Overview

The latest Intergenerational Report tells us that Australians aged 65 years and over accounted for 14% of the population – and that figure is rising. Whether you’re concerned about your future self or a loved one, aged care is an issue most of us will have to manage at some time in our lives.

At the time of Federation, Australians at birth had an average life expectancy of around 50 years. The most common causes of death were infectious and parasitic diseases resulting from unsanitary sewerage and water systems, poor quality food and limited health education.

Improvements in public sanitation, health and medicine have seen lower death rates and longer life expectancies. As enhanced living standards meant we began living longer, cancer and heart disease became our most common causes of death.

The latter part of the 20^th century witnessed substantial advances in medical treatment, which reduced the impact of these diseases and further increased Australians’ life expectancy.

Given mounting pressures on governments to assist an aging population, more Australian families are taking the support of elderly loved ones into their own hands – and this is where it pays to do early homework.

Assessment

Illness, disability or the passing of the years can make it difficult for you or your loved one to maintain an independent lifestyle.

The ideal is to remain in one’s own home for as long as is reasonable and safe, but knowing when independence is no longer feasible is the difficulty.

Your first step is a visit to your doctor to discuss your or your loved one’s situation. If necessary, your doctor can refer you to an Aged Care Assessment Team (ACAT).

The ACAT consists of appropriately qualified people usually based at a local hospital. They can visit the elderly person in their home and, following a government-approved guideline, assess how much and what type of care may be required.

Levels of Care

Prior to 1 July 2014 care options included in-home care, and low or high level residential care. Since then the two levels of residential care have been replaced by a single level providing standard accommodation and personal services. Residents pay for optional additional services.

Planning and Preparation

Statistics forecast an increase in the percentage of people requiring some form of Aged Care in the near future – a challenge for any government. Consequently, future generations may not have access to current levels of government subsidies.

According to the Australian Institute of Health and Welfare, a man now aged 65 could live to be 84 years old – a woman could see 87.

While Australians have embraced the concept of self-funded retirement, we evidently need to start considering those decades beyond.

Could your superannuation support you for twenty-plus years – including funding the level of aged care you might need? Could you afford the additional expenses if your partner remained in the family home while you moved into an aged care facility?

Living long enough to receive a letter from the Queen is one thing – affording it is another!

It’s all in the planning.

Overview

The foundation of this year’s Budget is “jobs and growth” with the Government positioning the message that it has a solid economic plan to transition the economy from the resource boom to a more diversified economy.

The Federal Budget is based on the following key areas which have implications for the economic and investment outlook:

• Putting in place “jobs and growth” measures aimed at boosting new investment, creating jobs and supporting small companies
• Cutting the company tax rate for small to medium companies to 27.5% from 1 July 2016. It is expected that economic and job growth will be greater from tax cuts to small and medium businesses than to larger companies. The company tax rate will be progressively lowered to 25% for all companies over the next 10 years
• Limiting superannuation tax concessions to the rich and redirecting these to lower income earners and those with lower tax balances
• Controlling spending growth. Government payments as a share of GDP are forecast to decline from 25.8% of GDP in 2016-17 to 25.2% of GDP in 2019-20.

The measures announced aim to create jobs as the mining boom ends and new sources of growth emerge. According to the Budget papers, almost 300,000 jobs were created in the economy last year, which is the largest number of jobs created in a single year since 2007.

The Government’s view is that a key to higher economic growth is through supporting innovation with a $1.1 billion National Innovation and Science Agenda and other new measures to boost investor confidence.

The key issues of the budget and how they may affect you are detailed below.

Important Note: Before any of these announcements can be implemented, they will require passage of legislation.

Small Business

Reducing the company tax rate over 10 years to 25%

The government will reduce the company tax rate to 25% over 10 years (i.e., by 1 July 2026).

This measure will commence from 1 July 2016, whereby the government will cut the small business company tax rate to 27.5%, and make this tax rate available to small companies with an annual aggregated turnover of less than $10 million. This turnover threshold will then be progressively increased to ultimately have all companies eligible for the 27.5% tax rate in 2023/24.

The progressive increase in the annual aggregated turnover thresholds for companies eligible for the 27.5% tax rate will be as follows:

• $25.0 million in the 2017/18 income year;
• $50.0 million in the 2018/19 income year;
• $100.0 million in the 2019/20 income year;
• $250.0 million in the 2020/21 income year;
• $500.0 million in the 2021/22 income year; and
• $1 billion in the 2022/23 income year.

In the 2024/25 income year, the company tax rate will be reduced to 27% and then be reduced progressively by 1 percentage point per year until it reaches 25% in the 2026/27 income year.

