Over the course of Platinum’s recent 2016 adviser and investor roadshows in Sydney, Melbourne, Brisbane, Perth and Adelaide we conducted an investor survey which contained an embedded experiment.

The first part of the survey asked roughly half of the total number of attendees in each venue what they considered the biggest investment opportunities were in the current market, and the other half was asked what they considered the biggest risks were. The findings from the some 1,200 surveys collected were broadly consistent across the groups.

The second part of the survey asked all attendees to give their estimate of market returns. The answers here appeared to have been influenced by the positive or negative framing of the first question. While not true in every sample group, across the aggregate data there was a marked degree of greater optimism among those who had considered opportunities compared to those who had considered risks.

Framing

In asking guests to focus on the market from two different angles (opportunities versus risks) prior to making an estimate of returns from global markets over the remainder of the year, the experiment we conducted attempted to highlight the risks of framing.

Forecast returns in each venue were measured across the adviser and investor sample and averages and medians of the opportunity and risk groups were compared.

The aggregate data is tabulated below, with over 1,200 surveys completed – the bottles of champagne on offer to the best forecaster in each session appeared an appropriate incentive!

(Average/ Median)

Opportunities Group

Risks Group

Bias

Investors

5.6% / 5.1%

3.8% / 4.0%

1.8% / 1.1%

Advisers

6.1% / 6.0%

4.6% / 5.1%

1.5% / 0.9%

The findings suggested that there was a positive bias in forecasts exhibited by those who had been given the positively framed survey. The extent of this appeared to be around 1-1.5% against an average forecast level of about 5%.

This is consistent with behavioural psychology studies on the framing effect, which is a cognitive bias that causes our analyses of information and decision-making to be influenced by “variations in the framing of acts, contingencies, and outcomes”. Tversky and Kahneman famously demonstrated that depending on whether questions are formulated in terms of gains versus losses, our perception and assessment of risk and rewards changes even though actual probabilities are the same.

The survey results also showed a tendency for advisers to be more optimistic than investors, perhaps itself an interesting topic. Also worthy of noting is that returns forecast tended in aggregate to be broadly consistent with long-term returns from equity markets in the high single digits, with 5% to the end of the year equating to about 7-8% annualised before dividends, an additional 2-3%. This suggests no particularly strong view from the group surveyed that they believe markets are excessively cheap or expensive.

Opportunities and Risks

In the first part of the survey guests were asked to select the three biggest opportunities or the three biggest risks from a list of 12 options.[1]

Healthcare polled as the leading opportunity in each of the samples, with agriculture in the Top 3 of every group except for Sydney advisers. Advisers were interested in e-commerce which had a Top 3 position in all adviser surveys, while no investor group ranked this in their Top 3. Meanwhile every group of investors saw the Chinese consumer as a Top 3 choice, but only Sydney and Adelaide advisers were convinced. Clients may be encouraged to know that our portfolios have considerable exposure to their areas of interest.[2] Chinese consumer growth and e-commerce have been key areas of Platinum’s focus for some time and the presentations by Andrew Clifford and Clay Smolinski address our key investments in some detail.

biggest opportunities


On the risk side, both investors and advisers had the same Top 3 concerns and deflation and negative interest rates caused a little more alarm than the Chinese slowdown or a debt-driven GFC-type event. Here, while the China slowdown concerns a lot of people, Sydney investors were the only group to rate this #1, perhaps symptomatic of their perception of what has been driving their home apartment market. We feel that our clients absolutely had their fingers on the pulse – how to find interesting investment opportunities in an environment of chronic low rates is the top question on our minds as is on yours. In fact, low interest rates are the central theme of this year’s keynote presentation by Andrew Clifford (Chief Investment Officer and Co-Manager of the Platinum International Fund) who drew some important lessons from similar periods in history. More specific insights on how to navigate such a deflationary low-rates environment as investors were addressed in further detail by Clay Smolinski, drawing lessons from our direct experience with Japan.    

Donald Trump’s tilt at the US presidency was the most interesting, as it concerned 40% of Adelaide attendees, versus 20% across the other venues. This could to an extent be a case of “recency bias” as the Adelaide session took place on the day when headlines were dominated by the news that he was to be the Republican nomination. Recency bias, also known as availability heuristic, is the tendency to give more weight and attribute more relevance to information with greater “availability” in memory, which is often influenced by how recent the memories are.

Sudden interest rate rises seemed only to be a concern of advisers – perhaps after the presentation around the lack of inflationary pressures, we hope this fear may have been assuaged somewhat.
greatest risks


This data is a telling snapshot of what is on investors’ and advisers’ minds at this juncture, and along with the illustration of the impacts of framing, it provided a useful interactive lesson amidst this year’s roadshow. We hope our clients in turn gained some useful insights from the presentations by Andrew and Clay on the challenges and opportunities in today’s world of investments.

Friday, 27 May 2016 03:12

Europe in Charts

Written by

Europe has endured a long and painful recovery following the GFC and the Euro Debt crisis.  It may surprise many to know however that the European economy is again growing, all be it at a low rate.

This article provides a very brief overview the current state in Europe by charts.

 

 

 

 

 

Friday, 27 May 2016 00:10

Donald Trump - Old Crazy and New Normal

Written by

Stephen Coleman, University of Leeds

This article is part of the Democracy Futures series, a joint global initiative with the Sydney Democracy Network. The project aims to stimulate fresh thinking about the many challenges facing democracies in the 21st century.


When cultural practices and performances become obsolete, they rarely simply collapse into exhausted redundancy. Rather, they linger as grotesque parodies, displaying with uncontrollable intensity the very reasons for their implausibility.

The embarrassing spectacle of the hack comedian whose tasteless jokes and predictable routines generate audience cringe rather than mirth stands as a warning that performative repertoires do not come with sell-by dates. You find out your act is outmoded when the audience start to ask for their money back.

