Financial Planning Archives - Page 5 of 20

The risks of relying on dividends

by James Weir | May 27, 2020 | Financial Planning, Investments

John D. Rockefeller, once the world’s wealthiest man, claimed that nothing gave him more pleasure than watching his dividends come in. Many Australian investors feel the same, giving rise to a popular strategy of investing in companies that pay high dividends that will hopefully fund the cost of living while preserving the underlying capital – that way you hopefully don’t outlive your savings.

While it seems like a conservative approach, the upheaval caused by the COVID19 lockdown has exposed the multiple risks of this strategy and should prompt those investors to consider the benefits of a different way of looking at how a portfolio can fund your lifestyle.

Reduced dividends = a pay cut

Leading Australian small cap fund manager, Ophir Asset Management, quotes research by MST Marquee that between the start of February and the end of April, Australian dividend forecasts suffered a 16% cut, the biggest in the world.

The risks of relying on dividends_image1

But there could be more to come. Will Baylis, a portfolio manager with equity income specialist Legg Mason Martin Currie, says the dividend forecasts published by stockbroking analysts have yet to fully account for the effect that slashed company earnings will have on dividends, with their own internal forecasts being more like a fall of 25% this year.

Risk #1: the wrong kind of stocks

Investing in high yielding shares can be a fabulous strategy, because not only have Australian dividends been relatively generous, but historically they’ve been reliable and consistent – if you pick the right ones. Baylis points out that dividends have grown at 3.9% per annum over the 10 years to the end of March this year, while over the same period term deposit rates have fallen by 17% per year.

The problem is that by just focusing on the dividend, rather than the whole story, many investors end up with shareholdings that destroy capital. The classic example of this is the major banks, which Australian investors have had a long love for, but which face some potentially strong headwinds, something I warned about last year.

If you’d invested $100,000 into each of the big four banks at the start of 2010 you’d have seen an overall return of 5.7% per year (including franking), but if you’d used all the dividends to fund your cost of living, you’d have had less than $320,000 of capital left by the end of April this year. The only bank to have delivered an increase in price was the Commonwealth Bank, by 14% (a measly compounded return of 1.3% per annum), the share prices of the other three banks fell by an average of 33%. Indeed, you may be surprised to know that at the end of February, so before the banks were hit by the COVID19 selloff, ANZ’s and Westpac’s prices were the same as they were 14 years ago, and NAB’s was the same as 20 years ago!

An alternative income strategy has been infrastructure, property and utilities shares, otherwise known as ‘real assets’, which generally have steady, predictable income streams and assets that are leveraged to a growing population. A simple portfolio invested equally between Transurban, Sydney Airport, Spark and the Vanguard Australian Property ETF over the same period would have seen your capital double, and a total average annual return of more than 10%.

A far better strategy is to focus on the total return from an investment, that is, dividends plus capital. CSL might be an extreme example, given how well it’s done, but those shares have always traded on a relatively paltry yield of 1-2%, but over that same 10-plus year period the total return was a phenomenal 25% per year, 94% of which was capital growth.

Risk #2: a lack of diversification

You might think investing entirely in high yielding, blue chip Australian shares is a conservative strategy, but there is no doubt, that is a high risk portfolio: the Australian share market has suffered falls of as much as 38% in a year, hardly conservative.

The best way to reduce risk in a portfolio is to make sure it’s diversified across a range of asset classes and geographies, a process called asset allocation, a basic principle of which is that different countries will perform differently over the same time frame. For example, over the 10 years to the end of March, US shares have delivered returns of 16% per year, more than double Australia’s.

Returns like that also put paid to the preoccupation some Australian investors have with capturing franking credits. It’s essential to focus on the bottom line: NAB’s dividends have been fully franked, but you’d have lost a whopping 38% of your capital over the past 10 years.

Also, you can cast your view beyond just shares. For example, investing in corporate bonds from across the globe offers a vast range of risk and return, some of which can be more predictable and, if managed correctly, less volatile than shares.

Take a dividend from your whole portfolio

Focusing on a total return strategy, rather than an income-oriented one, does require a slightly different mindset: rather than living off the dividends generated by your portfolio, you need to look at it as paying yourself a dividend from your overall portfolio, which can be funded through a combination of income and capital growth.

That might involve setting a certain dollar amount you harvest from your portfolio each year, or a percentage. Either way, it means you’ll need to rebalance your portfolio from time to time, a small and very healthy price to pay for heeding the COVID19 wake up call.

