Federal Budget Oct 2022 Summary

Federal Budget Oct 2022 Summary

by | Oct 26, 2022 | Financial Planning, Wealth Management

This year’s Federal Budget focuses on providing relief for those with children, homebuyers and social security recipients whilst maintaining pre-election commitments. 

Note: These changes are proposals only and may or may not be made law. 

Summary 

Personal taxation 

  • No changes to personal income tax: The Budget did not contain any measures announcing changes to personal income tax. This includes:
    • no changes to the Stage 3 tax cuts which will take effect from 1 July 2024, and 
    • no extension of the Low and Middle Income Tax Offset, which ended 30 June 2022.
  • Helping enable electric car purchases: For purchases of battery, hydrogen, or plug-in hybrid cars with a retail price below $84,619 (the luxury car tax threshold for fuel efficient vehicles) after 1 July 2022, fringe benefits tax and import tariffs will not apply. Note: Employers will still need to account for the cost in an employee’s reportable fringe benefits. 

Home ownership 

  • Housing affordability measures: A key focus of the Budget were measures to help individuals secure housing. This is expected to occur largely via the Housing Accord – which will bring Federal, State and Local Governments together to work on housing affordability and homelessness. Measures announced include:
    • A commitment to the ‘Help to Buy’ scheme which will support first home buyers to buy a home with the Federal Government being a part owner, resulting in a lower balance to be funded by the individual themselves.
    • A Regional First Home Buyer Guarantee from 1 October 2022 which, similar to the existing First Home Deposit Guarantee scheme, is expected to provide up to 10,000 first home buyers with a guarantee over their mortgage, removing the need for lenders mortgage insurance.

Superannuation

  • Expanding eligibility to downsizer measures: Legislation has been introduced to reduce the downsizer eligibility age from 60 to 55. This measure will take effect from the first quarter after passing into law, which is expected to be 1 January 2023.
  • SMSF and tax residency: The Government confirmed its intention to continue with the 2021/22 Budget measure of extending the temporary trustee absence period from two years to five years and removing the ‘active member’ test. These changes will help SMSFs continue to maintain their Australian tax residency even while members are overseas, and allow them to continue to contribute to their funds even if they become non-tax residents.
  • Three-year audit cycle for SMSFs not proceeding: Originally announced as part of the 2018/19 Budget, it was confirmed the current Government will not proceed with this measure. 

Social Security 

  • Child care subsidy changes: As part of a package of reforms to encourage parents to return to the workforce, the maximum child care subsidy from 1 July 2023 will increase to 90% for families earning less than $80,000. For every $5,000 earned over this threshold the subsidy will reduce by 1% – reducing to zero for incomes $530,000 or above.

The higher rate of subsidy for families with multiple children in care will continue under its current arrangements, ceasing once the eldest child reaches six years old or has been out of care for 26 weeks. 

  • Paid parental leave increases: Announced before the Budget, from 1 July 2024 the Paid Parental Leave Scheme will increase the maximum period of leave by two weeks each year – reaching a maximum of 26 weeks by 1 July 2026.

Further, from 1 July 2023 both parents will be able to access leave at the same time or enter into more flexible arrangements than currently available under the limited Dad and Partner Pay limits, and requirements to take 12 weeks as a continuous period. The paid parental leave income test will also be extended to include a $350,000 family income test, which can be used to help families who do not meet the individual income test. 

  • Reducing assessment of former home proceeds: For individuals on social security benefits, the temporary assets test exemption of home sale proceeds is to be extended from 12 months to 24 months. Additionally, these proceeds will only be deemed to earn a return at the lower deeming rate (currently 0.25% per annum) for this period. Note: This exemption only applies to the portion of the proceeds expected to be used in a new home purchase.
     
  • Work Bonus deposit for older Australians: Announced as an outcome from the Jobs and Skills Summit, age pensioners and veterans over service pension age are expected to receive a one-off credit of $4,000 into their Work Bonus income bank. The Work Bonus typically offsets $300 per fortnight of income earned from employment or self-employment activities, allowing pensioners to receive a higher age pension whilst still working.
     
  • Increased income thresholds for Commonwealth Seniors Health Card: The Government has committed to increasing the income thresholds for the Commonwealth Seniors Health Card to $90,000 for singles and $144,000 combined for couples.
     
