Josh Frydenberg delivering the 2019 Federal Budget

 

 

 

 

 

 

 

 

 

 

 

 

On Tuesday, 2 April 2019, Treasurer Josh Frydenberg handed down his first Federal Budget. In an election Budget, the Treasurer announced the first Budget surplus in more than a decade at $7.1 billion for the 2019-20 financial year. The Government forecasts a total of $45 billion of surpluses over the next 4 years. Total revenue for 2019-20 is expected to be $513.8 billion, an increase of 3.6% on estimated revenue in 2018-19.

 

 

 

 

 

 

 

 

 

 

 

 

 

In the next few days, Prime Minister Scott Morrison is expected to announce an election date of either Saturday 11 or 18 May 2019. This Budget is unique because of its close timing to the election for two reasons. Firstly, the Liberal Government is unlikely to be able to legislate any of the measures announced prior to the election, so many of the proposals and tax incentives discussed in this analysis may not come to fruition. Secondly, the Morrison Government also announced $3.2 billion in Budget expense measures under the heading “decisions taken but not yet announced”. Therefore, expect to see some further ‘sweeteners’ announced prior to election day as the Coalition tries to win some ground back on the polls.

This places the current Government distinctly apart from the Australian Labor Party which has a superannuation policy platform that will negatively impact many retirees because of the proposed changes to remove excess franking credit refunds, and restrict super contributions. In addition, Labor has also proposed that if elected, they will remove the tax deductions for negative gearing when investing in property (except for new build houses), and reduce the Capital Gains Tax (CGT) discount to 25%. Concerns are that this could contribute to a slowdown in the Australian economy, put further downward pressure on property prices, and create a negative wealth effect overall.

Taxation – Personal

On personal taxation, the Government announced two significant changes designed to deliver $158 billion of additional tax relief:

1.  More than doubling the low & middle income tax offset (LMITO) up to $1,080 from 2018-19.

In 2018-19

  • The Government will further reduce taxes for low and middle-income earners to ease cost of living pressures and support consumption growth.
  • Low and middle-income earners will have their tax reduced by up to $1,080 for single earners or up to $2,160 for dual income families, after lodging their tax returns as early as 1 July 2019.
  • Taxpayers earning up to $126,000 a year will receive this tax cut.
Click for a larger image

The new targeted offset will benefit over 10 million low and middle‑income earners

 

In 2022-23

The Government will preserve the tax relief provided by the larger low and middle income tax offset by increasing the top threshold of the 19 per cent tax bracket from $41,000 to $45,000 and increasing the low income tax offset (LITO) from $645 to $700.

2. Lowering the 32.5% tax rate to 30% from 1 July 2024.

In 2024-25

The Government will reduce the 32.5 per cent tax rate to 30 per cent, more closely aligning the middle tax bracket with corporate tax rates. This will cover around 13.3 million taxpayers earning between $45,000 and $200,000 and will mean that 94% of taxpayers are projected to face a marginal rate of 30 per cent or less.

 

 

 

 

 

 

 

2024-25: With the announced changes there would only be three personal income tax rates of 19%, 30% and 45%

2024-25 with the Government's plan.

* Average full-time earnings includes both males and females, and excludes earnings from overnight work.

 

Proposed changes to personal tax rates and thresholds over time 

Rates in
2017-18
Thresholds in
2017-18
New Rates in
2024-25
New Thresholds in
2024-25
Nil Up to $18,200 Nil Up to $18,200
19 per cent $18,201 – $37,000 19 per cent $18,201 – $45,000
32.5 per cent $37,001 – $87,000 30 per cent $45,001 – $200,000
37 per cent $87,001 – $180,000
45 per cent Above $180,000 45 per cent Above $200,000
Low income tax offset in 2017-18 Up to $445 Low income tax offset in 2024-25 Up to $700

Medicare levy changes

From 1 July 2018

While the Medicare levy remains unchanged at 2% of taxable income, the thresholds for low-income singles, families, and seniors and pensioners will increase in the 2018–19 income year.

The threshold for singles will increase to $22,398. The family threshold will increase to $37,794 plus $3,471 for each dependent child or student.

For single seniors and pensioners, the threshold will increase to $35,418. The family threshold for seniors and pensioners will increase to $49,304 plus $3,471 for each dependent child or student.