Things to think about before snapping up bargain stocks

by James Weir | Apr 22, 2020 | Financial Planning, Investments

This article appears in today’s AFR.

When a stock market plunges 37% in a matter of a few weeks, it’s hardly surprising a lot of investors will smell a bargain and look to take advantage of the big drop in prices by snapping up some heavily sold shares. And given the market’s bounced 19% from its recent lows, so far it’s worked out well for a lot of them, but before you’re tempted to try your hand at doing the same thing, there are some important questions you should ask yourself.

Are you looking for a short-term punt or a long-term investment?

You might fancy your chances of making a quick trading profit, with the intention of being in and out within days or weeks, or even telling yourself you’ll hang on for a year or two. Seriously, anything that’s less than 3-5 years is a punt, not an investment, especially when there’s not a person on the planet that can tell you when the full effects of the most comprehensive economic shutdown we’ve ever experienced will have washed through. Like any punt, you’ll need to be prepared to lose money.

On the other hand, if you see this as an opportunity to start, or add to, a long-term portfolio, in other words, investing, there are still some questions to ask.

Personal or super?

First, do you think you’ll need to use the money for anything before you retire? If you reckon you’ll need to access it for other things, then it makes sense to invest in your own name. However, if you feel sure you won’t need to access the money once it’s invested, then you really should be looking at investing in your superfund if you can because it provides potentially enormous tax advantages. If your marginal tax rate is, say, 30%, compared to the 15% rate in super, that difference can really add up over several years.

That means you need to be on top of your super contributions: have you, or will you, max out your concessional contributions (for example, the ones you get through work) before the end of the financial year? If not, then topping up your concessional contributions to the $25,000 limit could bring you the added bonus of a tax deduction. If you have, or will, hit that limit then you can always explore whether you’re able to make a non-concessional contribution of up to $100,000. In fact, you’re able to bring forward three years’ of non-concessional contributions in one hit.

You need to be careful of the details here, so if you’re unsure, you really should speak to a financial adviser, and while there’s a bit more hassle involved, rest assured, the difference in tax will be worth it.

DIY or outsource?

When share prices have fallen a lot, it’s easy to think you can’t lose no matter what stocks you pick. That couldn’t be further from the truth. Again, we don’t know how long or deep this downturn will be, and while the government is stepping in to plug some of the gaps, that money should be seen for what it is: a rescue package, not a stimulus. There’s a very real risk businesses could fail. In just the past few weeks dozens of Australian companies have had to raise money through share placements to prop up their balance sheet.

If you don’t feel confident you have the skills or knowledge to be able to work out whether a company has what it takes to survive, then you’re taking on a lot of extra risk. Alternatively, if you decide you haven’t got the skills or knowledge, you can outsource the decisions to a fund manager, whose analysts are trained to pick apart a company’s financial accounts and who are often able to pick up the phone to a CEO or CFO at short notice.

Specific stocks or index?

There are literally hundreds of different fund managers out there, but once you go down that path you face just as big a challenge working out which ones are any good, or which style best suits you: value or growth, big companies or small, fundamental or quant?

If choosing a fund manager, or selecting which stocks are going to survive and prosper is simply too daunting, you can opt to buy an ‘index fund’. These funds simply replicate either an entire county’s share market, or a part of a share market, or even a region’s share markets, like Europe or Asia. You can buy what’s called an Exchange Traded Fund (or ETF), which will replicate an index, as easily as you can buy individual shares on the stock exchange. Popular ETF issuers in Australia include the likes of Vanguard, iShares, BetaShares or SPDR.

The advantage of buying an index fund is you get instant diversification and it takes the decision making out of your hands, which is why it’s also called ‘passive’ investing, as opposed to trying to pick stocks, which is called ‘active’ investing. Importantly, you can reduce your risk even further by buying index funds for a variety of different markets, a process called asset allocation.

This stock market correction could turn out to be the opportunity of a lifetime or a nasty bear trap, and the difference can boil down to knowing what you don’t know.

Bullish? Bearish? Or confusedish?

by James Weir | Apr 17, 2020 | Financial Planning, Investments, Markets and Economy

To say financial markets have been a wild ride recently is flattering to wild rides! The MSCI global index fell 33% in the space of a month, and to date has bounced 25% from its bottom, to currently sit 19% below the February peak.

Chart 1: the MSCI All Countries World Index

Along the way we’ve had all kinds of records set: the fastest ever decline to a bear market, the highest volatility since the GFC, the fastest bounce back, the best weekly gains, etc., etc. – it’s enough to leave your head spinning.

