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Wednesday, 11 July 2012 16:34

8 Common mistakes made by investors


Elinor at computer

Mistake 1: Excessive Buying and Selling

A study of more than 66,000 households found that investors who traded most frequently underperformed those who traded the least. For the study, investors were split into five groups based on their trading activity. The returns achieved by the 20 percent of investors who traded the most lagged the least active group of investors by 5.5% annually. Another study showed that men trade 45 percent more than women, and consequently, women outperformed men.

Mistake 2: Information Overload

Those who monitor the market too closely have a tendency to undermine their portfolios with self-destructive behavior. Richard Thaler, a professor at the University of Chicago, conducted a 25-year study where he divided investors into three groups: one group who checked their investment performance every month, one that checked performance once per year, and one that checked performance every five years. The study concluded that individuals who check performance the most obtain the lowest investment return and are most likely to sell an investment immediately after a loss. Of course, selling low is not a good strategy for making money.

Mistake 3: Market Timing

History has shown that the market rises about 70 percent of the time.

Market timers tend to find themselves out of the market during the 70 percent of the time that it is going up because they are trying to avoid the 30 percent of the time the market is falling.

Market timing is typically driven by emotion. Investors tend to buy stocks when they feel good and sell when they feel bad. Unfortunately, investors tend to feel good once the market has run up 20 percent and feel bad when their portfolio is down 20 percent. With the feel good/bad strategy, investors will always buy after the market has already gone up and sell when the market has already fallen.

Mistake 4: Chasing Returns

Guess which managed funds attract the most new money each year? Money flows into managed funds that have just enjoyed the greatest performance in the previous year. Unfortunately, investors are often late to the party with this strategy. It shouldn't be surprising that chasing returns is a very common mistake. The entire financial media industry is built around a common theme: Don't Miss Out on the Ten Hottest Stocks. When the fine print says past investment performance is no guarantee of future returns, believe it!

Mistake 5: Poor Diversification

You may have seen this mistake coming. Investors tend to be concentrated in one or two companies or sectors of the market.

Over-concentration can hurt a portfolio, whether the market is performing well or poorly. Poor diversification leads to excessive volatility and excessive volatility causes investors to make hasty, poor decisions.

Mistake 6: Lack of Patience

Most managed fund investors hold their funds for only two or three years before impatience gets the best of them. Individual stock investors are even less patient, turning over about 70 percent of their portfolios each year. It's difficult to realize good returns from the stock market if you invest for only weeks, months, or even a couple of years. When investing in stocks or funds, investors must learn to set their investment sights on five and ten-year periods.

Mistake 7: Not Understanding the Downside

When you buy an investment, you should plan on worst-case scenarios occurring when you invest. It is true that past performance isn't guaranteed to repeat, but it does give us an indication of what to expect on the downside. Know how your investments performed during recessions, wars, terrorist attacks, and elections. If you don't understand the risks at the outset, you are more likely to react poorly during periodic market setbacks and get scared out of the market.

Mistake 8: Focusing on Individual Investment Performance Rather than Your Portfolio as a Whole

One way to know you are diversified is that you will always dislike a portion of your portfolio. If you are properly diversified, I can guarantee you that each year some of your investments will lag behind others in your portfolio. If you look at investments in isolation rather in context of your overall portfolio, you will be tempted to make poor decisions. You can get yourself into trouble by getting rid of investments when theyr'e low in value and replacing them with those that just experienced a nice run.


Most of these mistakes can be avoided by having a clearly defined, long term investment strategy. Before investing, develop a proper diversification strategy, a system for evaluating the performance of investments, and solidify your long term investment goals. Then, turn off the TV and refer back to the systems and principles of your strategy when it is time to make investment decisions.

This information is of a general nature only and neither represents nor is intended to be personal advice on any particular matter. We strongly suggest that no person should act specifically on the basis of the information contained herein, but should obtain appropriate professional advice based upon their own personal circumstances including personal financial advice from a licensed financial adviser and legal advice. RI Advice Group Pty Limited ABN 23 001 774 125  AFSL 238 429.


