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Monday, 27 August 2012 16:32

Reversionary Beneficiary

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Allocated Pensions - Reversionary Pension could save Tax for surviving spouse

retirement-planning

Many people are under the impression that their will deals with all of their assets after death.  Not so generally with respect to people’s superannuation.

The payment of the balance of your superannuation fund, after your death, will generally be to a dependant beneficiary, such as your spouse or a dependant child.  However if no nomination has been made, the decision about where to pay benefits could rest with the trustee of the super fund.  It may be beneficial to pay your superannuation benefit as a pension rather than a lump sum.  To facilitate this your fund may allow you to nominate what is known as a “reversionary beneficiary”. The nomination of a reversionary beneficiary allows for the continuation of your pension upon your death, locking in some important potential benefits.

The rules of the fund (trust deed for Self Managed Super Funds must allow you to nominate a reversionary at the time you begin the original allocated pension, this is an important aspect for trustees of Self Managed Super Funds to check.

Some advantages of nominating a reversionary beneficiary.

Continuity of Tax Treatment - If the primary beneficiary was 60 or older at the time of death, then payments to the reversionary beneficiary will be tax exempt regardless of the age of the beneficiary. This is also the case if the reversionary beneficiary is also 60 or older but the member died before reaching 60.

John is 62 years old and has commenced an allocated pension with his wife Mary aged 57 as his reversionary beneficiary. If John dies Mary would continue to receive his pension payment of $30,000 per year tax free even though she is only 57 years old.

This benefit can be particularly important if Mary has another source of taxable income in her own right where she has already used up her tax free and low tax threshold.

Your benefit is paid according to your wishes. Where a valid reversionary nomination is made, the trustee of the superannuation fund is bound to continue paying the pension to your nominated reversionary upon your death. This takes away the risk that the superannuation fund trustee may pay part or all of your benefit to someone other than whom you desired.

This risk can arise when people have multiple spouses (although not at the same time) and children from different relationships.  Sometimes in these situations having assets bypass the estate can reduce the risk of an estate being contested resulting in hefty legal bills.

There can clearly be benefits in establishing a “Reversionary Beneficiary” for investors with allocated pensions, however these nominations can only be made at the time of establishment. For those with pre-existing allocated pensions, they could simply rollover their fund to a new fund provider and nominate a reversionary beneficiary at that time, but this needs to be considered against any adverse effects on Centrelink entitlements.

 

Monday, 27 August 2012 10:44

Financial Planning and Family Risk

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There is an important aspect to Financial Planning we would like to highlight which is the potential risk associated with an illness, injury, or major trauma event occurring to a member in your family ie a son, daughter, their spouse or a grandchild.

If the unthinkable happened and one of your family members was to suffer from any of these events, would they survive financially, or would you need to step in and offer financial support?
We think it is important that you be honest and ask yourself two questions.
  1. Would you step in and help out your family in the event that one of your children, their spouses or your grandchildren were to suffer a serious illness or injury.  We know the importance of family and think in most cases the answer would be yes.
  2. How would you feel if when you found out they had no or insufficient insurance cover to provide for their family.......how would the rest of your family feel?

The financial consequences for you could be a burden too great to bear and drastically affect your future plans and other family members.

Many parents know little or nothing of their extended family’s real financial position, this extends to not knowing how much debt they hold and ongoing financial commitments they have.  In addition, most parents rarely know what insurance cover they have in place and if this is sufficient to meet the circumstance.

This is not unusual as they are adults now and responsible for their own life BUT, if something did happen and only then did you find out, you would potential have to suffer the financial consequences.  This is what we call Family Risk as it affects all members of the family.

We provide a financial planning service to the adult children of our clients.  We would be happy to have a discussion with you about your family and how we could provide this service to them.

Wednesday, 22 August 2012 11:14

Spain & Italy Are (Probably) Fine

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...right round, baby, right round. Let's get it together and have a roundtable...Just as Brussels is finally enjoying a spell of summer sun, there’s more good news for debt-crisis watchers who stayed behind in the European Union’s headquarters: The Peterson Institute for International Economics says the debt loads of Italy and Spain are (most likely) sustainable.