The extraordinarily strong rally in both shares and bonds over the past few weeks has left many scratching their heads after apparently disastrous economic data was being greeted with an enthusiastic bounce. There seems to be no shortage of reasons to be bearish, but markets appear to be telling the opposite story.

In the midst of the greatest economic shutdown the world’s ever seen, I thought it might be interesting to look at some of the reasons to be both bullish and bearish – which could well leave you sitting in the middle, confusedish.

The bullish arguments

Central banks

The single biggest reason to be positive is the scale of response we’re seeing from both central banks and governments to support stumbling economies, absolutely dwarfing what was thrown at them during the GFC.

This hit a staggering high last week when the US central bank, the Federal Reserve (usually referred to as the Fed), responded to jittery bond markets by announcing it would spend US$2.3 trillion to effectively backstop large companies by buying risky bonds that had lost their investment grade credit rating. That, together with some other never before seen moves, has created the perception of a lot less risk in bond markets, meaning credit, the lifeblood of modern economies, was able to flow once again.

Chart 2: After initially freaking out, bond markets responded to the Fed’s support measures

The Fed’s announcement underwrote a rally in bond markets that migrated through to shares as well, and stoked perceptions that no matter how bad things get for companies the Fed will bail them out. Other central banks, including our own Reserve Bank, have announced their own programs designed to make sure the financial plumbing in credit markets doesn’t get clogged up, with the tantalizing promise that they’ll do more if they have to.

Chart 3: Central banks have been far more aggressive than during the GFC

Governments

It seems as if a whole bunch of governments around the world, including Australia’s, have turned their ‘responsible fiscal spending’ rhetoric on a dime, and replaced it with talk of being ‘at war’. Perhaps the lessons of how ridiculously absurd fiscal austerity was in the wake of the GFC were in fact learned, with some simply massive programs unleashed along with, again, the promise of more to come if necessary.

Chart 4: Governments are turning on the fiscal tap

Importantly, the focus of support has been to make sure businesses go into hibernation rather than liquidation by supporting their employees so they don’t have to be sacked, and helping households navigate surviving the crisis.

The curve is flattening

It must be the most talked about curve on the planet: the gradient of the growth in the number of confirmed COVID-19 cases across the world is flattening off, with strong indications that isolation and the unprecedented quarantining measures in place all over the world are working.

Chart 5: Global number of confirmed new cases and daily new cases

The same charts for Australia indicate not only are we getting on top of new cases, but we could realistically be looking at eradication in the next few weeks.

Chart 6: Australia’s rate of new cases is falling rapidly

With the flattening of curves comes the ability of economies to reopen, as we’re now seeing in China, where a number of real time, high frequency measures are showing a strong and steady improvement.

Chart 7: China’s economy is coming back to life

Markets are forward looking

Share markets have a knack for very quickly factoring in what is known and then moving on to look for what we think we know. Obviously, the big swing factor is sentiment, which moves markets far, far more than facts, especially during a bear market.

The huge initial tumble starting in late February reflected the uncertainty from a scenario of great swathes of the global economy shuddering to a halt, and the subsequent bounce was optimism inspired by governments and central banks stepping up to the plate like we’ve never seen before. We all know unemployment will rise, spending will fall, and GDP readings will look ugly, that’s a given. But share markets don’t look much like the economy, so they can move quite independently, and the fact the US share market has powered on despite unemployment claims going through the roof shows you the market is looking through the curve to the other side.

We know the world will recover in due course, it’s just a question of when, and then markets will resume their inevitable onward march.

The bearish arguments

Government packages

There’s an old truism that financial markets hate uncertainty. Well, the list of unknowns is frighteningly long right now, with key amongst them that we have no idea when we’ll be able to give the go ahead to get the economy revved up again, meaning we also have no idea of just how much damage will have been done.

While the government spending packages are essential, they should be seen for what they are: rescue packages, not stimulus packages. There’s no way the government will be able to plug the entire hole where the economy used to be, and again we won’t know how big that hole is for a while yet.

Central bank measures

Undoubtedly central banks have played a key role in making sure liquidity didn’t dry up, ensuring money and credit are able to flow through the economy to where it’s needed. However, this crisis is going to move from being a liquidity crisis to a solvency crisis, especially among small to medium sized businesses. That is, it’s not going to be about businesses being able to get their hands on cash, it’ll be about having any business left.