Franking credits will be distributed in line with the rate of tax paid by the company.

Increasing the Small Business Income Tax Offset (‘SBITO’)

The tax discount for unincorporated small businesses will increase incrementally over 10 years from 5 per cent to 16 per cent.

The tax discount will increase to 8 per cent on 1 July 2016, remain constant at 8 per cent for eight years, then increase to 10 per cent in 2024-25, 13 per cent in 2025-26 and reach a new permanent discount of 16 per cent in 2026-27.

The discount is currently available to an individual in receipt of income from an unincorporated small business entity (‘SBE’) (i.e., basically, an entity with an aggregated turnover of less than $2 million), and applies to the income tax payable on the business income received from such an entity.

The current tax discount (or SBITO) cap of $1,000 per individual for each income year will be retained.

Furthermore, access to the discount will be extended to individual taxpayers with business income from an unincorporated business that has an aggregated annual turnover of less than $5 million.

Small business entity turnover threshold

From 1 July 2016, the small business entity turnover threshold will be increased from $2 million to $10 million. However, the current $2.0 million turnover threshold will be retained for access to the small business capital gains tax concessions, and access to the unincorporated small business tax discount will be limited to entities with turnover less than $5.0 million.

Superannuation

The Government is attempting to reduce the cost of tax concessions to super by limiting the amount that can be contributed as well as the tax exemptions in retirement.

Clients with lower balances and/or lower levels of income will gain greater flexibility. Clients with higher balances and/or incomes may choose to seek alternative non-superannuation investment options that also provide tax advantages.

A summary of the changes are as follows:

$1.6 million superannuation transfer to pension phase balance cap

From 1 July 2017 the Government will introduce a cap of $1.6 million on the amount of benefits that can be transferred from an accumulation account into a tax free (pension) retirement account. The cap will work as follows:

• The cap will increase in $100,000 increments in accordance with the consumer price index.
• Earnings derived in the pension account after transfer will not need to be transferred from the fund in the event that retirement account grows to exceed $1.6 million.
• A proportionate method which measures the percentage of the cap previously utilised will determine how much cap space an individual has available at any single point in time. If the individual has previously used up 75 % of their cap they will have access to 25% of the current indexed cap.
• Subsequent movements in retirement accounts due to earnings growth will not be measured against cap space.
• Those individuals already in retirement as at 1 July 2017 with balances of $1.6 Million will need to either:
  1. Transfer the excess amount above $1.6 million back into an accumulation super account where income will be taxed at 15%, or
  2. Withdraw the excess amount from their superannuation fund
• Individuals who breach the $1.6 million cap will be subject to a tax on both the amount in excess of the cap and the earnings on the excess amount similar to the tax treatment that applies to excess non-concessional contributions.

Taxation of concessional superannuation contributions

Currently those who earn over $300,000 (taxable income plus superannuation contribution) are required to pay an additional 15% contribution tax on their concessional super contributions (i.e. total of 30% contribution tax).

From 1 July 2017, this threshold will reduce to $250,000.

Reduction in the Concessional Contribution Cap to $25,000

From 1 July 2017 the Government will also reduce the annual cap on concessional superannuation contributions to $25,000 (currently $30,000 under age 50; $35,000 for ages 50 and over).

Lifetime cap of $500,000 for non-concessional superannuation contributions

From 7:30 pm (AEST) on 3 May 2016, a $500,000 lifetime non-concessional contributions cap (indexed to ordinary times earnings) will apply.

Excess contributions will need to be removed from the fund or will be subject to penalty tax. The amount that could be removed from any accumulation accounts will be limited to the amount of non-concessional contributions made into those accounts since 1 July 2007.

All non-concessional contributions made from 1 July 2007 will be counted towards the lifetime cap. However, contributions made before this measure cannot, by themselves, result in an excess amount.

The lifetime cap will replace the annual caps (and ‘bring forward’ arrangements), which currently apply.

The new cap will allow Australians up to age 74 to make non-concessional contributions.

Transition to Retirement income streams (TRIS)

From 1 July 2017, the tax exemption for earnings on assets supporting ‘transition to retirement’ income streams will be removed.

Low Income Superannuation Tax Offset (LISTO)

From 1 July 2017, a Low Income Superannuation Tax Offset (LISTO) will apply to reduce tax on superannuation contributions for low-income earners.

The LISTO is a non-refundable tax offset to superannuation funds, based on the tax paid on concessional contributions made on behalf of low income earners.

The offset is capped at $500 and will apply to members with adjusted taxable income up to $37,000.