Taxation – Small and Medium Business

Instant asset write-off threshold increased to $30,000
until 30 June 2020

On Small Business tax, the Government has proposed to increase the instant asset write-off threshold to $30,000 until 30 June 2020. The threshold applies on a per asset basis, so eligible businesses can instantly write off multiple assets. This builds on the Government’s earlier announcement that the instant asset write-off threshold would be increased from $20,000 to $25,000 and extended to 30 June 2020. More than 350,000 businesses have already taken advantage of the instant asset write‑off.

The Government is also expanding access to the instant asset write-off to include medium‑sized businesses by increasing the annual turnover threshold from $10 million to $50 million. Around 22,000 additional businesses employing around 1.7 million workers will now be eligible to access the instant asset write-off.

These changes will benefit small and medium‑sized businesses and improve their cash flow as they will be able to immediately deduct purchases of eligible assets each costing less than $30,000.

Around 3.4 million businesses, employing around 7.7 million workers will be eligible.

If legislated, the increased threshold and expanded eligibility will apply from 7.30pm (AEDT) on 2 April 2019 to 30 June 2020.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Superannuation

Superannuation contributions for older Australians
From 1 July 2020

The work test will no longer need to be met to make voluntary contributions to superannuation from 1 July 2020 for those aged 65 and 66. The ability to utilise the bring-forward rule will also be amended to allow individuals less than age 67 to contribute a greater amount to superannuation. This means the work test requirements will align with Age Pension age which will be 67 from 1 July 2023.

There is no change to other criteria, such as the total superannuation balance, which will limit the ability to make non-concessional contributions.

The removal of the work test would provide the opportunity for those eligible clients to:

  • Make non-concessional contributions
  • Make concessional contributions including catch-up contributions
  • Implement the recontribution strategy
  • Manage tax, including capital gains tax
  • Claim the spouse contribution tax offset or co-contributions (if eligible), and
  • Transfer foreign superannuation into an Australian superannuation account.

Spouse contributions up to age 74
From 1 July 2020

The age limit for spouse contributions will increase to 74. Currently spouse contribution can only be made if the receiving spouse is under age 70.

Additional flexibility will be provided by the removal of the work test for those aged 65 and 66. This would enable spouse contributions to be made for the receiving spouse without the need to satisfy the work test up to age 66. From age 67 to 74, the work test would need to be satisfied by the receiving spouse.

Making spouse contributions is a simple strategy that enables that spouse’s superannuation to be boosted. This may be used as a means of equalising the superannuation interests of both members of the couple. It may also entitle the contributing spouse access to the spouse contribution tax offset.

There is no change to other criteria, such as the total superannuation balance, which will limit the ability to make non-concessional contributions.

Insurance in superannuation
From 1 October 2019

Part of the Government’s Protecting Super Package included the provision of insurance in superannuation on an opt-in basis for accounts with balances of less than $6,000 and for members under age 25. The original start date for this was 1 July 2019, however it has been deferred until 1 October 2019.

Calculation of exempt current pension income
From 1 July 2020

Trustees of superannuation funds will be able to choose the method they use to calculate exempt current pension income (ECPI) for funds with members in both pension and accumulation phases.

The requirement for superannuation funds to obtain an actuarial certificate to calculate ECPI under the proportionate method when all the members are in retirement phase will be removed.

This measure would be primarily of interest to Self Managed Super Fund (SMSF) trustees.

Social Security

One-off energy payment
From 1 June 2019

A one-off payment of $75 for singles and $62.50 for each eligible member of a couple will be made to assist with the cost of energy bills. To be eligible, an individual must be a resident in Australia and be eligible for a qualifying payment on 2 April 2019. Qualifying payments are:

  • Age Pension
  • Disability Support Pension
  • Carer Payment
  • Parenting Payment (Single)
  • Veterans’ Service Pension
  • Veterans’ Income Support Supplement
  • Veterans’ Disability Payments
  • War Widow(er)s Pension, and
  • Certain permanent impairment payments

The payment will be tax free and not counted as income for social security purposes.

Partner Service Pension – eligibility alignment
From 1 July 2019

Former spouses and former de-facto partners of veterans will be able to access the Partner Service Pension when they separate from their veteran partner.

