Category : The Verdict

Home/Archive by Category "The Verdict"

US Election 2016: Trump Wins. How Markets will React?

How Markets will React: A Short, Medium and Long Term View.

Keeping an eye on the short term

While there was a quick selloff at first signs of a conclusion to the U.S. elections, and markets seem to have recovered quickly, there still may be some near-term volatility. As with many geopolitical events that generate market swings, the first priority is to rationally evaluate your chosen investment strategy. Review your primary market indicators (we use cycle, value and sentiment), consult your expert advisors and then chart your course over the long term rather than as a reaction to current events. There could be opportunities you miss if you rush to follow the herd.

Looking at the potential longer-term global ramifications, President Trump may call into question the decades-long assumption that more trade is good trade. The “Brexit” vote this past summer was one shoe dropping on a growing belief that trade may not always be good. The U.S. presidential election is another shoe. Trump has opposed the Trans-Pacific Partnership, said he will re-negotiate or tear up the North American Free Trade Agreement (NAFTA) and has generally shown a willingness to renegotiate trade deals with anyone. Most investors in a global economy will be watching how U.S. trade policies develop.

Looking ahead to the medium-term

Even though such a drastic change in administrations may seem jarring to some, the American political system has plenty of checks and balances, which is why no president since Franklin D. Roosevelt has been able to enact a truly far-reaching agenda like the New Deal.

Plus, the U.S. economy is driven far more by the private sector and consumer spending, in particular, which accounts for nearly 70 percent of economic activity. Fundamentals matter more for the outlook: what happens with earnings growth, economic growth, and monetary policy are likely to be much more influential than presidents when it comes to financial markets, in our view.

And don’t forget that the U.S. Federal Reserve (the Fed), which holds many of the economic levers in the United States, has an important meeting in December. We still think the Fed is on track to hike at that meeting, but it is a much closer call after today’s outcome. Janet Yellen and the Federal Open Market Committee will be looking at financial conditions to see whether markets stabilize before making that important policy decision.

So we don’t see this election as having a lasting impact on markets. True, it will take some time for investors to consider the implications of a Trump presidency, and act accordingly. But there are sectors that might benefit—energy could outperform, given Trump’s insistence that he will reduce regulations and work to boost output of oil, gas and coal. Healthcare and biotech stocks, which faced concerns that Hillary Clinton would seek greater regulation and even price controls, might benefit as well. More fiscal spending could reinvigorate growth and potentially help to boost the infrastructure sector.

The markets during the next presidency

While President Trump comes with plenty of uncertainty, it isn’t clear what many of his policy positions are and what he’ll actually push forward as a legislative agenda, nor is it clear what direction the Fed will take under a Trump presidency. He has said he will replace Fed Chairwoman Janet Yellen, although her current term is through January 2018.  The Fed is deliberately positioned to be independent of the political process in Washington. That provides an important source of stability and leadership in the short-run.

Against a backdrop of stable macroeconomic fundamentals, we at Russell Investments like buying significant dips like this one and prefer non-U.S. assets at this time. We encourage investors to remember that however radical this presidential change may seem, the United States is a big place with a large and diverse economy. And, as Brexit proves, populism is becoming a driving force in global politics today. We don’t think one person—even the president—is positioned to help send the markets permanently off the rails. Savvy investors should look for opportunities as the political environment settles.

Source: Russell Investments Blog

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

Screen Shot 2014-05-28 at 11.42.10 AM

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

2017-and-2017-budget-banner

Excerpt: 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.

2016 The Year of Volatility

Screen Shot 2016-02-29 at 3.30.00 PM

Given the relentless media coverage of the issue, it will come as no surprise that markets have been in a state of volatility since the start of the year. This volatility comes off the back of the second half of 2015, seeing a 10% reduction in the value of the Australian market. So all in all, not a market that is causing investors to sleep without a tad of anxiety.

Having mentioned the media, let’s not forget that good news doesn’t sell papers, make ratings or lead to web site hits. So, the abundance of bad news has been a boon for the news cycle.

