RATES ON HOLD

The RBA has opted to leave the official cash rate on hold at 1.5%.

As lenders continue with their out of cycle rate increases, at its board meeting today the Reserve Bank of Australia decided to leave the official cash rate unchanged.

This follows new data released yesterday that indicates the strong Sydney and Melbourne property markets may be close to peaking following APRA's intervention into the levels of interest only and investment lending the banks are funding.

It also appears the Reserve Bank is waiting to gauge the impact of next Tuesday's federal budget on overall economic sentiment.

The July 1 Super Changes...

We're now only a few months away from sweeping changes to the superannuation and pension environment, but for most people, the impact of these changes will be either positive or neutral.

At the end of the day, super remains a very attractive place to save for retirement. So with all of the 'noise' surrounding the super changes coming on July 1st, its important to remember some basic super facts...

Fact 1:  While you are building your super, pre-tax contributions and investment earnings will generally continue to be taxed at the low rate of up to 15%, not your marginal tax rate of up to 49%. That alone is a massive advantage in favour of super versus other forms of savings.

Fact 2: When you eventually retire, you can still transfer a generous amount into a superannuation pension, where no tax is paid on investment earnings - and payments are generally tax-free from age 60.

The major changes the are occurring from July 1st, primarily revolve around 'limits' - limits on how much you can contribute to super (pre or post tax), and limits on how much you can start a super pension with (i.e. $1.6 million each).

In addition, the 15% contributions tax will be doubled if your income is greater than $250,000 - this single rule change is an unpopular one, and might be a 'game changer' for some higher income earners.

Moving closer to July 1, there is some work to do, especially if you run your own self-managed super fund. Please, contact your financial adviser asap to see if any of the upcoming changes will impact you, and if so, find out what action you need to take, before it's simply too late.

Rick Maggi

Global growth looking healthy

Despite numerous geopolitical threats (Eurozone elections, tensions between the US and China, North Korea, etc.), worries about the demise of the so-called "Trump trade" and shares being overbought and due for a correction at the start of the year, share markets have proved to be remarkably resilient with only a minor pull back into their recent lows. This despite a more significant fall back in bond yields. Partly this is because the geopolitical threats have not proven to be major problems (at least so far) and Trump remains focussed on his pro- business policy agenda (he has already embarked on deregulation and his tax reform proposals – while lacking in details – indicate that tax reform remains a key objective). More fundamentally though, markets have been underpinned by an improvement in global growth. This is likely to continue. 

Read more here

Rates: Where do we go from here?

The RBA provided no surprises following its April board meeting leaving the official cash rate on hold at 1.5%. The RBA remains more confident regarding global growth, see Australian economic growth as moderate, regards the labour market as being mixed, sees a gradual rise in underlying inflation and continues to see conditions in the housing market as varying considerably across the country, but sees recent regulatory measures as reducing the risks associated with high and rising household debt.

This note looks at the outlook for the cash rate, the impact of bank rate hikes and the implications for investors. Read more here

Trump Tantrum?

Since the US elections back in November, the 'Trump Trade' has sharply boosted global share markets, based on the promise of lower taxes, less regulation and other 'pro-growth' policies. After a lengthy period of economic 'stagnation' (not quite true), the prospect of Donald Trump ushering-in a thrilling, no-holds-barred period of Reaganesque optimism is an intoxicating idea, no doubt contributing to his election in the first place.

But is all of this about to come unstuck? Quite possibly.

With a Presidency already under fire for possible Russian collusion, bogus wiretapping claims and a myriad of other missteps, you could be forgiven for thinking that you've just stepped out of a time machine and it's 1974 all over again.

Nixon aside, Trump's massively eroded political capital and growing credibility problem points to short-term danger for the sharemarket. If Trump is no longer trusted, or even liked, his capacity to swiftly enact his pro-growth agenda is suddenly at risk, and with it, the quick sharemarket gains made since last November.