Aged Care

Better access to care
From 1 July 2018

More funding will be available to improve the quality, safety and accessibility of residential and home care services, including:

  • The release of an additional 10,000 home care packages across the four package levels, and
  • Developing an end-to-end compliance framework for the Home Care program, including increasing auditing and monitoring of home care providers.

Other Measures

Infrastructure

The budget includes a record $100 billion in funding for road and rail projects around the country over the next decade.

Extending FTB to ABSTUDY recipients aged 16 and over who study away from home

The Government announced that it will provide $36.4 million over 5 years from 2018-19 to extend Family Tax Benefit (FTB) eligibility to the families of ABSTUDY (secondary) student recipients who are aged 16 years and over, and are required to live away from home to attend school.

Tax Avoidance Taskforce on Large Corporates etc: more funding

The Government will provide $1.0bn over 4 years from 2019-20 to the ATO to extend the operation of the Tax Avoidance Taskforce and to expand the Taskforce’s programs and market coverage.

The Taskforce undertakes compliance activities targeting multinationals, large public and private groups, trusts and high wealth individuals. This measure is intended to allow the Taskforce to expand these activities, including increasing its scrutiny of specialist tax advisors and intermediaries that promote tax avoidance schemes and strategies.

The Government has also provided $24.2m in 2018-19 to Treasury to conduct a communications campaign focused on improving the integrity of the Australian tax system.

Tax exemption for North Queensland floods grants

The Government will provide an income tax exemption for qualifying grants made to primary producers, small businesses and non-profit organisations affected by the North Queensland floods.

Qualifying grants include Category C and Category D grants provided under the Disaster Recovery Funding Arrangements 2018, and grants provided under the On-Farm Restocking and Replanting Grants Program and the On-Farm Infrastructure Grants Program.

The exemption will apply where the grants relate to the monsoonal trough, which produced flooding that started on or after 25 January 2019 and continued into February 2019. The grants will be non-assessable non-exempt income for tax purposes.

Tax exemption for primary producers affected by Queensland storms

The Government will provide an income tax exemption to primary producers in the Fassifern Valley, Queensland affected by storm damage in October 2018.

The tax exemption relates to payments distributed to affected taxpayers through a grant totalling $1.0 million to the Foundation for Rural and Regional Renewal, working with the Salvation Army and a local community panel.

Please contact our office if you would like to review your situation and determine the financial strategy options that will assist you secure your future.

Grant

Equity markets around the world have been volatile of late, and whenever this happens, investors naturally look for explanations for the downturn and wonder whether they’re in the right investments. We believe this response to volatility, although natural, is likely unhelpful. Instead, you are better served by putting recent market movements into the context of what’s important to you in the long term. For example, looking back a decade to the massive market decline of 2008, consider this question: Would you be closer to meeting your long term financial goals by having sold out of equities after double-digit losses only to miss the rebound and one of the longest bull markets in history?  Putting market volatility into context is a much better way to react than trying to understand every market move or selling at the wrong time to quiet fears.

Reserve Bank of Australia - facade

 

Key Takeaways

  • Predicting how macro-economic issues will work out or how they’ll affect markets is next to impossible.
  • Volatility can be upsetting, but selling after significant losses can be counterproductive.
  • We believe valuations, not volatility are the key to portfolio reallocation, although sometimes high volatility may open up attractive valuation-driven purchases.

The good old days seem to be quickly sliding into the past. As recently as a year ago, markets were on a joyride. Ever higher returns pushed painful memories of the Global Financial Crisis (GFC) further and further into the background. The fear index, also known as the VIX or more formally the CBOE Volatility Index, rises during periods of market stress. But in 2017, the VIX couldn’t have been less scary, as it set record lows amid a seemingly ever rising market. In fact, from January 1990 through December 2016, the VIX fell below 10 on nine days (nine days in 27 years!) but in 2017 it sat below 10 for 52 days so calm were the markets.