Catch-up concessional superannuation contributions

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

The measure is limited to those whose superannuation balance is less than $500,000.

Unused amounts are carried forward on a rolling basis for five consecutive years.

Only amounts accrued from 1 July 2017 can be carried forward.

Contribution rules for those aged 65 to 74

From 1 July 2017, individuals under the age of 75 will no longer have to satisfy a work test and will be able to receive contributions from their spouse.

Superannuation balances of low-income spouses

From 1 July 2017, the Government will increase access to the low-income spouse tax offset – which provides up to $540 per annum for the contributing spouse – will apply where the low-income spouse’s income is up to $37,000 (increased from the current $10,800).

Anti-detriment payments

These will be abolished from 1 July 2017.

Tax deductions for personal superannuation contributions

From 1 July 2017, all individuals up to age 75 (without the need to satisfy the work test after age 65) will be able to claim an income tax deduction for personal superannuation contributions.

This will apply regardless of employment status (i.e., wholly employed, self-employed or a partially employed/self-employed).

Personal Income Tax

Income tax relief

From 1 July 2016, the government will increase the 32.5% personal income tax threshold from $80,000 to $87,000.

This measure will reduce the marginal rate of tax on incomes between $80,000 and $87,000 from 37% to 32.5%, preventing around 500,000 taxpayers facing the 37% marginal tax rate.

Medicare levy low income thresholds

For 2015/16 will be as follows:

• Individuals $21,335 (previously $20,896)
• Families $36,001 (previously $35,261)
• The family income threshold (i.e., $36,001) will be increased by $3,306 (previously $3,238) for each dependent child or student.
• For single seniors and pensioners with no dependants who are eligible for the seniors and pensioners tax offset, the threshold will be increased to $33,738 (previously $33,044).

Negative Gearing

The Government has announced officially that they will not remove or limit negative gearing because it would increase the tax burden on Australians trying to invest for their future.

Social Security & Family Payments

Work for the Dole

From 1 October 2016, the most job ready job seekers will enter the Work for the Dole phase after 12 months participating in job active, rather than the current six months.

Jobs for Families Package

Child Care Subsidy, Additional Child Care Subsidy and Community Child Care Fund will now apply from 1 July 2018 (rather than the previously announced 1 July 2017).

Child care fee assistance will continue to be provided under the Child Care Benefit, Child Care Rebate, Jobs, Education and Training Child Care Fee Assistance, Community Support Program and Budget Based Funded Program until 30 June 2018.

Removal of Clean Energy Supplement

From 1 July 2017 new applicants of social security and veterans affairs payments will not receive this additional payment.

Insurance plays an important role in any wealth creation and management strategy. There is little point in accumulating wealth if you don’t protect it, or yourself, from unforeseen risks that can undermine the best made plans. Just as your wealth creation strategy needs to be reviewed on a regular basis, so too does your wealth protection plan. Every stage of life brings with it exciting challenges along with different types of risk. Let’s look at the most common scenarios. You may see yourself in some of these stories.

Young singles

As the name suggests, people in this life stage are young, and generally without children and mortgage responsibilities. Whilst young people are usually fit and healthy, their age group is most at risk of accidental injury, whether from road accidents or those associated with sporting activities.

At this stage, a young person’s greatest asset is their ability to earn an income, so this is a good time to learn about income protection (IP) insurance. This will replace up to 75% of income in the event of serious illness or injury. It can provide much-needed financial assistance during recovery.

Young couples

Young couples are often career-focused and working had to secure their financial future. This period often sees a greater income, matched by additional expenditure. Home ownership is often a goal, with many buying their own home, or saving for a deposit, whilst others seek to establish financial security before starting a family.

Young couples will face similar risks as young singles, but are more likely to have higher debt obligations. This is when a combination of Life, Total and Permanent Disability (TPD), Trauma and IP cover should be considered to provide financial support in the event of death, disability, illness, or injury. This insurance will pay lump sums that can be used to replace lost income, extinguish debt, and cover medical expenses.

Young families

Often families in this life stage have one spouse working full-time, whilst the other may work part-time or not at all to focus on parental responsibilities. At this stage, families often have greater debt levels including a mortgage, and are heavily reliant upon the full-time income. Stress tends to be high during this period of life, so what would happen if the breadwinner were to die suddenly, or suffer a debilitating disease that prevented them from working for an extended period of time?

Adequate insurance coverage is essential to be able to replace income, cover medical expenses, extinguish debt, and allow the family to maintain the lifestyle to which it is accustomed. Families with young children may also consider an additional feature of most trauma policies which allows families to include their children. This cover provides a lump sum to help pay for medical expenses and allow parents to have time off work to care for a sick child.

