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.
The US Presidential Election
The attached note looks at the US Presidential and congressional elections that are looming large, especially now that the polls between Donald Trump and Hillary clinton are neck and neck.
Super: Further Clarification
The Federal Government has provided further clarity on how the proposed 'bring forward' and $1.6 million eligibility threshold will work with regard to superannuation. The details can be found here - all very interesting, but if you would prefer a plain-english explanation, please call me personally.
Rick Maggi
$500k Lifetime Limit Scrapped
The Government today announced major changes to the superannuation package contained in the 2016 budget, including scrapping the backdated, lifetime cap of $500,000 on non-concessional contributions (NCCs). However, anyone with over $1.6 million in super will not be allowed to make further NCCs. Today’s announcement includes several other changes.
The full announcement by the Government is attached here.
The announcement does not change the lowering of the concessional contribution to $25,000, and with the reduction in NCCs from $180,000 a year to $100,000, weaker flows into superannuation than in the past can be expected. It’s likely to hit SMSF inflows harder, since these are generally used by wealthier investors who can afford the extra contributions.
Read a full summary of the superannuation package here.
Home values rise 1.1%
The CoreLogic Home Value Index recorded a 1.1% rise in dwelling values in August, with six of the eight capital cities recording a lift in dwelling values over the month. Performance of the combined regional areas remained comparatively soft, with dwelling values virtually flat at -0.1%.
The strong combined capital cities headline result masks the underlying movements associated with dwelling values which are trending differently from region to region and across the broad property types.
In Sydney and Melbourne, dwelling values continued to increase at more than 1% month-on-month, with the cumulative growth (June 2012 to date) now reaching 64% in Sydney and 44% in Melbourne. Outside of Sydney and Melbourne, the third highest rate of capital gain over the same period was Brisbane at 18%, and was as low as 4% for Darwin.
The most recent twelve month period has seen dwelling values rise by a lower 7% per annum, with Perth and Darwin the only capital cities to record a fall in dwelling values over the same period, dealing by 4.2% in both cities. Softer economic conditions and a significant fall in overseas migration rates, together with an increasing net outflow of residents to other states and territories, has made a substantial dent in housing demand, reducing values and rental returns.
Read the full report here.
Interest Rates Steady
The RBA has resolved to keep interest rates on hold at 1.5 per cent ahead of a possible US rate hike on 21 September and the release of Australian CPI figures on 26 October.
As expected, RBA governor Glenn Stevens’ final meeting before handing over the reins to his successor Philip Lowe proved to be uneventful.
The decision to keep rates on hold was in line with market expectations, with the ASX 30 Day Interbank Cash Rate Futures September 2016 contract pricing in a 95 per cent chance of ‘no change’ to the cash rate.
UBS chief economist Scott Haslem said the RBA is likely to remain on hold for the “foreseeable future” given firm growth data, a likely lower trend in the Australian dollar and concern about financial stability.
“While inflation will remain low, core inflation is likely to drift modestly higher from here,” Mr Haslem said.
The ANU Centre for Applied Macroeconomics Analysis (CAMA) Shadow Board attached a 57 per cent probability to 1.5 per cent being the correct policy setting.
“The CAMA RBA Shadow Board clearly believes that the cash rate should not be cut any further,” said the Shadow Board. “After the RBA’s decision in August to cut the cash rate to a historic low of 1.5 per cent, there is good reason to pause.
“Unemployment fell slightly, but only because of a large increase in part-time employment. With consumer price inflation equaling 1 per cent year-on-year, well below the RBA’s 2-3 per cent target band, and wage growth a modest 2.1 per cent year-on-year, there exist little immediate inflationary pressures,” said the Shadow Board.
Rick Maggi
7 Reasons for Optimism
a Trump presidency?
Super: not giving an inch
At the Bloomberg Address today, Treasurer Scott Morrison was asked about his previous statement about not changing the superannuation rules and his definition of retrospectivity. His unequivocal reply leaves little hope for those expecting a retreat.