In a new working paper, William R. Cline—a sovereign-debt crisis veteran going back all the way to Latin America’s troubles in the 1980s–calculates different trajectories for the debt loads of the two countries whose financial fate is seen as central to the survival of the euro. The interesting thing about the paper is that it not only examines three typical scenarios (good, baseline, bad) and applies them to five variables (the level of growth, primary surplus, interest rates, bank recapitalizations, and privatization receipts), but also assesses the probability of several of these variables going bad (or good) at the same time. In other words, Mr. Cline calibrated the effect of, say, low privatization receipts on a government’s primary surplus or the interest rates it’s likely to pay on its bonds.

His conclusion–which should delight policymakers in Rome, Madrid, and Brussels alike–is that the most likely outcome by the end of the decade is that “both Spain and Italy remain solvent” and that they won’t need a debt restructuring á la Greece or, even worse, leave the euro zone.

The “probability weighted average,” i.e. the best bet, for Spain is that its debt will be no higher than 92% of gross domestic product by 2020. That’s up quite a bit from the 81% it is expected to hit by the end of the year and slightly worse than the 89% under Mr. Cline’s baseline scenario, but still at a level that is generally seen as manageable for a large, developed economy. On top of that, there’s a 75% chance that the debt load will be below 99% of GDP by 2020. For Italy, the best bet is a debt that declines to at least 109% of GDP by 2020 from 123% this year, with a 75% probability that it will go down to at least 116%.

Now, forecasting debt levels eight years into the future is in itself a tricky exercise. The goal of Greece’s debt restructuring earlier this year was to bring the country’s debt load to a “sustainable” 120% of GDP by 2020. Even back in March some EU officials warned privately that that kind of calculation was more of a political spiel designed to convince parliaments in countries like Germany or the Netherlands to once again open their wallets for Greece than a sound basis for economic policy making. Less than six months on they were proven right–international debt inspectors are currently trying to determine how much the political uncertainty of two national elections have set the country behind in hitting the 120% target, while the International Monetary Fund is arguing that for Greece, really, a level of 100% of GDP is much more suitable.

The biggest challenge with these calculations is of course determining how to fill in the variables, i.e. what’s the good, baseline or bad scenario for growth or interest rates. And it is perhaps here were Mr. Cline’s analysis is most vulnerable. For Spain, for instance, the “good” scenario for bank recapitalizations is that Madrid will have to pick up exactly €0 of the cost of recapitalizing its banks—that would only happen if either the stakes the government acquires in struggling lenders turn out to be unexpectedly valuable or the country succeeds in moving the entire recapitalization costs off its own books and onto those of the euro-zone bailout fund. We explained why either of these two scenarios are unlikely here and here.

The baseline scenario expects bank recapitalizations to add only some €5 billion to government debt (mostly thanks to the European Stability Mechanism taking direct stakes in the saved lenders rather than routing the money through the government, as Mr. Cline explained in an interview). Even under the bad scenario the bank bailouts add “only” €50 billion to the debt load (that’s assuming that the cost cannot be transferred to the ESM). Considering that the euro zone has promised Spain as much as €100 billion and some analysts fear that low growth could push the bailout bill even beyond that, it’s easy to imagine a worse scenario. (Sidenote: the bank recapitalization section in the Spain scenario table on p.15 of the paper also includes €36 billion in debts that the Spanish government may have to take on from crisis-hit regions—a footnote that Mr. Cline says was accidentally dropped in the final version.)

But there are conclusions in the paper that go beyond the exact variables used for the different scenarios. For instance, Mr. Cline’s calculations show that for both Spain and Italy higher interest rates—and even lower growth–have a smaller effect on debt levels than missing budget targets. For Spain, more-expensive bank bailouts set off a similar dynamic: the “bad”(€50 billion) recapitalization scenario drives the baseline debt load from 89% of GDP to 94% by 2020; the full €100 billion, meanwhile, would take it up to 99%, even if all other variables stay in the baseline.

The good news from that if of course that governments may have more influence on their primary deficits—and even the cost of bank bailouts for national governments amid “direct” bank recapitalizations from the ESM–than on interest rates and growth. Or as Mr. Cline summed it up in an email: “The good outcome depends on Spain doing its part on the primary surplus and the euro zone doing its part on the banking union.”

