Cash is King no longer applies
The old truism that “cash is king” is under considerable doubt in an era where interest rates are extremely low and expected to remain so for many years. Retirees must face the reality that they cannot generate a meaningful return from Cash and Term Deposits, or high-quality Government bonds. Cash remains a great comfort in troubled economic times and will always play a role in people’s savings/wealth portfolios but, in the current period of low inflation, cash represents declining purchasing power over time.
For retirees who need to generate a reasonable return from their Super and other investments to provide income to live off, the challenge now is how to allocate their investments such that they can generate a reasonable return without taking too much risk. This is a considerable challenge and it is important not to simply chase yield – high-interest deposit/mortgage offerings and high dividend-paying shares – as this can be a trap and in some instances lead to loss of capital.
2020 Federal Budget & Implications
Recognising the weak economic environment that has resulted from coronavirus, the Federal Government is borrowing substantially to try and boost economic activity and stimulate job growth. This can be seen in the projected growth in Federal Government debt outstanding.
Some of the key announcements in last week’s Federal Budget were:
Tax cuts – $17.8 Billion was allocated to bring forward the government’s Stage 2 tax cuts, which will be backdated to 1 July 2020. The new tax rates are:
|Current Taxable income thresholds (2020-21)||Tax rate (excluding Medicare levy)||From 1 July 2020 (proposed*)||Tax rate (excluding Medicare levy)|
|Up to $18,200||Nil||Up to $18,200||Nil|
|$18,201 – $37,000||Nil + 19% of each $1 over $18,200||$18,201 – $45,000||Nil + 19% of each dollar over $18,200|
|$37,001 – $90,000||$3,572 + 32.5% of each dollar over $37,000||$45,001 – $120,000||$5,092 + 32.5% of each dollar over $45,000|
|$90,001 – $180,000||$20,797 + 37% of each dollar over $90,000||$120,001 – $180,000||$29,467 + 37% for each dollar over $120,000|
|$180,001 and over||$54,097 + 45% of each dollar over $180,000||$180,001 and over||$51,667 + 45% of each dollar over $180,000|
* Legislated from 1 July 2022, now proposed to start 1 July 2020.
“Job Maker” – A new name for a scheme which is part of the government’s new jobs plan, which will pay a weekly amount to firms that create eligible new jobs and employ workers between 16-29 years old ($200/week) and 30-35 years old ($100/week). This scheme as been criticised for excluding those over age 35 and because the wage subsidy is relatively modest.
Immediate Business Investment Write-offs for Eligible Assets– a large $26.7 Billion to boost business investments and will cover 99% of Australian business. Firms will be able to deduct the full cost of eligible depreciable assets until 30 June 2022 in the year installed.
1st Home Loan Deposit Scheme extended – In addition to the already 20,000 spots offered, there will be an additional 10,000 spots offered that sees eligible borrowers able to buy new dwellings up to a certain amount, which varies by city/state. This may see the Government guarantee up to 15% of eligible borrowers’ loans, whereby a person/household can get a loan with as little as 5% equity, 95% loan (95% LVR), and not need expensive lenders mortgage insurance.
Those areas that missed out in the Budget include Arts, Tourism, Universities, Childcare and self-funded retirees. Low-interest rates, which will continue for years, are certainly hurting those relying on interest to support their lifestyle. There also was an expectation of more money for Aged Care but presumably that will be announced soon. There was also nothing to help older unemployed find a new job, though the subsidies to encourage employers to take on young people was a good response to a significant problem as this group has seen more job losses than any other due to coronavirus.
Superannuation changes in the Budget
Thankfully, there were no major changes to Superannuation announced in this year’s Budget; for example, contribution caps and the amount that can be held in a tax-free pension ($1.6m) are unchanged.
The most significant initiative was that a Superfund that continues to underperform and fails two consecutive annual performance tests will not be permitted to accept new members. This is expected to lead to further industry consolidation. It is not expected to apply to Self-Managed Super Funds. Other key elements of the government’s latest changes to super regulation include the stapling of member accounts to each individual to slash account duplication and a government-funded comparison tool to help people choose their Superfund.
Salary Sacrifice / Personal Tax-deductible Super Contributions
The change in the tax brackets has not changed the tax saving (the difference between your personal marginal tax rate and the 15% Super contributions tax) for most people unless your personal marginal tax rate has changed i.e. the marginal tax rate applying to the top slice of your taxable income.
Looking purely at the tax differential, we see salary sacrifice/ personal deductible super contributions will be:
- largely irrelevant for people earning $37,000 – $45,000,
- about the same as it was before the announcements for those whose net income (after the salary sacrifice) is around $45,000 – $90,000 – i.e. modestly valuable
- not quite as valuable but still positive for those in the $90,000 – $120,000 tax bracket, and
- still highly valuable for those earning more than $120,000 if they have room within their $25,000 annual concessional contribution cap.
Cashing out your Super in Retirement
While reduced personal marginal tax rates for many taxpayers have moderately reduced the tax benefit derived from a tax-free pension, for most single people with a balance of $500,000 or more it still does not make sense to withdraw a lump sum from Super and invest personally. The larger the Super balance and the higher the investment earnings the more benefit there is in retaining savings in a tax-free pension. The tax saving benefit from tax-free pensions requires a higher combined pension balance for couples as they have two tax-free thresholds.
Also, anyone with a pre-2015 pension is grandfathered for the Commonwealth Seniors Health Care card so they should be careful before withdrawing significant funds from their Pension account.
Residential Property Prices
Until recently most economists and other forecasters were saying that they expected residential property prices to fall considerably due to the recession bought on by coronavirus. lt now seems likely that property prices will only decline by around 5% because of the pandemic. Many forecasters now say we could then experience capital gains of between 10 and 20% through to 2023.
Dwelling values in Brisbane, Canberra and Adelaide have all started to increase already, albeit slightly. Perth property prices also appear to be stabilising. Melbourne is the one exception to the positive forecast. Prices in the city have continued to decline throughout the lockdown and could potentially fall as much as 10%.
Recently, Westpac’s chief economist, Bill Evans, echoed CBA’s call that national property prices may only drop another 2 to 3%. Evans said we will probably see some downwards pressure on prices over the next few months as mortgage deferrals wind down and some property owners are forced to sell. However, he believes the favourable conditions of 2021 – such as incredibly low-interest rates, ongoing support from regulators and the overall economic recovery – should see strong demand return to most capital city markets by the second half of the year. He said that Brisbane and Perth could see price increases of up to 20% by 2023.
Sustainable Investing – a look at Australian Companies
An increasing number of investors, both individual and large (fund managers and superfunds), are concerned that their investments be in companies adopting sustainable practices. Businesses that are perceived to downplay this are increasing seeing shareholders either sell or agitate for policy change.
For those who are interested, fund manager Perennial has recently released their 2nd Sustainable Future corporate report based on a survey which was sent to ~250 listed companies in Australia. The survey is designed to take the “ESG Pulse” of ASX listed companies. The survey seeks to obtain the views of ASX listed companies on where they have been, where they are now and where they are going on all things ESG (Environmental, Social and Governance). Please contact us if you would like a copy.
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.