Why has the share market risen since the pre-Christmas decline?

 The doom and gloom of the pre-Christmas period has been replaced by increasing optimism in January as a result of The US Federal Reserve indicating future interest rate increases are less likely and because of signs that President Trump is looking for a compromise with China on trade and with the Democrats on immigration. Since Christmas Eve the S&P 500 has rallied an almost 14%. The Australian market is up around 7%. Brexit and a Chinese economic slowdown remain concerns, so they are holding back an even stronger recovery in share prices globally.

The US Fed increased the federal funds rate 9 times between December 2015 and December 2018 (it’s now 2.5%) but slower US growth and move “dovish” comments from Fed Chairman Powell have the market believing that interest rates may well be on hold during 2019.

Official interest rates (the RBA cash rate) have been on hold at 1.5% in Australia since August 2016 and virtually no one expects an increase in the foreseeable future. Some are even forecasting a cut due to the weak housing market, though I doubt that will happen as the availability of finance from banks, rather than the cost of credit, is behind recent housing price falls.

Another recent positive for the US share market, and other markets tend to follow its lead – are clear signs that Trump wants a deal with China to boost the markets and so that he can go on Fox News claiming that he has engineered the greatest deal in the history of great deals. Remember, his campaign for re-election in 2020 has effectively started. China is slowing sharply as is evident from their authorities launching a range of stimulatory measures including tax cuts and cuts in the amount of cash Chinese bank’s must hold in reserves, thus enabling them to lend more. Both sides have incentives to strike some sort of deal.

Similarly, Trump appears keen to strike a deal with the Democrats on the building of his wall on the border with Mexico as the Government shutdown is hurting his poll numbers and doesn’t help public sentiment. The Democrats may play hardball, but a compromise is likely soon as Trump is willing to concede on other issues if he can get some funding for the wall, he promised back in 2016.

Payment of the increased tax on Super contributions for high income earners

Division 293 tax was originally introduced for the 2013 financial year to “reduce the tax concession” on super contributions for “high-income earners”. Division 293 tax is applied to certain concessional Super contributions where an individual’s combined income and low tax Super contributions for a year exceed $250,000.

The government lowered the threshold for division 293 tax from $300,000 to $250,000, effective 1 July 2017. Division 293 tax is only payable on any excess over the threshold, or on the super contributions, whichever is less. The rate of Division 293 tax is 15%.

The ATO will shortly start issuing assessments for those taxpayers liable to pay additional tax on their concessional contributions made in 2017-18. The taxpayer can choose to pay the tax bill from their own money, or they can use an official release authority from the ATO to pay the debt using their super money.

Financial Adviser and Financial Planner are now restricted terms

Not before time, use of the terms financial adviser and financial planner has been restricted to those properly qualified and licensed. From 1 January 2019 the terms ‘Financial Adviser’ and ‘Financial Planner’ (and any similar terms) are restricted by legislation to individuals authorised to provide personal financial advice. Individuals who aren’t licensed should not be using these or similar terms and if they do provide financial advice this would be a breach of the Corporations Act and may attract a fine.

Social Security (Centrelink) Assessment of the former Home for Aged Care Residents

An important change to the social security assessment of the former home (for Age Pension entitlements, for example) applies to those who entered residential aged care on or after 1 January 2017.

In summary, the ‘indefinite exemption’ which provided an assets and income test exemption on the former home, is no longer available for those who first entered aged care on or after 1 January 2017. The indefinite exemption previously applied when an aged care resident paid at least a portion of their accommodation payment periodically and rented out their former home.

For those who first permanently entered residential aged care on or after 1 January 2017, the social security assessment of the former home is:

  • Rental income from the former home is included in the social security income test.
  • The market value of the former home becomes an assessable asset after two years from the date of permanently entering aged care, unless a partner resides in the former home.

For persons who first entered residential aged care on or after 1 January 2017, the two-year anniversary of entering aged care can be an important milestone if they retained their former home and a partner does not reside in the home. Impacted age care residents may need to review their situation prior to the two-year anniversary to determine the impact on their social security entitlements and cashflow situation.

Enjoying the New Year at a beautiful property in Victoria

Andrew & Steve were fortunate to spend a few days with family at a beautiful property outside of Daylesford in Victoria, including on New Year’s Eve. The building itself is a modern masterpiece and the views in all directions are spectacular. It could have featured on Grand Designs for those familiar with that TV show on the ABC. We only had 5 nights but it was special and highly recommended for a group of up to 10 people.

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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