The all-important consumer

Consumer spending accounts for about 60% of most developed economies, and discretionary spending is about 35% of that, so call it about 20% of GDP. How much of a hit will it take? Estimates of unemployment vary from 8-15% in Australia, which is likely to not only affect spending but could hit house prices too, which will have knock effects to spending again.

In the US, still by far the most influential market in the world, retail sales in March were down 8.7% from the previous month (which had been revised downwards), the biggest month on month decline since this data series began in 1992. And even that was possibly understating how bad things were given a lot of businesses didn’t respond to the survey because they were closed.

Chart 8: US retail sales recorded their biggest month on month fall ever

Other US data is ugly

US unemployment claims have been eye wateringly high: as of this morning well over 20 million people had signed up in the space of four weeks, equivalent to 12.4% of the workforce. The US hasn’t seen anything like it since the Great Depression, and it’s pretty much wiped out all the job gains of the past 10 years. While a lot of those jobs will possibly reappear just as quickly, we can’t be sure all of them will.

Chart 9: recent US unemployment claims have jumped so high it makes the GFC look like a blip

Similarly, US factory output dropped by more than 6% compared with February, the biggest decline since 1946.

Chart 10: US factory output dropped the most since the end of WW2

PE multiples

The Price to Earnings (PE) ratio is a basic measure of how expensive an individual share is, or you can apply it to an entire market. It’s simply the share price divided by the earnings per share, and the higher the number, the more expensive is the market. A higher PE is also a reflection of investors being more positive, or bullish, about the market.

There are two ways of looking at the PE ratio: the earnings that have actually been reported, which is called the Twelve Month Trailing PE (or TTM), or the forecast earnings for the next 12 months, which is called the forward PE. Right now, analysts have no idea what individual companies will earn, so they’re not willing to make a guess, which means the forward PE is not very helpful.

The PE ratio for the Australian All Ordinaries Index was 15.4 at the end of March. Just for comparison, during the GFC the Australian market’s PE ratio bottomed out at 9.3 in March 2009, 40% below where it is now. If we use US data (because unfortunately I don’t have the same data for Australia), in the seven nasty bear markets they’ve experienced since 1929, the PE bottomed at an average of 13.1.

Looking at it another way, the Australian PE was 20.1 at the end of January and comparing that to the March number it implies the market’s allowing for earnings to fall 23%. Again, using the US experience, earnings fell an average of 45% during those bear markets.

Confusedish?

It’s an absolute given that every bear market is different, with the huge difference this time that governments and central banks have responded like never before. Markets can be confounding, rising on bad news, and there are strong arguments on both sides. One thing’s for sure, on a long-term view, it’s never paid to bet against the irrepressible nature of human innovation.

A look at the reasons to be bullish or bearish, which could just leave you somewhere in the middle.

How can I pause my home loan repayments and how does it work?

by Cameron Purdy | Mar 31, 2020 | Financial Planning, Investments, Property Loans

With an estimated 1 million people facing unemployment as a result of the current crisis it’s no wonder that the ability to service what is most household’s largest expense, mortgage repayments, will be placed under stress. If you’re in this precarious situation, or know someone else who might be, you may ask “what are the options and how does it work?”

Each lender has provided those in hardship with a six-month payment holiday. This article summarises the big four banks’ policy response but all lenders have implemented similar measures, with slight variations.

Commonwealth Bank

You will be able to defer home loan repayments for up to six months and, instead of making your repayments, interest will be capitalised, in other words, added to your loan balance. That balance will be recalculated at the end of the period and extended so repayments stay the same as they were before you started the deferral.

Westpac

You will be able to defer repayments for three months initially, with a possible extra three-month extension available after review. The deferred interest will be capitalised and when payments resume, they will increase slightly for the remainder of your loan term.

NAB

You will be able to defer your repayments for up to six month and there will be a three month ‘check in’ point with the bank. Like Westpac, the deferred interest will be capitalised and when they resume, payments will increase slightly for the remainder of your loan term. You will still be able to redraw during the repayment pause if you have made additional repayments to date.

ANZ

You may be able to put your repayments on hold for six months and interest will be capitalised. The bank will check in with you after three months and at the end of the period your minimum repayments will slightly increase to account for the increased loan balance.

What do I need to provide to have my payments suspended?

Again this will vary for each lender but in most cases you won’t have to provide any evidence that you’ve suffered substantial loss of income, or have contracted corona virus, but you may have to sign a declaration as such.