Pre-retirees

Pre-retirees can also be referred to as ‘empty-nesters’, as their children have generally flown the coop by this time. They are also usually debt-free (or close to it) and have the sole objective of preparing for retirement. While they may be well-placed to achieve their objectives, they are also least likely to be able to afford any adverse changes to their plans.

With age comes a greater risk from a range of events and illnesses including heart attack, stroke or cancer. For this reason it is important that appropriate insurance coverage is maintained to help keep retirement plans on track. A combination of Life, TPD, Trauma and IP can provide protection against these unexpected events, and deliver financial security pre- and post-retirement.

Retirees

The key goal of all retirees is to enjoy the fruits of their labour. Whether self-funded or receiving government support payments, the need for insurance has generally diminished as retirees no longer have an income to protect, nor do they usually have a lot of debt. However, not everyone is the same, and insurance reviews at this life stage are just as crucial as any other time.

Many insurance providers also now recognise that a person’s insurance needs can change over time, and have included life stage options as part of their policies. These options provide an opportunity to increase sums insured without additional underwriting, and sometimes with limited evidence. Examples of life stage events which can trigger increases on Life & TPD policies include: marriage, the birth or adoption of a child, and taking out or increasing a mortgage.

Whatever your age or stage in life, insurance delivers valuable peace of mind that you and your family are financially protected from whatever misfortune may come your way. But it’s not a “one size fits all” solution. To ensure your wealth protection is appropriate to your needs, talk to us.

Share Market Update

The final quarter of the 2015 calendar year was positive with the ASX/200 closing at 5,295.90 points on 31^stDecember 2015. The ASX/200 finished the previous quarter (30^th September 2015) at 5,021.60, which equates to an increase of 274.3 points or 5.46%.

Overall the 2015 calendar year was negative falling from 5,411 points on 31^st December 2014 to 5,295.90 at 31^stDecember 2015 – a drop of 115.1 points or negative 2.13%.

Two of the major issues contributing to the volatility within equity markets are summarised below.

China

Fears of an economic slow down of growth in China has weighed heavily on global stock markets and the media seem happy to push this negativity. China is still growing, it has just slowed down a bit. Here’s a summary of the latest economic data out of China:

• Economic growth of 6.8% per annum in quarter four matched forecasts.
• Retail sales rose at a big 11.1% but missed forecasts of 11.3%.
• Industrial production was tipped to grow at 6% but came in at 5.9%.
• Urban investment rose by 10% just shy of the forecast of 10.2%.

China is rebalancing its economy to be less dependent on manufacturing like other first world economies have done. The Chinese economy continues to get bigger and mature and, as a result, economic growth rates are gradually easing toward the growth rates that are more common in major industrial nations.

Economic growth in 2015 was the slowest in 25 years, and next year it will be the slowest in 26 years. In Australia and in the US, ‘good’ economic growth rates are near 3%. In China, economic growth is set to hold near 6.5% to 7% over the coming year. Therefore China will out-perform for some time to come as it transitions to a ‘consumption’ fuelled economy.

Oil

Oil has been undergoing a massive rout since mid-2014, and it just keeps going, with no floor in sight.

US crude oil is currently trading below the $US30-level for the first time in 12 years. To put that in perspective, as recently as the fourth quarter of 2014, Brent was trading at $US100 per barrel.

Since the start of the year, concern about China’s economic performance and future demand for energy appears to have weighed heavily on oil prices. But the far bigger driver of oil prices has been global oversupply. OPEC – the middle eastern cartel of oil producing countries – has faced stiff competition from US oil production, which has nearly doubled from 2008 levels due to improvements in shale “fracking” technology.

Prices began to fall in the second half of 2014, presenting OPEC with a quandary. In a meeting in November 2014, OPEC made the decision that it would try to preserve market share in the face of US competition rather than cut supply to support prices. Consequently prices have fallen sharply. To exacerbate matters, OPEC production quotas, which have been exceeded by its own members for years, have now been abandoned. And if that wasn’t enough, OPEC member Iran – which had been banned from selling oil due to US sanctions over its nuclear program – is about to re-enter the market with its own supply.

On the positive side, for a net importer of oil such as Australia the drop is considered good for the economy.While the lower oil prices affect earnings – and jobs – in the energy sector, they are also supposed to boost consumption, as they typically translate into lower fuel prices, leaving households with more money to spend. On balance, weaker oil prices “have a positive effect on overall growth of the Australian economy”, the RBA said last year.

