Dog-Days-cover-(print)Ross Garnaut - Economic Adviser to the Hawke/Keating Governments and well respected economist has recently published a book that labels Australia as complacent and at the 'cross-road' to its future.

"Here is a brilliant guide to the future of the Australian economy that our prime minister, his cabinet and indeed all members of parliament should study.  We cannot be sure that big problems are ahead for Australia owing to the end of the China boom, but it is highly likely, and our government must be prepared."  Max Corden on the book.

Here is an article extracted from the media recently that outlines some of the aspects of the book that we believe is worth a read.  It's price is $19.99 from bookshops or can be downloaded in electronic version for $9.99.

Australia is enjoying its 22nd year of economic growth without recession – an experience that is unprecedented in any other developed country.

For the first decade of expansion, growth was based on extraordinary increases in productivity, attributable to productivity-raising reforms from 1983. In the early years of this century, reform and productivity growth slowed sharply and then stopped. For a few years, increases in incomes and expansion of output came from a housing and consumption boom, funded by wholesale borrowing overseas by the commercial banks.

Unlike other English-speaking countries and Spain, Australia avoided recession with the end of the housing and consumption boom (earlier in Australia than elsewhere). This was largely the result of a China resources boom. The boom emerged when the exceptional metals and energy intensity of Chinese growth in response to Keynesian expansion through the Asian financial crisis, and again in response to the global financial crisis, took markets by surprise, and lifted prices of iron ore and coal continuously and immensely from 2003 until the Great Crash late in the September quarter of 2008.

China’s fiscal and monetary expansion put iron ore and coal prices back on a strongly rising trajectory in the second half of 2009, and new heights were reached in 2010 and 2011. The high prices for coal and iron ore flowed quickly into state and especially Commonwealth government revenue and was mostly spent as it was received – raising the Australian real exchange rate to unusual, and by 2013, unprecedented levels. The high commodity prices induced unheard-of high levels of resources investment after the recovery of the Chinese economy from the Great Crash of 2008, adding to the expansionary and cost-increasing impacts.

The China resources boom created salad days of economic policy, in which incomes could grow even more rapidly than community expectations. The expansionary effect of the resources boom – taking expenditure induced by high terms of trade, resource investment and resource production together – reached its peak in the September quarter of 2011, when the terms of trade began a decline that continues today. The terms of trade fell partly because Chinese growth fell by about one-quarter within a new model of economic growth.

A bigger influence was the new model of growth, which caused energy and metals and especially thermal coal to be used less intensively. Huge increases in coal and iron ore supplies are also putting downward pressure on prices and will be increasingly important in future.

The dog days of economic policy

 

The declining impact of the China resources boom ushered in the dog days of economic policy from late 2011, when government revenue and private incomes growth sagged well below expectations and employment grew less rapidly than adult population. The maintenance of high employment and reasonable output growth without external payments problems requires the restoration of investment and output in trade-exposed industries beyond resources. And yet the real exchange rate by early 2013 was at levels that rendered uncompetitive virtually all internationally traded economic activity outside the great mines. A substantial reduction in Australian cost levels relative to other countries is required – a large depreciation of the real exchange rate – to maintain employment and economic growth.

The more that productivity growth can be increased the better. Helpful policy measures include the removal of artificial sources of economic distance between Australia and its rapidly growing Asian neighbours to allow larger gains from trade – removal of remaining protection and industry assistance at the border as the real exchange rate falls, and investment in transport and communications infrastructure.

While China’s new model of economic growth ends the extraordinary growth of export opportunities for iron ore and coal that characterised the first 11 years of this century, new patterns of growth in China and elsewhere in Asia are rapidly expanding opportunities in other industries in which Australia has comparative advantage – education, tourism and other services, high-quality foodstuffs, specialised manufactures based on innovation.

But in contrast to iron ore, coal and natural gas, Australia does not have overwhelming natural advantages over other suppliers of these products. It must compete with the rest of world on price and quality, especially with developed country suppliers with hugely depreciated real exchange rates following the Great Crash.

Even with the return of productivity growth to the world-beating levels of the 1990s, maintenance of output and employment growth would require a large reduction in the nominal value of the dollar, accompanied by income restraint to convert this into a real currency depreciation.

A new economic reform era is required. That requires social cohesion around acceptance that all elements in society must share in restraint as well as commitment to productivity-raising structural change. Achievement of this outcome is blocked by changes in the political culture of Australia since the reform era. Now, uninhibited pursuit of private interests has become much more important in policy discussion and influence.

The new Australian government will succeed in building the political culture that is necessary to deal with the problem only if it is effective in persuading the community of the importance of reform, and in confronting the Australian complacency of the early 21st Century.

This will be hard, as the government will have to change the 21st-century tendency for private interests to outweigh the public interest in policy discussion and choice. Harder still, it will have to disappoint its strongest supporters along the way to leading Australia into a new reform era.

Ross Garnaut is vice-chancellor’s fellow and professorial fellow in economics at the University of Melbourne. This article is based on his book, Dog Days: Australia After the Boom, and is part of a series from East Asia Forum (www.eastasiaforum.org) in the Crawford School of Public Policy at the Australian National University.

