Wednesday, 15 January 2014 00:57

Govt's Super and Tax Plans confirmed

Draper_05The Coalition Government has reiterated its position on a range of previously announced superannuation and tax issues, as part of the Mid-Year Economic and Fiscal Outlook.

The key take-outs of interest include:

  • The next increase in the superannuation guarantee rate to 9.5% will be deferred for two years.
  • A range of measures relating to the Mineral Resource Rent Tax that were legislated during the previous Government's tenure will be repealed.  This includes the low income super contribution, income support bonus and school kids bonus.
  • The 2015 personal tax cuts will not proceed.
  • Benefits from the Government's Paid Parental Leave scheme will generally be paid by the Department of Human Services, not the person's employer.  Efective 1 March 2014.
  • Deeming will be extended to include allocated pensions from 1st January 2015 (for new pensions only)
  • The tax of 15% on earnings exceeding $100,000pa from assets held by a member in a superannuation pension will not proceed.


DISCLAIMER: The above information is commentary only (i.e. our general thoughts).  It is not intended to be, nor should it be construed as, investment advice.  To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information.  Before making any investment decision you need to consider (with your financial adviser) your particular investment needs, objectives and circumstances.

Published in Investment Advice
Sunday, 24 November 2013 20:45

Bank Shares - Safe as Houses?

Mark Draper (GEM Capital) talks with Daniel Moore (Investors Mutual) about the impact of a potential property bubble in Australia on Australian Banks.

The average punter on the street considers Bank Shares to be a safe haven , but just correct is that assumption.


DISCLAIMER: The above information is commentary only (i.e. our general thoughts).  It is not intended to be, nor should it be construed as, investment advice.  To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information.  Before making any investment decision you need to consider (with your financial adviser) your particular investment needs, objectives and circumstances.



Published in Investment Advice
Friday, 04 October 2013 16:47

China - is it the next US sub-prime?

Mark Draper (GEM Capital) talks with Andrew Clifford (Chief Investment Officer - Platinum Asset Management) about the stress that the Chinese credit system is under.

Andrew provides his view on whether China is the next US sub-prime crisis waiting to happen and outlines the sectors he would avoid given what is going on in China at the present time.

Andrew manages the Platinum Asia Fund and is in an excellent position to comment on the current situation in China.

Published in Investment Advice
Thursday, 08 August 2013 15:34

The Australian election and investors

The Federal Election

With the much anticipated Australian Federal election now set for 7 September it is natural to wonder what impact, if any, there might be on investment markets – both in terms of the uncertainty created by the election itself and in terms of the outcome. At present while opinion polls have Labor and the Coalition running at around 50% each on a two party preferred basis, according to bets placed on online betting agency Centrebet the Coalition remains the clear favourite.

Source: Centrebet

The performance of markets around elections

Elections can potentially have a short-term impact on investment markets. This is because investors don’t like the uncertainty associated with the prospect of a change in government during the campaign and then there may be relief once the poll is out of the way and possibly optimism associated with the election of a new Government.

The next chart shows Australian share prices from one year before till six months after Federal elections since 1983. This is shown as an average for all elections (but excludes the 1987 and 2007 elections given the global share crash 3 months after the 1987 election and the start of the global financial crisis in 2007), and the periods around the 1983 and 2007 elections, which saw a change of government to Labor, and the 1996 election, which saw a change of government to the Coalition. The chart suggests some evidence of a period of flat lining in the run up to elections, possibly reflecting investor uncertainty before the poll, followed by a relief rally soon after it is over.

Source: Thomson Financial and AMP Capital

However, the elections when there has been a change of government have seen a mixed picture. Shares rose sharply after the 1983 Labor victory but fell sharply after the 2007 Labor win, with global developments playing a big roll in both. After the 1996 Coalition victory shares were flat to down. The point is that based on the historical experience it’s not obvious that a victory by any one party is best for shares in the short term and, in any case, historically the impact of swings in global share markets arguably played a much bigger role than the outcomes of Federal elections.