However it isn’t all doom and gloom. If we look at the ASX Accumulation Index which also takes into account dividends, the 2015 calendar year was positive, and has in-fact been positive over the last 10 years on average as detailed below:

As demonstrated in the above table, stocks have paid on average 8% per annum over the last 10 year period, with about 2-3 bad years therein when the returns were negative. However, the other 7-8 positive years more than make up for the bad. The period above also takes into account the GFC, where there were serious problems compared to now. 2007 and 2008 brought negative returns but 2009 gave us a rebound in excess of 30%.

The key message here is to invest in good quality stocks with a reliable dividend and to hold your portfolio during times of volatility. We do see a lot of positive signs within our economy; however we expect volatility to continue. UBS has a 2016 year-end target of 5,500 which is a growth return of over 10%.

Economic Update

The media does a fantastic job at doom and gloom. However, when you really look at the key indicators of the Australian economy, it isn’t all that bad. In fact, it’s good. Here’s why.

Unemployment fell from 6.2% (September 2015) to 5.8% (November & December 2015).

December’s 5.8% is the lowest unemployment figure since May 2015 and saw the economy add 71,400 jobs – the largest gain since July 2000. If we see the unemployment rate fall further, or remain at 5.8% for the next few months, a new trend will emerge – one that paints a very different picture of our economy.

Business finance approvals are the best since 2009.

Businesses are borrowing money and investing in their businesses, taking advantage of the low interest rates.

Motor vehicle sales are the best ever.

The record 1,155,408 vehicles sold last year obviously mean the Australian economy wasn’t doing nearly as badly as we sometimes like to tell ourselves. Car yards don’t do increased business in hard times.

Interest rates are at historic lows with no increase in sight.

The Reserve Bank of Australia (RBA) has again kept the cash rate steady at 2% for the final quarter of 2015. It is expected to remain on hold for at least the next 12 months.

RBA Governor Glenn Stevens reiterated that the decision to keep the cash rate on hold was due to further softening of commodity prices, volatility in global markets and falling terms of trade domestically.

Oil prices are at record lows.

These low prices will act as a huge stimulus to the Australian and global economy. Look no further than Qantas’ reported bumper profits!

Residential dwellings.

After an unexpected hiccup in the June quarter, new dwellings building rebounded in the September quarter growing by 2.1%. Residential building has been growing strongly over the last three years and has been a key driver of GDP growth. We believe we have another year of increase in new dwellings being built before the cycle runs out of puff.

Prices peaked around September 2015 but are still high. As more supply hits the market, prices will naturally taper.

Importantly, we don’t see a huge crash in residential property prices as some doomsayers predict.

Economic growth – it’s not huge but it’s still growth.

National Income (or nominal GDP, current prices) improved markedly in the September quarter, increasing 0.8%, to be up 2.2% through the year. The improved quarterly result follows the dismal 0.2% rise in the June quarter and 0.6% in each of the previous two quarters.

Nevertheless, nominal GDP growth is still tracking below real GDP growth due to weak price growth in the economy and particularly as a result of the steep falls in terms of trade. GDP is forecast to be around 2.7% throughout 2016.

Export Growth is healthy.

With a falling Australian dollar and free trade agreements with South Korea and China all locked up, and India to come shortly, export growth will become a key driver of the economy going forward.

Increased access to these massive markets will be historic in our economic development in the years ahead.

The Australian dollar.

Early this month the Australian dollar took a tumble down to its lowest point in three months. Concerns about the Chinese economy were the main driver for this devaluation as commodity prices once again fell and investors flocked to buy the currency cheaply. The dollar is trading at just under US$0.70 at present.

A lower dollar will improve the competitiveness of trade exposed industries. Tourism and education services are already benefiting. This will boost profitability and will create capacity constraints which, in turn, will encourage these sectors to refurbish and then expand their facilities.

In a nutshell.

The lower Australian dollar and the unemployment rate hold the keys to the shape of the recovery.

We have only just begun the transition from mining investment-led economy to non-mining drivers. Further, non-mining business investment will gradually build momentum. There is no magic wand that an incumbent Prime Minister can wave. The recent improvement in confidence (unfortunately just a honeymoon effect for a new PM) won’t stimulate investment until capacity tightens and profitability improves.

Property Market Update

Source RP Data

Capital gains stalled in the final month of the year with Sydney recording a second month of lower home values. After showing strong conditions through to September, the final quarter of 2015 ends with capital city dwelling values declining by 1.4%.

According to the CoreLogic RP Data Home Value Index, dwelling values were absolutely flat across the combined capitals during December, with negative movements in Sydney, Adelaide and Canberra being offset by a rise in dwelling values across the remaining five capital cities. The Sydney housing market was the main drag on the December results, with dwelling values down 1.2%, while values were down 1.5% in Adelaide and 1.1% in Canberra. The remaining capitals saw a rise in dwelling values, led by a 2.3% bounce in Perth values and a 1.0% rise in Melbourne values over the month.