You should only defer mortgage payments if you really have to

It’s worth noting that there’s no advantage deferring the loan if in fact you can afford the repayments as capitalising the interest will mean that your repayments will increase over the life of the loan. For example, if you paused the interest repayments on a $300,000 loan with a current rate of 3%, after 6 months the balance of the loan will increase to $304,500. In most cases when you recommence your repayments, the minimum amount will be calculated based on this increased loan balance.

If you, or someone you know, unfortunately falls into this category you will need to contact your lender’s financial hardship team which can guide you through the application process. As always, please feel free to get in touch if we can assist in any way.

Jobkeeper Payment

by Anthony Picone | Mar 30, 2020 | Financial Planning, Industry News, Markets and Economy

The Federal Government last night announced its 3^rd, and largest, round of stimulus with a $130 billion package aimed at businesses impacted by the COVID-19 pandemic. Eligible businesses will receive a fortnightly wage subsidy up to $1,500 per eligible employee as part of a Federal Government action to prevent the significant jobs losses due to the COVID-19 pandemic.

The Government has released a helpful Fact Sheet detailed below.

OBLIGATIONS ON EMPLOYERS

To receive the JobKeeper Payment, employers must:

Register an intention to apply on the ATO website and assess that they have or will experience the required turnover decline.
Provide information to the ATO on eligible employees. This includes information on the number of eligible employees engaged as at 1 March 2020 and those currently employed by the business (including those stood down or rehired). For most businesses, the ATO will use Single Touch Payroll data to pre-populate the employee details for the business.
Ensure that each eligible employee receives at least $1,500 per fortnight (before tax). For employees that were already receiving this amount from the employer then their income will not change. For employees that have been receiving less than this amount, the employer will need to top up the payment to the employee up to $1,500, before tax. And for those employees earning more than this amount, the employer is able to provide them with a top-up.
Notify all eligible employees that they are receiving the JobKeeper Payment.
Continue to provide information to the ATO on a monthly basis, including the number of eligible employees employed by the business.

BACKGROUND ON JOBKEEPER PAYMENT

Under the JobKeeper Payment, businesses impacted by the Coronavirus will be able to access a subsidy from the Government to continue paying their employees. Affected employers will be able to claim a fortnightly payment of $1,500 per eligible employee from 30 March 2020, for a maximum period of 6 months.

Eligible empyloyers

Employers will be eligible for the subsidy if:

their business has a turnover of less than $1 billion and their turnover will be reduced by more than 30 per cent relative to a comparable period a year ago (of at least a month); or
their business has a turnover of $1 billion or more and their turnover will be reduced by more than 50 per cent relative to a comparable period a year ago (of at least a month); and
the business is not subject to the Major Bank Levy.

The employer must have been in an employment relationship with eligible employees as at 1 March 2020, and confirm that each eligible employee is currently engaged in order to receive JobKeeper Payments.

Not-for-profit entities (including charities) and self-employed individuals (businesses without employees) that meet the turnover tests that apply for businesses are eligible to apply for JobKeeper Payments.

Eligible employees

Eligible employees are employees who:

are currently employed by the eligible employer (including those stoo down or re-hired);
were employed by the employer at 1 March 2020;
are full-time, part-time, or long-term casuals (a casual employed on a regular basis for longer than 12 months as at 1 March 2020);
are at least 16 years of age;
are an Australian citizen, the holder of a permanent visa, a Protected Special Category Visa Holder, a non-protected Special Category Visa Holder who has been residing continually in Australia fro 10 years or more, or a Specia Category (Subclass 444) Visa Holder; and
are not in receipt of a JobKeeper Payment from another employer.

If your employees receive the JobKeeper Payment, this may affect their eligibility for payments from Services Australia as they must report their JobKeeper Payment as income.

APPLICATION PROCESS

Business with employees

Initially, employers can register their interest in applying for the JobKeeper Payment via ato.gov.au from 30 March 2020.

Subsequently, eligible employers will be able to apply for the scheme by means of an online application. The first payment will be received by employers from the ATO in the first week of May.

Eligible employers will need to identify eligible employees for JobKeeper Payments and must provide monthly updates to the ATO.

Participating employers will be required to ensure eligible employees will receive, at a minimum, $1,500 per fortnight, before tax.

It will be up to the employer if they want to pay superannuation on any additional wage paid because of the JobKeeper Payment.

Further details for businesses for employees will be provided on ato.gov.au

Businesses without employees

Businesses without employees, such as the self-employed, can register their interest in applying for JobKeeper Payment via ato.gov.au from 30 March 2020.