Political leaders are beginning to resemble seaside comics who have failed to recognise that the deckchairs are empty. Repertoires that had them rolling in the aisles in the era of Churchill and Roosevelt – or even Nixon and Wilson – now look like mediocre impersonations.

Donning the fluoro gear, Chancellor of the Exchequer George Osborne is a dedicated observer of the political ritual in the UK. Stefan Rousseau/Reuters

Not only are political speeches replete with linguistically risk-averse clichés borrowed from middle management – “facing important challenges”, “we’re listening very carefully”, “moving forward”, “all in it together”, “people who do the right thing” – but the semiotic production has been reduced to a constant replay of metaphors designed for idiots.

Politicians wear hard-hats and orange protective jackets, as if to prove they thrive on the shop floor. Leaders have a routine habit of making speeches surrounded by “ordinary people” who look like involuntary participants in the opening ceremony of the Beijing Olympics.

The surprise is surely not that whole sections of the population are turned off by these preposterous rituals, but that some people are still paying any attention.

Popular distrust of politicians is not a new phenomenon. Apart from a brief period in the mid-20th century when people trusted Churchill because he wasn’t Hitler and then trusted Attlee because he wasn’t Churchill, political leaders have always been accepted on sufferance.

That isn’t a bad thing. The fantasy of perfect political trust evaporated when people stopped believing in the divine right of kings. Democracy can only work well when representatives are held accountable to those they claim to speak for.

The problem of contemporary democracies is not that citizens trust politicians less than they did in the past, but that leaders’ attempts to make themselves appear accountable have become increasingly implausible. Their scripts are stale; their gestures ritualistic; their evasions transparent; their artlessness palpable.

 

The first presidential debate between John F. Kennedy and Richard Nixon in 1960 was watched by more than one in three Americans, an inconceivable audience today. United Press International

Technology transforms image-making

Contemporary political distrust focuses on form as much as content. In the past, leaders were distant and, when it suited them, invisible. They had considerable control over their public images.

Technologies of public mediation have changed that. Television in particular places political actors under unprecedented levels of scrutiny. This has driven party machines to excesses of performance management that cast politicians as mere functionaries delivering approved lines to median voters.

Politicians are caught between a relentless chase for mass-mediated publicity and a permanent anxiety about the risks of unwanted visibility. Now that most people carry smartphones that can capture pictures and sound with a click, political impression management is a losing battle. Politicians continue to perform as if they are on stage (in Goffmanesque terms), but it is the blurry zone between on and offstage that they now occupy, never immune from public judgement.

They are tested by their capacity to conform – literally, to subscribe to a performative form that is readable as “acting like a leader”. But it is a form that is becoming increasingly degraded and obsolete. The new political balancing act entails conforming sufficiently to legitimise the performance, while breaking the formal boundaries with a view to displaying a degree of authenticity that cannot be contained within the bounds of form.

Trump, the performer

Trump’s performance works by using the political stage to denounce the stage. Darron Birgenheier/flickr, CC BY-SA

Enter Donald Trump: so unbalanced in his affair with political form that he permanently teeters between a mesmerising dance of solipsistic decadence and staggering off the stage.

Following a long line of populist form-busters, from Silvio Berlusconi to Viktor Orban, Trump performs as if he had just seen Peter Handke’s 1960s production, Offending the Audience, and concluded that every performance before it had misunderstood what audiences were for.

Handke said that he aimed to do “something onstage against the stage, using the theatre to protest against the theatre of the moment”. This is precisely what Trump does well; he uses the political stage to denounce the political stage. He enters the temple, but only to blow away its walls.

Speaking at a rally before the New Hampshire Republican primary, Trump said what he thought of politicians:

These people – I’d like to use really foul language. I won’t do it. I was going to say they’re really full of shit. I won’t say that. No, it’s true. It’s true. I won’t say it. I won’t say it. But they are.

What is going on here? On the face of it, here is a leader wrestling with the conventions of political form. He simply can’t use certain words. Who knows what might happen to him if he let out what he really thinks? But his frothing authenticity gets the better of him. “I won’t say it. I won’t say it.”

He’s like a character in a Victorian novel who wants to press the hand of the girl he fancies, but is paralysed by propriety. But not quite paralysed; not quite propriety: his authentic self erupts, leaking its proscribed thoughts into the minds of followers who have already bathed in the same forbidden waters.

He is telling them what they know to be true. They trust him in the same way that they are seduced by their own shadow.

This is why Trump’s speech-making never sounds like oratory, but an inner conversation. He is seeking to convince his echo to stay faithful to the original rant.

Manufacturing belief in anything

Contemporary politicians have a trust problem, but Trump is different. It is not a crisis of distrust that Trump symbolises, but an excess of trust. While contributing to a general feeling that “they’re really full of shit”, he uses the pronoun to distance both himself and his followers from the smell. They are politicians. He is a man who happened to stumble on to the stage.

Trump embodies the crudest fantasies of the American dream. He can be trusted because, by his account, he is self-made – except for the estimated US$200 million trust fund given to him by his father, which rather skews the narrative.

Because he is perceived as a man who made his own fortune, he is seen as a leader who owes nothing to anyone. Why vote for a politician who’s in the pocket of shady billionaires when you could vote for a shady billionaire?

The logic is perverse, but it is the foundation of a form of projection that allows the following to be accepted as strategic thinking:

Now, we have to build a fence. And it’s got to be a beauty. Who can build better than Trump? I build; it’s what I do. I build; I build nice fences, but I build great buildings. Fences are easy, believe me.

I saw the other day on television people just walking across the border. They’re walking. The military is standing there holding guns and people are just walking right in front, coming into our country. It is so terrible. It is so unfair. It is so incompetent.