  • Deeming rate freeze: The Government has also confirmed its intention to retain the current deeming rates until at least 30 June 2024.
     
  • Plan for cheaper medicines: From 1 January 2023, the general patient co-payment for Pharmaceutical Benefits Scheme treatments is expected to reduce from $42.50 to $30. 

Source: budget.gov.au / Actuate Alliance Services

Business owners

  • Self-assessment of depreciating assets: The Government will not proceed with the measure to allow taxpayers to self-assess the effective life of intangible depreciating assets, announced in the 2021-22 Budget.
    • Reversing this decision will maintain the status quo – effective lives of intangible depreciating assets will continue to be set by statute. This will avoid the potential integrity concerns with the previously announced measure and contribute to budget repair.

Source: Macquarie

Should you be hedging your offshore investments?

Should you be hedging your offshore investments?

by | Oct 12, 2022 | Investments, Markets and Economy, Wealth Management

Amidst the turbulence of global financial markets this year, one of the most notable things has been the inexorable strengthening of the US dollar (USD) against every other global currency. The corollary of the strong USD has been a relatively weak Australian dollar (AUD).

One of the great lessons of the COVID Crash in 2020 for anyone investing in overseas assets was the more than 40 per cent difference that investing in a hedged version made to returns over the following year.

Hedging is like a form of insurance where a manager neutralises the so-called ‘currency effect’ of the AUD rising, or becoming more expensive, relative to other currencies, so that the investment’s return only reflects the change in its underlying value.

For example, buying USD20,000 worth of US shares when the AUD is buying 65 US cents, will cost A$30,769 (20,000/0.65).

If the share price rises by 10 per cent over the next year and the currency remains unchanged, the investment will be worth A$33,846 (22,000/0.65).

However, if instead the AUD appreciates by 20 per cent, to 78 cents, the investment would only be worth A$28,205 (22,000/0.78). The currency effect has more than wiped out the benefits of the higher share price.

Buying a hedged version of the investment in the first place takes the currency effect out of the equation, so the return would equal the change in the underlying investment, in this case 10 per cent, regardless of what the AUD does.

Why not hedge all the time?

Given that example, it might sound sensible to simply buy a hedged version of any overseas investment and not worry about what happens to the Little Aussie Battler. But there are times when the heightened volatility of the AUD can work to your advantage and being unhedged can help returns.

For example, buying USD20,000 worth of hedged US shares when the AUD is trading at 75 US cents would cost you A$26,667 (20,000/0.75). If the shares fell in value by 10 per cent, the investment would be worth A$24,000 (18,000/0.75).

However, if the AUD exchange rate had fallen to 65 US cents over the same period, the value of the investment will have gone up to A$27,692 (18,000/0.65). Given the AUD is seen as more risky than the USD, and in a downturn investors often rush to safe haven assets like the USD, this scenario is not unrealistic.

Is the AUD cheap enough to hedge now?

Unfortunately, there is no scientific formula to work out whether the AUD is cheap versus other currencies. Last year, research was released that examined more than 50,000 currency forecasts from 136 different institutions over a 15-year period that concluded the forecasts were worse than what you could achieve from random predictions, in other words guessing.

Dan Miles, the Chief Investment Officer at Innova Asset Management, which uses a lot of quantitative (maths based) analysis to determine asset allocation and portfolio construction, says, “Historically, because the Aussie dollar has been seen as a risky currency compared to the US dollar, it’s done a pretty good job of helping to insulate investors against share market volatility. So our policy has been to remain unhedged unless the exchange rate gets to extremes.”

What is ‘extreme’? Miles admits there is no effective mathematical rule to apply but observes that the currency has averaged USD0.76 over the past 30 years, and got to as low as USD0.61 in the GFC and USD0.57 in the COVID crisis. At levels of around USD0.64, he believes it is defendable to be 50 per cent hedged.

Hedge your bets on hedging

Smart investors that are already holding overseas shares that are entirely unhedged, even at a loss, could consider switching to a hedged version for a portion of the holding if there is one available.