Xi Jinping - Trump

Volatility has clearly returned to markets in 2018. Earlier in the year, fears of rising interest rates and multiple trade conflicts set the market on edge. Many investors continued to have confidence in leading growth stocks for much of the year until threats of stiffer regulations and the failure of a few internet darlings to live up to lofty expectations caused a dramatic rethinking of their worth. In addition, markets have had to wrestle with slowing economic growth in China, the possible end of Quantitative Easing (printing money) by the European Central Bank, volatility caused by the US midterm elections and property prices crashing here in Australia. If balancing all those risks to form a better forecast of how they’ll play out or affect markets seems like a tough job, we couldn’t agree more. Clearly it’s hard to predict these issues in isolation. But in reality, these issues interact and evolve, and people react to them along the way, thus multiplying complexity and making outcome predictions next to impossible. No investor can consistently know how today’s concerns might affect markets in the future. Some current examples of this are:

  • The US-China trade wars and tariffs,
  • Interest rate increases by the US Federal Reserve in response to strong economic growth,
  • The unresolved UK Brexit and political turmoil in Europe,
  • Australia’s possible change of Government in May to Labor and proposed cuts to tax benefits, including the removal of excess franking credit refunds and the reduction of tax deductions for negative gearing,
  • The Reserve Bank of Australia keeping interest rates at the historically low level of 1.50% for over two years,
  • Restrictions on investor and interest-only loans by APRA and Banks curtailing lending,
  • Property prices falling significantly in Sydney, Melb, Perth and Darwin,
  • Australian Banks being exposed for misconduct by the Royal Commission, paying billions in fines and forecasting less profits,

All demonstrating how quickly investor sentiment can change and evolve.

Whether the market is, or will become completely comfortable with all or some of the concerns above remains to be seen. In the US, reaching a new North American trade agreement gave some relief, but progress has been elusive in talks with China, a situation that appears poised to potentially flare at any moment. Europe’s slow growth is fragile, and it looks likely Australia will have another change of Prime Minister in May 2019. But again, knowing when a flare up around these issues might happen, how long it would last, and how it might impact investment markets strikes us as a monumental task.

Bill Shorten

Fintech’s investment management committee think there’s a better way to invest. Specifically, we don’t believe every market hiccup needs deep analysis, nor do we read tea leaves. We prefer to focus our work on fundamental research, contrarian signals, and investment valuations. In the long term, you get paid by the current and future cash flows of the shares and securities you own. We seek to buy securities when prices are low compared to expected cash flows. This valuation work is the driver of our research, and it relieves us from becoming overly concerned about the next central bank rate decision or the outcome of an election.

Scott Morrison frustrated

Should We React to Spikes in Volatility?

The short answer: No. We focus on long term valuations, the true and durable value of an asset class, rather than the volatility of its market price. Having a long term perspective makes the next turn in interest rates, political posturing, the US-China trade spat or the Brexit deal less concerning to us. Instead, we ask, “How might this affect fundamentals over the next several years?”

Investors who trade on emotion and short term market moves are more likely to sell after markets have gone down and buy after they’ve risen. We seek to do the opposite, in part by sticking to our principled approach to investing, which is designed to keep us rational in a sometimes irrational world. In this regard, Fintech’s investment management team is prepared to be buyers if and when valuations provide an attractive buying opportunity.

US Federal Reserve Building

Making sure your financial strategies accurately reflect what’s important to you and your specific needs, is critically important. Fintech Financial Services provides advice relating to your level of income, tax, assets, debts, risks (personal and business), family needs, health, savings and desired lifestyle. A key element is constructing your investment structure and portfolios in line with your Investment Risk Profile, tax effectiveness and to provide the level of certainty you require over the long term.

Please contact our office if you would like to review your situation and determine the financial strategy options that will assist you secure your future.

Grant

Scott Morrison’s third budget is headlined by $140 billion in tax cuts over the next decade, immediate tax relief of up to $1,060 a year for middle-income households and a fundamental reform of the tax system.

This Budget will be the last before the next federal election (due by May 2019) and not surprisingly, the proposals include a range of pre-election sweeteners. However, Treasurer Scott Morrison is also keeping the focus on a return to a surplus. Thanks to an improvement in the budget position of around $7bn per annum, the path to surplus has been made relatively easy for the Turnbull Government.

The modest fiscal stimulus will help households, but the main risk is that the revenue boost seen this year is not sustained and the budget continues to have relatively optimistic assumptions regarding revenue growth.

The Government’s stronger corporate revenue has mainly come from reduced tax losses and higher commodity prices. Added to this is stronger personal tax revenue thanks to higher employment and reduced spending. As a result, the 2017-2018 budget deficit is projected to come in at $18.2bn compared to $23.6bn in the Mid-Year review. Impact on the Reserve Bank of Australia’s interest rate settings and the share market is likely to be minimal, if at all.