What is clear though is that after elections shares tend to rise more than they fall.The next table shows that 8 out of 11 elections since 1983 saw the share market up 3 months later with an average gain of 5.4%, which is above the 1.8% average 3 monthly gain over the whole period.

Source: Bloomberg, AMP Capital

The next chart shows the same analysis for the Australian dollar. In the six months or so prior to Federal elections there is some evidence the $A experiences a period of softness and choppiness which is consistent with uncertainty about the policy outlook, but the magnitude of change is small – just a few percent. On average, the $A has drifted sideways after elections. While the $A fell soon after the 1983 Labor victory this was due to a policy devaluation in the dying days of the fixed exchange rate system.

Source: Thomson Financial, AMP Capital

The next chart shows the same analysis for Australian bond yields. Interestingly, on average bond yields have drifted down over the six months prior to Federal elections since 1983. The average decline has been around 0.75% which is contrary to what one might expect if there was investor uncertainty regarding the policy outlook. However, the tendency for bond yields to decline ahead of Federal elections appears to be more related to the aftermath of recessions, growth slowdowns and/or falling inflation prior to the 1983, 1984, 1987 and 1993 elections and the secular decline in bond yields through the 1980s and 1990s in general. More broadly, it’s hard to discern any reliable affect on bond yields from Federal elections.

Source: Thomson Financial, AMP Capital

Policy change and shares

Over the post war period shares have had an average return of 12.9% pa under Liberal/National Coalition Governments compared to 9.8% pa under Labor Governments.

Source: Thomson Financial and AMP Capital

Some might argue though that the Labor Governments led by Whitlam in the 1970s and Rudd and Gillard more recently had the misfortune to be affected by severe global bear markets beyond their control and if these periods are excluded the Labor average rises to 14.6% pa. Then again that may be pushing things a bit too far. But certainly the Hawke/Keating government defied conventional perceptions that conservative governments are always better for shares. Over the Hawke/Keating period from 1983 to 1996 Australian shares returned 17.3% pa, the strongest pace for any post war Australian government.

Once in government political parties of either persuasion are usually forced to adopt sensible macro economic policies if they wish to ensure rising living standards. Both the Coalition and Labor agree on the key macro fundamentals – i.e. the need to keep inflation down, to return the budget to surplus and in the benefit of free markets.

Policy differences

The main areas of difference between the two parties of probable economic significance relate to taxation, climate change, government spending & the budget and regulation.

  • in terms of tax the Coalition has promised to cut the company tax rate (although for large companies this is partly offset by a paid parental leave scheme) and abolish the mining tax;
  • the Coalition is proposing to abolish the carbon tax/Emissions Trading Scheme and will rather pay companies to reduce emissions;
  • the Coalition is likely to take a lighter/more business friendly approach to regulation than a Labor government. This may involve some partial wind back of industry regulation; and
  • the Coalition will likely try and speed up the return to a budget surplus by cutting government spending, much as it did under John Howard following the 1996 election.

As a result, perceptions that the Coalition will be lower taxing and less focussed on regulation and hence more business friendly than a Labor government may increase the chance a Coalition victory will result in a typical post election share market bounce. However, it’s worth noting that this may be partially offset if it announces aggressive fiscal tightening after the election (given the negative impact this could have on economic growth and profits at a time when the economy is already soft). What's more if a returned Labor Government follows up on its commitment to a National Competitiveness Agenda working to seriously boost productivity growth then it could have a positive long term impact on growth, profits and ultimately share market returns.

However, it does seem that there is the potential for significant sectoral impacts with the Coalition’s policies likely to be positive for miners, heavy carbon emitters and small companies (due to the company tax rate cut).