However, something else to bear in mind is that whilst the AUD has fallen against the USD this year, it has strengthened against the euro, yen and pound. Before deciding to hedge an investment it might pay to check what its currency exposures are.

Chart 1: the AUD has fallen against the USD, but strengthened against the euro and pound, USD index (+20.4%), AUD (-15.4%), euro (-16.4%) and pound (-20.1%)

Alternatively, another option is to buy a currency ETF as a kind of insurance overlay. For example, the BetaShares Strong Australian Dollar Fund (AUDS) is designed to increase by more than 2 per cent if the Australian dollar rises against the US dollar by 1 per cent. Their Strong US Dollar Fund does the opposite.

Finally, for long-term investors the third option is to do nothing. There is research that argues the long-term effects of currency fluctuations are negligible because it tends to gyrate around the average. So those times the AUD appears cheap simply offset those when it appears expensive.

If you would like to discuss whether hedging would be right for you, please get in touch.

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Director Identification Number (director ID) – time’s running out to apply

Director Identification Number (director ID) – time’s running out to apply

by | Sep 27, 2022 | Financial Planning, Tax, Wealth Management

You may have heard about the new rules which require directors of Australian companies to obtain a Director Identification Number (director ID). It is a unique 15-digit identifier that directors apply for once and keep forever.

The following provides some useful further information.

As a director of my SMSF’s corporate trustee do I need a director ID?

The new requirement to obtain a director ID applies to all directors of corporate trustees of an SMSF.  This obligation also applies to any directors who may have resigned from all director roles after 31 October 2021 and have no intention to ever be appointed as a director of an Australian or foreign company.

How long do I have before I need to get my director ID?

Individuals that were a director of any company prior to 1 November 2021 have until 30 November 2022 to get a director ID. This transitional period also applies to newly appointed directors of corporate trustees of an SMSF, provided they were an existing director, of a company, before 1 November 2021.

Otherwise, first time directors are now required to have a director ID before they are appointed as director of any company.

What is the fastest way to apply for a director ID?

With 30 November 2022 fast approaching, we strongly encourage all directors to apply for their director ID now. The fastest way to apply for your director ID is online at abrs.gov.au/directorID. 

To access the director ID application online, you will use your myGovID to log in to ABRS (Australian Business Registry Services) online.

This director ID demonstration video will show you step by step, how to apply for your director ID online.

What to do if you do not have a myGovID already?

A myGovID is different to your myGov account. Your myGov account allows you to link to and access online services provided by the ATO, Centrelink, Medicare and more, while myGovID is an app that enables you to prove who you are and to log in to a range of government online services, including myGov.

If you do not already have a myGovID you will need to set this up before you can apply for your director ID online. Refer to mygovid.gov.au/setup for more information on setting up a myGovID.

You will need to choose your identity strength, noting that ‘standard’ identity strength is the minimum strength required for a director ID.

What if I can’t set up myGovID online?

Where you are experiencing difficulties setting up your myGovID, the ATO encourages you to contact them on 13 62 50.

To speed up the phone application, please have your TFN ready as well as the information listed below, required to verify your identity.

If you cannot apply online or over the phone, the ATO will provide you with a paper form to complete. This is the least preferred option and will require you to provide certified copies of your documents to verify your identity.

Can we help you get your director ID?

You must apply for your director ID yourself, so that the ATO can verify your identity.

To verify your identity against your ATO records, once you have logged into ABRS online using myGovID, you’ll need your tax file number, your residential address held by the ATO, and information from two of the following documents:

  • bank account details (where your tax refunds or payments are made and received)
  • an ATO notice of assessment
  • a dividend statement
  • a Centrelink payment summary
  • a PAYG payment summary (this is different to your income statement or your PAYG instalment activity statement).

 Source: SMSF Association

 

How can we help?

If you have any questions or would like further information about director IDs, please feel free to give me a call, or arrange a time for a meeting, so we can discuss your requirements in more detail. Although we are unable to apply for a director ID on your behalf, we would be more than happy to guide you through the process and where possible, source documents to help you verify your identity with the ATO.

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Alternative assets: the new portfolio airbag?