Positive outlook

The Government has assumed that much of this revenue boost will continue (see the ‘Parameter changes’ line in the table below) and has only used a small part of it to fund tax cuts and other measures. The net result is that the budget is projected to continue to track to a surplus. This is now expected to be reached one year earlier in 2019-2020 albeit only just at $2.2bn in the positive or 0.1% of GDP. The move back to surplus is slowed slightly by the fiscal easing from policy changes, which are predominately tax cuts. For example, the 2018-2019 deficit is projected to fall to $14.5bn but it would have fallen to $13.8bn were it not for the tax cuts announced.

underlying-cash-budget-balance-projections

The planned tax cuts for higher income earners over the next decade are designed to satisfy the Government’s commitment from the 2014 Budget to cap tax revenue at 23.9% of GDP (or total revenue once dividends are allowed for as shown in the chart below at 25.4% of GDP). This is on the basis of the historic highs reached in the Howard resources boom years, and this cap is now projected to be reached in 2021-2022.

federal-government-spending-and-revenue

What’s next

The 2018-19 Budget has a sensible focus on providing a small boost to households (with the full impact of tax cuts not occurring until next decade) and to infrastructure at the same time as maintaining a return to surplus. The main risks are around whether the recent revenue windfall to the budget proves temporary and the assumptions for continued strong revenue growth.

If you would like to discuss the implications of any of the 2018 Federal Budget announcements to your personal situation, please contact Fintech Financial Services on telephone 07 3252 7665.

scott-morrison-malcolm-turnbull

Summary of key Budget measures

Note: These changes are proposals only and may or may not be made law.
From 1 July 2018

  • Low and middle income earners are to benefit from tax savings of up to $530 per person (or $1,060 per couple). This is mainly achieved by lifting the Low Income Tax Offset and raising the $87,000 tax threshold to $90,000.
  • Dropping the planned 0.5% Medicare Levy increase, which will remain at 2%.
  • The $20,000 instant asset write-off for business with aggregate turnover less than $10m will be extended until 30 June 2019.
  • Funding for home care services and residential aged care will increase, and new products listed on the Pharmaceutical Benefits Scheme.

From 1 July 2019

  • A one year exemption from the ‘work test’ will apply to recent retirees who have less than $300,000 in total super savings.
  • Life insurance can only be offered in super on an ‘opt-in basis’ to new members under 25 years of age or members with inactive accounts or an account balance under $6,000.
  • Fees when exiting a super fund will be banned and administration/investment fees will be capped at 3% pa on accounts with balances of less than $6,000.
  • The ATO will work to proactively reunite Australians’ dormant superannuation funds with their active account, with inactive balances less than $6,000 to be transferred to the ATO.
  • The Pension Loans Scheme will be available to all Australians over Age Pension age and the maximum payments will increase to 150% of the full Age Pension.
  • An extra $25bn in infrastructure spending including the Melbourne rail link, Bruce Highway, Gold Coast/Brisbane M1, road and rail in WA and North-South Corridor in SA. This is only partly offset by various savings including an illicit tobacco tax and the usual tax integrity measures to target the black economy and multinational tax avoidance.
  • Ongoing commitment to cut the corporate tax rate to 25% for large companies by 2026-27.

Opportunities post 1 July 2018

There are some key financial strategy opportunities for our clients following announcements made in previous Federal Budgets that are already legislated to take effect on 1 July 2018. These include:

  • People aged 65 or over can make ‘downsizer’ super contributions of up to $300,000 from the proceeds of selling their home.
  • First home buyers who have made super contributions under the First Home Super Saver Scheme can access their money for eligible property purchases.
  • Where the annual concessional contribution cap is not fully utilised, it may be possible to accrue unused amounts for use in subsequent financial years.

Further information on these opportunities can found at the end of this summary.

Taxation

Personal income tax savings
Date of effect: From 1 July 2018
Low and middle income earners will benefit from initial tax savings of up to $530 per person (or $1,060 per couple) in the 2018-2019 financial year, then via a series of further tax cuts to be implemented over seven years.

Personal income tax thresholds

Treasurer, Scott Morrison has a plan to fundamentally reform the tax system with changes to the income thresholds in 2022, and in 2024. The tables below show the impact of removing the 37% tax bracket and having the 32.5% tax bracket go all the way up to $200,000 on 1 July 2024.