So, where to from here? There is no doubt that the world is still grappling with the ongoing issues that caused the financial crisis of 2008. The GFC, as it is commonly known, was fuelled by debt which, in the main, remains. In the regulators’ attempts to avoid financial Armageddon, more debt (cheap debt) was introduced. Recently there has been commentary about $200 trillion of debt, which will never be repaid. Whilst this is a wonderful headline, it fails to mention that with current low interest rates, debt repayment doesn’t make sense. We must, as a result, focus on borrower’s capacity to meet their interest obligations and, in the majority of cases, they are coping.

Central banks have printed money to kick start economic activity and lift inflation. Over time, this will dilute the real value of all this debt. But falling commodity prices around the world have acted as a foil for this desired inflation. It has also sharpened the focus on the ability of commodity revenue dependant emerging economies, to service their debt. This is further complicated by the rising US dollar, given much of their debt is US denominated.

These are all reasonable arguments to justify some anxiety in markets. But let’s reset.
The US economy has turned a corner. Housing has recovered, the unemployment rate is less than 5% (which purists would argue is full employment), the Federal Reserve has had the confidence to raise interest rates (albeit only once at this stage) and company profits are growing. Europe appears finally, to be getting its act together and may well yet “muddle through”.

China is in transition and its economic growth is slowing, however, there are still hundreds of millions to the urbanised. It is fair to say China’s internal consumer demand is yet to gain momentum, and their government continues a “whatever it takes” approach to maintaining their status as the wunderkind of the East! Lets’ not forget that China has doubled the size of its economy over the last 10 years meaning growth at today’s rate of 6.5%pa, is still creating more new wealth than when it was growing at 10%pa, 10 years ago.

While there are many cultural differences and strategic challenges that will make India’s journey to urbanisation different, it will follow a similar path in that they require the same services and resources available from the Australian economy that China does. This is a good news story for our economy over the longer term.

Much has also been written about the collapse in oil prices which has seen the likes of our local darling, Santos, decimated. What hasn’t been widely written about, however, is why the oil price has collapsed. Demand has moderated, yes, but it’s the growth profile that has moderated, not total consumption. We are still consuming more oil than ever and, as the developing world introduces power stations, motor vehicles, transport infrastructure and industrialisation, fossil fuels will be a staple for the revolution.

The issue for oil is “supply”, and supply has been driven by geopolitics. While trying to kick-start their economy with little left in their monetary policy armoury, it has suited the US Federal Reserve to have oil prices fall. There is speculation that forces have been at work to drive down the cost of energy to compromise Russia’s funding of the Ukraine conflict. Finally, the OPEC nations have a vested interest in challenging the shale oil producers and other higher cost suppliers.

Our view is these political games are near an end and supply will be tapered. This may not result in a return to the prices of three years ago, but it will see a normalisation in the oil price. In turn, this will lead to stabilisation in the valuations for oil producers and their downstream suppliers. It may also deliver the desired modest rise in inflation that will give the US Federal Reserve the confidence to normalise interest rates, and finally reset their economy for the post GFC world.

So what does all this mean?

Our view is that 2016 will continue to be a volatile year with regular swings of 100 points or more a day. Much of the volatility will be driven by the markets response to the US Federal Reserve’s approach to interest rates not long term trends. Hedge fund managers constantly reposition their portfolios based on what they know now and bet on what they think will happen next. The weight of money that flows when these decisions are made has the potential to swing markets wildly, albeit in short bursts. Based on what we can see at this point, we don’t see the market spending too much time below 5000 points on the All Ordinaries Index as a foundation is put in place for growth beyond 2016.

We have had a relatively good run since 2012, where our market bobbed around 4000 points while we digested the implications of the Greek debt crisis. There has been a dearth of volatility throughout the last three years and, in fact, what we are now seeing is a return to more normal market behaviour. There is no doubt blood pressures will be tested through this period of volatility. However, we remain committed to the tenet that the patient and unemotional investor will be rewarded through appropriate diversification across asset classes and markets, aligned with risk profile, pragmatic manager and stock selection and the implementation of good strategy.

I can only hope that by the time this reaches you, things have not changed again!