If that thesis holds up, Mr. Cline’s analysis may herald more good news than Brussels weather, where the probability of sustainable summer sunshine is close to zero.

By Gabriele Steinhauser

The Wall Street Journal

Wednesday, 22 August 2012 13:22

Why don't mortgage rates move in line with RBA rate moves

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With the constant symphony of politicians from all parties clamouring over each other to bash up the banks and accuse the Australian banking industry of profiteering from mortgage holders since the GFC, we examine the truth behind why the interest rates on home loans have risen more than the official Reserve Bank cash rate.

First some revision, where do banks source money to enable them to lend out to homeowners?  Banks can either attract deposits by offering term deposits and cash accounts or they can "buy" money from the wholesale market, largely from overseas.

The graph below shows the increase in the cost to acquire these sources of funding since the start of the GFC, courtesy of Commonwealth Bank's analyst pack at their recent results presentation.

The chart highlights that Australian banks have paid an additional 1.65% to obtain funds from the wholesale market and have had to pay cash account and term deposit holders 1.86% over what they were paying before 2007 to attract funds.  Those who watch term deposit rates would know this as term deposits are currently more than the RBA official cash rate of 3.5%, whereas prior to GFC banks paid around 1.5% below the cash rate for deposits (source RBA Bulletin March 2010)

Despite having to pay on average 1.78% more to acquire funds to lend out, CBA's increase to the standard variable home loan rate has been less than 1.5% which means that the bank has absorbed some of the pain of the increase cost of funding.

The bank bashers will not accept this and point to their record profits.  The banks higher profitability has come through acquiring several of the second tier lenders such as BankWest (CBA) and St George & RAMS (Westpac) so one would hope their profits are higher as their businesses are now much larger.

We readily accept that the cost to build a house has increased due to the increased cost of raw materials such as steel and timber, and yet when the cost of "raw materials" for banks increase we accuse them of gouging.

Australia should be proud of our healthy banking system and pay no attention to the ill informed politicians who are bank bashing to distract voters from their own inadequacies.

 

 

 

Thursday, 23 August 2012 10:06

Don't trip up when Chasing Income Yield

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With official interest rates hovering at 3.5% and residential property income yields typically running at between 4-5%, investors are clamouring for investments that pay a higher rate of income.

Is it as simple as running a ruler over the dividend yield column in the Financial Review to select your investments?

The table below highlights the top 20 dividend payers from the Australian share markets based on forecast dividend payments for the current financial year.

What are some of the questions investors should ask themselves when considering high income investments?

What is the likely profit growth trend that can support future dividends?

What proportion of company profits are being paid out as dividends?  A high proportion doesn't leave the company much room to maintain dividends if profit drops.

Is the dividend being artificially inflated by asset sales, debt or financial engineering?

What is the outlook for the sector in which the company operates within?

These points are best illustrated comparing the highest ranking dividend payer in the chart above, Metcash with its larger rival Woolworths.  Woolworths dividend is not as high as Metcash but the share price chart below shows that Woolworths has been a better performing investment despite paying a slightly lower dividend.  (Woolworths is the blue line and Metcash the red line)

Woolworths vs Metcash Share Price Performance

There is no doubt there are some juicy dividends to be enjoyed by investors in the current market, but care must be taken to avoid what is referred to as a value trap.  (where an investment appears good value - but performs as a dog)  We encourage investors to look beyond the headline dividend yield when considering an investment.

This material has been provided for general information purposes and must not be construed as investment advice. This material has been prepared without taking into account the investment objectives, financial situation or particular needs of any particular person. Investors should consider obtaining professional investment advice tailored to their specific circumstances prior to making any investment decisions and should read the relevant Product Disclosure Statement.