Wednesday, 04 July 2012 16:02

Australian Housing - is it about to crash?

Suburban Houses, Hobart, Tasmania, Australia

Key points

  • Australian housing is still overvalued, leaving it, banks & the broader economy somewhat vulnerable. Undersupply provides some support but the two key threats are a Chinese hard landing and selling by investors.
  • The most likely scenario is many years of range bound house prices around a flat trend in real terms.
  • Right now house prices may slip a further 3% or so in the short term but lower mortgage rates are likely to lead to a bounce in prices from later this year/early next year.

After the surge in Australian house prices from the mid 1990s into last decade my view was that while the risks of a sharp fall back in house prices were high, the most likely scenario was an extended period of range bound house prices in real terms. If anything most of the surprise has been on the upside – although not by much in real terms. But
despite the fears of many, house prices have not plunged like those in the US and elsewhere, despite a bigger boom.

However, the risks are rising again. Prices have slid 6% since their 2010 high and worries that the GFC is about to finally catch up with Australian housing are on the rise again. Excessive house prices and the excessive level of household debt that has come with it are Australia’s Achilles heal. Housing is 60% of household wealth and so movements
in house prices have a big impact on household financial well being and spending. Housing credit also amounts to 59% of total private credit so what happens to house prices is critically important to Australian banks. And as we have seen in Ireland and now Spain, what happens to banks can have a big impact on public debt levels.

Still overvalued, but not by as much

The bad news is Australian housing is still way overvalued. The good news is it is less so, with real house prices going nowhere for the last four years:

  • According to the OECD, the ratio of house prices to incomes in Australia is 28% above its long term average, putting it at the top end of OECD countries, although several other countries are more extreme. The US is now
    below its long term average on this measure.

  • According to the 2012 Demographia International Housing Affordability Survey, Australian housing trades on a median multiple of house prices to annual household income which is double that of the US. In Sydney, median house prices are $637,600 compared to $324,800 in Los Angeles. In Perth they are $450,000 compared to $159,500 in Houston, Texas.
  • However, it is apparent in the next chart that while real house prices are still above their long term trend, the divergence has narrowed to 13% from a peak of 33%.

Real house prices have now fallen back to 2008 levels.

  • Another way of looking at property valuations is to look at the ratio of price to rents (sometimes referred to as a PE ratio for housing) and adjust for inflation. On this basis Australian housing is still overvalued relative to its long term average by 10%, but at least this is down from a peak overvaluation of 38% in 2003.

The bottom line is while it may not be as stretched as was the case a few years ago, Australian housing is still overvalued. This combined with still high household debt to
income ratios leaves Australia vulnerable. Still undersupplied, but maybe not as much
One of the big supports for the Australian housing market is thought to be a shortage of housing with the National Housing Supply Council estimating a cumulative shortfall of
more than 200,000 dwellings. However, the just released 2011 ABS census wiped almost 300,000 off previous population estimates suggesting that the undersupply may not be as chronic as thought, and along with slowing population growth, has potentially reduced a support for house prices. Our assessment though is that while the undersupply of housing may not be as severe as thought, low vacancy rates still attest to some undersupply. And
Australia has not had anything like the residential property construction boom that the US had last decade, which accentuated the downwards pressure on its house prices. In Australia, housing starts and approvals are at cycle lows.

Where to from here?

Right now the Australian residential property market is chronically weak. Finance approvals & new home sales are depressed, first home buyer activity is subdued, prices are down, listings are up and auction clearance rates have been weak for 18 months. In fact, the failure of timely data like auction clearances to spring back into life despite mortgage rates starting to fall 8 months ago is a sign of how weak things are. Since the GFC, Australians have become fearful of taking on more debt and the once strongly held belief that house prices can only go up has long been ditched.

However, while fears are growing of a deep house price slump ahead, the most likely scenario remains a lengthy period of range bound house prices around a flat trend in
real terms. Just as we have seen nationally over the last few years and in Sydney since 2003. Essentially poor affordability, overvaluation and high household debt levels have put a cap on house prices whereas undersupply should limit their downside, within which, prices will cycle up and down in lagged response to falls and rises mortgage rates.