Author: Andrew Creaser, Managing Partner at FinSec

Disclaimer

Less Politics, More Economics – The Verdict Budget 2014/15

Screen Shot 2014-05-28 at 11.42.10 AM

THE BUDGET WE HAD TO HAVE!

“The Budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed, lest Rome will become bankrupt. People must again learn to work instead of living on public assistance.” – Cicero , 55 BC

We can’t help but think Cicero was on the money (no pun intended) when he proclaimed these words so long ago. Now 2,069 years later, our countries leaders are struggling to find the ‘straight talk’ to deliver in essence this same message. Instead and regardless of positive intent, poor strategy, poor communication and poor media management have combined to kill the story of the budget and its real purpose.

It has now undeniably become totally consumed by the focus on broken promises, the denial of broken promises, the possibility of an early double-dissolution election, a civil war with state leaders over funding cuts, and a premature debate about whether the GST rate should rise or its base broaden. As Jennifer Hewett said in her column last Friday (Australian Financial review) “may the political circus begin”.If you really wanted to sell a budget, you should look at everything the Government has done over the past two weeks and do the opposite.There is no denying of course that these problems arose from the landmines Tony Abbott himself planted during the election campaign when he pretty much promised everything to everyone. Accordingly Australians (based on the polls) have decided the budget is unfair. Some may have a point and they’re right, too, to complain about Abbott’s broken promises.
But it has to be said, was it ever really going to be possible to return the budget to surplus without raising taxes, or cutting spending on health and education, or reducing pension entitlements?Perhaps Jonathan Holmes was right when he said “The Australian electorate will punish the tellers of hard truths, and reward the snake-oil salesmen, the good-news spruikers, the soft-soapers”. (Sydney Morning Herald, 21st May 2014).
Arguably the most objectionable part of all, is Bill Shorten’s refusal to recognise the scale of the budget repair task, in-fact he refuses to acknowledge there’s even a problem, to use his word it’s all a ‘myth’.
“Yet it is no myth that Australia has just enjoyed the greatest burst of good fortune in at least a century, but is still entrenched a structural budget defecit that leaves the working men and women who Labor claims to represent highly exposed”. “Squandering the privilege of leading the nation should call for soul-searching, including over just how a government left a budget deficit stretching well into the 2020s” David Rowe, Australian Financial Review
A political circus indeed!Back to the budget purpose – bring Australia back to surplus and address the demographic necessity of change.
Politics aside let’s look to the facts, the real economics behind the 2014/15 Budget and our verdict – The budget we had to have!People weren’t ever going to like this budget, it is tough and it will hurt everyone. There are many budget measures we’d advocate for change (is the age of entitlement really over for everyone…), however we are broadly supportive of it’s purpose and we do believe it’s the ‘budget we had to have – here’s why.

1. Government spending

The International Monetary Fund has shown that of all the major countries it monitors;

  • Australia was facing the fastest growth rates of government spending
  • Australia had the third-most significant jump in net debt

We do agree that right now Australia does not really have a ‘budget emergency’: the budget deficit has not come anywhere near the 10% of GDP levels that sparked concern in the US, parts of Europe and Japan.

That said, the budget is always about balance and Australia does have a budget problem. After the biggest boom in our history, there is an argument for stating that the budget should be in better shape.
“In 2006 Ireland’s net public debt was close to where Australia’s is now and yet it skyrocketed when its boom turned to bust. Given our resources boom and 20 plus years with no recession we should be much closer to Norway which is running huge surpluses and negative net public debt (-205% of GDP).” Dr Shane Oliver, Chief Economist AMP

Against this backdrop, the 2014-15 Budget is a step in the right direction with the measures put in place to control spending growth over the medium to long term likely to put it on a sustainable path.

Without some fiscal repair, Australia was exposing itself to huge risks, if and when the cycle turns negative.

2. Australia is facing a longevity crisis.

The age pension has been set at 65 years since it was introduced over 100 years ago (1909). In 1910 the average life expectancy of a 65 year old (post retirement) was on average 12.1 years, in 2009 20.25 years – the government is now funding payments for an extra 8 plus years.