Monday, 13 August 2012 15:59

House Hold "Tips and Tricks"

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Useful Tips and Tricks For Every House Hold

cutaway house

  • To silence your squeaky hardwood floors sprinkle some baby powder on the squeaky area and sweep it into the cracks. Then wipe the floor. The baby powder between the boards will act as a lubricant and will stop the annoying noise.
  • Have friends on their way over and you forgot to put drinks in the fridge. Place your drinks in a large pot and cover with ice. Sprinkle 2 cups of salt on top of the ice and then fill the rest of the pot with water. Your drinks will be ice cold within 2 to 3 minutes.
  • If you have already sealed an envelope and realized you forgot to put something in it, place the envelope in the freezer for a couple hours. It will pop right open so you don't have to get another envelope.
  • After cooking fish put a little vinegar in a pot and let it boil. The nasty fish smell will disappear almost instantly leaving your kitchen smelling clean again.
  • To peel a kiwi cut off the top and bottom, slip a spoon between the skin and the flesh. Twist the spoon around the entire kiwi (keeping it between the skin and flesh the whole time). Then just pop the skin off.
  • When you are done using the roll of tape, fold the last quarter inch down and stick it back onto itself. This will create a little tab that can easily be found so you don't have to waste time searching for the end of the tape.
  • Accidentally close a tab on your browser? No problem! Hit ctrl-shift-T and the page will pop up again.
  • When packing liquids (shampoo, conditioner, mouthwash, etc...) for your next trip, take the lid off, place a piece of plastic wrap over the opening and screw the lid back on. The plastic wrap will keep the liquid from spilling even if the lid pops open.
  • Before cooking a burger patty, press a hole in the middle of the patty. The hole will disappear as the burger cooks. This will minimize shrinking and you won't have to worry about them not being done in the center.
  • Rubbing some butter over the cut edge of a block of cheese will seal it and stop it from molding.
  • When masking tape and painters tape sit in the garage or other hot areas for too long, they tend to dry out and break apart when you try to peel them. Place them in the microwave for a few seconds. (keep a close eye on them, you don't want to start a fire.) This should loosen them up and they will peel a lot easier.
Thursday, 26 July 2012 11:31

Australian Official Interest Rates - Further to fall

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Westpac Consumer Confidence index was released in July showing an improvement in Consumer Sentiment.

Finally we have some evidence that the Reserve Bank’s policy of cutting the official cash rate by 1.25% between November last year and June this year is starting to gain more positive traction with households.

However, this result is far from convincing and should not be interpreted that we can expect confidence to steadily return to more normal levels over the months ahead.

The Index is now 2% above its level in October last year prior to the beginning of the rate cut cycle. However it is still 4.1% below the reading in November last year when households responded positively to the first rate cut in November. Following that initial
positive response in November concerns around the international and domestic economic outlooks offset any positive impact of the rate cut in December. These ongoing concerns, particularly around the international economic outlook, continued to mute the impact of subsequent rate cuts in May and June. In fact, despite the cumulative cuts of 125bps we still have the situation that pessimists slightly outnumber optimists.

Over the month, households were probably buoyed considerably by the result from the Greek elections and the positive reception to the latest European leaders’ summit , averting, at least for the time being, a new crisis in Europe.

While the Reserve Bank did not cut interest rates further there was a strong 5.5% jump in the confidence of those respondents who hold a mortgage.

There was also some positive news around the domestic economy.Petrol prices are down by 7% since the last survey and have now fallen 13% since May. The Australian dollar rallied from 98¢ to 102¢ versus the US dollar, and the share market rose 2.7%.

All components of the Index increased in July. The sub-indexes tracking consumer expectations for economic conditions over the next 12 months and five years increased by 5.8% and 5.2% respectively. The sub-index tracking responses on ‘whether now is a good time to purchase a major household item’ rose by 1.1%.

Respondents were also more positive around their own finances. The sub-indexes tracking assessments of finances relative to a year ago improved by 4.6%; and the outlook for finances over the next 12 months improved by 3%.

However, disturbingly, the sub-index tracking respondents’ outlook for their finances over the next 12 months is still 9.4% below the level in October last year prior to the beginning of the Reserve Bank’s rate cut cycle.

The Board of the Reserve Bank next meets on August 7. It is our view that interest rates in Australia are still too high. In his Statement following the interest rate decision on July 3 the Governor described interest rates as “a little below medium term averages”. With the Australian dollar back above parity, despite lower commodity prices, and fiscal policy being quoted by the RBA to be contradictionary in the order of 0.75% – 1.5% of GDP financial conditions in Australia are mildly stimulatory at best. Although there are tentative signs of improvement emerging in some interest rate sensitive parts of the economy, these have yet to show a convincing recovery and remain vulnerable to renewed weakness. Mean while the threat from a deteriorating global economic outlook continues to build.