Australia did not experience the same deterioration in lending standards that occurred in other countries last decade. Home ownership rates didn’t increase. Most of the increase in mortgage debt went to older and wealthier Australians better able to service loans. And this has all been reflected in still low arrears rates of around 0.6%, and something like 50% of borrowers being ahead on payments.

Nevertheless, there are two key threats. First, a hard landing in China, resulting in a collapse in export earnings could drive unemployment sharply higher threatening a sharp risein delinquencies and forced sales. However, while this risk has increased given the threat from Europe, a sustained hard landing in China seems unlikely given China’s low
tolerance for social unrest and falling Chinese inflation.

Second, property investors who make up a third of housing debt may loose patience with the lack of capital growth and sell, leading to sharp falls in house prices. However, while it’s hard to see investors piling into residential property now, why would those who are already in suddenly sell now? Real estate investors are usually in there for the long term, made necessary by large transaction costs.

A third threat was coming from interest rates but with rates falling since last November, this has turned into a positive for the housing market. Affordability is still poor, but at least it’s improving and our assessment is that a further improvement in affordability lies ahead as interest rates are likely to fall another 0.75% by year end.

Bottom line – in the very short term house prices could fall a bit further as economic uncertainty continues to impact, but providing Europe doesn’t plunge China and the world into a renewed recession, falling mortgage rates are likely to drive a cyclical recovery in the housing market from later this year/early next. However, the most likely profile over the next 5 to ten years is for house prices to be stuck in a 10% or so range around a broadly flat trend in real house prices.

This is consistent with the 10-20 year pattern of alternating long term bull & bear phases seen in real Australian house prices since the 1920s. See third chart on page 1. The long
term bull phase of Australian house prices that started in the mid 1990s is now giving way to a long term bear phase.

Housing as an investment

After allowing for costs, residential property has historically provided a similar return over the long term to shares. This can be seen in the next chart, which shows an estimate of
the long term return from housing, shares, bonds and cash.

Since the 1920s, housing has returned 11.1% pa after allowing for capital growth and rents and shares have returned 11.4% pa after allowing for capital growth and dividends. While housing is less volatile than shares and for many seems safer, it offers a lower level of liquidity and diversification. Once the similar returns of housing and shares are allowed for there is a case for both in investors’ portfolios over the long term. Right now though, housing looks somewhat less attractive continuing to offer much lower yields. The gross rental yield on housing is around 3.7%, compared to yields of 7% on unlisted commercial
property, 6% for listed property (or A-REITs) and 6.5% for Australian shares (with franking credits). So for an investor, these other assets represent much better value.

This information is of a general nature only and neither represents nor is intended to be personal advice on any particular matter. We strongly suggest that no person should act specifically on the basis of the information contained herein, but should obtain appropriate professional advice based upon their own personal circumstances including personal financial advice from a licensed financial adviser and legal advice. RI Advice Group Pty Limited ABN 23 001 774 125  AFSL 238 429.

Wednesday, 04 July 2012 16:20

Euro Crisis cartoon explanation

For anybody who doesnt fully understand the Euro situation,
it is explained very simply in the picture below.........




'Many people, particularly the wealthy, have structures in place but little idea how they are set up, and therefore little idea how to protect themselves against issues that can, and do, come up over a lifetime.'

Estate Law

A woman once came to see me about purchasing an annuity and, to make sure I could offer her the best advice, I began asking a few questions about her financial circumstances.  She told me her income largely came from commercial properties owned by a family trust and, when I questioned her further, it turned out that she had split with her husband 15 years earlier and even though she was a director of the trustee company, her ex-husband was the sole appointor of the trust which she didn't realise.  This meant that her ex-husband was in total control of the trust.