After dwelling values had been broadly rising since June 2012, the December quarter results revealed a 1.4% fall in dwelling values across the combined capitals, the largest quarter on quarter fall since December 2011. Six of the eight capital cities recorded a negative result over the December quarter, with weaker conditions in Sydney and Melbourne acting as the greatest drag on capital city performance, according to CoreLogic RP Data.

The largest quarterly fall was recorded in Sydney, where dwelling values were down 2.3% over the final three months of the year, followed by Melbourne, where dwelling values were 1.9% lower. The only capital cities to show a rise in dwelling values over the December quarter were Brisbane (+1.3%) and Adelaide (+0.6%).

This was in contrast to the first three quarters of 2015, where capital city dwelling values rose by 9.3%, largely driven by a 14.1% surge in Sydney values and a 13.3% increase in Melbourne. In stark contrast, the final quarter of 2015 showed Sydney as the weakest performer of any capital city, with dwelling values down by -2.3% while Melbourne recorded the second weakest result of -1.9%.

The complete 2015 calendar year results reveal a 7.8% increase in capital city dwelling values which is the lowest rate of capital gain over a calendar year since 2012 when values slipped 0.4% lower over the full year. Highlighting the diversity in the capital city housing markets, dwelling values fell across four of the eight capitals in the 2015 calendar year. The largest of these falls were recorded in Perth, down by 3.7% and Darwin down by 3.6%. Hobart and Adelaide also showed subtle falls of 0.7% and 0.1%.

Despite the recent weakening of housing market conditions in Sydney and Melbourne, the two largest capital city housing markets still recorded much stronger annual gains than all other capital cities, 11.5% in Sydney and 11.2% in Melbourne. Dwelling values in Brisbane and Canberra were up a more sustainable 4.1% over the year.

The wealth created from housing in Sydney and Melbourne has been exceptional over the past twelve months. In dollar terms, Sydney home owners have seen approximately $82,000 added to their wealth thanks to the strong capital gains over the year while home owners in Melbourne have seen the value of their dwelling grow by approximately $60,400. Brisbane home owners are $18,560 better off while Canberra owners have seen the value of their homes increase by approximately $21,900.

Home owners in the remaining capital cities have seen some erosion of their wealth via falls in the value of their dwelling. The largest losses have occurred in Perth where the average dwelling is now worth approximately $19,970 less than it was 12 months ago, while Darwin home owners have seen the value of their home shrink by a similar $18,150. The annual decline has been milder in Adelaide and Hobart, however dwelling values are still $515 lower in Adelaide over the year and down $2,430 in Hobart.

The slowdown in housing market conditions across Sydney and Melbourne in the last half of 2015 is being driven by a range of factors that can best be described as both organic and externally influenced. Organic market conditions have been derived from affordability pressures, rental yield compression and cyclical factors, while factors from external influences largely stem from a change in the regulatory framework introduced by APRA which has made it more expensive and difficult for investors to access housing finance. Added to this are higher mortgage rates and more restrictive credit policies and loan servicing requirements.

Index results as at December 31, 2015

If your business is in the hospital/non-profit sector and uses salary packaging for team members, is a small business, or provides team members with a gym or space to do yoga, then there are a few things you need to know beyond the basic Fringe Benefits Tax (FBT) changes when the new FBT year starts on 1 April 2016.

1. Your business will pay more FBT

The FBT rate is currently 49%. The rate increased from 47% on 1 April 2015 in conjunction with the introduction of the 2% debt tax on high income earners (Temporary Budget Repair Levy). The FBT year that just ended is the first year at the higher tax rate which means if your business has an FBT liability, it will pay more tax.

The FBT rate will stay at 49% until 31 March 2017 when the impact of the debt tax is scheduled to be removed.

2. Meal entertainment crackdown – medical professionals beware

If your business is an FBT exempt entity (public and not-for-profit hospitals, public benevolent institutions, health promotion charities, public ambulance service) or qualifies for the FBT rebate then there are significant changes that come into play on 1 April you need to be across.

In the past, employees of FBT exempt and rebatable entities have been able to salary sacrifice an unlimited amount of meal entertainment expenses (eg, restaurant meals) with no impact on their existing annual caps. But, this will all change on 1 April 2016. From this date, a separate single grossed-up cap of $5,000 for salary sacrificed meal entertainment benefits for employees of exempt and rebatable employers will apply.