And Trump's first litmus test will be tonight's vote on his revised healthcare bill. If the vote doesn't pass or is post-postponed, markets will be rattled. Brace yourself, but don't forget the opportunities that come with uncertainty - we've been here before.

Rick Maggi

HOUSING OVERVALUED?

The cooling in the Sydney and Melbourne property markets evident in late 2015 in response to macro prudential tightening deployed by APRA has proved ephemeral.

Price gains have reaccelerated and auction clearance rates & lending to property investors have rebounded.

Over the last five years Sydney dwelling prices have risen a ridiculous 73% and Melbourne prices are up 47%. As a result the Australian housing market continues to cause much angst around poor affordability and high household debt. This note looks at the main issues.  Read more

GOODBYE EUROZONE?

The long running soap opera around whether the Eurozone will break up is now into its eighth year!

In 2015 all the focus was on the latest Greek tantrum and last year the big fear was that the populist/nationalist Brexit vote and Trump victory would lead to a surge in support for populist parties across Europe and drive a Eurozone break up.

There was no sign of this in Spanish and Austrian elections, but this will be put to the test again with elections this year in the Netherlands, France, Germany and maybe in Italy.

The fear is that a Eurozone break up will plunge the world’s third biggest economic region into recession and financial chaos, which would adversely affect the global economy and Australia. Such a fear may be exaggerated – the UK hardly imploded after Brexit – but that’s the worry. 

Read more

WILL THE SUPER REFORMS HURT?

From 1 July 2017, a range of super reforms announced in the 2016 Federal Budget will take effect.

For most people, the impact of these changes will be positive or neutral.

Super remains a very attractive place to save for retirement. And there may be opportunities to grow your super and retire with more.

If your income is below $250,000 (for 2017/18), while you build up your super, pre-tax contributions and investment earnings will generally continue to be taxed at the low rate of up to a maximum of 15%, not your marginal tax rate of up to 49%. 

Also, when you retire, you can still transfer a generous amount into a superannuation pension, where no tax is paid on investment earnings and payments are generally tax-free at age 60 and over.

Next steps...

Once you have read through this guide, you should consider making an appointment with your financial adviser. They can assess the impact the super reforms could have for you, as well as review your retirement savings plans and the strategies you are using. 

Beyond that, as we head towards the end of another financial year, now is a great time to see if there is anything else you could be doing to tax-effectively build and protect your wealth.

If you don’t have an adviser, you call us (Westmount Financial) on 9382 8885 to arrange an appointment. 

View a basic, 'at a glance' guide here.

Rick Maggi

Where are we now?

It’s now a decade since the first problems with US sub-prime mortgages started to appear and nearly eight years since share markets hit their global financial crisis lows. From those lows in 2009 lows US shares are up 239%, global shares are up 167% and Australian shares are up 80% (held back by relatively higher interest rates, the absence of money printing, the plunge in commodity prices from their 2011 highs and the high $A).

An obvious question is how close the next downturn is, which ultimately relates to where we are in the investment cycle. 

Read more here

honeymoon over?

Since the US election last November, US and global shares rallied around 8% and Australian shares rallied around 12%. But with Trump now inaugurated as President we are at a point where that optimism is being tested. Read on...

Top 10 New Year Headlines

What will 2017 hold? Our natural curiosity about the future makes a ready-made market for speculative media articles about events likely to drive financial markets in the coming year.

But the assumption driving much of this seasonal coverage is that the mere turn in the calendar from one year to the next justifies overhauling your investment portfolio, generating significant turnover and unnecessary cost.

Against that background, here are 10 perennial New Year headlines to watch out for in the coming weeks...

1. “New Year, New Portfolio”
This journalistic boilerplate trades off our desire for reinvention as the calendar year turns. The presumption is you should completely change your investment strategy as if you were updating your wardrobe.

2. “Different Times, Different Strategies”
This assumes that the world has changed so dramatically that the rules of diversification and discipline no longer work. If you’re persuaded, look at last year’s forecasts.