I decided to dig a little deeper and when I saw copies of all the documents it confirmed two things that were a problem. Firstly, as he was the sole appointor of the trust, he could hire and fire the trustee, get rid of the trustee company and even install his new partner - with whom my client shared a mutual loathing.  On top of that there was no reference at all to what happens if her ex-husband died - would his new partner take control of the trust - who arguably wouldn't continue paying income to my client?  This type of example is incredibly common.

Those who own assets in a Family Trust must ensure their adviser has recently read the trust deed to make sure that the deed continues to be appropriate for the present time.

Everyone needs to ensure that they understand the nature of ownership of all of their assets and how differing forms of ownership can impact the ability to control those assets both while you are alive and upon death.

'If you own assets through a legal structure (such as superannuation or a family trust), make sure you understand exactly what it is and - just as importantly - what happens to that legal structure in the event of the death of any one of the parties.'


Thursday, 14 June 2012 10:56

Global Investment Update May/June 2012

Please click on the link below to view an informative video presentation from Hamish Douglass (Magellan Financial Group CEO) that discusses the uncertainties facing the global economy including Greece, Spain, Portugal, United States and China.

Spain Bailout

 Click here for Global Investment Update with Hamish Douglass

The key points from this update are as follows:

  • A spectacular Greek exit from the Euro is very unlikely irrespective of which party wins the June 17th 2012 election.  Greece deciding to leave the Euro now is best described as “suicide”.  If polls can be believed, 80% of Greeks wish to remain in the Euro.
  • Financial issues within Europe are well understood by the authorities including the European Central Bank (ECB) which has made substantial moves already to deal with liquidity in the European Banking system.  This sends a signal that the ECB will not idly sit and let the European financial system fail.
  • Spanish Banks require additional capital to restore their balance sheets following a property market bubble, possibly as high as EUR 100 billion.  The European Stability Mechanism (ESM) is to commence operating in July 2012 and has EUR 500 billion at its disposal and in Hamish’s view, if required could be used to recapitalise Spanish Banks.  The French are suggesting methods to increase the ESM financial firepower.
  • Low probability that the Spanish Banking system will cause a financial meltdown.
  • ECB is in a position to provide assistance to keep borrowing rates affordable for Spain to ensure that Spain does not become insolvent.
  • A gradual United States recovery is underway, and on a 3 year view, US housing will lead a sharp recovery in the US economy.
  • Chinese economy on track for a “soft landing” (meaning that Chinese economy unlikely to fall off a cliff) and is likely to slowdown gradually.
  • Volatility in financial markets is likely to be a feature of the landscape for months to come.

If you could go back and give your younger self some advice about money, what would it be?

This is a superb new edition of the What I Wish I Knew series by best selling author, Marty Wilson, produced in collaboration with GEM Capital, that gets a broad range of financial experts and an inspirational collection of successful people to pass on the wisdom of their financial experience.

The book has a healthy attitude towards money and more particularly the role it can play in achieving one’s life goals.  You will find the book pleasurable, informative reading that you don’t have to read from cover to cover if you don’t want to.

For your copy of this extraordinary new book that shares tips, strategies and stories to help fast track your financial independence, please contact us at:

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Email: This email address is being protected from spambots. You need JavaScript enabled to view it.

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Key points

  • With yields on shares up and yields on bonds down, shares likely offer a decent return premium for long-term investors notwithstanding ongoing short-term uncertainty.
  • However, for those who can’t take a long-term approach, outcome-based approaches or focussing on investment yield are worth considering.
  • While term deposit yields are falling, attractive alternative sources of yield can be found in Australian shares, corporate debt, non-residential property and infrastructure.


The investment environment remains tough. On a long-term basis, shares and other related growth assets look attractive after several years of poor performance. Against this, Europe and the US are continuing to suffer aftershocks from the global financial crisis, resulting in periodic falls in investment markets as investors run for safety only to be reversed again as government policy-makers swing into action. Meanwhile popular safe havens such as government bonds and bank term deposits are becoming less attractive as yields fall.

So what should investors do? There are essentially three options: sit tight and ride it out; consider outcome-based strategies; or focus on yield-based investments.