Concluding comments

The historical record points to the strong chance of a post election share market bounce. This may also fit in as we move out of the September quarter, which is often the weakest of the year, into the normally strong December quarter, as the profits reporting season ends in Australia and as uncertainty is removed post a possible September decision by the US Federal Reserve to start tapering its monetary stimulus.

Another potential positive from the election is that it is likely to see the end of minority government in Australia as whoever wins is likely to have a clear majority in the House of Reps. This could help usher in a period of more certain and rational policy making. However, it’s not guaranteed as whoever wins may still not have control of the Senate.

Dr Shane Oliver
Head of Investment Strategy and Chief Economist
AMP Capital

Important note: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided.
Published in Australian Economy

The Government has announced a range of superannuation reforms, including:

  • taxing earnings in pension phase that exceeds $100,000pa
  • recognising deferred annuities for earnings tax concession purposes
  • increasing the concessional contributions cap for those aged 50 and over
  • increasing the ability to refund excess contributions
  • commence deeming account based pensions under the social security income test
  • increasing the balance threshold below which lost super must be transferred to the ATO

The majority of these proposed reforms will commence on 1st July 2014.  It is important to note that the changes announced are not yet legislated and may change prior to becoming law.

1. Tax treatment of earnings on superannuation assets supporting income streams – from 1 July 2014

From 1 July 2014 the Government proposes that future earnings, including interest and dividends, on assets supporting an income stream liability will be tax free up to $100,000 a year for each individual. Earnings above the $100,000 threshold are proposed to be taxed at the 15% tax rate that applies to earnings in the accumulation phase of super.

Under current tax rules, all income received by a superannuation fund from assets supporting an income stream such as an account based pension, is completely tax free.

The Government has also announced that the proposed $100,000 threshold will be indexed to the Consumer Price Index (CPI), and will be increased in increments of $10,000.

Special arrangements for capital gains on assets purchased before 1 July 2014

The Government has also announced that special rules will apply to the taxation of capital gains on assets purchased before 1 July 2014 to allow people time to restructure their superannuation arrangements where desired. These are:
  • For assets purchased before 5 April 2013, the proposed changes will only apply to capital gains that accrue after 1 July 2024
  • For assets purchased from 5 April 2013 to 30 June 2014, individuals will have the choice of applying the proposed changes to the entire capital gain, or only that part that accrues after 1 July 2014
  • For assets that are purchased from 1 July 2014, the reform will apply to the entire capital gain.

Changes to apply to defined benefit funds

The Government has also announced the proposed changes will also apply to members of defined benefit funds in the same way that they apply to members of accumulation funds.

This is proposed to be achieved by calculating the notional earnings each year for defined benefit members in receipt of a concessionally-taxed superannuation pension. These calculations will be based on actuarial calculations, and will depend both on the size of the person's superannuation pension and their age. The amount of notional earnings each year will fall as a person grows older, in the same way that yearly earnings for people in defined contribution schemes fall over time as they draw down their capital.

GEM Comment

At this stage it is unclear how these proposals would practically work. However, to cater for individuals who have two or more pension funds it seems likely that trustees will be required to report income amounts received by the fund in respect of each member.

The proposed special arrangements for capital gains may also require trustees, including self- managed super fund (SMSF) trustees, and their advisers to take into account the potential future tax treatment of a fund’s CGT assets when reviewing the fund’s investment strategy and portfolio.

Other unresolved questions in relation to these reform proposals include:

  • whether capital gains will still attract the capital gains tax discount for the purposes of the $100,000 threshold
  • if capital losses in one fund or investment option will be able to be offset against capital gains in another fund or investment option
  • whether any tax liability on income over the $100,000 threshold will be levied on the member or the fund.

2. Concessional taxation for deferred annuities – from 1 July 2014

The Government will encourage the take-up of deferred lifetime annuities, by providing these products with the same concessional tax treatment that superannuation assets supporting income streams receive.