And we don’t have the best coming in. We have people that are criminals, we have people that are crooks. You can certainly have terrorists. You can certainly have Islamic terrorists. You can have anything coming across the border. We don’t do anything about it. So I would say that if I run and if I win, I would certainly start by building a very, very powerful border.

This image of a man who builds nice fences, great buildings and beautiful walls can only be understood from the perspective of biblical metaphor. The politicians droning on about “cutting the deficit” as they pretend to blend in on the factory floor are mere theatrical extras compared to Trump, on stage and in flow, so hard and tall and foreigner-resistant that his audience purrs collectively in claustrophobic bliss.

G.K. Chesterton reminded us that when people stop believing in something, they do not believe in nothing, but are more likely to believe in anything. Trump is a vessel for the deposit of American disbelief. He is the “anything” that occupies the space that would otherwise be “nothing”.

Trump’s support comes from his ability to turn a crisis of distrust into a willingness to trust anything he says and does. Jamelle Bouie/flickr, CC BY

Can democratic politics re-invent itself?

Here lies the lesson for democratic politics. Just as obsolete forms atrophy slowly, lingering until the last drop of affective vitality evaporates, so new political forms often emerge as prefigurative contortions, only discernible through the trace lines of oddity.

Trump might not be the New Normal, but neither can his performance be dismissed as the Old Crazy. He is a spectre of things to come: of political performance in an age of projection rather than representation.

To represent is to stand in for those who must be absent. To represent democratically is to diminish the consequences of the electorate’s absence from the sphere of everyday decision-making by remaining accountable to their interests, preferences and values.

Political projection is representation in reverse. The dummy produces a ventriloquist that is in its own image. Citizens are not re-presented, but offered a fantasy of presence through the demagogic persona of a leader. They, the shit-filled politicians, cannot be trusted because you, the hollow public, should not be trusted.

Trump, on the other hand, provides a receptacle for indiscriminate trust – in him, in yourself, in anything, but never something.

The faultlines in democratic politics are clearly marked. On the one side is a system of representation that is bad at making people feel represented. On the other is a process of projection that satisfies a visceral desire to be affectively registered, but amounts to little more than an incontinent protest against conventional political form.

Obsolete modes of representation are unlikely to defeat Trump – as the US Republican contest has shown. A key question for contemporary democracies is whether they can reinvent practices of democratic representation that allow people to communicate in ways that build commitment to something rather than surrender to anything. Such practices must amount to more than participatory tokenism or technological gimmickry.

Obsolete forms of representation as a distant relationship, ritually reaffirmed by periodic elections, cannot be resuscitated by simply putting them online, encouraging politicians to expose their inner feelings on TV chat shows, or changing the voting system. Clogged up with prejudices, resentments and semi-articulated desires, the political atmosphere surrounding prevailing relations of representation generates default disappointment.

The fast-growing cast of anti-politicians who seem drunk on cheap trust (for Trump is by no means alone) will surely thrive and expand unless a more meaningful form of representation is established.

Rather than devoting huge energy pointing to the absurdity or toxicity of this new populism, democracies would be better served by beginning a debate about what it means to represent and be represented; what form democratic representation might take in an era of instantaneous communication.

The Conversation

Stephen Coleman, Professor of Political Communication, University of Leeds

This article was originally published on The Conversation. Read the original article.

John Lingard, Newcastle University

British dairy farmers are once again protesting over the low prices on offer for their milk. They worry that too many producers are going bust, and that long-term milk supplies are at risk.

Supermarkets are usually cast as the villains in this piece and this time it is no different. Farming unions are meeting Morrisons to ask for a fairer deal – and protesters in Stafford even took two cows into an Asda branch to help make their point.

However it is too simplistic to blame the supermarkets – the real problem is global. Too much low-value milk is being produced around the world.

Too much milk …

Over the past decade, UK milk production averaged 14 billion litres per year, of which around 500m litres are exported. Just 139m litres are imported. Milk made in the UK tends to stay in the UK.

What happens to that 14 billion litres? Defra

Nonetheless the number of dairy farmers continues to decline, from 40,000 at the start of the 1990s to 14,159 in 2013. This is alarming to some, but it shouldn’t be. For long-term security of milk supplies, it doesn’t really matter how many dairy farmers pack up production. The cows often move to another farm and it is easy enough to step up production through more intensive feeding and selective breeding.

After all, even though the total number of cows in the UK has halved since the 1970s, production has remained steady thanks to the fact average yields have doubled. Farmers are literally squeezing more out of each cow.

… that no one wants

Half of domestic milk production has to be diverted from the more lucrative liquid market into cheese, yoghurt, ice cream, butter and other manufactured products.

This is partly because people drink a lot less milk these days; from five pints per week in the 1960s to around three pints today. Consumption is down 8.1% in the past ten years alone. Any industry would struggle in such circumstances.

This supply and demand problem is replicated across the world – and there is currently a massive oversupply of manufactured milk products on world markets due largely to increased production in China, India, Brazil and New Zealand (where they are dealing with similar issues).

Got milk? gwire, CC BY

This surplus, combined with a collapse in global demand especially in China, has depressed prices. A Russian import ban in retaliation for EU action over Ukraine has also hit prices. Russia used to buy 27% of the EU’s cheese exports and 19% of its butter.

The Global Dairy Trade auction, the industry’s main dairy commodities index, hit a 13-year low in August 2015. The GDT has now lost 64% of its value since a record high in February 2014.

What this means for your local farmer

The amount paid to farmers – the UK’s farm gate price – has declined sharply since early 2014 to just 23.66p per litre. When it costs farmers around 30p to produce each litre, it’s easy to see why they are annoyed.