The below chart compares retirement ages and life expectancies in 2009 with those from 1901. Figures are based on ABS Australian Historical Population Statistics 2008; ABS Deaths. Australia, 2009.

Screen Shot 2014-05-28 at 11.46.00 AM

Medical technology has prolonged both the quality and the quantity of life. However we aren’t working any longer to pay for this.

There is an interesting irony in the government’s decision to allocate the $7 dollar GP surcharge to a $20 billion medical research fund. It goes without saying that we all hope this money leads to a great many medical breakthroughs, which will inevitably prolong our lives even further…

Putting even more pressure on the social security system is the ‘Boomer Impact’.
In the next 20 years the number of people over 65 years in Australia is set to double.

  • 13% of the population were aged over 65 in 2011 (2.9million people)
  • 19.9% of the population will be aged over 65 in 2031 (5- 7 million people)

Based on conservative figures Australia would need to find a whopping extra $13 billion dollars per year to support it’s ‘boomer’ pensioners.

Interestingly, around 80% of Australians who have reached Age Pension age currently receive a full or part Age Pension. Some couples who hold more than a $1 million in assets (in addition to the family home) are currently eligible for a part Age Pension.

Screen Shot 2014-05-28 at 11.50.23 AM

The other challenge that comes with the retirement of the baby boomers is the issue of productive workers leaving the workforce.

The impact here is twofold;

  1. Less workers to do the work will potentially impact on productivity and consequently economic growth.
  2. If there are less workers earning an income, there will be less tax revenue collected to fund the burgeoning pension bill.

In effect this will place the economy in a pincer movement which unless managed very deftly by successive governments over the next 20 years will deliver genuine potential for the budget emergency that has been mooted.

These statistics all come together to paint a dramatic picture of the demographic, market and regulatory landscape around retirement incomes and why things have to change.

Just a “myth”, “no emergency” they say, we’ll let you be the judge of that!

FinSec Partners Disclaimer

THE VERDICT: Federal Budget 13/14

TheVerdict

THE GOOD, THE BAD AND EVERYTHING IN-BETWEEN

This Budget could be described as uneventful as it contained little in the way of sweeteners for middle-income earners, families and pensioners. Many of the key announcements were released pre-budget and confirmed by the Government in the budget papers. These include a number of changes to the superannuation system such as an increase in the concessional contributions cap for older Australians, changes to the excess contributions tax regime and 15% tax on certain earnings in the pension phase.

The Budget also contained some announcements that were unexpected including the phase out of the net medical expense, the removal of the baby-bonus, and a new housing help pilot scheme allowing pensioners to downsize the family home without affecting their pension.

Before any of these announcements can be implemented, they will require passage of legislation.

Implications

Implications for interest rates

While there is a fiscal tightening in the Budget, it is actually zero this year and doesn’t kick in until 2014-15 at 0.4% of GDP before rising to 0.7% of GDP in 2015-16. This makes it somewhat academic (as it may not even occur) given past experience and is unlikely to have any impact on the Reserve Bank of Australia’s (RBA) immediate thinking regarding interest rates.

Implications for Australian assets

It’s hard to see a major impact on Australian assets.

Cash and term deposits

We can’t see much impact here at all. The RBA is likely to cut rates further which is likely to put more downwards pressure on term deposit rates. Expect term deposit rates to fall below 4% in the months ahead.

Bonds

The delay in a return to surplus is probably not enough to threaten Australia’s AAA sovereign rating and continuing low interest rates should ensure bond yields remain low. But the problem remains that with five-year bond yields at 2.8%, it’s hard to see great returns from Australian sovereign bonds over the next few years.

Shares

While increased spending on roads and rail may help construction and building material stocks, the impact is likely to be minimal. It’s hard to see much impact on the share market overall, where we see the broad trend remaining up thanks to reasonable valuations, easier monetary conditions and prospects for stronger profits.

Property

Property prices are likely to continue gaining at a modest pace on the back of low interest rates and as domestic growth starts to pick up.

