What is causing Australian house prices to fall?

There is little doubt now that the long house price boom in Sydney, Melbourne and some other cities is over and prices are weakening.

There are numerous factors contributing to this, one of the most important being tightening bank credit standards. Low wage growth, strong supply of units, affordability problems for many potential buyers and the prospect of changes to negative gearing and capital gains tax concessions if a Labor government is elected are also contributing to the changing investment landscape.

There will always be opportunities for astute property investors who have done their research and have a relatively long timeframe but the days of easy gains would seem to be over.

 Is there really a trade war developing between the USA & China and does it matter?

Last week President Trump said “China was on the way to be bigger than us in a very short period of time. That’s not going to happen anymore.” That’s a very provocative statement and suggests that he believes America is in an economic war with China. Trump’s anti-China trade rhetoric will likely intensify as the US mid-term elections get closer. The U.S. and China implemented new tariffs on each other last week. Market watchers are now keeping their eyes on further US tariffs planned to be imposed on $200 billion worth of Chinese goods expected later this year.

From an Australian perspective, we can only hope that both the US and China will back off before this escalates further because, if it intensifies, it could only hurt Australia given China is by far our largest trading partner. Normally there are no winners in a trade war so it is interesting that so far neither the US or Australian share markets have reacted to this situation. Let’s hope the markets are right but I’m concerned that this could get ugly as neither side looks inclined to back down.

The effective Income tax free thresholds for 2018-19

A single person or a member of a couple will be able to have taxable income of $21,595 in 2018-19 before having to pay any income tax.

This amount is higher than the $18,201 income at which a 19% marginal tax rate starts because of the Low-Income Tax Offset (LITO) and Low & Middle-Income Tax Offset (LMITO). These offsets eliminate the income tax that would otherwise be payable between $18,201 and $21,595.

Amounts above this have a marginal tax rate starting at 19% plus the Medicare levy up to $37,000 and then 32.5% from $37,001 to $90,000.

Senior Australians (defined as those of Centrelink Age Pension age, currently 65.5), including self-funded retirees, may also be eligible for the Seniors & Pensioners Tax Offset (SAPTO) which results in no income tax being payable for single people with taxable income of up to $32,915 and for members of a couple with $29,609 each. The SAPTO is only available for those with “Rebate income” (taxable income adjusted for employer and personal deductible Super contributions, investment and rental losses) below defined limits – $50,119 for a single person or $83,580 combined income for a couple in 2018-19.

 Be aware of Centrelink changes if applying for the Age Pension or other benefits

From 1 July 2018 Centrelink says that you need to complete your claim (for benefits, such as the Age Pension) in full before you can get a payment. This also applies to concession cards. You need to submit all supporting documents before they will start to process your claim.

If your claim is successful, you’ll get a payment or concession card issued from the date you submitted your complete claim. Centrelink will no longer pay you from the date you started your claim or contacted them about claiming i.e. backdating, which frequently applied, has ceased.

I think this change in policy is most unfair given the difficulty many people have in completing Centrelink’s lengthy and complex forms and given Centrelink are very slow to process applications or ask for further information. Also, they sometimes lose paperwork they have been given.

If you are making a claim for yourself or a relative you should be aware of this change in policy as delays in completing claim forms and supplying supporting documentation may result in significant delays in the payment start date. Delays could occur for a number of reasons, including difficulty locating documentation or understanding Centrelink forms. It may also take a considerable amount of time before Centrelink advises clients that the claim forms are incomplete, which causes further delays to the payment start date.

In the future, good preparation and timely submission will be very important. For those who are getting close to the age where they may be entitled to a part or full Age Pension (currently 65.5 but progressively increasing to 67), it would be wise to prepare the paperwork early and have it checked by someone for completeness and accuracy. Also, you can submit the application up to 13 weeks before your applicable birthday. It would be advisable to take it to a Centrelink office and have them check the application and to get a receipt to minimise the chances of a delay in being approved for payment.

 What if your (Super) Pension account has gone above the Transfer Balance Cap of $1.6m?

Retirees with large superannuation balances were required to adjust their pension accounts back to $1.6 million on 30 June 2017.  This was done to reflect new rules that placed a limit, called the Transfer Balance Cap, on pension accounts.

One year later, at least some of these pension accounts have grown above $1.6 million.  This is a consequence of taking the minimum required pension withdrawals and investing in assets that have produced strong income, growth or both.  Particularly for younger retirees, the combination of income and growth can exceed the amounts that have been drawn out as pension payments.

So, what happens now?  Does another adjustment need to be done to reduce the pension accounts back down to $1.6 million at 30 June 2018? In short, no.

The Transfer Balance Cap is not a cap on the amount in superannuation or even the amount in a “retirement phase” pension (generally speaking, a pension being paid to someone who has retired).

It is a limit on the amount that can be used to start retirement phase pensions.

Retirement phase pensions need only be checked against the limit when they start. So, in 2018/19 and onwards it is possible and potentially will not be uncommon to see pension accounts above $1.6 million.

This newsletter contains general advice. It does not take into account your individual objectives, financial situation or needs. You should consider talking to a financial adviser before making a financial decision.

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