Sit tight

History shows that over long periods of time, shares provide higher returns than cash or bonds. This can be seen in the following chart, which shows that since 1900 Australian shares have returned nearly 12% per annum (pa) compared to 6% for bonds and 4.8% for cash.

In a longer-term context what we are going through right now is not particularly unusual. From late 1969 through much of the 1970s, shares churned roughly sideways (albeit with a 60% slump in share prices along the way). Also, from a high in 1987, accumulated share market returns didn’t reach a new high until 1993. But after each of these episodes, shares resumed generating solid returns.

It is also worth noting that over the last thirty years or so government bonds have been in a massive bull market as ten-year bond yields have fallen from around 15% in the early 1980s to record lows in the US now and near record lows in Australia. The Australian ten-year bond yield is now 3.14%, a level which was last seen in May 1941 at the height of World War II. The record low for ten-year bond yields was in September 1897 at 2.9%.

This massive decline in yields from the early 1980s was driven by the adjustment from high inflation to low inflation and more recently by worries about global deflation following the global financial crisis. It has generated huge capital growth and hence returns for bond investors. However, with bond yields so low, the days of high returns from government bonds are behind us. Sure, bond yields could fall below 1% if Japanese-style deflation sets in. But it is hard to see the US Federal Reserve Chairman Bernanke or Reserve Bank of Australia (RBA) Governor Stevens allowing this. In the meantime an investor who buys a ten-year bond today and holds it to maturity will get the spectacular return of 1.74% pa in the case of US bonds or 3.14% pa from Australian bonds.

The dividend yield on Australian shares today is around 5% (or 6.5% if franking credits are allowed for). Only modest capital growth of 5% pa will generate a total return of 10%, which is well above the prospective return on bonds.

So while the secular bear market in shares may have further to go, reflecting public and private debt deleveraging in key advanced countries, extreme monetary policy settings and less business friendly governments, at least a lot is already factored in and given current starting point valuations (higher yields on shares and low yields on bonds) shares should provide a decent return premium over bonds. So on this basis it may be best to stay put with previously agreed strategies focussed on the long term.

However, that may be fine for someone who can take a long-term investment horizon, but it may not be so good for those near to retirement or in retirement (like my Mum) and with modest investment balances. Of course it also ignores the opportunities for taking advantage of extreme market moves along the way. So it is worth considering alternatives.

Outcome-based investing

Outcome-based investing involves investing in funds that target a particular outcome in terms of return (say inflation plus 5% pa) or income. The key elements of a multi-asset fund managed along these lines would be a focus on overall risk, highly flexible asset allocation capabilities (often referred to as dynamic asset allocation) and wide sources of market returns. This is in contrast with the traditional approach which involves constructing a benchmark mix based on simplistic growth/defensive categorisations and assuming it will deliver to client risk and return expectations.

Yield-based investing

Another approach, which can be seen as a subset of outcome- based investing, is to focus on assets that provide a decent investment yield. This is attractive because assets with a decent and sustainable yield provide a greater certainty of return in an environment of high market volatility and constrained capital growth. However, many of the traditional options here are becoming less attractive.

The traditional safe asset – government bonds – has seen yields collapse to record or near record lows. Australian ten-year bond yields have fallen to 3.14% and five-year bond yields (indicative of the yield on an Australian government bond portfolio) are just 2.5%. The average yield on global government bonds is around 1.5%, which is all the more amazing given that Japan and the US, which have the highest weight in global sovereign bond indices, have worse public debt levels than Europe.

Bank term deposit rates are now falling with the RBA cutting official interest rates. The collapse in bond yields points to further falls ahead, reflecting a combination of increasing global uncertainty, a moderation in growth in China taking the edge off the mining boom, struggling conditions in non-mining sectors and benign inflation. We expect the cash rate to fall to around 3%, which will likely see bank term deposit rates fall to around 4%.