3. “Brace for Uncertainty”
Saying the future is uncertain is a bit like saying night follows day. In the past year, there was Brexit and the US presidential election. In the coming year, there are elections in Germany and France. In other words, there is always uncertainty and there is always plenty of scope for speculation.

4. “Interest Rate Fears Mount”
Conjecture about central bank policy is a hardy perennial for financial media looking to fill space. Thee irony is that market expectations about these movements are already incorporated into current prices.

5. “Ten Stocks to Count On”
What if you could whittle your portfolio down to a handful of stocks and get rid of the rest? It might seem like a nice idea. However, it is also a dangerous one as the lack of diversification leaves you open to idiosyncratic influences.

6. “The World has Changed Forever”
Actually, the world is always changing. Economies rise and fall, businesses flourish and perish, some investments do well, while others languish. The rules for dealing with that haven’t changed at all.

7. “The Right Moves to Make Right Now”
This headline assumes there is a perfect time to invest and, equally, a perfect time to cash in. Problem is there’s no evidence you can reliably time the market. And in any case, everyone’s needs are different.

8. “Make Your Portfolio Bulletproof”
The idea that nothing you invest in should be falling in value is certainly an attractive one. The truth is no portfolio is likely to be completely bulletproof. Some parts of the portfolio may outperform, others may lag. Hence the need for diversification.

9. “Invest with the Stars”
No, this isn’t your horoscope for 2017. It’s a headline regularly attached to profiles of the top performing stock pickers of the previous year. But while everyone loves a winner, how many of them repeat?

10.“Take Charge of Your Wealth”
Who doesn’t love do-it-yourself stories? Just buy yourself some trading software and play the currency market from your spare room. Alternatively, you could hire an advisor and get your life back.

The truth about these holiday front covers is they are usually cooked up in an editorial meeting a few weeks out from the holiday season. They’re easy to write. They’re timeless. They’re clickbait. And, best of all, you can recycle them year-to-year.

In any case, what you do with your investments shouldn’t change according to the news, but according to your own needs, goals and risk appetite. Decisions are better made under the guidance of an advisor who understands your circumstances.

That’s a better foundation for a happy new year. 

Jim Parker, 'Outside the Flags', Dimensional Australia

Abandon gift in Will to keep pension?

The Financial Planner carefully structures Mary’s affairs.

Mary receives a $1 pension and Concession Card. But then, Mary’s mother dies.

Mum’s Will leaves everything to Mary. The inheritance costs Mary her $1 pension and Concession Card. Mary has money from her superannuation. She doesn’t want the inheritance. Mary desperately renounces the gifts under the Will. Mary’s children get the inheritance instead.

Does Mary keep her Centrelink Benefits?

Sadly, no. Centrelink deems monies abandoned or given away still yours for the next five years.

The two exceptions:

1. $10,000 rule – gifts under $10,000 per year are not means tested
2. $30,000 rule – gifts under $30,000 over a five-year period are within the gifting free area. However, a gift cannot exceed $10,000 in any year.

Gifts above $10,000 are ‘deprived assets’. ‘Deprived assets’ are given away but still deemed yours for the next five years. Sure, Mary can abandon the gifts under her Mum’s Will. However, Centrelink deems the gifts still hers for the next five years.

So what can you do?

Let’s pretend Mary’s mother is still alive. There are many strategies available to them. For example, an Accountant or Financial Planner can go on a legal website (we recommend Legal Consolidated - www.legalconsolidated.com.au) and easily build a 3-Generation Testamentary Trust Will.

The 3-Generation Testamentary Trust Will names Mary and her children as beneficiaries. The 3-Generation Testamentary Trust is flexible. Each beneficiary can receive a portion or none of the estate.

Mary then successfully retains her $1 pension and all-important Concession Card.

Companies and Family Trusts would require a slightly different approach.

Rick Maggi

IT HAPPENED

Today’s US election results were a surprise to most and are likely to have a short-term impact on global share markets. Locally, our markets fell by just under 2% today, erasing gains made over the last two days - yes, after all of the media hysteria today (ie $34 billion ‘wiped off’ the sharemarket etc) markets are merely back to Monday’s levels.