The major milk processors have to balance their operations across the various markets they sell in and, as a consequence, pay dairy farmers an average price. Farmers will not get, and should not expect to get, the supermarket price for liquid milk. Some supermarkets – Tesco, Marks & Spencer, Sainsbury’s and Waitrose – have agreed direct contracts with dairy farmers that allow them to recover their production costs, but these only involve a small number of farms.

Retail supermarket prices for liquid milk are much higher than farm gate, at typically 55-60p per pint (£1.30 or so per litre), but there is no evidence that milk is being used as a “loss leader”. Four pints for 89p at Asda is probably as low as they can get, but the price spread is understandable, appropriate and market-justified; we can’t just hold supermarkets alone responsible. If there is a villain in this piece, it is the world market.

With too much supply and not enough demand, farmers have two options. Those near big cities can opt out of the globalised milk market through establishing farmer co-operatives to supply just the local area where they can possibly charge higher prices. Or they can seek high-value, niche markets such as yoghurts, farm-produced ice cream and organic milk.

One other way of dealing with supply-demand imbalances would be to bring back dairy quotas, at least at lower levels. The EU introduced quotas in 1984 to control milk production and eradicate butter mountains but they were abolished in April this year.

The problem currently facing the British dairy industry is that it is easy to produce milk in the UK’s green, wet and pleasant land, but it is very difficult to find profitable markets for 14 billion litres of the stuff. Until dairy farmers resolve this overproduction dilemma, many will continue to go out of business.

Uneconomic dairy farms, like uneconomic coal mines, must close down and the adjustment process is harsh and painful for farmers and miners alike. In today’s highly globalised world a more humane outcome is unlikely.

The Conversation

John Lingard, Associate, Centre for Rural Economy, Newcastle University

This article was originally published on The Conversation. Read the original article.

Bruce Muirhead, University of Waterloo

The Australian government’s intervention in the dairy crisis by offering concessional loans to struggling farmers has prompted suggestions that other types of regulation - such as a dairy floor price - might be needed.

The dairy industry was deregulated more than a decade ago; perhaps it’s time Australia looked to other countries for models to fix the system.

The current situation facing the Australian dairy industry is the same the world over. The European Union and the United States come to mind, as milk supply outweighs demand. But they provide assistance to their dairy farmers through subsidies or other support that helps to keep them viable.

Canada does not compete internationally in the dairy sector as it maintains a supply management system introduced in the early 1970s. Dairy is not subsidised, as government provides no support, and the price paid to farmers is negotiated among stakeholders.

When I explained this Canadian supply management model to Victoria dairy farmers, as part of my research earlier this year, they rejected the idea. However the current situation may cause some of them to reconsider this position.

While the Canadian model works for Canadian farmers, a supply managed system would be more difficult for those in Australia given that about 40% of Victorian dairy is exported and exports don’t happen with supply management. But Australia’s share of the global market is decreasing over time, despite the best efforts of Australian dairy organisations and farmers, and the number of farms continues to decline. Perhaps Australia will end up with a system resembling a supply managed one through market mechanisms.

I interviewed a total of 45 farmers and dairy stakeholders in Australia during February and March of this year, nearly half in Queensland and the remainder in Victoria and Tasmania. I was interested in how the Australian dairy model works, especially as it is cited by the business press in Canada as one that we should adopt given their dislike of Canada’s regulated system.

What is the supply management model? Briefly, it matches domestic demand with domestic supply and exports are non-existent. The system is based on quotas - for example a kilogram of milk solid costs C$25,000 in the province of Ontario where I live, and it represents about one cow’s worth of production. Producers need at least 50kg of milk solids to run a decently remunerative operation.

Stakeholders representing producers, consumers, processors, the restaurant association and others meet annually to determine price, not government. Included in this is a profit guarantee for farmers that allows them to make long-term decisions and maintain a middle class lifestyle while milking on average about 70 cows. It also means they are immune to this latest global crisis, and to future ones.

And if supermarkets decide to use milk as a loss leader, it is the deep-pocketed supermarket that takes the hit, not the farmer. The price paid to the latter is guaranteed by negotiation, which creates stability.

Clearly, this is not how it operates in Australia where the supermarkets, according to one Queensland dairy producer, “must bruise the farmers to give them a loss leader.” Nor is the price consumers pay for milk in Ontario out of line with that charged by Coles and Woolworths, the real regulators of Australian dairy. Southern Ontarians pay the equivalent of the infamous A$1.00 per litre – A$4.00 for Canada’s four litre container, and have done so for years.

I found in my research that Victoria’s dairy farmers are in favour of privatisation and deregulation. They talked a lot about efficiency and how they are among the world’s more efficient farmers, and Canadians must surely not be, given their system.

Perhaps this is true if efficiency is measured by getting the greatest amount of milk for the least input. But Australian dairy farmers fall behind by other parameters.

Ontario dairy farmers, for example, employ robotic technology at a much greater rate than their Victorian counterparts. New dairy barns are being put up all over the province and a majority of them install robots to do their milking. Ontario now has hundreds of farms using milking robots.

The situation in Victoria could well come to that of New Zealand’s, where cows may be culled and the survivor’s rations severely cut back, as farmers are unable to feed supplements in such an adverse economic climate.

In an interview, as part of my research, one New Zealand dairy farmer told me he was into “starvation mode” for his cows because of cost. He was feeding them with grass only and when that ran out, there was nothing else. He was certainly running an efficient farm, but at a significant cost to his own mental health and to that of his cows’ wellbeing and ability to provide milk.

One Victorian farmer told me that even before the announcement of cuts to the milk solids price, he and his colleagues “farmed at the margins". When prices are robust, so are farmer’s livelihoods, but when they collapse, as they always do in a commodity situation, so do their livelihoods.

