Welcome to the 2016 Winter Edition of the BFG Report.
How Will The Budget Effect You ?
We have summarised some of the key points from the 2016 Federal Budget below, but remember these are proposals only and are subject to the passing of legislation.
Lifetime cap on non-concessional super contributions
The Government is replacing the previous caps of $180,000 per year (of $540,000 over 3 years under the ‘bring forward’ provisions) with a lifetime cap of $500,000. This will be indexed presumably on an annual basis. While this change is effective from Budget night, importantly it is also retrospective as it will take into account all non-concessional contributions made since 1 July 2007. If you’ve already contributed more than $500,000 during this time, the extra amount will not be taxed but you won’t be able to make any future contributions. If you breach your lifetime cap, you can have the excess refunded to avoid penalties.
Reduced concessional contributions cap
The Government intends to reduce the annual concessional contributions cap to $25,000 for everyone from 1 July 2017. The cap is currently $30,000 for people under age 50 and $35,000 if over age 50.
Transition to retirement strategies less effective
The tax exemption on earnings in a transition to retirement (TTR) pension will be removed, thereby reducing the tax-effectiveness of TTR strategy. Withdrawals from TTR pensions will also not be able to be taxed as lump sums. If you are over 60 you will still benefit from receiving tax-free pension payments.
New limit on amount transferred to retirement accounts
In a move to limit the amount of tax-free earnings in your super, the Government intends to place a cap of $1.6 million on the amount you can transfer into your pension account. Any future earnings generated in your pension account will not be affected, even if the balance goes over $1.6 million. Those people already in retirement will need to reduce the balance of their pension account to $1.6 million by 1 July 2017. The $1.6 million cap will be indexed in $100,000 increments in line with the consumer price index. If you breach the limit then the excess will be taxed at the highest marginal tax rate.
Removing the work test
The Government has decided to remove the work test for people aged between 65 and 74 who want to make voluntary superannuation contributions. The advantage for those affected is that they no longer need to satisfy a work test and can receive contributions from their spouse. This measure also applies to small business owners who often want to contribute the proceeds from their business after age 65.
Tax deductions for personal contributions
This change means anyone up to age 75 can claim an income tax deduction for personal concessional super contributions up to the proposed $25,000 cap. This change abolishes the 10% self employed test and benefits people who cannot take advantage of salary sacrifice.
To address bracket creep, the Government has proposed an increase in the 32.5% personal income tax threshold from $80,000 to $87,000. Business also benefits with a proposed reduction of the company tax rate to 25%. This new
rate will be phased in depending on the size of the company or its turnover.
Investment Market Review – Quarter Ending 31 March 2016
Asset Class – Australian Shares
1 year return is -9.27% p.a.
5 year return is 5.45% p.a.
10 year return is 4.32% p.a.
The S&P/ASX 300 Accumulation Index fell 2.7% in the March quarter. The financial sector was the worst performer falling 7.2% as investors grew concerned over bad debt levels in the big banks due to their commodity related exposures. The better performing sectors were industrials rising 5.3%, materials up 5.1% and utilities which rose 3.3%.
Asset Class – Listed Property Trusts
1 year return is 11.40% p.a.
5 year return is 15.83% p.a.
10 year return is 2.41% p.a.
The REIT sector generated a positive return of 6.4% for the March quarter. The sector outperformed the broader market by providing stable earnings during a period of heightened volatility and weaker economic growth. Expectations that interest rates will remain lower for longer continued to support the sector.
Asset Class – International Shares
1 year return is -5.00% p.a.
5 year return is 11.74% p.a.
10 year return is 3.37% p.a.
The MSCI World Index in Australian dollar terms was down 5.2% in the March quarter. International shares delivered weak performance for the March quarter as a result of headwinds facing global economies. The German DAX 30 was down 7.2% and the Nikkei 225 fell 12% but the S&P 500 posted a moderate gain of 0.8%.
China continued its extraordinary monetary easing in an attempt to boost growth. Economic fundamentals didn’t help reduce market concerns as China’s growth continued to slow while being over-reliant on credit. The economic recovery in Europe is progressing more slowly than expected and this forced the European Central Bank to increase monthly asset purchases to 80 billion and reduce the deposit rate to -0.4%. The US Federal Reserve maintained the US official cash rate within a range of 0.25%-0.50%. This was partly due to weaker net exports and business investment and partly because of risks associated with global economic and financial developments.
Asset Class – Fixed interest and cash
1 year return is 1.97% p.a.
5 year return is 6.63% p.a.
10 year return is 6.32% p.a.
International bond yields declined over the quarter. The benchmark 10 year Government bond rate in the US and Australia fell by 50 and 39 basis points to close at 1.77% and 2.49% respectively. Yields fell on the Federal Reserve’s outlook on interest rate increase, which sees as not increasing as swiftly as previously. Yields were also pushed lower as a result of higher demands for safe haven assets because of concerns over emerging markets and macroeconomic headwinds.
Asset Class – Cash
1 year return is 2.24% p.a.
5 year return is 3.23% p.a.
10 year return is 4.44% p.a.
The RBA left the main interest rate unchanged at 2.0% during the March quarter. The RBA noted that the expansion in the non-mining parts of the economy had improved labour market conditions. However, monetary policy would need to be accommodative to help support weaker growth. Diminishing inflationary pressures and concerns over the recent strength of the Australian dollar may cause the RBA to reduce interest rates in the near future.
High Yielding Internet Savings Accounts
Financial Institution and Interest Rate
ME Bank Online Savings – Rate 3.35% p.a.
St George Maxi Saver – Rate 3.20% p.a.
BankWest – Telenet Saver – Rate 3.15% p.a.
UBank – Usaver with Ultra – Rate 3.12% p.a.
Westpac ESaver – Rate 3.11% p.a.
ING Savings Maximiser – Rate 3.00% p.a.
Rates are subject to conditions and change.
Rates are correct as at 21/05/2016.