Alternative assets: the new portfolio airbag?

by | Sep 13, 2022 | Investments, Wealth Management

Article featured in the AFR

Nobel Laureate Harry Markowitz described diversification as the only free lunch in investing. Classic portfolio construction applies this principle by trying to obtain the best return from taking a particular amount of risk, with equities doing the heavy lifting on the return side and bonds playing the defensive role.

That split served investors well over the past 40 years while interest rates were in long-term decline: share markets got into trouble, central banks cut interest rates and bonds would go up in response. The counter-correlation between equities and bonds acted as an effective airbag for a portfolio.

But the current downturn has been very different: with interest rates starting at close to zero and going up, global bonds have fallen 20 per cent since the start of the year, roughly the same as global shares. The benchmark 60 per cent equities, 40 per cent bonds portfolio has never had a worse start to a year.

This has sparked a search for a new form of portfolio protection, with much of the focus shifting to ‘alternative assets’, a catchall description of a collection of different investments that are intended to provide returns that are uncorrelated to the rest of a portfolio. In other words, a new kind of airbag.

However, since the only qualification required is that returns are not correlated to shares or bonds, there is a broad range of investments that fits under the alternatives banner, from the relatively straightforward to the seriously complex, cheap(ish) to expensive and liquid to illiquid.

There is a lot to learn about alternative investments, but there are two important points to start with. First, the range of ‘alts’ accessible to private investors is quite restricted compared to institutional, and second, because these investments are uncorrelated there is no assurance they will go up when shares go down, they could go up, down or sideways.

Private market assets

Alts can be either defensive or growth oriented. One of the most popular is private markets investing, which can be into equity, real estate, infrastructure or credit. Because these assets are privately owned, they don’t trade on something like a share market, so they are not subject to the same ‘mark to market’ risk as equities or bonds. That means they don’t tend to experience the same level of volatility as publicly traded assets, thus the reduced correlation.

The legendary manager of Yale University’s endowment fund, David Swenson, pioneered a portfolio model that invested heavily in unlisted assets, and produced returns that comfortably beat share markets with lower volatility. Since then, institutional investors, here and overseas, have thrown ever increasing amounts into unlisted assets: AustralianSuper reported 28 percent of its $260 billion portfolio is in unlisted assets, and the Future Fund has more than one-third.

Unlisted property funds are already popular with private investors, and fund managers like Charter Hall have delivered strong returns from a blend of yield and capital growth. Other assets like water rights have also provided attractive and totally uncorrelated returns.

Hedge funds

The title ‘hedge funds’ also covers a broad range of investments. Managers can deploy options-based strategies, sometimes combined with shorting, to target positive returns regardless of underlying share market movements.

An example is long-short funds, such as L1, which can short sell stocks it doesn’t like and so potentially make money when markets fall as well as rise. Another is market neutral funds, such as Sage Capital, which will offset every long position with a short, thereby trying to neutralise exposure to the underlying equity market but aiming to make money from its stock selection skills.

Macro funds, which aim to exploit global economic trends, and CTA funds, which try to capture momentum trades by transacting in futures contracts across almost any investable asset, are aptly described as ‘crisis alpha’. It’s not unusual they deliver great returns when markets are volatile, but don’t do much when markets are performing well.

Blended funds

Trying to sort through the range of alternative assets available to invest in can be not only time consuming, but thoroughly daunting if you don’t know what you’re looking for. There are funds that offer access to a curated, diversified portfolio of alts in one hit.

Partners Group is a specialist in private asset investing and offers four diversified funds compiled by the Global Investment Committee that makes the most of their deep industry experience.  LGT offers a broader portfolio of alts that aims to deliver positive returns in all market conditions, and WAM Alternatives (WMA) is listed on the ASX, meaning it is also a highly liquid option, but it can trade at a discount or premium to its underlying value.

Before investing in any alternative asset, investors need to understand the liquidity provisions that apply to it. Whilst some products provide daily liquidity, meaning you’re able to redeem your investment on a daily basis, others may only be monthly or quarterly, and some can require you to lock your money up for years. Although that can be a pain, the ‘illiquidity premium’ will hopefully be reflected in the returns you receive.

At a time when financial markets are in upheaval and listed assets offer little diversification protection, smart investors should consider alternative assets, but should also be conscious that they are often complex, pricey and can sometimes take months to get your money out of. It’s the kind of asset class where a good adviser can be very helpful.