This results in another vicious cycle of dairy farmers quitting the industry which leads to further instability. As another interviewee told me, following the cut:

“We will wait and see and hang on for dear life.”

Might the future of Victorian dairy be Queensland, where farmers suffered much of what their Victoria counterparts are now experiencing more than a decade ago after deregulation, and dairy is now a niche industry?

As one Queensland interviewee emphatically instructed me about Canada’s model:

“Don’t give away [the] regulated system!”

Now is the time for Victoria to consider the advice of this farmer and introduce more regulation.

The Conversation

Bruce Muirhead, Professor of History and the Associate Vice President, External Research , University of Waterloo

This article was originally published on The Conversation. Read the original article.

 

 

 

 

 

 

 

 

 

 

Superannuation measures
 

Accumulation phase and Contribution Measures

Concessional contributions cap will be reduced

The annual cap on concessional superannuation contributions will be reduced to $25,000 from 1 July 2017. There will be one cap for all taxpayers irrespective of their age.

The cap is currently dependent on the age of the taxpayer as on 30 June of the previous financial year:

  • under age 49 - $30,000
  • aged 49 and over - $35,000

 

GEM Capital Comment

The reduced concessional contributions cap of $25,000 does not apply until 2017-2018.  Clients should consider taking advantage of the current higher concessional cap of $30,000 (under age 50) and $35,000 (age 50 and over) in the 2015-2016 and 2016-2017 financial years.

 


Catch-up concessional superannuation contributions will be allowed

From 1 July 2017, individuals will be allowed to make additional concessional contributions where they have not reached their concessional contributions cap in previous years.

Access to the unused cap amounts will be limited to individuals with a superannuation balance less than $500,000.

Amounts are carried forward on a rolling basis for a period of five consecutive years. Only unused amounts accrued from 1 July 2017 can be carried forward.

The Government has recognised that annual concessional caps can limit the ability of people with interrupted work patterns to accumulate superannuation balances commensurate with those who do not take breaks from the workforce. Such individuals would include stay at home parents and/or carers. Allowing them to carry forward their unused concessional cap provides them with the opportunity to ‘catch up’ if they have the capacity to do so, and choose to do so.

The measure will also apply to members of defined benefit schemes. The Government will undertake consultation in this regard.

 

GEM Capital Comment

The ability to carry forward unused concessional cap amounts appears to apply to everyone who has contributed less than the concessional cap, not just those who take breaks from the workforce such as home parents and carers.
 

 

Harmonising contribution rules for those aged 65 to 74

From 1 July 2017, the Government will remove the existing restrictions on people aged 65 to 74 from making superannuation contributions for their retirement.

People under the age of 75 will no longer have to satisfy a work test and will be able to receive spouse contributions.

This measure is intended to simplify the superannuation system for older Australians and allow them to increase their retirement savings, especially from sources that may not have been available to them before retirement, including from downsizing their home.

Currently, the work test applies which requires individuals aged 65 or over to be in gainful employment for at least 40 hours within 30 consecutive days in a financial year before their super fund can accept any contributions for them.

Introduction of this measure will effectively make the work test irrelevant past 1 July 2017.

 

GEM Capital Comment

Clients are currently required to work 40 hours within 30 consecutive days in the financial year they make a contribution over the age of 65.  This proposal will remove this requirement and make it  easier for older clients to contribute to super.

When combined with the life-time non-concessional cap this proposal could allow non-working clients aged 65-74 who were previoulsy not eligible to contribute to make non-concessional contributions of up to $500,000 after 1st July 2017.  It also would appear to open the door to tax deductible super contributions for those 65 - 74 who receive other taxable income such as a Government Superannuation Pension.

 

 

Personal superannuation contributions will be tax deductible

From 1 July 2017, all individuals up to age 75 will be able to claim an income tax deduction for personal superannuation contributions. This effectively allows all individuals, regardless of their employment circumstances, to make concessional superannuation contributions up to the concessional cap.

Beneficiaries of this change include:

  • individuals who are partially self-employed and partially wage and salary earners; and
  • individuals whose employers do not offer salary sacrifice arrangements will benefit from these changed arrangements

Currently, there is ‘a maximum earnings as an employee’ condition which needs to be satisfied in order to claim a deduction for personal superannuation contributions. Broadly, less than 10% of the total of taxpayer’s assessable income, reportable fringe benefits and reportable superannuation contributions may be in relation to an eligible employment activity. This essentially means that many self-employed professionals who work independently but are deemed employees under the superannuation guarantee law cannot make further voluntary deductible contributions to super.

 

GEM Capital Comment

This announcement will dramatically simplify the eligibility requirements for a member to qualify to claim a deduction for a personal super contribution.  The requirement to not be an employee during the financial year or to satisfy the 10% test will be replaced with a single requirement to be under age 75.

The announcement also gives employees more flexibility and allows them to make personal deductible contributions in addition to super guarantee and salary sacrifice contributions, to use up any unused concessional cap at the end of the year.

 

 


A new lifetime cap for non-concessional superannuation contributions

The Government will introduce a $500,000 lifetime non-concessional contributions cap. This lifetime cap will be available to all Australians up to and including the age of 74.

For taxpayers aged 75 and more existing rules will remain – only mandated contributions can be accepted by their superannuation fund.

The cap will take into account all non-concessional contributions made on or after 1 July 2007. This is the time from which the ATO has reliable contributions records.

The measure will commence at 7.30pm (AEST) on 3 May 2016.

Contributions made before commencement cannot result in an excess. However, excess contributions made after commencement will need to be removed, otherwise penalty tax will apply.

The cap will be indexed to average weekly ordinary time earnings.

The cap will replace the existing annual non-concessional contributions caps of $180,000pa (or $540,000 every 3 years for individuals aged under 65).