3. Concessional contributions cap – from 1 July 2013

The Government proposes to introduce a higher concessional contributions cap, initially for those aged 60 or more, and then for those aged 50 or more. This higher cap will be $35,000 per year, unindexed. Table 1 illustrates the concessional caps that will apply for the 2012-13 to 2014-15 financial years.

Table 1

Importantly, the Government has confirmed that it will not proceed with earlier proposals to limit the new higher cap to those aged 50 or more with superannuation balances below $500,000.

GEM comment

The Government has recognised that this measure will “...allow people who have not had the benefit of the Superannuation Guarantee for their entire working lives to have the ability to contribute more to their superannuation as their retirement age approaches...”. However, indexation of the standard concessional cap means that by 1 July 2018, it is expected to reach the higher $35,000 cap for those under 50.

The effectiveness of transition to retirement (TTR) strategies has been limited in recent years by a number of concessional cap reductions. With eligible clients aged over 60 (from 1 July 2013) and aged 55 to 59 (from 1 July 2014) able to make greater concessional contributions, TTR strategies will in many cases be more tax effective and lead to a higher end retirement balance.

4. Excess concessional contributions – from 1 July 2013

The Government proposes allowing all individuals to withdraw any excess concessional contributions made from 1 July 2013 from their superannuation fund. Additionally, the Government will tax excess concessional contributions at the individual’s marginal tax rate, plus an interest charge (recognising that excess contributions tax is collected later than personal income tax).

The Government has also confirmed that individuals with income greater than $300,000 will be subject to a 30% rate of tax on certain non-excessive concessional contributions rather than the 15% rate.

GEM comment

Currently, an individual may request a refund of excess concessional contributions of up to $10,000 made since 1 July 2011 on a once-only basis. It would appear that the important change announced in the current reforms is to extend that relief to all concessional contributions, regardless of amount and when made.

The imposition of an additional interest charge on excess concessional contributions appears likely to curtail strategies for those on the highest marginal tax rate to deliberately make excess concessional contributions. Currently, an individual on the 46.5% marginal tax rate is subject to the same rate of tax on personal income as excess contributions, but benefits by a timing arbitrage on the latter, due to the collection of PAYG income tax compared to that of excess contributions tax. Additional interest charges would appear to remove this benefit.

Details and draft legislation on exactly how the higher rate of tax on contributions for high income earners measure will operate remain outstanding, other than the following:

  • The additional tax will be collected through a mechanism similar to that which operates for excess contributions tax.
  • ‘Income’ means taxable income, concessional super contributions, adjusted fringe benefits, net investment loss, target foreign income, tax-free government pensions and benefits, less child support.
  • If concessional contributions themselves push a person over the $300,000 limit, the higher rate of tax will only apply to the part of the contributions that is in excess of the threshold.
  • ‘Concessional contributions’ means all employer contributions (both SG and salary sacrifice), deductible personal contributions and notional employer contributions for defined benefit members.
  • Excess concessional contributions will only be subject to excess contributions tax, not the additional 15% tax.


5. Deeming on account based income streams – from 1 January 2015

The Government proposes extending to account based income streams the Centrelink deeming rules that currently apply to financial investments such as bank deposits, shares and managed funds.

Currently, the first $45,400 for a single pensioner and $75,600 for a pensioner couple of financial investments is deemed at 2.5% pa. Any financial investments over these thresholds are deemed at 4% pa.

Under the change announced, these standard Centrelink deeming rules would apply to superannuation account based income streams from 1 January 2015. However, all such products held before 1 January 2015 will be grandfathered and continue to be assessed under the existing deductible amount rules indefinitely, unless the pensioner chooses to change to another product.

GEM comment

Many retirees seeking to optimise their financial situation under the Centrelink means tests currently consider strategies involving non-deemed investments or seeking out returns on deemed assets in excess of the deeming rates. Traditionally, account based pensions have featured prominently in the first of these strategies.