The A$

While the initial response to the Budget saw the A$ fall 0.5%, the announcements in the Budget alone are not radical enough to have much of an impact on the A$. In the very short term, the A$ was oversold after last week’s sharp fall. However, with the commodity price boom fading, the interest rate differential in favour of Australia falling and the A$ overvalued on a purchasing power parity basis, the trend in the A$ is now likely to be down.


Implications for those nearing retirement

Increasing the concessional cap for certain superannuation members

The current concessional contributions cap is $25,000 for individuals of all ages. If you contribute more than this cap, you may have to pay extra tax.

This cap is proposed to increase to $35,000 (unindexed) for those:

  • Aged 60 and over from 1 July 2013, and
  • Aged 50 and over from 1 July 2014.

Concessional contributions include employer contributions, salary sacrifice contributions and personal contributions where a tax deduction has been allowed.

If you are aged 59 or more on 30 June 2013 you can take advantage of the higher cap by making concessional contributions up to $35,000 during the 2013-14 financial year.

The higher concessional contribution cap will apply until the general concessional contribution cap reaches $35,000 due to indexation (expected to occur from 1 July 2018). That is, the higher cap will only be temporary.

The current $150,000 limit together with the additional 2 year bring forward rules for non-concessional contributions remain completely unchanged.

Fairer excess contributions tax system

Amounts contributed to a superannuation fund in excess of the concessional contributions cap are currently taxed at 46.5 per cent.

Excess concessional contributions made from 1 July 2013 will be taxed at your marginal tax rate (MTR), plus an interest charge to recognise that tax on excess contributions is collected at a later date than normal income tax. You will also be able to withdraw the excess contribution from your superannuation fund.

This measure will be much more flexible than under the current rules where refunds are limited to excess contributions of less than $10,000 and only on a once off basis.


Implications for those in retirement

Deeming of account-based pensions from 1 January 2015

Under the current Centrelink rules, account-based pensions are fully assessable under the assets test.

However, income received from account-based pensions is currently treated more favourably than income generated by other financial investments such as bank accounts, shares and managed funds under the income test. This is because income from an account-based pension attracts a non-assessable portion, which loosely recognises that part of these pension payments represent a return of capital. In comparison, other financial investments are subject to deeming rules that attribute a fixed rate of return to these investments, irrespective of how much income they actually produce.

The Government proposes that these normal deeming rules will apply to new superannuation account-based income streams commenced after 1 January 2015. All account-based pensions held by pensioners before 1 January 2015 will be grandfathered and the existing rules (e.g. access to the non-assessable portion under the income test) will continue to apply, unless the product is changed on or after 1 January 2015.

If you are looking to retire at or around 1 January 2015, it is important to work through your circumstances with your FinSec Planners adviser to see whether there is a financial benefit by commencing an account-based pension before or after 1 January 2015.

Pension earnings above $100,000 to be taxed at 15%

The Government proposes that from 1 July 2014, all earnings on assets supporting income streams will be tax-free only up to $100,000 per year. Earnings above $100,000 per year will be taxed at a rate of 15 per cent.

The Government estimates that this measure will only affect 16,000 superannuation members who are estimated to have superannuation balances of $2 million and over. However, when capital gains are taken into account further down the track, those will smaller balances may also be impacted.

Special arrangements will apply for capital gains on assets purchased before 1 July 2014. This will cause the CGT treatment of assets supporting income streams to have a three tiered structure over the next 10 years so that for:

  • Assets that were purchased before 5 April 2013, the reform will only apply to capital gains that accrue after 1 July 2024;
  • Assets that are purchased from 5 April 2013 to 30 June 2014, individuals will have the choice of applying the reform to the entire capital gain, or only that part that accrues after 1 July 2014; and
  • Assets that are purchased from 1 July 2014, the reform will apply to the entire capital gain.

Capital gains that are subject to the tax will receive the 33 per cent discount, and will therefore be taxed at a rate of 10 per cent.

The Government has said it will ensure that members of defined benefit funds will be equally impacted by this change as members of accumulation funds. This will be achieved by calculating a notional earnings for each year a defined benefit member is in receipt of a concessionally taxed superannuation pension.