Table-1-personal-tax-rates-and-thresholds

Personal tax offsets

  • A Low and Middle Income Earners Tax Offset of up to $530 will apply from 1 July 2018 to 30 June 2022.
  • From 1 July 2022, the Low Income Tax Offset will increase from $445 to $645.

Personal tax savings

Table 2 below illustrates the tax payable in future financial years (and the potential tax savings compared to 2017/2018) for a range of taxable incomes. These figures take into account the proposed personal income threshold and tax offset changes.

Table-2-tax-payable-and-potential-savings

Medicare levy to stay at 2%

The previously proposed increase in the Medicare levy to 2.5% from 1 July 2019 has been abandoned.

Extension of instant asset write off

Date of effect: From 1 July 2018
Small businesses with turnover of less than $10 million will be able to immediately write-off newly acquired eligible assets valued at less than $20,000 for a further 12 months.

Superannuation

Work test exemption for retirees
Date of effect: 1 July 2019

A person aged 65 to 74 is currently able to make contributions to superannuation if the ‘work test’ has been satisfied (i.e. they have worked at least 40 hours in 30 consecutive days) in the financial year the contribution is made.

A one year exemption from the work test will apply to older Australians who have less than $300,000 in total super savings. This exemption will apply to the financial year following the last year the work test was satisfied. This will allow an additional period of time for those eligible to contribute to superannuation.

Insurance in super

Date of effect: 1 July 2019
In many super funds, including MySuper and employer funds, insurance is offered as a default option. It’s proposed that members will need to ‘opt-in’ for insurance where they:

  • have a balance less than $6,000
  • are new members under age 25, or
  • have an account which has not received a contribution in 13 months and are considered inactive.

Protection for small super balances

Date of effect: 1 July 2019
Measures will be introduced to reduce the impact of fees on low super balances and focus on returning lost super to members.

  • Protection will be provided to super accounts by limiting administration and investment fees to a 3% annual cap. This cap will apply to accounts with balances below $6,000.
  • Exit fees will also be banned on all super accounts.
  • A $6,000 threshold will apply to inactive accounts. These accounts will need to be transferred to the ATO. The ATO will increase data matching activities to return amounts to active accounts held by members.

Personal deductions

Date of effect: 1 July 2018
The ATO will develop new compliance processes for taxpayers claiming a deduction for personal superannuation contributions. This includes raising awareness regarding the necessary steps, including lodging a ‘notice of intent to claim a tax deduction’ form with the super fund trustee.

Inadvertent concessional cap breaches

Date of effect: 1 July 2018
Employers are required to pay Superannuation Guarantee (SG) based on an individual employee’s income. For some individuals this means their concessional contribution cap is breached by the total of multiple employers’ compulsory contributions.

Individuals who have a total income exceeding $263,157 pa and multiple employers will have the option to elect to no longer have SG contributions paid on certain income from their employer. This overcomes the inadvertent breach of the concessional contribution cap and associated tax penalties.

SMSF increase in member numbers

Date of effect: 1 July 2019
Self-managed superannuation funds (SMSFs) are limited to having four members. This threshold will increase to six to provide greater flexibility and allow families, for example, to all be members of the same SMSF.

SMSF three-year audit cycle

Date of effect: 1 July 2019
SMSFs with a history of good record-keeping and compliance will move from providing an audit on an annual basis to a three-yearly cycle. Eligible SMSFs will be those with a history of three consecutive years of clear audit reports and have lodged annual returns on time.

Social security

Pension Loans Scheme

Date of effect: 1 July 2019
The Pension Loans Scheme allows eligible individuals to access some of the equity in the home or other property via a Government loan, which is advanced in fortnightly instalments.

This scheme will be available to all Australians over Age Pension age and the maximum loan payments will increase to 150% of the full Age Pension. Eligibility will continue to limited by the value of the property used as loan security.

The following table summarises the payment ranges for singles and couples based on current rates, where the full pension and no pension is available.

Table-3-pension-loans-scheme-payment-range

Work Bonus

Date of effect: 1 July 2019
Under the Work Bonus, the first $300 per fortnight (currently $250) of employment income will not count when calculating Age Pension entitlements under the income test.