Not with standing these issues the recent rhetoric from the Bank indicates that it is in a ‘wait and see’ mind set. Accordingly, whilst we think it is likely that, as we saw in the first half of 2012, the Bank’s ‘wait and see’ approach will eventually evolve into further
rate cuts totaling 0.75%, our call that the next cut will come in August could prove to be too early. However, because we believe that Australia needs lower rates and much can happen, particularly in the international economy, we are comfortable
maintaining that view.

Sourced from Bill Evans -Chief Economist Westpac

Monday, 23 July 2012 11:53

Tips on how you can save money on your power bill

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1)  Check to see if you can get a better contract, or make payments based on average monthly cost.

Check to see if you can get a better contract, or make payments based on average monthly cost.

  • Determine how much electricity you use. Use the monthly electric bills from the last year to calculate an approximate value.
  • (If possible) Compare different offers from electrical companies; chose the one that is the cheapest (lowest cost per kilowatt hour).
  • Find out if there is an OFF-PEAK time of the day when the rate is lower and use that time for most electricity needs (e.g. running washing machine, dish washer, or cooking). This will likely require additional costs for special metering hardware to track usage during those times.

2)  Buy energy efficient devices.

  • Don't buy devices that are bigger than necessary (buy and use small pressure cookers whenever possible). Ask for energy efficient devices. Don't forget to check the stand-by consumption. Check if there is a label like Energy Star.

3)  Switch off or unplug devices when not in use

Switch off or unplug devices when not in use.

  • If a device doesn't have an on/off switch, use a plug connector with an on/off switch. Connect for example your TV and the loudspeakers with a plug connector. You can switch off both devices by just one action. Connect your DVD recorder with a separate socket since it is likely that you have to readjust it if you would switch it off.
  • Don't forget that power adapters (transformers for rechargeable appliances) also consume energy. Unplug them when not in use.
4)  Be aware of the energy consumers in the household
     Refrigerator, Freezer and Fridge:
  1. Put each cooling device on a place which is as cold as possible, away from heat sources like radiators, direct sunlight or other big energy consuming devices.
  2. Check that the cooling device is at least 5cm (2 inches) away from the wall and that the air can circulate well.
  3. Increase the inner temperature of the cooling devices. 7°C (45°F) are enough for the fridge and -18°C (0°F) are enough for the freezer.
  4. Keep the cooling devices tidy, label the items in the freezer, so that you can get the food item as quick as possible.
  5. Fill unused space with padding such as polystyrene or just a blanket.
  6. Keep the door of these devices closed.
  7. Check the sealing gasket of the cooling devices: Put a switched on torch (lamp) in the fridge and close the door. Check if the sealing gasket is damaged and buy a new one if necessary.
  8. Act energy efficient. Let the food cool down before you put them in a cooling device and warm up frozen food in the fridge.
  9. Defrost the freezer if there's a layer of ice.

Lights:

  1. Find effective places for lights and light switches.
  2. Paint your rooms in a bright color. More light is reflected by those brighter walls and so you need less light to make your room bright.
  3. Replace regular light bulbs with compact fluorescent bulbs. It is economical to replace a light bulb if it burns for more than half an hour a day. Use high quality L.E.D. - Light Emitting Diode (Best type) or C.F.L - compact fluorescent bulbs.
  4. Don't use ceiling floodlights, unless there L.E.D. types.

Stove:

  1. Use the right pots. Use pots with a diameter that is as small as possible. Put these pots only on hobs that fit to them or are smaller. Try to use a pressure cooker if you're cooking for a considerable time. Check that the bottom of the pot is even. Keep the pots closed as long as possible. Without a lid you'll loose about 2/3 of the energy.
  2. Reduce the amount of water you use while cooking.
  3. Turn the stove off 5 minutes before you reach the cooking time.
  4. Chose a gas stove or an induction cooker if you buy a new stove.
  5. Boil water with an electric kettle instead of the stove.

Oven:

  1. Don't preheat the oven.
  2. Bake with circulating air.
  3. Use the oven several times if it's already hot.
  4. Keep the oven's door closed as long as possible.
  5. If the oven has already reached the final temperature turn it off 10 minutes before the food is ready.
  6. Use a toaster or the microwave if possible instead of the oven.