Businesses without employees will need to provide an ABN for their business, nominate an individual to receive the payment and provide that individual’s Tax File Number and provide a declaration as to recent business activity.

People who are self-employed will need to provide a monthly update to the ATO to declare their continued eligibility for the payments. Payment will be made monthly to the individual’s bank account.

Further details for the self-employed will be provided on ato.gov.au.

Employer with employees on different wages

Adam owns a real estate business with two employees. The business is still operating at this stage but Adam expects that turnover will decline by more than 30 per cent in the coming months. The employees are:

Anne, who is a permanent full-time employee on a salary of $3,000 per fortnight before tax and who continues working for the business; and
Nick, who is a permanent part-time employee on a salary of $1,000 per fortnight before tax and who continues working for the business

Adam is eligible to receive the JobKeeper Payment for each employee, which would have the following benefits for the business and its employees:

The business continues to pay Anne her full-time salary of $3,000 per fortnight before tax, and the business will receive $1,500 per fortnight from the JobKeeper Payment to subsidise the cost of Anne’s salary and will continue paying the superannuation guarantee on Anne’s income;
The business continues to pay Nick his $1,000 per fortnight before tax salary and an additional $500 per fortnight before tax, totalling $1,500 per fortnight before tax. The business receives $1,500 per fortnight before tax from the JobKeeper Payment which will subsidise the cost of Nick’s salary. The business must continue to pay the superannuation guarantee on the $1,000 per fortnight of wages that Nick is earning. The business has the option of choosing to pay superannuation on the additional $500 (before tax) paid to Nick under the JobKeeper Payment.

Adam can register his initial interest in the scheme from 30 March 2020, followed subsequently by an application to ATO with details about his eligible employees. In addition, Adam is required to advise his employees that he has nominated them as eligible employees to receive the payment. Adam will provide information to the ATO on a monthly basis and receive the payment monthly in arrears.

Employer with employees who have been stood down without pay

Zahrah runs a beauty salon in Melbourne. Ordinarily, she employs three permanent part-time beauticians, but the government directive that beauty salons can no longer operate has required her to shut the business. As such she has been forced to stand down her three beauticians without pay.

Zahrah’s turnover will decline by more than 30 per cent, so she is eligible to apply for the JobKeeper Payment for each employee, and pass on $1,500 per fortnight before tax to each of her three beauticians for up to six months. Zahrah will maintain the connection to her employees, and be in a position to quickly resume her operations.

Zahrah is required to advise her employees that she has nominated them as eligible employees to receive the payment. It is up to Zahrah whether she wants to pay superannuation on the additional income paid because of the JobKeeper Payment.

If Zahrah’s employees have already started receiving income support payments like the JobSeeker Payment when they receive the JobKeeper Payment, they will need to advise Services Australia of their new income.

2020 Coronavirus stimulus package unpacked

by James Weir | Mar 26, 2020 | Financial Planning, Industry News, Markets and Economy

There have been so many separate government announcements over the past few weeks with different support packages that it can be hard to keep up. Our friends at Netwealth have put together this helpful, clearly written summary of the Federal Government measures announced so far, divided into individuals, households and businesses.

Even if you are not able to make use of any of the measures yourself, you may well know someone who can.

The Government is acting decisively in the national interest to support households and businesses and address the significant economic consequences of the Coronavirus (COVID-19).

While the full economic effects from the virus remain uncertain, the Government’s outlook has changed since their initial Economic Response announced on 12 March 2020 and as a result a second round of stimulus has just been announced.

These actions seek to provide timely support to affected workers, businesses and the broader community. The Government’s economic response targets three areas namely:

Supporting individuals and households
Support for businesses
Supporting the flow of credit

Below is a summary of issues that may impact financial planners and their clients, but please note that the situation is changing daily and individual State Governments are also undertaking their own measures.

Supporting individuals and households

Income support for individuals

From 27 April 2020, eligibility to increased and accelerated income support payments is being expanded for the next 6 months, and a new, time-limited Coronavirus supplement to be paid at a rate of $550 per fortnight (p.f.) will be available. This is on top of existing income support payments.

Those on the following income support payments are eligible for the new Coronavirus supplement

JobSeeker Payment (and all payments progressively transitioning to JobSeeker Payment; those currently receiving Partner Allowance, Widow Allowance, Sickness Allowance and Wife Pension)
Youth Allowance JobSeeker
Parenting Payment (Partnered and Single)
Farm Household Allowance
Special Benefit recipients

Those eligible for the Coronavirus supplement will receive the full supplement of $550 p.f.