 

Published in Investment Advice

DohInsideThe Tax Office has published a list of the top 10 compliance mistakes that SMSF trustees make when running their funds. The list is based on the type of contraventions reported by approved SMSF auditors between 2005 (when contravention reporting started) and up to June 30, 2012.

The top 10 contravention types (although admittedly one of them is “other”) in percentage terms are as follows:

SMSF Contraventions

An interesting observation is that of the top 10, three types of contravention represent more than two-thirds of the proportion of asset values (67.8%) involved in the most frequent contraventions. These are:

  • in-house assets
  • separation of assets
  • loans to members/financial assistance.

When looking at the number of contraventions, a little under two-thirds (64%) involve four of the top 10. These are:

  • loans to members/financial assistance
  • in-house assets
  • administrative-type contraventions
  • separation of assets.

The Tax Office has the following options when dealing with an SMSF contravention issue:

  • making an SMSF non-complying for taxation purposes
  • applying to a court for civil penalties to be imposed — a person may also face criminal penalties for more serious breaches of the law
  • accepting an enforceable undertaking in relation to a contravention, and
  • disqualifying a trustee of an SMSF.

As well, the Tax Office can issue the following:

  • rectification and education directions for contraventions, and
  • an administrative penalty regime for SMSF trustees for certain contraventions.

A rectification direction will require a person to undertake specified action to rectify the contravention within a specified time and provide the Tax Office with evidence of the person’s compliance with the direction.

An education direction will require a person to undertake a specified course of education within a specified time frame and also provide the Tax Office with evidence of completion of the course.

Where an administrative penalty is imposed it must be paid personally by the trustee or the director of the trustee company and cannot be paid or reimbursed by the SMSF. A table of some of the provisions that will attract the administrative penalty follows:

SMSF Penalties

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

Consumers can expect double digit percentage increases in their Life Insurance and Income Protection premiums over the next few years.

Insurance company TAL recently said in a statement to the media that the last few years has seen a much higher incidence of claims which has put severe pressure on insurance company profitability.  This can be seen in the charts below which were sourced from actuaries Rice Warner.

Insurance Premiums likely to rise

It was also revealed recently that the Media Super fund had increased insurance premiums by 45%.

Life Insurance and Income Protection is a highly competitive industry and we recommend that given the likelihood of premium increases, consumers would be well advised to seek help from an insurance specialist (offered by GEM Capital).  An insurance specialist can access insurance policies from many different insurance companies to obtain the best possible outcome for each individual.

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 Life Insurance

 

The ban on off-market transfers for self-managed superannuation funds (SMSFs) will not go ahead as planned from 1 July 2012, and is likely to be delayed for one year, according to Self-Managed Super Fund Professionals' Association (SPAA) technical directorPeter Burgess.

SPAA understands that the Minister for Financial Services and Superannuation, Bill Shorten, will announce the delay of the measure to 1 July 2013 before the end of the month.

Treasury is currently experiencing some "drafting issues" with the proposed ban on off-market transfers, which is "causing it a few headaches", Burgess said.

"In addition to the brokerage costs that SMSF trustees are going to have to incur because they have to go on market, they also run the risk of the market moving against them," he said.

"Since they can't be the other side to the trade, they have to wait until there's been a market price that determines the asset value. Then they can get into the market and buy it back," Burgess said.

"We continue to advocate for the removal of this proposal and for the introduction of an operating standard," he added.

SPAA director of education Graeme Colley said the ban on off-market transfers would have implications for employee share issue arrangements.

"If a public company wants to issue shares under employee share issue arrangements they can be transferred directly to the superannuation fund," he said.

But things would get complicated if the employee has an SMSF, Colley said.

"The question then becomes: does that company have to put the shares on the market before they can be transferred to the superannuation fund?" he said.

Published in Superannuation

18 April 2012 – Off-market transfers of certain assets, such as shares, between related parties and self managed superannuation funds (SMSFs) will cease to be allowed under Tax Office rules.

Frequently referred to as in-specie contributions, the government announced in 2011 that from July 1, 2012, non-market transactions that result in a contribution being made to an SMSF in the form of an asset will no longer be permitted.

The government's move came as a response to the growing trend of SMSF members making in-specie contributions of property into their SMSF, as on a practical level many people may not have had spare cash but may have had valuable assets they could contribute.

However there are restrictions imposed on the assets that can be acquired by funds from related parties (such as fund members or family members). The asset must be:

  • business real property (property used exclusively in one or more businesses)
  • listed securities (shares)
  • certain in-house assets acquired at market value (where the value of those in-house assets do not exceed 5% of the value of the fund's total assets).

Off-market transfers that make in-specie contributions to an SMSF are, however, generally made without actually selling and re-purchasing the securities on the open market. Hence the government believed that such non-market transactions were not transparent, and were open to abuse — through transaction date and/or asset value manipulation to achieve more favourable results with regard to both contribution caps and capital gains tax outcomes.

Keeping such asset transfers at arm's length was also seen to more closely meet the sole-purpose test for SMSF activities.