If you’d like to discuss whether alternative assets would be right for you, please do get in touch.

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How to get your head around fixed income

How to get your head around fixed income

by | Aug 16, 2022 | Investments, Markets and Economy, Wealth Management

Article featured in the AFR

Fixed income returns over the fiscal 2022 year were the worst on record. When share markets experience returns like that investors have understandably become conditioned to look for bargains, but fixed income markets don’t necessarily work the same way.

Any well diversified portfolio will include defensive holdings designed to reduce its overall volatility and cushion the effects of falling share markets. Fixed income investments normally play that role, and that typically means allocating to government or corporate bonds, which are two very distinct markets, driven by different factors.

Because bonds issued by governments of developed nations are almost certain to be repaid, the price they trade at is not normally influenced so much by their credit rating as the outlook for inflation in their home country. If the market expects inflation to rise, investors will demand a higher yield to compensate, which requires a lower price and vice versa.

By contrast, while inflation also plays a role in pricing of corporate bonds, credit risk is the biggest issue, that is, the risk the company defaults and you don’t get your money back. Consequently, corporate bond prices are more sensitive to the outlook for recession, when company earnings come under increased pressure. The more investors are worried about recession, the higher the premium, or credit spread, to investing in risk-free government bonds they will demand.

Andrew Papageorgiou, managing partner at Realm Investment House, explains, “Just like bargain hunting in the share market, there are short and long-term considerations for fixed income investing. However, unlike the share market, fixed income markets have nuances that are only revealed through information that’s tough for non-professional investors to get their hands on.”

For example, in considering whether it’s a good time to invest in Australian government bonds, it helps to know that, according to the swaps market, inflation is currently forecast to average 2.6 per cent over the next 10 years. If the 10-year bond is yielding 3.15 per cent, that gives you a ‘real’ yield (after inflation) of 0.55 per cent. Is that a fair return? The average real yield over the past 15 years was 0.8 per cent, which makes it look a little low, but the post-GFC average has been 0.13 per cent, which makes it look much better.

In the US the current real yield on 10-year bonds is minus 0.05 per cent, which sounds pretty lousy, but the post-GFC average has been minus 0.17 per cent. Still, with the uncertainty around inflation, a negative real return is tough to swallow. For instance, in June, the real yield was 0.5 per cent, but since then inflation expectations have tumbled.

Meanwhile, credit spreads, or the risk premium, for Australian corporate bonds are as high as they were during the March 2020 COVID crisis. Papageorgiou points out that’s not a good reflection of the current perceived risk of recession, especially compared to the crazy time of early 2020, but is more to do with technical factors. So parts of that market look attractive, particularly compared to the US, where credit spreads are much less generous.

For the longer-term outlook, Damien Hennessy, of Zenith Investment Partners, says the current market signals around whether inflation has peaked, or economies will recess are so mixed that it’s difficult to view fixed income as a set and forget strategy right now. He points out that bond yields in June spiked to levels where he recommended reducing underweight positions but have since fallen again making them less attractive.

For investors who are game to increase their allocation to fixed income, just like with shares, there are passive and active options. Rather than trying to pick individual bonds, which introduces concentration risk, a fund will provide diversification. For passive investors, Vanguard offers both Australian and international government bond ETFs, credit ETFs and blended ETFs.

For investors who prefer to leave the decisions to professional managers, there are many to choose from. A good adviser will be able to help with curated recommendations.

For investors who see fixed income markets as just too uncertain, one option for the defensive portion of a portfolio is cash, which also provides flexibility for picking up bargains. However, with inflation currently many times higher than the bank interest rates on offer, it is guaranteed to lose purchasing power.

Portfolios always benefit from holding defensive assets to protect them against volatility, and over the past 40 years the long-term decline in interest rates has been very kind to smart investors. However, just as with equities, the uncertain outlook for inflation is a game changer.

At Steward Wealth, we went underweight both government and corporate bonds a few years ago and instead invested into ‘private credit’, that is, deals that are not open to the public at large and are usually senior secured mortgages over building and property developments. These loans have the dual benefits of not trading on public markets, so their value doesn’t go up and down like a bond, and they typically pay generous interest of between 5-8 per cent per annum.