For the periood of the Coronavirus supplement, there will be

Expanded access

JobSeeker Payment and Youth Allowance JobSeeker criteria will provide payment access for permanent employees who are stood down or lose their employment.

Expanded access will also be available for sole traders, for the self-employed, for casual workers and for contract workers who meet the income tests as a result of the economic downturn due to the Coronavirus. This could include a carer for someone who is affected by the Coronavirus.

Reduced means testing

Asset testing for JobSeeker Payment, Youth Allowance JobSeeker and Parenting Payment will be waived for the period of the Coronavirus supplement. Income testing will still apply to the person’s other payments, consistent with current arrangements.

Reduced waiting periods

Where eligible for the Coronavirus supplement:

The Ordinary Waiting Period has been waived
The Liquid Asset test Waiting Period (LAWP) and the Seasonal Work Preclusion (SWPP) will be waived (including those currently serving the LAWP)
The Newly Arrived Residents Waiting Period (NARWP) will be temporarily waived, however residency requirements still apply
Income Maintenance Periods and Compensation Preclusion Periods will continue to apply

Steamlined application process

Simplified arrangements will be put in place including removing the requirements for:

Employment Separation Certificates, proof of rental arrangements and verification of relationship status,
Job Seeker Classification Instruments and;
The need for job seekers to make an appointment before beginning to be paid.

Flexible JobSeeking arrangements

Where in self-isolation or having caring responsibilities, an exemption from “mutual obligations” re: job seeking may be available.

Payments to support household

Two separate $750 payments to social security, veteran and other income support recipients and eligible concession card holders will be made. The payments are available to those who are eligible payment recipients and concession card holders at any time between 12 March and 13 April 2020 inclusive, and again on 10 July 2020. In the case of the second payment, the $750 payment is not payable for those who are receiving an income support payment that is eligible to receive the Coronavirus supplement. The first payment will be paid automatically from 31 March 2020 and the second automatically from 13 July 2020.

The payment will be exempt from taxation and will not count as income for the purposes of Social Security, Farm Household Allowance and Veteran payments.

The complete list of eligible income support payments and concession card is available here: https://treasury.gov.au/sites/default/files/2020-03/Fact_sheet-Payments_to_support_households.pdf.

Temporary early release of superannuation

Eligible individuals can apply online from mid-April through myGov to access up to $10,000 of their superannuation before 1 July 2020 (only 1 application allowed for the period). They will also be able to access up to a further $10,000 from 1 July 2020 for approximately three months (depends on the passage of the legislation).

Eligibility

To apply for early release you must satisfy any one or more of the following requirements:

You are unemployed
You are eligible to receive a JobSeeker Payment, Youth Allowance for JobSeekers, Parenting Payment (which includes the Single and Partnered Payments), Special Benefit or Farm Household Allowance.
On or after 1 January 2020
- You were made redundant, or;
- Your working hours were reduced by 20 per cent or more, or;
- If you are a sole trader — your business was suspended or there was a reduction in your turnover of 20 per cent or more.

Access

Applications are directed to the ATO using the myGov portal, who will process and issue a determination with a copy to the Fund who will then release the money.

Taxation

People accessing their superannuation will not need to pay tax on amounts released and the money they withdraw will not affect Centrelink or Veterans’ Affairs payments.

Temporarily reducing superannuation minimum drawdown rates

The superannuation minimum drawdown requirements for account-based pensions and similar products is being temporarily reduced by 50 per cent for the 2019-20 and 2020-21 income years.

Reducing social security deeming rates

As of 1 May 2020, the upper deeming rate will be 2.25 per cent (currently 2.5 per cent) and the lower deeming rate will be 0.25 per cent (currently 0.5 per cent).

On average, this will result in the receipt of around $105 more from the Age Pension in the first full year that the reduced rates apply.

Support for businesses

Boosting cashflows for employers

The Government is providing up to $100,000 to eligible small and medium-sized businesses and not- for-profits (NFPs) that employ people, with a minimum total payment of $20,000.

Small and medium sized business entities and NFPs with aggregated annual turnover under $50 million and that employ workers will be eligible. Eligibility will generally be based on prior year turnover.

Under the scheme, employers will receive a payment equal to 100 per cent of the business’ salary and wages withheld, with the maximum payment of $50,000 and a minimum payment of $10,000.