Both the assets test and income test determine the actual amount of Centrelink pension payable to an individual. Taking both these tests into account, those clients most likely to be adversely affected by the proposed change are those whose account balances are:

  • greater than the point at which deemed income exceeds the income free area (currently $152 pf for a single person and $268 pf for a couple combined), but
  • less than the point at which the assets test determines the benefit paid. These asset levels are summarised in Table 2.

Table 2


Additionally, applying deeming to account based pensions may result in greater focus on other non-deemed investments, such as direct property.

6. Lost super – increased account balance threshold – from 31 December 2015

In the 2012—13 Mid-year Economic and Fiscal Outlook, the Government announced that super balances of inactive and uncontactable members below $2,000 must be transferred to the ATO from 31 December 2012. In addition, from 1 July 2013 it proposed paying interest at a rate equal to the CPI on all lost superannuation accounts reclaimed from the ATO.

The Government now proposes increasing the account balance threshold to $2,500 from 31 December 2015 and $3,000 from 31 December 2016.


The information contained in this Briefing is based on the understanding Colonial First State Investments Limited ABN 98 002 348 352 AFS Licence 232468 (Colonial First State) has of the relevant Australian laws and the joint media release of the Treasurer and Minister Shorten as at 5 April 2013. The Briefing should not be taken to indicate if, when or the extent to which, announcements will become law. While all care has been taken in the preparation of the Briefing (using sources believed to be reliable and accurate), no person, including Colonial First State, GEM Capital Financial Advice or any other member of the Commonwealth Bank group of companies, accepts responsibility for any loss suffered by any person arising from reliance on the information. The Briefing has been prepared for the sole use of advisers, is not financial product advice and does not take into account any individual’s objectives, financial situation or needs.

Published in Superannuation

Interest Rate ImageAs expected the Board of the Reserve Bank decided to leave the cash rate unchanged at 3.0%.

However there was considerable encouragement in the statement for our near
term view that they will decide to cut rates by 0.25% at the next meeting
on March 5.

The most important justification for that expectation is around the
sentence in the final paragraph: "The inflation outlook as assessed at
present would afford scope to ease policy further should that be necessary
to support demand." Our experience is that use of that word "scope" in a
forward sense indicates a decent chance that the Bank will move at the next

The discussion around the domestic economy was largely similar to the
discussion following the December Board meeting. That is, two extra months
of low rates have not provided the Board with much encouragement that
things are turning. For example, investment outside mining is still
described as "remains relatively subdued". The labour market is still
described as "softening somewhat and unemployment edging higher". And
consumer spending is described as "moderate growth".

On the other hand there is a modest uplift in the assessment of the housing
sector with house prices being described as "moved higher" compared to the
December assessment of "moving a little higher". The strength of car sales
is recognised for the first time: "the demand for some categories of
consumer durables has picked up". And the mild reduction in risk aversion
by savers is noted: "savers are starting to shift portfolios towards assets
offering higher expected returns".

Some new concerns emerge in the statement. Firstly, a sign that the Board
is concerned about the outlook for employment growth: "businesses are
likely to be focussing on lifting efficiency". And recognition of the weak
credit growth in both households and firms: "some households and firms
continue to seek lower debt levels". Despite a modest fall in the AUD and a
30% jump in the iron ore price since the last Board meeting, the Board
continues to note the high exchange rate in a context of the observed
decline in export prices.

The main motivation for markets beginning to price out further rate cuts is
around developments in the world economy. In previous statements, the
Governor had consistently described risks to the global economy as to the
down side because of Europe. He now qualifies that by talking about these
risks having "abated, for the moment at least". However, he notes that the
build-up in public and private debt still affords vulnerability to
financial markets.

The wording around China is a little more upbeat with growth being
described as "fairly robust pace", while he is more constructive around
prospects for the rest of Asia due to the improved overall global
environment. Surprisingly no attention is given to the recent upswing in
iron ore prices with export prices still being described as having

We expected that recent optimism around the world economy would not be
sufficient to change the Bank's clear bias to further cut rates. This
expectation has been confirmed more strongly in this statement than we had
expected. In qualifying the recent improvement in financial conditions it
is clear that the Board does not believe that the global economy is on a
sustained upswing.