Self-employed retirees will be able to access the scheme for the first time.

A ‘personal exertion test’ will ensure the bonus only applies to income earned from paid work.

Any unused Work Bonus (up to a total of $7,800 pa) can continue to be accrued to reduce assessable employment income in a future period.

Means-testing of certain lifetime income streams

Date of effect: 1 July 2019
Favourable social security rules will be introduced to encourage the development and use of income products that will help retirees reduce the risk of outliving their savings.

Under the proposed rules, only 60% of the amount initially invested in these ‘lifetime income streams’ will be assessed under the assets test. This concession will apply until the account holder is 84 (or for a minimum of five years). After this time, only 30% will be assessed for the rest of the person’s life. Also, only 60% of the income payments will be assessed under the income test.

Means testing of Carers Allowance

Date of effect: To be confirmed by Government
As previously announced, the Carer Allowance and Carer Allowance (child) Health Care Card will be income tested. Households earning over $250,000 won’t be eligible. Both existing and new recipients of Carer Allowance will need to meet this income test.

Aged care

Additional funding for aged care

Date of effect: From 1 July 2018
Funding for home care services and residential aged care will increase, including:

  • 14,000 new home care packages over four years
  • 13,500 new residential aged care places, and
  • grants for aged care facilities in rural, regional and remote areas.

Legislated super changes post 1 July 2018

Downsizer contributions

Individuals aged 65 or older may be able to make super contributions of up to $300,000 (or $600,000 per couple) from 1 July 2018 when selling their home.

These contributions, known as ‘downsizer contributions’ can be made without having to meet a ‘work test’ or ‘total super balance test’ and they don’t count towards the contribution caps. However, they must be made with 90 days of settlement and a tax deduction can’t be claimed.

The property must have been owned for at least 10 years and have been the main residence at some time during this period.

First home super saver scheme – access

First home buyers who have made super contributions under the First Home Super Saver Scheme (FHSSS) can access their money from 1 July 2018.

The FHSSS started on 1 July 2017 and allows eligible first home buyers to save a deposit in the concessionally taxed superannuation system. Contributions of up to $15,000 per year (and a total of $30,000) can be made and they count towards the relevant contribution cap.

An online estimator is available to explore the potential benefits of using the FHSSS.

Catch-up concessional contributions

Where the annual concessional contribution (CC) cap is not fully utilised from 1 July 2018, it may be possible to accrue unused amounts for use in subsequent financial years.

The CC cap is currently $25,000 pa1. Counted towards this limit are all employer contributions (including super guarantee and salary sacrifice), personal tax deductible contributions and certain other amounts.

Unused cap amounts can be accrued for up to five financial years. 2019/20 is the first financial year it will be possible to use carried forward amounts.

To be eligible, individuals cannot have a total super balance exceeding $500,000 on the previous 30 June.

This measure could help those with broken work patterns and competing financial commitments to better utilise the CC cap. It could also help to manage tax and get more money into super when selling assets that result in a capital gain.

This cap applies in FY 2017/2018 and 2018/2019. It may be indexed in future financial years.

 

 

 

Principal of Fintech, Grant Chapman delivers his Christmas message to Fintech clients and followers. Includes a short recap of the year it was, a few little updates, insights and a message of thanks & hope to everyone this holiday season.

World financial markets swung wildly yesterday afternoon as Donald Trump stunned the world and headed for victory over Hillary Clinton to secure the top job at the White House. 

A gracious tone in the first speech by US President elect Trump had a calming effect on the markets, and there was a surprisingly fast recovery following initial sell-offs.

Trump sounded more Presidential than at any stage during the long winded US election campaign:

  • Trump congratulated his Democratic rival, saying that Hillary Clinton waged “a very very hard-fought campaign”. He also commended her for having “worked very long and very hard” over her political career.
  • “Now it’s time for America to bind the wounds of division – to get together,” he said. “To all Republicans and Democrats and independents across this nation, I say it is time for us to come together as one united people”.
  • Trump, who had been criticised by opponents for rhetoric characterised as divisive and racist, pledged, “I will be president for all Americans, and this is so important to me”.

The Australian sharemarket initially dropped by almost 4% but recovered to end up down 1.94% at close of trade. The US dollar and European markets also recovered from early dips as markets continued to digest Trump’s victory for the Republicans including winning control of the House and Senate.