Housing used to be seen as an attractive source of investment yield, but after the house price boom of the past twenty years this is no longer the case, with the rental yield on houses around 3.6% and that on apartments around 4.7%. After costs net yields are around 1% for houses and 2.2% for apartments and after a long bull market, Australian house prices are vulnerable to an extended period of poor capital growth.

However, there are several alternatives to term deposits, government bonds and residential property in terms of assets that provide decent income. See the next chart.

The grossed up dividend yield on Australian shares at around 6.5% is now above term deposit rates meaning that shares are actually providing a higher income flow than bank deposits. Of course, shares come with the risk of capital loss. One way to minimise this is to focus on stocks that provide sustainable above average dividend yields as the higher yield provides greater certainty of return during tough times. Excluding resources, the grossed up dividend yield on Australian shares rises to over 7%, for telecommunication companies and utilities it is around 8% and for bank shares it is above 9%. Furthermore there is evidence that stocks paying high dividends are associated with higher returns over time as retained earnings are often wasted and dividends reflect confidence regarding actual and future earnings. Of course there is no such thing as a free lunch – so the key is to focus on companies that have a track record of delivering reliable earnings and distribution growth over time, where dividends are not reliant on significant leverage and the yield is not high only because there is something wrong with the company.

Corporate debt is a good option for those who want higher yields than government bonds and term deposits but don’t want the volatility that goes with the sharemarket. For Australian corporates, investment grade (i.e. top quality companies) yields are now around 6% and lower quality corporate yields are higher.

Australian real estate investment trusts (A-REITs) used to be a popular alternative to bank deposits but fell out of favour in the global financial crisis as their yields proved unsustainable partly due to excessive debt. However, A-REITs have now refocussed on their core businesses of managing buildings, collecting rents and passing it on to their investors – all with lower gearing. A-REIT yields, at around 6%, are currently the second highest in the world amongst REITs (after France) and the sector seems to be more stable (falling only slightly during the recent correction).

Unlisted commercial property also offers attractive yields, around 7% for a high quality, well diversified mix of buildings, but into the low double digits for smaller lower quality property. Not bad when inflation is around 2%.

Finally, listed and unlisted infrastructure offers yields of around 6%, underpinned by investments such as toll roads and utilities where demand is relatively stable.

Concluding comments

With yields on shares up and yields on bonds down, shares offer a decent return premium for long-term investors despite short-term uncertainty. However, for those who can’t take a long-term approach and/or want to take advantage of short- term opportunities, outcome-based approaches or focussing on income yield beyond bank deposits are worth considering.


This information is of a general nature only and neither represents nor is intended to be personal advice on any particular matter. We strongly suggest that no person should act specifically on the basis of the information contained herein, but should obtain appropriate professional advice based upon their own personal circumstances including personal financial advice from a licensed financial adviser and legal advice. RI Advice Group Pty Limited ABN 23 001 774 125  AFSL 238 429.

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


Monday, 28 May 2012 11:25

Age Care Reforms Announced

On 20 April 2012, the Prime Minister and the Minister for Social Inclusion and Minister for Mental Health and Ageing, announced the ‘Living Longer Living Better’ plan, a 10-year plan beginning on 1 July 2012.

To make it easier for older Australians to stay in their home while they receive care, the Government will:

  • Increase the number of Home Care Packages- from 59,876 to almost 100,000     (99,669).
  • Provide tailored care packages to people receiving home care, and new funding for dementia care.
  • Cap costs, so that full pensioners pay no more than the basic fee.

To make sure more people get to keep their family home, and to prevent anyone being forced to sell their home in an emergency fire sale, the Government will:

  • Provide more choice about how to pay for care. Instead of a bond which can cost up to $2.6 million and bears no resemblance to the actual cost of accommodation, people will be able to pay through a lump sum or a periodic payment, or a combination of both.
  • Give families time to make a decision about how to pay, by introducing a cooling-off period.
  • Cap care costs, with nobody paying more than $25,000 a year and no more than $60,000 over a lifetime. This measure will not affect people already in the system.

