Merry Christmas & Happy New Year
After another challenging year for most in 2021, even if financial markets have been relatively kind, we wish to extend our greetings and wish everyone a safe and happy time for the holidays. While unfortunately Covid has certainly not disappeared, things are feeling more normal and hopefully, 2022 will genuinely feel like we are fairly much back to normal.
US Inflation is high and what it might mean for interest rates
There has been considerable debate as to whether the recent large increase in US inflation – an increase of 6.8% over the last year which is the biggest increase since 1982 – will be transitory or something more permanent and result in the Federal Reserve needing to raise official interest rates sooner than expected. That issue has now been largely resolved this week by recently reappointed Fed Chairman Powell who has signaled rate rises will be brought forward. Fed member projections on interest rates see the federal funds rate rising to rise to 0.9% by the end of 2022, up to 1.6% by the end of 2023, and then 2.1% by the end of 2024. That is the equivalent of three 0.25% hikes in 2022, another three in 2023, and two in 2024.
Perhaps somewhat surprisingly, the stock market actually rose on the news that rates would be rising sooner than previously indicated, perhaps because it provides more certainty and highlights the extent to which the US economy is booming despite challenges such as Omicron, labour shortages, and supply bottlenecks.
Headline inflation should moderate in early 2022 as supply-side constraints ease and a higher base effect will kick in, but core inflation – that which the Fed cares far more about – is likely to remain at elevated levels compared with what we have been used to in the last decade or more.
Housing costs, which have a significant weighting across underlying US inflation measures, should continue to increase at a brisk pace, oil prices are expected to remain elevated and the US labour market is very tight as it seems many workers who left the labour market during the pandemic are not coming back.
In Australia, headline inflation was at 3% in the year to September 30, while underlying inflation was 2.1 per cent, so clearly, we aren’t experiencing the same inflation pressures as the US even if everyone is complaining about petrol prices. Anecdotally, I feel that we may be experiencing a bit more inflation than the official figures suggest, but not enough to concern the RBA.
Interest rates in all developed economies remain at historically very low levels so no one should be too surprised if we see three small rate increases in the US during 2022, and many other countries are likely to follow, but I think very high government indebtedness will ensure that rate rises are relatively modest and unlikely to cause more than temporary concerns for share markets.
The recent rises in some Australian interest rates, such as fixed-rate home loans, have mainly been a result of higher bank funding costs as the RBA cut back on cheap funding for the banks rather than being the result of inflationary pressures.
Downsizer Contributions to Super – qualifying age likely to be reduced to 60
From 1 July 2022 the qualifying age to be eligible to make a downsizer contribution to superannuation is expected to be reduced from the current age 65 to age 60. The legislation is before parliament but may not be passed before the next election.
There will be no change in the other qualifying conditions – such as
– minimum 10 years ownership of the property being sold
– $300,000 cap per person on Downsizer Contribution
– 90-day time limit in which to make the downsizer contribution
Downsizer contributions were introduced in July 2018 to permit individuals, who may otherwise have been prevented from making non-concessional contributions by their age or contribution cap limits, to transfer the proceeds from the sale of their principal residence (home) into the superannuation system.
Downsizer contributions are not subject to the age or work test tests that apply to other non-concessional contributions and also not subject to the non-concessional contribution cap.
While there are several requirements for a contribution to be treated as a downsizer contribution, in broad details, the principal requirements are that:
- the individual who is to benefit from the downsizer contribution must have attained age 65 (age 60 from 1 July 2022 if legislation is passed) at the time the contribution is made
- the maximum amount of the downsizer contribution for any individual cannot exceed $300,000
- the maker of the contribution must have sold an Australian dwelling that qualified for the principal private residence exemption at any time
- the dwelling must have been owned for 10 or more years
- the contribution must be made within 90 days of the sale of the dwelling
- Downsizer contributions for an individual can only be sourced from the sale proceeds of one designated dwelling and they cannot exceed the sale proceeds arising from the sale of that designated dwelling.
Abolition of the minimum salary threshold for SG contributions
The minimum threshold of a $450 salary per month for employer contributions is being abolished:
- The change applies from 1 July 2022
- Employers will have to pay SG contributions on monthly salary/wages even if they are less than $450 for a calendar month (currently this is not the case)
- This change will benefit part time and casual employees who earn less than $450 in a calendar month
- It will benefit part time and casual employees who have two or more unrelated employers each paying salary/wages of less than $450 per calendar month
- The rule that salary or wages of under 18-year-olds are not counted for SG purposes is unchanged.
Change on ownership of Colonial First State
On 1 December 2021, Kohlberg Kravis Roberts & Co. L.P (KKR), became the majority shareholder of Colonial First State Investments Limited (CFSIL), and Avanteos Investments Limited (AIL), acquiring 55% ownership. Commonwealth Bank of Australia (CBA) has retained 45% ownership.
If you have a Colonial First State (CFS) account, you might have some questions about what this means for you and what you can expect following the sale.
The change in ownership won’t affect how you deal with CFS or where or how your money is invested. Your money will continue to be held under the trust of CFS’s various superannuation and investment funds and managed by a majority independent board. Importantly, the superannuation sector and CFS remain regulated by the Australian Taxation Office (ATO), Australian Securities and Investment Commission (ASIC), and the Australian Prudential Regulation Authority (APRA).
Magnitsky Laws passed by Australian Parliament – good news!
In December last year I recommended for holiday reading a book about corruption and murder in Putin’s Russia and a campaign to make the perpetrators pay. The book is:
Bill Browder: Red Notice: A True Story of High Finance, Murder, and One Man’s Fight for Justice
The Magnitsky-style laws are named after a Russian whistleblower Sergei Magnitsky who died in a Moscow jail after accusing Russian officials of tax fraud. That prompted political activist Bill Browder to lead a push for the US Magnitsky Act to be adopted in 2012 on behalf of his former lawyer with the measures later becoming adopted across many countries.
I am pleased to say that the global campaign headed by Bill Browder to expose and punish Sergei Magnitsky’s killers and other corrupt and disreputable characters is having a real impact and Australia has finally joined many other countries that have passed laws to harm the perpetrators.
Laws allowing Australia to slap sanctions on human rights abusers, cyber attackers, and corrupt officials were recently passed by the Senate. The so-called Magnitsky style laws will allow the Australian government to directly target sanctions against individuals or entities.
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.