This measure is intended to improve the sustainability of the superannuation system. According to the Government, the change will continue to provide support for the majority of Australians who make non-concessional contributions well below $500,000. Further, there will be more flexibility around when people choose to contribute to their superannuation.

Existing arrangements in respect of CGT cap (set at $1.415 million for 2016-17 financial year) will be retained. Effectively this means that small business taxpayers eligible for CGT concessions can place proceeds from realising their business into the superannuation system.

 

GEM Capital Comment

 

To determine how much of the lifetime non-concessional cap has been utilised with prior non-concessional contributions, clients will need to add their non-concessional contributions since 1 July 2007 from all funds to determine how much counts towards their lifetime non-concessional cap.

While the Government states the ATO has reliable contribution records since 1 July 2007, it is not clear whether clients will be able to access this information.  Clients may need to contact the relevant super funds for confirmation.

Clients who have previoulsy utilised the bring-forward provisions will need to carefully review their situation to determine whether they have exhausted their lifetime cap.

Prior to recommending a non-concessinal contribution, advisers should ascertain the amount of lifetime non-concessional contribution cap that the client has available.

The introduction of the lifetime non-concessional cap may limit the ability to implement a recontribution strategy.  Strategies such as spouse contributions which count against the spouse's lifetime non-concessional cap may assist.

Advisers may wish to refrain from providing advice to make non-concessional contributions until the amount of a clients non-concessional contributions made since 1 July 2007 can be verified.

 

 

Improving superannuation balances of low income spouses

From 1 July 2017, the Government will increase access to the low income spouse superannuation tax offset by raising the income threshold for the low income spouse from $10,800 to $37,000.

 


A new Low Income Superannuation Tax Offset (LISTO)

The Government will introduce a Low Income Superannuation Tax Offset (LISTO) to reduce tax on super contributions for low income earners, from 1 July 2017.

The LISTO is a non-refundable tax offset for superannuation funds, based on the tax paid on concessional contributions made on behalf of low income earners. The offset will be capped at $500.

The LISTO will apply to fund members with adjusted taxable income up to $37,000 that have had a concessional contribution made on their behalf.

This measure is to ensure that low income earners do not pay more tax on savings placed into superannuation than on income earned outside of superannuation.

The measure essentially extends the operation of low income superannuation contribution (LISC), which is set to expire on 30 June 2017, under another name.


Division 293 threshold will be reduced

From 1 July 2017, the Division 293 threshold will be reduced from $300,000 to $250,000. This threshold is the point at which high income earners pay additional 15% contributions tax on concessional contributions.

This measure is designed to improve sustainability and fairness in the superannuation system by limiting the effective tax concessions provided to high income individuals.

 

 

 

Pension phase measures

Introducing a new $1.6 million superannuation transfer balance cap

The Government will introduce a $1.6 million transfer balance cap on the total amount of accumulated superannuation an individual can transfer into the retirement phase. This cap will take effect on 1 July 2017.

Subsequent earnings on these balances will not be restricted.

Where an individual accumulates amounts over $1.6 million, they will be able to maintain this excess amount in an accumulation phase account, where earnings will be taxed at 15%.

This cap will limit the extent to which the tax-free benefits of retirement phase accounts can be used by high wealth individuals. It will effectively force funds in excess of $1.6 million either to remain in accumulation phase with investment earnings taxed at 15% or to be taken out of superannuation system completely if members wish to do so.

For example, Asha had accumulated a superannuation balance of $2.2 million. She can start an account-based pension with a maximum of $1.6 of her balance. The remaining $600,000 will have to remain in an accumulation phase or be taken out as a lump sum.

Further, suppose that she transferred a maximum $1.6 million amount of her balance into the pension phase and commenced an account-based pension. This balance was very well invested and after taking the required minimum pension, investment earnings for the financial year were $200,000. This brings Asha’s pension phase balance to $1.8 million solely because of the investment earnings. This is fine because subsequent earnings on pension phase balances are not affected by the $1.6 million cap.

Members already in the retirement phase with balances above $1.6 million will be required to reduce their balance to $1.6 million by 1 July 2017. Excess balances may be converted to superannuation accumulation phase accounts.

Transferred amounts exceeding the $1.6 million cap (including earnings on these excess transferred amounts) will be taxed, similar to the tax treatment that applies to excess non-concessional contributions.

The amount of cap space remaining for a member seeking to make more than one transfer into a retirement phase account will be determined by apportionment.

Commensurate treatment for members of defined benefit schemes will be achieved through changes to the tax arrangements for pension amounts over $100,000.

The Government will undertake consultation on the implementation of this measure.

 

GEM Capital Comment

This proposal will allow couples to have a combined pension balance of up to $3.2 million.  However, where most of a couples superannuation savings are in one spouses name the $500,000 lifetime non-concessional cap will restrict a couple's ability to equalise their benefits to take full advantage of the transfer balance cap.

The requirement for member's with balances already in excess of $1.6 million to either withdraw or transfer the amount in excess of the cap back to superannuation (accumulation phase) means that people with pension account balances in excess of $1.6 million have not been grandfathered from these changes.

In this case, this may also result in impacted memebers with Self Managed Super Funds or super wrap accounts disposing of assets prior to transferring back to accumulation so as to ensure any capital gains are crystalised while the assets are still in pension phase and exempt from tax.

 

 


Transition to Retirement Income Streams (TTR): removing the tax exemption and an ability to treat pensions as lump sums in certain circumstances

The Government will remove the tax exemption on earnings of assets supporting Transition to Retirement Income Streams (TTR) from 1 July 2017.

Currently, earnings on superannuation balances that support a TTR pension are exempt from income tax of 15% applicable to investment earnings in the accumulation phase.

The Government will also remove a rule that allows individuals to treat certain superannuation income stream payments as lump sums for tax purposes.