To ensure immeditate improvements, the Government will also:

  • Increase residential aged care places from 191,522 to 221,103
  • Fund $1.2 billion to improve the aged care workforce through a Workforce Compact.
  • Provide more funding for dementia care in aged care, and more support for services.
  • Establish a single gateway to all aged care services, to make them easier to access and navigate.
  • Set stricter standards, with greater oversight of aged care.

Implementation of the reforms will be overseen by a new Aged Care Reform Implementation Council. The new reform package will be implemented in stages to enable providers and consumers to gain early benefits of key changes and have time to adapt and plan for further reform over the 10 years.

Home care

  • Home Care packages will increase from 59,876 to 99,669 over the next 5 years
  • Under new means-testing arrangements for Home Care packages, which will start from 1 July 2014, a consistent income test will be introduced. This will ensure that people of similar means pay similar fees – regardless of where they live – with safeguards for those who can least afford to pay.
  • The means test will not include the family home, which remains exempt.
  • People currently receiving a Home Care package will not be subject to the new arrangements while their current care continues.
  • In addition, to protect care recipients with higher than average care needs, an indexed annual cap of $5,000 for single people on income less than $43,000, and on a sliding scale of up to $10,000 for self-funded retirees, will apply to care fees. A lifetime care fee cap of $60,000 will be introduced.

Residential care

  • From 1 July 2014, the maximum accommodation supplement that the Government pays to aged care providers when people are unable to meet the cost of their accommodation will be increased from $32.58 to around $52.84 per day. As a result, the Government expect aged care places to increase from 191,522 to 221,103.
  • There will be more choice about how to pay for their care. Residents can pay for their accommodation in a lump sum, periodically, or a combination of both. A new cooling off period will mean that residents will not need to decide how they are going to pay until they have actually entered care.
  • From 1 July 2014, residential care means testing will be strengthened and improved. The treatment of the family home will not change from current arrangements.
  • An annual cap of $25,000 and a lifetime cap of $60,000 will apply to care fees.

Source: Hon Julia Gillard, Prime Minister & Hon Mark Butler, Minister for Social Inclusion & Minister for Mental Health & Ageing, Media Release.


23 May 2012 – The private health insurance rebate is to be means tested from July 1, 2012 but a method of maintaining the full 30% rebate has emerged.

Some private health insurance companies are accepting pre-payment of premiums before June 30, 2012, which will allow health fund members to lock in the current rebate before the new income-tested scaled reductions to the rebate comes into effect.

The office of the Minister for Health, Tanya Plibersek, has confirmed that private health insurance premiums that are paid before June 30, 2012 will qualify the payer for the level of rebate under existing rules, but that payments made after July 1, 2012 will be
subject to the new health insurance rebate rules.

The legislation allows for health insurance providers to determine themselves if they will allow for pre-payment of premiums. Many health insurers have done just that, and allow for pre-payment of up to 12 months, some allowing 18 months and one company
even providing for up to 30 months' pre-payment.

The Private Health Insurance Ombudsman's office (PHIO) confirms that the relevant legislation (the Fairer Private Health Insurance Incentives Act 2012) is worded in such a way to allow for the date when actual payments are made for health cover premiums to
determine under which financial year eligibility for relevant government rebates or offsets is set.

The new means testing will mean that singles earning more than $130,000 and households on more than $260,000 will miss out entirely on the rebate from July 1, 2012. The reduction in rebate levels starts after individual incomes reach $84,000 and family
income passes $168,000 (see table below).

Unchanged               Tier 1                          Tier 2                           Tier 3

Singles            <$84,000              $84,001-97,000            $97,001-130,000          >$130,001
Families          <$168,000            $168,001-194,000        $194,001-260,000         >$260,001

< Age 85            30%                       20%                              10%                              0%

< Age 65-69       35%                       25%                              15%                              0%

< Age 70+          40%                      30%                               20%                              0%

There are three ways to claim the rebate. Either by asking your fund to give you the rebate in the form of a reduced premium, through a Department of Human Services service centre as a cash payment or cheque (and there's another form for that), or claim it back through your annual income tax return

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