To give you some idea of the impact let’s look at the example of a doctor employed by a public hospital who salary sacrifices $32,000 of meal entertainment benefits. If the doctor salary sacrificed these benefits in the 2015-16 FBT year, the full $32,000 would be exempt from FBT and he has nothing to report in his tax return. If the doctor salary sacrifices these benefits in the 2016-17 FBT year, then only the first $5,000 will not count towards his annual exemption cap. However, the balance will be taken into account in determining whether he exceeds his annual exemption cap for the year. If this excess amount causes him to exceed his annual exemption cap then an FBT liability will arise. In addition, the entire amount (including the first $5,000) will also be included in his reportable fringe benefits amount for the year which could impact his ability to satisfy other income based tests within the tax system, as well as eligibility for certain benefits (e.g., family assistance benefits) and certain liabilities (e.g., child support payments).

As an employer, it will be essential to review the existing salary packages of team members affected by the changes as someone will be paying the extra FBT that arises as a result of the new cap being introduced. If your agreements don’t enable your business to recover the additional FBT liability from the employee then your business will be stuck with the additional cost.

3. Salary sacrificing may not be worth it

By now you should have reviewed any salary sacrifice agreements to ensure that they are still viable at the higher 49% FBT rate. In some cases, salary sacrifice agreements may no longer achieve the intended goals and simply create an administrative burden for little to no benefit.

For high income earners (above $180k) however, the difference in timing between the FBT year and the income year means that there will be a planning opportunity between 1 April 2017 when the FBT rate reduces back to 47% and 30 June 2017 when the 2% debt tax is removed.

With any salary sacrifice agreement just be aware that certain rules must be followed for the agreement to be effective. This means that the employee should agree in writing to forgo an amount of salary and wages before that entitlement has been earned. If it’s after, it’s not valid and the employee will simply be taxed on that amount. The business would also be liable for obligations such as PAYG withholding and superannuation guarantee amounts.

Be aware that the ATO is likely to pay close attention to the validity of salary sacrifice agreements over the next few years where the arrangements are being used to reduce the taxable income of high income earners below $180,000.

4. Two laptops are better than one for small business

If your business is a small business (turnover under $2m), from 1 April 2016 the FBT exemption on portable electronic devices will be extended. From this date, your business can offer employees more than one work-related portable electronic device, such as a mobile phone, laptop and tablet and not have to pay FBT on it even if the device is the same or similar to other devices already provided in that same FBT year. All other businesses are limited to one device that is identical or similar to another.

5. Yoga or gym classes at the office?

Wondering what to do with that extra office space? Put in gym facilities for the team? Use a room for a yoga class or personal trainer perhaps? A recent ATO decision confirmed that the FBT implications of these two options are quite different. The reason is the definition of a “recreational facility.” A recreational facility is exactly that, a facility for recreation. Recreational facilities can be exempt from FBT if certain conditions can be met. However, a fitness class or a personal trainer is not a recreational facility and therefore, FBT would generally apply.

Where the ATO is taking an active interest

Travelling or living away from home ‑ what’s the difference?

An issue that often comes up is determining whether someone is living away from home, relocating or just travelling. The ATO is looking closely at Australian taxpayers claiming living away from home (LAFH) allowances to make sure they are not incorrectly accessing the FBT concessions. If somebody is living in Sydney but travelling to Melbourne on an ad hoc basis every other week for work, they are probably just travelling. They may be entitled to travel deductions but are not entitled to the FBT concessions that can apply to LAFHAs. If the person sets up a home temporarily in Melbourne, keeps their home in Sydney for their use (can’t be rented out), then it’s more likely they can access the living away from home allowance concessions. You need to double check to get the distinctions right.

There are also special rules where transport is provided by employers to fly-in-fly out workers to ensure the travel is exempt from FBT.

Motor vehicles

Where a motor vehicle owned or leased by the business is used by an employee for private purposes (including travelling between home and the workplace), then FBT is an issue that needs to be managed. The ATO is conducting a data matching program that is aimed at motor vehicles to try and capture benefits that are not currently being reported through the FBT system.

Interaction between FBT, income tax and GST

If your business pays FBT on a benefit relating to entertainment then it can generally claim a deduction for the costs associated with providing the entertainment as well as the GST credits. However, if FBT does not apply to the benefit then no deduction or GST credits can generally be claimed.

 Entertainment can be almost anything from food, drink, recreation such as movie tickets, to non‑work based travel. If your business provides any entertainment benefits to employees, such as an employee attending a business lunch, then FBT might apply.