Those loans carry their own risks, which have become evident this year with several high profile construction companies going bankrupt. However, we are in regular contact with the lenders and feel comfortable with their assurances that their screening and due diligence processes have become even more stringent. At the same time, the commercial banks have reduced lending to the sector which is throwing up lots of very attractive opportunities at higher rates of return.

Want to discuss your investment strategy with a specialist?

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Why you’ll make more by focusing on a portfolio’s total return

Why you’ll make more by focusing on a portfolio’s total return

by | Aug 3, 2022 | Investments, Markets and Economy, Wealth Management

Article featured in the AFR

Australians love their dividends. And what’s not to love? Those semi-annual dividend deposits are one of the great benefits of investing in a capitalist society.

John D. Rockefeller famously said, “Do you know the only thing that gives me pleasure? It’s to see my dividends coming in”.

One of the most popular strategies for investors, especially retirees, is to buy high dividend paying shares with the aim of generating sufficient income to live on while hopefully leaving the portfolio principal intact.

While this holds obvious appeal, particularly for investors who are anxious about outliving their money, and benefits from dividends typically being far more predictable than earnings, it is a very constricting approach and carries some risks.

High dividend paying companies tend to offer lower growth. Clearly, if a company is paying generous dividends, it leaves less income to reinvest into the company’s operations. While it’s by no means a universal rule, if a company is able to generate a high return on the equity invested into the business it makes more sense for management to do that rather than pay it out as dividends.

That means a portfolio full of high dividend paying companies is less likely to provide as much capital growth as a more diversified portfolio. If the strategy is to maintain the portfolio’s capital value, then that may not be reason to lose sleep, but over time, it does mean the portfolio won’t benefit as much as it may from the share market’s long history of growth. This is especially true during a period like we saw between 2009-2021 where growth-oriented companies outperformed strongly.

An alternative strategy for investing a portfolio can be to take what’s referred to as a ‘total return approach’, which takes account of both income as well as capital growth. The key to this strategy is to feel comfortable meeting target income requirements by paying a ‘dividend’ from the portfolio by harvesting some of the long-term capital gains.

In other words, imagine an investor with a $1 million investment portfolio who needs $60,000 per year to cover living expenses. If the portfolio generates income of $40,000, they would make up the balance by selling $20,000 worth of investments each year.

To illustrate the benefits of a total return approach, let’s presume it’s the start of 2012 and two investors each have $100,000 to invest as part of a larger overall portfolio. The first buys $100,000 worth of Telstra shares, which were trading on a prospective dividend yield of an amazing 12 per cent, including franking benefits.

The second buys $100,000 worth of CSL shares, which were trading on a prospective yield of a modest 2.6 per cent. However, they decide to sell as many shares as required at the end of each year to bring the total ‘income’ to $12,000 (to match the Telstra yield).

How did the two strategies stack up over 10 years to the very end of 2021? The Telstra shares will have delivered a total of $103,721 of income, but for the last four years the investor was forced to sell a total of $20,255 worth of shares to maintain the $12,000 targeted income. The closing value of the holding was $100,761, so the total return was $124,737 (i.e. net of the initial investment of $100,000) for a compounded annual return of a still respectable 8.4 per cent.

For our other investor, despite having to sell a total of $70,179 worth of CSL shares over the 10 years in order to meet the $12,000 per year income requirement, the closing value of $709,109 plus that $120,000 of ‘income’ delivered a total return of $729,109, or a compounded annual return of 23.6%.

Clearly you could hardly choose a more favourable pair of stocks to illustrate the point, but if the first investor had split the $100,000 equally between the big four banks for a target annual income of $10,000, after 10 years the total return would have been $146,498 or 9.4 per cent per year.

The same investment into the iShares S&P 500 ETF (IVV) and again selling shares to fund the required ‘income’, would have delivered a total return of $371,122, or a 19 per cent annual return.

Source: MarketIndex.com, Steward Wealth

With shares now on sale, smart investors should be mindful of constructing a diversified portfolio that benefits not only from those welcome dividend deposits, but from the inexorable long-term growth that share markets have to offer.

Want to discuss your investment strategy with a specialist?

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