These measures are expected to remove the attractiveness of TTR pensions as a tax planning device.

 

GEM Capital Comment

Taxing earnings on TTR income streams significantly reduces the tax effectiveness of strategies such as TTR and salary sacrifice.  For clients aged 60 or over, TTR strategies may still be worthwhile as pension payments are tax free and allow tax effective salary sacrifice contributions.  However for clients under age 60, the tax benefits are minimal.

The taxation of earnings in pension phase will only apply to "Transition to Retirement' income streams where the client has reached preservation age but not yet retired.  Presumably income streams where the client has met a full condition of release such as retirement will continue to have the earnings tax exemption apply.  Clients may look at arrangements involving ceasing a gainful employment arrangement over age 60 or ceasing work and declaring permanent retirement to meet the retirement condition of release.

From a superannuation fund perspective, administering the taxation of earnings in pension phase for transition to retirement pensions will add complexity.

 

 

Superannuation death benefits: removing the anti-detriment provision

From 1 July 2017, the anti-detriment provision will be removed.

The anti-detriment provision can effectively result in a refund of a member’s lifetime super contributions tax payments into an estate, where the beneficiary is the dependant (spouse, former spouse or child) of the member. According to the Government, currently this provision is inconsistently applied by super funds.

Removing the anti-detriment provision will better align the treatment of lump sum death benefits across all super funds and the treatment of bequests outside of super.

Lump sum death benefits to dependants will remain tax free.

 

 

 

This information is of a general nature only and neither represents nor is intended to be personal advice on any particular matter. We strongly suggest that no person should act specifically on the basis of the information contained herein, but should obtain appropriate professional advice based upon their own personal circumstances including personal financial advice from a licensed financial adviser and legal advice. Fortnum Private Wealth Pty Ltd ABN 54 139 889 535 AFSL 357306

Friday, 29 April 2016 06:09

2016 Federal Budget - A Preview

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Westpac expects the underlying budget deficit for 2016/17 which will be announced by the Federal Government on Budget night, May 3, will be $29bn. That is a near $5bn upgrade from the Government's December forecast, published in the Mid-Year Economic and Fiscal Outlook (MYEFO). Across the four years to 2018/19, the improvement is $17bn.

The economic environment is somewhat more favourable than anticipated. Real output growth has surprised to the high side in 2015/16. Commodity prices have also surprised, bouncing off historic lows, driving an upgrade of the terms of trade forecasts. In 2016/17 the terms of trade is set to swing from a major negative for national income to a small positive. Partially offsetting this: the currency has moved up from its lows; and general inflation pressures have weakened.

On the Government's forecasts for real GDP growth we expect just the one change, a 0.25% upgrade for 2015/16. That yields a profile of: 3.0%, 2.75%, 3.0% and 3.0%. The forecast for nominal GDP growth is upgraded by 0.25% in both 2015/16 and 2016/17 but downgraded by 0.25% in 2017/18, giving a profile of: 3.0%, 4.75%, 4.75% and 5.25%.

The iron ore price is expected to be revised higher from US$39/t fob in MYEFO to US$50/t (fob) for 2016/17 and US$46/t (fob) beyond that. This adds an estimated $7.8bn over the 3 years to 2018/19.

The budget impact from the improved economic backdrop, together with prospects for the 2015/16 deficit to be $1bn smaller than expected on lower expenditures, is $4.5bn in 2016/17 and $3bn a year thereafter, we estimate.

We anticipate that the balance of new policy measures, including the drawing down of the contingency reserve, as occurred in the May 2015 Budget, will be neutral for the budget in 2016/17 and improve the budget position by $2bn in 2017/18, increasing to a $5bn contribution in 2018/19.

The 2016 Budget is to focus on competition, innovation, investment and infrastructure. There will be tax cuts to boost investment and activity, as occurred in the 2015 Budget, funded by revenue integrity measures. A new infrastructure delivery agency is to be created, with private sector involvement. Any potential impact of the new infrastructure agency on government borrowing is unclear and has not been incorporated in our figuring.

The budget returns to balance in 2019/20, which now rolls into the four year forward estimate period. That is one year earlier than expected in MYEFO.

Net debt peaks at 17.9% of GDP in 2017/18, which is below the 18.5% peak forecast in MYEFO. In dollar terms, net debt climbs to $330bn in 2018/19, some $17bn below that in MYEFO.

 

 

Bill Evans

Westpac Economics

 

 

Friday, 29 April 2016 02:38

Euro Refugee Crisis

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The flow of refugees into Europe has been staggering.  The human side of this tragedy is horrible, but here we are only considering the economic implications of the European Refugee Crisis.

 

We recently spoke with Clay Smolinski (Portfolio Manager Platinum Asset Management) to ascertain what he thinks are the key risks of this situation from an investment perspective.

 

Here is a video of our conversation - and a transcript below.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mark Draper: Here with Clay Smolinski from Platinum Asset Management and the Europeans have been through a lot really in the last decade and they’ve got plenty of coming up.

One of them has to do with the refugee crisis over there. So we just want to spend a couple of minutes looking at the investment aspects of the European refugee crisis. Can you just take us through your thinking on that?

Clay Smolinski: Yeah, absolutely. So the refugee crisis for me, the issue is – the risk of it is that it’s another challenge that the political will of the European Union needs to face.

For me the crisis alone probably wouldn’t be a huge deal for the union but the issue is that it comes on top of a lot of the problems, those individual – the union of countries has had to face over the last few years.

So we think about the union. Through the sovereign crisis, they got through the major battle, which was the economic battle needing to cut the budget deficits, needing to where – you know, that higher unemployment that that caused. From the economic perspective, we can fairly definitively point that that battle has been won. The economy is now recovering but that has left that political will far weaker.