Commentary around the domestic economy highlights new concerns around the
outlook for employment growth and credit while the description of the
housing market is hardly exuberant. From our reckoning we are also seeing
for the first time guidance that the Bank expects growth to be "a little
below trend over the coming year" – that is consistent with the current
forecast of 2.25 to 3.25% in the November Statement on Monetary Policy.
However it is interesting that this "below trend" concept is raised in this
particular statement given that has not been the practise in the past.

In May last year we forecast that the cash rate which at the time was 3.75%
would bottom out at 2.75% some time near the end of 2012 or the beginning
of 2013. Today's statement has given us considerable encouragement that
this last leg in the cycle is likely in the near term and we maintain our
call that another cut can be expected in March.

Bill Evans
Chief Economist
Westpac Institutional Bank


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.

Published in Fixed Interest

There are many ways of measuring value in the share market, but today we will concentrate on two.

1. Price Earnings Ratio

The Price Earnings ratio (PE) measures the share price divided by the earnings of a company.  If Company A had a share price of $1-00 and had earnings per share of $0-10, then the PE multiple would be 10.  If the share price however doubled to $2-00 while the earnings remained the same, then the PE multiple would be 20.

There is no hard and fast rule about PE ratios, but clearly the higher the PE ratio, the more expensive the company.  Of course a company that is growing its earnings quickly may look expensive today but as earnings grow the PE multiple reduces assuming the share price remains unchanged.  For example Company A with a share price of $1-00 and earnings of $0-10 per share, doubles its earnings to $0-20 per share now has a PE multiple of 5.

Below is  a chart showing the forecast PE multiples for the Australian share market as at today and compares the ratio historically.

Forward PE ratios

You can see that the forecast PE ratios are at the low end of where they have been since the 1980's, which implies that based on this measure, the Australian share market is not expensive.

2. Dividend Yield

The dividend yield is simply a percentage of income that is paid to investors from a share in a company.  It is calculated by dividing the dividend paid by the share price x 100.  For example Telstra pays a 28 cent dividend and assuming a share price of $4.50 represents a dividend yield of 6.22% (0.28/4.50 X 100).  When the Telstra share price was around $3 it was still paying a dividend of 28 cents per share, which equated to a dividend yield of 9.33%.  This does not include the benefit of imputation which is discussed elsewhere.  A simple way of looking initially at dividend yield is that the higher the yield the better the value.

Investors need to determine whether a dividend is sustainable by looking at what percentage of company profits is paid out as a dividend as well as the sustainability of profit levels.  For example a company that pays out 90% of its profits as a dividend may not be able to sustain its dividend, particularly if profit falls, versus a company paying out 70% of its profits as a dividend.

Dividend alone is not a determinant of value as many companies reinvest heavily back into their business rather than pay higher dividends to investors.  That said when considered across an entire market, dividend yield provides some clue as to whether a market is cheap or expensive (ie a higher dividend yield implies the share price is cheaper, while a lower dividend yield across a market implies share prices are more expensive)

Here is a chart showing the dividend yield of the Australian share market as well as its history.

Dividend Yields

Australian dividend yields are materially higher than their global counterparts (measured as MSCI World in red).  You would also notice that Australian dividend yields are relatively high compared to where they have been over the past 25 years, which implies that the Australian share market is relatively inexpensive.

We caution investors in attempting to value shares using only one method as there are many other aspects that should be considered.  However on two of the more commonly used valuation methods, the Australian share market appears attractively priced for investors.

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.

Published in Shares
Tuesday, 07 February 2012 17:13

Comedy - Financial Counseling Commercial


Here is a 1 min video showing a commercial for Financial Counselling in the UK.

Very amusing.



Published in Comedy