This could be a very complex measure to administer and there are a lot of unknowns at this stage including how this 15 per cent tax will be collected. Many retirees have multiple pension/annuity funds making it difficult to administer at fund level. If levied to the individual, new processes will have to be put in place by the ATO to consolidate information, calculate the tax and levy the bill.

Some other unresolved questions include:

  • If capital losses in one fund or investment option will be able to be offset against capital gains in another fund or investment option; and
  • How the capital gains component of managed fund distributions will be treated with the transitional rules.

Importantly, if you are aged 60 or over, pension payments and lump sum withdrawals will continue to be tax-free.

Housing Help for Seniors

The Government will trial a program from 1 July 2014 to 1 July 2017, to help older Australians downsize their family home and move to more suitable housing without adversely affecting their Age Pension. This will be achieved by providing a means test exemption on the excess proceeds under certain conditions.

The family home must have been owned for at least 25 years with at least 80 per cent of excess proceeds from the sale (up to $200,000) to be deposited into a special account by an authorised deposit-taking institution. These funds (plus earned interest) will be exempt from pension means testing for up to 10 years provided there are no withdrawals during the life of the account.

The exemption will also be accessible to individuals assessed as home-owners who move into a retirement village or granny flat. It will not be available to individuals moving into residential aged care.

At this stage it is not clear how funds in the special account will impact an eligible person’s partner who is receiving a social security entitlement other than a pension, such as Newstart Allowance. There has also been not clarification if this trial program will extend to Department of Veterans Affairs recipients.

Extending concessional tax treatment to deferred lifetime annuities

Deferred lifetime annuities (DLAs) will be eligible for the same concessional tax treatment that superannuation assets supporting retirement income streams receive from 1 July 2014.

DLAs are a form of longevity insurance offered in many countries, but not in Australia, due to unintended unfair taxation treatment. This reform will provide you with more choice in retirement by allowing you to allocate part of your superannuation to a product that will provide an ongoing income stream for life beyond a certain age.

Other measures that may be relevant to you

The Medicare Levy will increase from 1.5 per cent to 2 per cent as of July 2014 to fund the national disability insurance scheme, to be known as Disability Care Australia.

While this announcement will increase the amount of Medicare Levy people will pay on their taxable income, it will also increase the tax rates applicable to other amounts that include the Medicare Levy rate. These include:

  • Excess non-concessional contributions tax 46.5% to 47%
  • Tax on the taxable component of a superannuation lump sum benefit received by a taxpayer age 55 to 59 in excess of the low rate cap (currently $175,000) 16.5% to 17%
  • Tax on the taxable component of a superannuation lump sum benefit received by a taxpayer under the age of 55  21.5% to 22%
  • Tax on the taxable component of a superannuation lump sum death benefit paid directly to a non-death benefits dependent

– Taxed element – 16.5% to 17%

– Untaxed element – 31.5% to 32%

  • Withholding tax on financial investments where no TFN is provided – 46.5% to 47%

– Fringe benefits tax – 46.5% to 47%

The increase in the Medicare Levy may also improve the tax effectiveness of a number of strategies. These include:

  • Making salary sacrifice and personal deductible contributions more tax effective, as the Medicare Levy does not apply to these amounts
  • Delaying the withdrawal of any taxable component as a superannuation lump sum benefit until after age 60, as the Medicare Levy does not apply to these amounts
  • Arranging for a members death benefit to be paid to a non-death benefits dependent via the member’s estate, as the Medicare Levy does not apply to deceased estates

The net medical tax offset will be phased out. Importantly, the offset will continue to be available for out of pocket medical expenses relating to aged care fees until 1 July 2019.

Clients who are considering elective medical procedures that qualify as eligible out-of-pocket medical expenses i.e. major dental procedures may wish to bring forward the procedure and incur the expense in the 2012-13 financial year. This way they may be able to remain eligible for the NMETA for future years under the transitional arrangements.

Late registrations for the Pension Bonus Scheme will cease from 1 March 2014. The scheme has been closed since 20 September 2009 but has been allowing those eligible for the Scheme to register late.