The payment will be delivered by the ATO as an automatic credit in the activity statement system from 28 April 2020 upon employers lodging eligible upcoming activity statements.
Eligible employers that withhold tax to the ATO on their employees’ salary and wages will receive a payment equal to 100 per cent of the amount withheld, up to a maximum payment of $50,000.
Eligible employers that pay salary and wages will receive a minimum payment of $10,000, even if they are not required to withhold tax.
The payments will only be available to active eligible employers established prior to 12 March 2020.

Quarterly lodgers will be eligible to receive the payment for the quarters ending March 2020 and June 2020.

Monthly lodgers will be eligible to receive the payment for the March 2020, April 2020, May 2020 and June 2020 lodgements. To provide a similar treatment to quarterly lodgers, the payment for monthly lodgers will be calculated at three times the rate (300 per cent) in the March 2020 activity statement.

An additional payment is also being introduced in the July-October 2020 period

Eligible entities will receive an additional payment equal to the sum of all the Boosting Cash Flow for Employers payments they have received as above. This means that eligible entities will receive at least $20,000 up to a total of $100,000 under both payments.

The cash flow boost provides a tax-free payment to employers and is automatically calculated by the ATO. There are no new forms required.

Supporting apprentices and trainees

Eligible employers can apply for a wage subsidy of 50 per cent of the apprentice’s or trainee’s wage paid during the 9 months from 1 January 2020 to 30 September 2020. Employers will be reimbursed up to a maximum of $21,000 per eligible apprentice or trainee ($7,000 per quarter). The subsidy will be available to small businesses employing fewer than 20 full-time employees who retain an apprentice or trainee. The apprentice or trainee must have been in training with a small business as at 1 March 2020.

Temporary relief for financially distressed businesses

The key elements are:

A temporary increase in the threshold (from $2,000 to $20,000) at which creditors can issue a statutory demand on a company and the time (from 21 days to 6 months) companies have to respond to statutory demands they receive – both measures to apply for 6 months.
A temporary increase in the threshold (from $5,000 to $20,000) for a creditor to initiate bankruptcy proceedings, an increase in the time period (from 21 days to 6 months) for debtors to respond to a bankruptcy notice, and extending the period of protection (from 21 days to 6 months) a debtor receives after making a declaration of intention to present a debtor’s petition – all measures to apply for 6 months.
Temporary relief for directors from any personal liability for trading while insolvent.
Providing temporary flexibility in the Corporations Act 2001 to provide targeted relief for companies from provisions of the Act to deal with unforeseen events that arise as a result of the Coronavirus health crisis.

Increasing the instant asset write-off

The Government is increasing the instant asset write-off (IAWO) threshold from $30,000 to $150,000 and expanding access to include all businesses with aggregated annual turnover of less than $500 million (up from $50 million) until 30 June 2020.

The higher IAWO threshold provides cash flow benefits for businesses that will be able to immediately deduct purchases of eligible assets each costing less than $150,000. The threshold applies on a per asset basis, so eligible businesses can immediately write-off multiple assets.

The IAWO is due to revert to $1,000 for small businesses (turnover less than $10 million) from 1 July 2020.

Backing business investment

The Government is introducing a time limited 15-month investment incentive to support business investment and economic growth over the short-term, by accelerating depreciation deductions.

The key features of the incentive are:

Benefit – deduction of 50 per cent of the cost of an eligible asset on installation, with existing depreciation rules applying to the balance of the asset’s cost.
Eligible businesses – businesses with aggregated turnover below $500 million.
Eligible assets – new assets that can be depreciated under Division 40 of the Income Tax Assessment Act 1997 (i.e. plant, equipment and specified intangible assets, such as patents) acquired after announcement and first used or installed by 30 June 2021.

Supporting the flow of credit

Coronavirus SME guarantee scheme

Under the Scheme, the Government will provide a guarantee of 50 per cent to SME lenders for new unsecured loans to be used for working capital. SMEs with a turnover of up to $50 million will be eligible to receive these loans.

The Government will provide eligible lenders with a guarantee for loans with the following terms:

Maximum total size of loans of $250,000 per borrower.
The loans will be up to three years, with an initial six-month repayment holiday.
The loans will be in the form of unsecured finance, meaning that borrowers will not have to provide an asset as security for the loan.

Loans will be subject to lenders’ credit assessment processes. As part of the loan products available, the Government will encourage lenders to provide facilities to SMEs that only have to be drawn if needed by the SME. The Scheme will commence by early April 2020 and be available for new loans made by participating lenders until 30 September 2020.

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