Dishwasher and washing machine:

  1. Check if these devices are connected with the hot water pipe.
  2. Make the devices as full as possible.
  3. Reduce the water temperature and use energy and/or water saving modes.

Avoid the air conditioner. (You need 3 times more energy per degree to cool a room than to heat a room).

  1. Ventilate during the night or early in the morning in order to store the coolness for the day.
  2. Keep the coolness in the house during the day. Close the shutters and keep your windows and doors closed.
  3. Use a fan instead of an air conditioner.

Avoid heating with electric energy.

  1. While electric heat is the most efficient, it is often the most costly. If you can't change this or you use another energy source (natural gas, propane or heating oil) you can save money on electricity if you lower your heating costs.

Avoid the clothes dryer.

  1. Dry your wet clothes on a laundry line. If you can't follow this step try to fill the drier as full as possible and use the mode "iron-dry".

Optimize the energy consumption of your PC

  1. Modern PCs can be set up to enter energy saving modes from both the BIOS settings page and directly from the Windows Operating system. Enable "Sleep" and "Hybrid Sleep" for desktops and "Hibernation" for notebook PCs running Windows.

 

Monday, 23 July 2012 11:00

Greek Economy

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Greek Village

It is a slow day in a little Greek Village. The rain is beating down and the streets are deserted.    Times are tough, everybody is in debt, and everybody lives on credit.

On this particular day a rich German tourist is driving through the village, stops at the local hotel and lays a $100 note on the desk, telling the hotel owner he wants to inspect the rooms upstairs in order to pick one to spend the night.

The owner gives him some keys and, as soon as the visitor has walked upstairs, the hotelier grabs the $100 note and runs next door to pay his debt to the butcher.

The butcher takes the $100 note and runs down the street to repay his debt to the pig farmer.   The pig farmer takes the $100 note and heads off to pay his bill at the supplier of feed and fuel.   The guy at the Farmers' Co-op takes the $100 note and runs to pay his drinks bill at the taverna.   The publican slips the money along to the local prostitute drinking at the bar, who has also been facing hard times and has had to offer him "services" on credit.    The hooker then rushes to the hotel and pays off her room bill to the hotel owner with the $100 note.

The hotel proprietor then places the $100 note back on the counter so the rich traveller will not suspect anything.   At that moment the traveller comes down the stairs, picks up the $100 note, states that the rooms are not satisfactory, pockets the money, and leaves town.

No one produced anything.

No one earned anything.

However, the whole village is now out of debt and looking to the future with a lot more optimism.

And that, Ladies and Gentlemen, is how the Greek Economy works.

Friday, 20 July 2012 08:02

Government Ad on Tax Cuts - Deceptive Conduct

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This is the advertisement that is being prominently displayed around the country (at great expense to the taxpayer) relating to the tax cuts that become effective from 1st July 2012 to offset the impact of the carbon tax.

This ad should be accompanied by the sort of warning you would expect to find on your car side mirrors "Tax Cuts are smaller than they appear".

Our issue lies with the assertion in the ad that the tax free threshold is tripling to $18,200.  This leaves the reader with the feeling that they are about to receive a  very generous tax cut and fails to state that the current effective tax free threshold is currently $16,000 when the low income rebate is considered.

The Government goes to great lengths with retailers to ensure that prices must be expressed as a dollar figure per litre of drink, or per tissue etc.  Financial services providers must disclose in dollar terms as well, rather than using percentages as apparently studies suggest that more than half of Australians do not understand how to calculate them (note I did not use the term 50%).

Despite the Government insisting that business openly disclose facts in a manner that the average member of the public can understand, there appears to be a double standard when it comes to Government advertising.

The reality of the July 2012 tax cuts is that an average Australian taxpayer earning less than $80,000pa receives a tax cut of around $300 when all of the various changes to the tax free threshold, marginal rates and rebates are considered.  Refer our previous blog article on what the tax cuts mean for you at http://www.gemcapital.com.au/blog/carbon-tax-tax-changes-and-what-it-means-to-you-from-1st-july-2012

But then I don't suppose that a $300 tax cut sounds anywhere near as good as tripling the tax free threshold.

There shouldn't be a rule for us and a separate rule for the Government and the Unions when it comes to advertising