Welcome to the 2018 Summer Edition of the BFG Report
What To Look Out For In 2019?
As we look towards the next Federal election and beyond, it’s important to understand both the existing Government and the opposition party’s proposed policies relating to superannuation and tax. In relation to some policies, both parties agree on them.
- Neither party is currently seeking to increase the age pension age to 70. They both agree that it should rise from 65 to 67 in six-monthly intervals by 1 January 2023.
- They both agree that the Superannuation Guarantee (SG) should increase from 9.5% to 12%, however Labor wants to fast-track this while the current Government has a freeze on the increase.
Please remember that these are proposals only and may never become law, whether Labor wins the election or not.
Non-concessional contribution cap
The current cap for making non-concessional contributions (using after tax money to contribute to your super) is $100,000 pa. You can also ‘bring forward’ three years-worth of contributions into a single year and pay up to $300,000. Labor proposes to reduce the annual cap to $75,000 per year.
Another way to contribute to super is by making concessional contributions (before tax or deductible contributions) to super up to a cap of $25,000 per year. The benefit of this is that concessional contributions are generally subject to contribution tax of only 15% rather than your marginal tax rate. The current Government allows people, who can’t maximise the $25,000 cap in a particular year, to contribute any unused cap amounts in a later year as long as it is made within the next five years (conditions apply). Labor proposes to abolish the ability to make catch-up concessional contributions.
Change to tax concessions for high-income earners making concessional contributions
Currently, concessional contributions are generally subject to contribution tax of 15% but high-income earners may be subject to an extra 15% Division 293 tax. This translates to a total of 30% tax on contributions. High-income earners currently pay this higher contribution tax if their income is greater than $250,000 pa. Labor plans to reduce this income limit down to $200,000 pa.
Labor proposes to remove the ability to claim excess imputation/franking credits in cash from the ATO. If you receive income support from the Government, such as the Age Pension or Disability Support Pension, you will not be impacted. Nor will SMSFs that had at least one pensioner recipient before 28 March 2018.
Negative gearing refers to the situation where you make an investment that loses you money in the short term.
For example when the interest you paid on the loan and any related costs are greater than the income you receive such as rent from an investment property. Currently, you can deduct any losses associated with the investment from your personal income. Labor plans to restrict negative gearing to investors of all asset classes acquired after a certain date. If you invest in new housing or you have an existing investment, this change is not likely to affect you.
Capital gains tax
Currently, individuals and trusts are entitled to a 50% discount on the capital gain amount when they dispose of an investment asset, providing they have held the asset for more than one year. Labor plans to limit the capital gains tax discount on assets that are purchased after a certain date by halving the capital gains tax discount from 50% down to 25%. If you invest in a new investment such as housing or you have an existing investment, this change is not likely to affect you.
Investment Market Review – Quarter Ended 31 December 2018
Asset Class – Australian Shares
1 year is -3.10% p.a.
5 year is 5.6% p.a.
10 year is 8.9% p.a.
The S&P/ASX 300 Accumulation Index declined by 8.4% but outperformed global markets in the December 2018 quarter. The December 2018 quarter was dominated by a sharp fall in October due to concerns over rising US interest rates and the trade war between the US and China. The best performing sectors were Property (down 3.7%), Utilities (down 4.1%) and Materials (down 5%). The worst performer was the Energy sector (down 21.3%) caused by lower oil prices which were driven by a mix of excess global production and concerns regarding global growth. The Telecommunications sector was also much weaker (down 14.8%) as concerns mounted over the Australian Competition and Consumer Commission’s (ACCC) action against the proposed TPG-Vodafone merger.
Asset Class – Listed Property Trusts
1 year is 3.3% p.a.
5 year is 12.5% p.a.
10 year is 10.7% p.a.
The Australian real estate investment trust (A-REIT) sector held up comparatively well, declining only 1.7% during the December 2018 quarter. The relative strength of the sector was caused by a decline in bond yields and investor preference for lower risk investments. A-REITs are viewed as a proxy for bonds because they produce an income stream from rental payments, which means they tend to rise in price when bond prices rise.
Asset Class – International Shares
1 year is 1.3% p.a.
5 year is 9.6% p.a.
10 year is 9.7% p.a.
Global share markets were weak in the December 2018 quarter with the MSCI World Index in Australian dollar terms recording a decline of 11.1%. This negative return was somewhat reduced because of the depreciation of the Australian dollar (down 2.4%) with the MSCI World Index down 13.3% in US dollar terms. The Australian dollar fell, owing to concerns over China’s growth prospects and the implications for Australia. The global share market decline was led by the US market which had, until this quarter, performed well during the year. Interest rate increases and their predicted future path was a key issue for investors who fear excessive interest rate hikes could slow down economic growth. There was also sizeable concern regarding earnings in the technology sector. This was triggered by weak Apple iPhone sales. This saw the tech-heavy NASDAQ Index decline 17.5% while the US share market (with technology making up 20% of it) falling 14% in US dollar terms.
Asset Class – Fixed Interest
1 year is 4.5% p.a.
5 year is 4.7% p.a.
10 year is 5.2% p.a.
The Australian 3-year bond yield was 20 basis points (bps) lower at 1.85% and the 10-year bond yield fell by 35bps to 2.32% in the December quarter. The US yield curve also dropped with the 3-year bond yield falling 43bps to 2.46% and the 10-year by 38bps to 2.68%. Global trade concerns continued and only abated when the US and China agreed to a temporary tariff ceasefire in mid-December. This happened only weeks before the US had scheduled tariffs to increase from 10% to 25%. Concerns about US economic growth drove volatility in bond yields with the US 10-year rising to 3.23% at one point in late October. It then declined due to a combination of weak economic data which showed business investment and housing construction was weaker than expected and investor demand for safe assets to protect against a falling share market. The economy grew 0.3% in the September quarter but growth of 0.6% was expected. This disappointment, along with the continued correction in property prices, has contributed to concerns about the future growth outlook. It may also mean an upcoming Reserve Bank of Australia (RBA) interest rate cut.
Asset Class – Cash
1 year is 1.9% p.a.
5 year is 2.2% p.a.
10 year is 3.1% p.a.
The RBA left the cash rate unchanged at a historical low of 1.5% in the December 2018 quarter, maintaining their concern over low wage growth and high levels of household debt. In addition, weakening global trade and lower oil prices suggest inflation may remain muted in the future. The weakness in housing markets has also been due to a reduction in lending by banks. The lower than expected GDP growth in the September quarter may see the RBA revise its 2018 growth forecast. The RBA may also change its opinion that the interest rate will increase in the future.
High Yielding Internet Savings Accounts
Financial Institution and Interest Rate
RaboDirect Bank – Rate 3.05% p.a.
Citi Online Saver – Rate 3.05% p.a.
St George – Maxi Saver – Rate 2.70% p.a.
ME Bank Online Saver- Rate 2.85% p.a.
ING Savings Maximiser – Rate 2.80% p.a.
Rams Saver – Rate 2.80% p.a.
Rates are subject to conditions and change.
Rates are correct as at 7/3/2019.