His reply...
“I stand by everything I said in that statement for the simple reason that the retirement phase remains tax-free. You know that. The retirement phase account, which under our proposal with a transfer balance cap, will mean that 99% of people who have balances less than $1.6 million will remain absolutely in exactly the same situation that I referred to.
The changes that we put forward, which I hope at least from my point of view as Treasurer I never have to revisit, and I certainly have no intention of revisiting them, will ensure that those rules are now set for the future.
Why did we have to change the superannuation system? Because we have an aging population and we have system that is frankly overly generous for large balances, and the cost of having those large balances and the tax concessions … which have only been there since 2007, by the way, they weren’t introduced by Henry Parkes or anyone else like that [Editor’s note: Parkes served five terms as Premier of New South Wales between 1872 and 1891]. Those arrangements were brought in when the Budget had a $20 billion surplus and $40 billion in cash.
What we have chosen to do is make the superannuation system more sustainable in future. We have targeted a higher rate of tax, true, at the whopping rate of 15% for earnings on balances above $1.6 million. That enables us to preserve the exact situation that I was speaking in favour of at the SMSF Conference. We allow 99% of people who have saved for their retirement to have the deal that I said they should have, that is, paying no tax on what they have contributed to superannuation over their lifetime.
I know there are those with balances more than $1.6 million who are unhappy about that. I know there are less than 100,000 people in the country who have already put more than $500,000 into super after their pre-tax contributions [Editor’s note: he probably means in after-tax contributions]. I know there are those on very high incomes who will be paying more on their contributions going into superannuation now than before.
The alternative to that is for me to tell my kids, ‘You’re going to have to pay higher taxes to support those concessions.’ I don’t think that’s fair and I’m not going to do it.”
The Great Policy Rotation
For the last two decades, advanced country central banks have been focussed on price stability and have played the first line of defence in stabilising the economic cycle whereas fiscal policy has played back up, focussing more on fairness and efficiency. But we are starting to see debate about whether a new approach is needed. AMP Capital's Dr Shane Oliver discusses what a shift in policy approach (from monetary to fiscal policy) might mean for investors.
Banking On Europe
The European economy has started to recover and is now growing faster than the US. But markets have been fretting about the health of the European banking system and the potential for banking stress to unravel the recovery. Tim argues these concerns are overblown. While profitability is weak, European banks have recapitalised, the European Central Bank is lowering funding costs and governments appear willing to deal with the bad debt issue.
Interest rates cut to 1.5%
Megatrends
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.
Brexit: Stay or Leave?
A balanced summary of the pros and cons of a Brexit ahead of tomorrow's vote. Enjoy! Read more here
For more information, contact Rick Maggi on 9382 8885 or rickmaggi@westmount.com.au.
History on the run...
When news breaks and markets move, content-starved media often invite talking heads to muse on the repercussions. Knowing the difference between this speculative opinion and actual facts can help investors keep their nerve.
The Economy: Not so bad
The past few weeks have been messy with Brexit, the Australian election, terrorist attacks and an attempted coup in Turkey. But rather than dwelling on what's happened so far this year, this article gives us 9 reasons why the future may begin to look a little brighter. A good read!
REASONS TO BE CHEERFUL
AMP Capital's Dr Shane Oliver cuts through some of the current pessimism and finds some good, credible reasons to be optimistic. Be aware of the usual seasonal weakness, but don't let it paralyse you with fear... Read more here
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.
Jan 1 2017 Pension Changes
With the proposed changes to Age Pension rules (effective 1 January 2017) becoming law, this development now deserves your full attention. Retirees need to consider whether generally tighter eligibility rules will impact on the longevity of their current retirement strategy as a significant 'pay-cut' may be just around the corner. Read more here
For more information, contact Rick Maggi on 9382 8885 or rickmaggi@westmount.com.au.