Looking ahead, US markets look as if they might fall by roughly the same percentage this evening as investors weigh the potential pros and cons of a Trump presidency.

As we’ve seen before, these kinds of knee jerk reactions are typically short term in nature, so I would strongly suggest just ignoring the ‘noise’ over the coming weeks, and even consider taking advantage of market weakness, as long as you’re prepared to accept some short-term volatility.

We’ll continue to monitor the situation closely.

Interesting reading...

Shane Oliver

Bloomberg                                                                                                                                    Rick Maggi

US elections: implications for investors

Hillary's 11-point lead from just a few short weeks ago has since evaporated, with the two candidates now running neck and neck.

So what are the implications for Australian and global investors? Read more here

Interest Rates On Hold

Now that the weekend's grand final sporting festivities have come to a close, I'd like to draw your attention to today's rate announcement and the thoughts on why the Reserve Bank of Australia has made this decision. 

In making this call, the RBA has resisted temptation to further lower rates, opting instead to wait until the September quarter CPI data is released to allow it more time to measure the impact of the August rate cut.

UK votes to leave

With UK voters narrowly voting to leave the EU markets, and Prime Minister David Cameron announcing his resignation, markets are reacting quite negatively to the news, as expected.

As outlined in the email the blog post below, the ‘Leave' vote will create a period of instability over the coming days and weeks, creating a potential buying opportunity in the short term. This may also add to the case for the RBA to cut interest rates, which was likely to happen anyway.

We’ll continue to monitor the situation, but in the meantime, it is important not to get too perturbed by the media frenzy as this is likely to be a storm in a teacup.

Enjoy your weekend (and stay away from the newspapers!).

For more information, contact Rick Maggi on 9382 8885 or rickmaggi@westmount.com.au.

Insurance Bonds. Really?

Looking for a legal tax haven? There's no need to look offshore - how about one you can get in Australia that's taxed internally at 30 per cent, doesn't need to appear on your annual tax return and if you hold it for 10 years you can withdraw it without paying any tax?

Welcome to the not so new alternative to superannuation - insurance bonds.

As the dust settles from the Federal Budget earlier this month, insurance bonds have suddenly been getting a lot of love from advisers and investors, and for good reason. With the Federal Government effectively deciding that the wealthy can look after themselves, superannuation has been reduced from a five star to a four star investment, still incredibly tax effective and worth the effort, just not quite what it used to be, particularly for those with large superannuation balances. Enter insurance bonds.

What is an insurance bond? Just to refresh your memory, they are a tax-paid investment, with the bond fund paying up to 30 per cent tax on your behalf. All money invested in them comes from after-tax dollars, but there is no limit on the amount you can invest and your money is accessible at anytime.

Because the earnings accrue within the fund there is no assessable income to declare on your tax return each year, and if you hold them for 10 years or more all proceeds can be redeemed tax-free. This makes them ideal for people who want to reduce income for purposes such as maximising the family tax payment, or becoming eligible for the Commonwealth Seniors Health Card.

And if the bond is redeemed earlier than 10 years, the proceeds are taxable as normal income, but the holder is entitled to a rebate of 30 per cent, which effectively makes the bonds almost tax-free for most investors at any stage. For example there tax on $10,000 profit will be $3,250 but the rebate will be $3,000, so the holder will have just $200 tax to pay.

They also offer significant capital gains tax advantages. They can be transferred from one investor to another at any time without capital gains tax, and within the bond you can switch between a range of investment options (like Australian and international shares) without triggering capital gains tax whenever you feel it is appropriate.

Insurance bonds also handy for older investors who can no longer contribute to super, and investing for kids and grandkids.

Assuming the latest round of Budget proposals are passed, expect to hear more about insurance bonds in the coming year.

For more information, contact Rick Maggi on 9382 8885 or rickmaggi@westmount.com.au.