Part of the Stronger Super package, the legislation was formed to ensure that related party transactions be conducted through a market, or accompanied by a valuation if no market exists. In the latter case, transactions must be supported by a valuation from a suitably qualified independent valuer.

For equities, for example, the underlying formal market is the Australian Securities Exchange. So if SMSF trustees want to contribute listed shares to their fund, these will be required to be sold onto the market and then subsequently repurchased.

For business real property, there is no underlying formal market, so transferring these assets will therefore require validation by a valuation from a qualified valuer. Under the existing rules, a real estate appraisal of the value is sufficient.

Speaking at the SMSF Professionals Association of Australia's 2012 conference in February, Tax Office assistant commissioner Stuart Forsyth said the Tax Office will provide guidelines, probably before the end of the financial year, to help trustees and their advisers with the valuation problems they may encounter.

'They'll promote a consistent approach to valuations across the sector and support the proposed new requirement for SMSFs to value their assets at net market value,' Forsyth said. 'We'll also talk directly to auditors and other stakeholders as we develop this product which will build on existing guidelines focused on taxation compliance.'

Source: Taxpayers Australia INC latest news

 

Published in Investment Advice

For people who are self employed or persons with substantial taxable income personal deductible contributions are a way of tax deductible contributions to superannuation reducing your taxable income leaving more after tax money for investment.

What is the strategy?

Making personal deductible contributions reduces a person’s taxable income because the contribution is claimed as a tax deduction.

The contribution is taxed at just 15% which may be less than the tax paid if taken as taxable income. This means more after-tax money is available for investment, which increases a person’s overall retirement benefits.

Who is suited to this strategy and why?

This strategy is suitable for individuals who are:

  • primarily self-employed as a sole trader
  • under age 65 and who have not been employed in the income year the contribution is made, or
  • employed, but the income earned from employment is less than 10% of their total income.

The benefits of making personal deductible contributions are:

  • personal income tax is reduced
  • retirement savings are increased, and
  • small business owners can diversify their wealth outside of their business.

 

How the strategy works?

Individuals who are eligible to make personal deductible contributions into superannuation can claim a tax deduction equal to the amount of contribution.

The tax deduction reduces the person’s taxable income thereby reducing income tax.

Personal deductible contributions are taxed at 15% upon entry into super. This means the individual making the contribution will ultimately pay tax at 15% on the contributed amount instead of at their marginal rate.

Notice of Deductibility

To be eligible to claim a deduction for contributions to super, an individual must lodge a Notice of Deductibility form with their superannuation fund by the earlier of:

  • the date the individual lodges their tax return for that financial year, or
  • the end of the following financial year.

The form must be lodged prior to commencing a pension, rolling the contribution over to another fund or withdrawing the contribution.

Example

Kate is age 40. She runs her own mining engineering consultancy business as a sole trader, earning $185,000 per annum.

Kate’s financial adviser has recommended she contribute $20,000 into her superannuation fund as a personal deductible contribution.

Kate is aware that she won’t be able to access the contribution until she meets a condition of release, but she is interested in building up her retirement savings in a tax-effective manner.

 

The following table shows that Kate has created a tax saving of $5,100 as a result of implementing the strategy. Her cash flow has reduced by $11,900 but she has saved $17,000 for retirement.

 

Cash Flow BeforeStrategy AfterStrategy
Gross salary $185,000 $185,000
Less personal deductible contributions $0 $20,000
Taxable income $185,000 $165,000
Tax on taxable income* $59,575 $51,475
After-tax income $125,425 $113,525
Superannuation
Personal deductible contributions $0 $20,000
Less contributions tax $0 $3,000
Increase to super $0 $17,000
Net Package $125,425 $130,525

* 2010/11 financial year. Includes relevant tax offsets and the 1.5% Medicare levy.

Risks and implications

  • Making personal deductible contributions to superannuation reduces a person’s cash flow.
  • Contributions to superannuation are preserved until a ‘condition of release’ is met.
  • Personal deductible contributions count towards a person’s concessional contribution cap, as do SG contributions and salary sacrificed contributions. Contributions in excess of the concessional contribution cap are taxed at 46.5% and count towards the non-concessional contribution cap.
  • Reducing taxable income too low can result in more tax being paid as the 15% contributions tax paid on deductible contributions may be higher than the individual’s marginal tax rate.
  • Individuals who have worked through the year must be certain that they satisfy the 10% rule prior to making the deductible contribution.
  • Changes in legislation may reduce the flexibility or benefits that superannuation currently enjoys.

Note: Advice contained in this flyer is general in nature and does not consider your personal situation or needs. Please do not act on this advice until its appropriateness has been determined by a qualified adviser.  While the taxation implications of this strategy have been considered, we are not, nor do we purport to be registered tax agents. We strongly recommend you seek detailed tax advice from an appropriately qualified tax agent before proceeding.  The information provided is current as at May 2011.

Further information on Deductible Super Contributions can be found on our YouTube site which can be accessed via the website below:

Website:  www.gemcapital.com.au

 

or to arrange a no-cost, no-obligation first consultation, please contact the office on 08 8273 3222.

 

Blog Website:  www.investmentadviceadelaide.com

Published in Tax Advice