The Trump result eerily emulated the ‘Brexit’ experience in Britain earlier this year. There was a sense of complacency, surprise and panic, followed by swift recovery. In fact, it has happened more quickly this time.

However, it is yet to be seen whether Trump will be a much better President than some people were expecting less than 24 hours ago, and if there are enough positives from the result including the absence of a congressional deadlock. Markets around the world will be looking for Trump’s actions to reflect the words in his victory speech, with less of the maverick behaviour that he portrayed throughout the campaign.

Will Trump’s policies get traction?

Trump’s policy platform lacks the cohesion of a “typical” Presidential candidate reflecting his relative isolation from the Republican Party. This is further exacerbated by the fact that he has also been both a registered Democrat and Republican voter in the past.

There have also been some major shifts in policy during the campaign which makes it difficult to determine his core beliefs, although these shifts have largely been around immigration, social policies and foreign affairs.

Trump’s major economic policies include:

  • Lowering the corporate tax rate to 15% from 35%, and eliminating loopholes and deductions.
  • Cutting the top personal income tax rate to 33% from 39.6% and simplifying personal income tax by collapsing the current seven tax brackets to three.
  • Repealing estate tax laws.
  • Repealing or renegotiating trade deals including the North American Free Trade Agreement (NAFTA) between Canada, Mexico and the United States, and the Trans-pacific Partnership.
  • Increasing tariffs on exports to the US (and leaving the World Trade Organisation if it rejects the proposal).
  • Replacing the Affordable Care Act (Obamacare) with a more market-based health insurance system.

Congressional support for many of Trump’s policies may be difficult to achieve once he is in the White House

Some uncertainty remains:

  • The Mexican Peso has fallen almost 12% hitting at a record low. This is not so much reflecting Trump’s threat to “build a wall” along the border between Mexico and the US, but rather his intention to slap a tariff of 35 per cent on Mexico’s exports to the US.
  • Trump’s promise to launch a trade war against China, by declaring it a “currency manipulator”. He’s also threatened to impose tariffs of up to 45 per cent on everything China exports to the United States, something he can do under existing legislation.
  • Trump’s fiscal policies will add significantly to the US budget deficit and US public debt, potentially leading to higher long term US interest rates (which would in turn be negative for stock prices).
  • Trump’s repeated personal attacks on US Federal Reserve Chair Janet Yellen and the call to “audit the Fed” threaten to undermine market confidence in the Federal Reserve. President Trump will have the ability, almost immediately upon taking office, to reshape the Fed by filling the two vacancies on the Federal Reserve Board. Previously replacements for the board have been blocked by the Republican-controlled Senate in the outgoing Congress.

Reasons that markets are not likely to have a complete meltdown: 

  • The US economy is in reasonably good shape, with unemployment still low and growth rising in the last quarter.
  • Real economic growth has picked up in recent months while the unemployment rate, at 4.9%, is close to any economist’s definition of full employment.
  • S&P500 earnings have rebounded smartly from the oil & dollar induced slump of 2015 and inflation is still moderate.
  • The global economy is also showing signs of life with the global manufacturing PMI index hitting a two year high in October. All of this, absent political uncertainty, would be positive for stocks and negative for bonds.

What does this mean for your investments?

While ongoing uncertainty associated with the Trump presidency is likely to put a hand brake on equities markets, there is a concern that if passed, the combination of tax cuts and trade policies would see US budget deficits increase and the economy hurt by retaliatory trade actions.

In the short-term, the US Federal Reserve is likely to delay interest rate increases including the potential December hike, in response to the renewed uncertainty. However, in the longer term, deterioration in the deficit and higher inflation would likely see bond yields rise.

Your Integrated Financial Solutions investment portfolios reduce risk by utilising market leading research to identify high quality stocks that are diversifying across asset classes, regions and sectors in line with your risk profile.

To maximise your long returns, your portfolio is designed to deal with short term equities volatility that comes with geopolitical and other risks such as a the Trump Presidency result. This removes the need for panic sell-downs and mis-timed portfolio changes after markets have already fallen, crystalising losses. A well-diversified mix of highly researched, quality companies and stocks will benefit from market bounce backs that follow sharp declines over time.

Please contact our office if you would like to discuss your current investments or to take advantage of buying opportunities that arise.