the biggest myths cited when it comes to superannuation tax concessions – a little clarity, so you can join the conversation with confidence.

MYTH: Superannuation is not helping reduce the government’s spending on the Age Pension

FACT: Super saves the government $7 billion in Age Pension expenditure annually, and these savings will only increase as the system matures

Superannuation is boosting incomes and providing a lifestyle in retirement that is better than that which can be sustained on the Age Pension alone. Around 32 per cent of those aged 65 in 2013 were fully self-funded in retirement, up from 22 per cent in 2000. This number is projected to rise to 40 per cent by 2023.

MYTH: Superannuation tax concessions cost the budget $30 billion annually – more than the total spending on the Age Pension

FACT: The actual cost of tax concessions is around $16 billion a year

Tax concessions applied to superannuation concessional contributions are not significantly skewed towards high-income earners, and, in fact, support the bulk of the working community to save for their retirement. The Association of Superannuation Funds of Australia (ASFA) analysis of data from 2011/12 found that around 75 per cent of the tax concessions applied to contributions went to those paying either of the (then) middle income marginal tax rates of 30 per cent or 38 per cent: those earning between $37,000 and $180,000 a year.

MYTH: The most important tax concessions received by high-income earners relate to superannuation

FACT: High-income earners get the most benefit from concessional capital gains tax treatment, negative gearing and exemptions for the family home

The bulk of the wealth of high-net-worth individuals is in the form of shareholdings or property, both residential investment properties and commercial real estate. Around $360 billion is held in superannuation by those with more than $1 million in super. This is just over 20 per cent of the $1.6 trillion investable assets held by high-net-worth individuals.

For most high-net-worth individuals, tax arrangements relating to capital gains, negative gearing and the family home are likely to have more impact on the achievement and maintenance of wealth than superannuation tax concessions.

MYTH: Only high-income earners make salary sacrifice contributions

FACT: Many middle-income individuals make salary sacrifice contributions

Only around 35 per cent of employees with incomes above $150,000 a year make salary sacrifice contributions. Around 85 per cent of salary sacrifice contributions relate to employees with incomes below $150,000 a year. Over half a million Australians earning between $40,000 and $80,000 a year make salary sacrifice contributions.

MYTH: Most people take a lump sum from their super when they retire, spend it all on a big holiday or to pay off debt, then end up on the Age Pension

FACT: The majority of superannuation assets end up in income stream products when people retire

There is no evidence that the majority of retirees are using their super to pay off debt or using a lump sum to fund the purchase of boats, cars and overseas trips before going on the full Age Pension.

The vast majority of Australians are very sensible with their retirement savings. The great bulk of larger balances are retained in the superannuation system in order to generate ongoing income in retirement. In 2012/13, around $45 billion in superannuation assets were invested in phased drawdown income-stream products, compared to just $8 billion taken as lump sums.

MYTH: Compulsory superannuation has not increased household or national savings

FACT: National and household savings have been substantially lifted by compulsory super

The household savings rate has increased by around five percentage points from five per cent in 1992, when compulsory superannuation was first introduced, to around ten per cent in 2013/14.

MYTH: Government funds spent on superannuation tax concessions would be better directed at helping other areas of the economy

FACT: Superannuation provides broad economic benefits that are the foundation for growth and prosperity

Superannuation plays, and will continue to play, an important role in providing the foundations for economic activity and prosperity. It currently lifts household savings by around 2 percentage points of GDP or nearly $40 billion a year and, with the increase in the compulsory Superannuation Guarantee from 9.5 per cent to 12 per cent, this is expected to rise to 2.5 percentage points of GDP. Higher levels of domestic savings reduce the cost of capital in Australia, increasing investment by Australian businesses, which drives stronger economic growth.

MYTH: Private superannuation savings could be confiscated and that process has already started

FACT: Superannuation entitlements and account balances are strongly protected by law including constitutional requirements that property can only be acquired on just terms

No political party in Australia has a policy that would involve the nationalisation of superannuation savings

Myths and Facts Source: The Association of Superannuation Funds of Australia (ASFA)


The Trowbridge Report

Life Insurance is a large and very important part of Australia’s financial sector.

According to assistant Treasurer Josh Frydenberg “there are 28 life insurance companies writing more than $44 billion worth of business, and more than 13,500 life insurance advisers employed in Australia.” The policies they provide – be it through a superannuation fund, direct from an insurer or via a financial adviser – provide essential financial security in the event of death, serious illness or injury. Without it, even the best laid plans often go awry.

However, it has become clear through a series of reviews that reform in the sector is needed.

The latest of these reviews, an independent report by John Trowbridge and one commissioned by the industry itself, focuses yet again on the misalignment of interests that can occur between insurers, the adviser and the client.

Like the Murray Report before it, Trowbridge’s main concern is upfront commission and the issue of ‘churning’. His report outlines six policy recommendations for improvement.

  1. Upfront commissions be replaced by level commissions combined with an
    initial advice payment (to cover policy set-up) that can not be paid more than
    once every five years (‘the five year rule’).
  2. A transition period of three years in the implementation of point 1.
  3. Licensees be prohibited from receiving non-commission benefits from insurers that might have an impact on the products they recommend to their clients.
  4. Licensees to extend the number of providers on their Approved product list to include at least half of the providers servicing the market.
  5. Improve the standards of client engagement and education
  6. The industry to develop a ‘Life Insurance Code of Practice’ to better inform and govern adviser customer interactions.

Click here to read the full report 

FinSec Partners have long championed the raising of professionalism in financial planning, particularly the banning of conflicted remuneration and the requirement for advisers to act in the best interests of their clients. In this context, we welcome the Trowbridge Report .

Whilst the report (at this stage it is only a report, not law) addresses key issues within the risk industry and to this extent should be applauded, the current recommendations do require considerable ‘tuning’ to ensure the desired outcomes are in-fact achieved. We hope the 5 year rule allows the flexibility to deliver ‘best interest’ advice in-line with a persons changing needs and that any savings to manufacturers as a consequence of reform, is passed directly on to consumers, not pocketed as additional company profits.

Most in the industry would agree ‘churn’ should be prosecuted but not when the recommendations are in danger of helping large integrated insurers on the back of the sins of so few.

A step in the right direction none-the-less.

The Story Part 2: Federal Budget 2014/15 – what does it mean for you?

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On Wednesday we brought you ‘The Story’, a budget summary outlining the key proposals from Treasurer Joe Hockey’ s 2014-15 budget.
Now the dust has begun to settle we bring you ‘The Story Part 2’ – What does it mean for you? How could the Budget proposals change the way you live, work and pay for services on a practical day-to-day level?

Here’s a round-up of what the 2014-15 Federal Budget could mean for your family finances.

As always, if you have questions relating to your personal circumstances, we encourage you to contact us by email, or phone and we can discuss the changes in greater detail.

But don’t forget, the proposals may change as the legislation passes through parliament.


1.1 Superannuation Guarantee (SG) rate – Change to increase schedule
Proposed effective date 1 July 2014

The Government will change the schedule for increasing the SG rate. SG contributions are the compulsory super contributions made by employers into the super accounts of eligible employees. The current SG rate is 9.25%. The SG rate will increase from 9.25% to 9.5% from 1 July 2014 as currently legislated. The rate will remain at 9.5% until 30 June 2018 and then increase by 0.5% each year until it reaches 12% in 2022-23 as per the following table:

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