Since then we’ve seen that in subsequent elections, more radical left or right wing parties have been voted in. Examples of this would be Podemos in Spain or Syriza in Greece. We now have major members like the UK going to referendum on deciding whether it’s an exit or not and now we have the refugee crisis and immigration is always a very politically-charged issue and it’s clear that the member countries have differed in their views on how to exit, on how to handle it. That just creates – it’s another issue. It’s another reason for people to get upset, the voting populous and maybe vote for an exit.

What is interesting for us as well and is a bit of mitigant to that is how Germany is – has behaved through this and certainly through the sovereign crisis, the response to that crisis was very much dictated by Germany and that has forced a lot of the other member countries to go through a lot of pain.

Now with the refugee crisis, they’ve really stepped to the fore and said, “We’re going to do more than our fair share to handle this. We’re going to take a lot of these people on to our soil. We’re going to provide additional funding to the others to work through this,” and I think it’s their way of standing up and saying, “Look, we know you’ve done your part and now it’s our time to really give back and to show solidarity in the union.”

Mark Draper: So a major risk here would seem political for that in terms of the uprising of hard left or hard right – well, probably hard right in this situation.

Clay Smolinski: It’s very hard to factor that back into a definitive investment decision but it’s certainly something that we need to keep in mind and often when you compare the European market to the US market, the European market does trade at a valuation discount. But I think at least some of that discount is warranted given the – I guess the more uncertain political outlook for that region.

Mark Draper: So be alert, but not alarmed at the moment. It’s a work in progress.

Clay Smolinski: That’s how we’re viewing it.

Mark Draper: Thanks for your time Clay.

Clay Smolinski: You’re welcome

Thursday, 28 April 2016 23:21

China - Hard or Soft Landing?

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The Chinese economy is critically important to Australia as one of our key trading partners.  It used to be said that if America got the 'sniffles' Australia gets pneumonia, now it can be said if China has a headache, Australia develops a tumour.

So with China making headlines in recent months, we asked Clay Smolinski (Portfolio Manager - Platinum Asset Management) whether he believes the Chinese economy is heading for a Hard or Soft Landing?  (note definition of Hard Landing is "An economic state wherein the economy is slowing down sharply or is tipped into outright recession after a period of rapid growth, due to government attempts to rein in inflation")

We bring you the 3 minute video of our conversation below, or alternatively you can read the transcript.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mark Draper: Here with Clay Smolinski, Portfolio Manager at Platinum Asset Management. Thanks for joining us Clay.

Clay Smolinski: You’re welcome, Mark.

Mark Draper: Let’s talk about China. Hard or soft landing economically?

Clay Smolinski: Certainly. I think when answering the question when looking inside of China, evidence of the hard or soft landing is very much determined on what industry you’re looking at, at the time. So we take the heavy industries. So we’re talking about industries like steel or cement where there’s over-capacity. There is a clear hard landing going on.

So there has been a big fall-off in construction activity. The government is now planning forced closures of capacity in those industries. We’re talking about 1.5 million steel workers being laid off over the next 12 months. Times are very tough there. However, you look at other sectors of the economy and we’re talking about sectors such as air travel, ecommerce, healthcare. There’s no concept of a landing there. These sectors are in take-off mode, growing very strongly, creating a larger amount of new employment and that’s really where we’re focusing our attention and that’s really where our investments are today in China at Platinum. We’re focusing on those consumer and service-focused industries.

Then the question is when we put those two together, what are we seeing on a broad basis? And what we see is – we look at the leading indicators. What we see is that while growth has slowed, the economy certainly isn’t in store mode.

So first, one leading indicator, a good one is wage growth. So two years ago, wage growth across China was growing at 10 percent per annum. Today that number is five percent per annum. A big step down but five percent per annum is still fairly healthy in our book.

Another interesting indicator is housing prices. So you can forget about the stock market. The real investment class of this nation is residential and commercial property and house prices in China have actually been really strong over the last 18 months. We’re seeing very strong in tier one cities like Shanghai and Beijing but it’s also prices are rising in tier two and tier three cities.

Then finally we see the government and the government is increasingly becoming more – really need to take more measures to support growth. We see that through cuts through interest rates. But also there are a number of industries where a lot can still be done.

China is not a developed country yet by any standards. So we think about the investment that can go into things like healthcare, the investment that can go into environmental solutions. They have a large environmental problem. So these are areas where we can see stimulus that – and it will be stimulus that will be productive and good for society.

So when we put all that together, it feels to us that the economy has stabilised and we’re very much in the soft landing camp for now.

Mark Draper: That’s great. Thanks for your update Clay. I appreciate it.

Clay Smolinski: You’re welcome.

Since Motor Registration stickers were no longer issued, the chances of forgetting to pay your car's registration have risen considerably.

Most people would focus their mind on the $400 fine that applies in South Australia for driving an unregistered vehicle ($800 in Victoria), and if that was the only downside for not paying your car registration, this article would end here.

The harsh reality though is that part of the cost of motor registration is provision of third party person insurance, which covers personal injuries resulting from motor vehicle accidents.  One of the most notorious motor accident personal injury claims involved the late actor Jon Blake who was awarded nearly $8m following a car accident that left his severely disabled.  The risk of driving an unregistered car is that in the event of an accident, you may be liable to pay insurance costs that would otherwise be paid by the compulsory third party person insurance - which could result in bankruptcy for you.

To help motorists, the South Australian Government has introduced a smart phone app - called EzyReg.

 

EzyReg allows motorists to check when their registration is due and also add a calendar reminder to their smart phone.  Payments can also be made on this app.

Finally - monthly payments for motor registration is now available, which can further reduce the risk of missing an annual car registration bill.

A $400 fine is painful enough if you forget to register your car - but the real risk lies with the compulsory insurance cover.