Structuring employee salaries through a unit trust

The ATO has warned employers against complex structuring arrangements designed to channel benefits to employees using an employee remuneration trust. The most recent ATO alert looks at arrangements where the employer repays an employee’s loan through a trust. Under these arrangements, employees acquire units in a unit trust funded by a loan from the trustee. The loan is repaid by the employer using amounts salary sacrificed by employees. The result is that the taxable value of the benefit provided to the employee skirts the FBT system – a big no, no from the ATO’s point of view.

How do I know if I need to pay FBT?

If you are not sure whether your business is providing fringe benefits to its employees, here are some key questions you should ask yourself:

• Does your business make vehicles owned or leased by the business available to employees for private use?
• Does your business provide loans at reduced interest rates to employees?
• Has your business forgiven or released any debts owed by employees?
• Has your business paid for, or reimbursed, any private expenses incurred by employees?
• Does your business provide a house or unit of accommodation to employees?
• Does your business provide employees with living-away-from-home allowances?
• Does your business provide entertainment by way of food, drink or recreation to employees?
• Do any employees have a salary package (salary sacrifice) arrangement in place?
• Has your business provided employees with goods at a lower price than they are normally sold to the public?

What is exempt from FBT?

Certain benefits are excluded from the scope of the FBT rules. The following work related items are exempt from FBT if they are provided primarily for use in the employee’s employment:

• Portable electronic devices (e.g. laptop, tablet, mobile, PDA, electronic diary, notebook computer, GPS navigation device) that are provided primarily for use in the employee’s employment (limited to the purchase or reimbursement of one identical or similar portable electronic device for each employee per FBT year. Small business employers will be able to provide more than one identical or similar device to employees from 1 April 2016;
• An item of computer software;
• Protective clothing required for the employee’s job;
• A briefcase;
• A calculator;
• A tool of trade.

Share Market Review

Global equity markets have been on the decline since April 2015. The key factors driving negativity have been; falling oil and commodity prices, changes to liquidity requirements within the banking sector, fears of slower growth in China, unrest in the Middle East and the timing of interest rate rises within the US. All of these factors have had their own negative impact and then combined together has seen the market drop over 16% over the last twelve months. While we expect volatility to continue we believe that that the market presents some good buying opportunities for long term investors.

The first quarter of the 2016 calendar year was negative with the ASX/200 closing at 5,082.80 points on 31^st March 2016. This equates to a decrease of 213.1 points or 4.02% for the quarter.

Banking Sector Update

The Australian Banking sector has been copping a lot of negativity in the press over the last couple of weeks which has had an impact on share prices as well as the overall performance of the Stock Market. The banks and other financial companies make up about 40% of our stock market index. Hence, when they perform poorly so does our index.

Some of the key issues for the banking sector are summarised below:

• David Murray’s inquiry said the Banks were too exposed to home loans and needed to get more capital in, which they did through capital raisings.
• Overseas economists have reported that Australia has too much housing debt and that a bust is coming.
• International hedge funds have been shorting our banks on the back of some of these reports, including one who recently tried to create a ‘Big Short’ story for our housing market, which suggested that dodgy home loans would cripple our banks. However, a recent Bloomberg column showed that even our riskiest low doc loans have arrears under 5% and these make up only 1.2% of Australia’s total residential home loan mortgage book!
• In the US, they don’t understand that we pay back our home loans. Over there, they can drop off their keys to their mortgaged home at the bank and drive away with no personal guarantees involved. Therefore a very different home loan climate to ours.
• The weakness of the mining sector has led to ‘experts’ reporting that our banks are over-exposed to miners to whom they’ve lent money but the average exposure is under 2%!

On the positive front our big four banks were in the top 10 safest banks in the world during the GFC and they have been great dividend deliverers. Don’t believe everything you read or hear in the media.

Below is a chart detailing CBA’s dividend. This illustrates that the dividend has grown from just under 50 cents in 1996 to over $4 now while interest rates have steadily declined over the same period. Also note CBA’s share price has gone from $9.35 to over $73 today but has been as high as $95.27 over the past 12 months.

Note that for 2016 only one dividend has been paid to date with another dividend due to be paid in October 2016.

The Bloomberg graph below illustrates the dividend yield (dividend per share price) on a rising share price has faired much better than Australian Government Bonds.

Source: Bloomberg

Economic Update

The Reserve Bank of Australia (RBA) kept rates on hold for the 11^th consecutive month since May 2015. At its most recent meeting Governor Glenn Stevens announced that “the global economy is continuing to grow, though at a slightly lower pace than expected”. This has become a bit of a mantra for the RBA and all forecasts show that this slow but persistent growth will continue.

In recent times commodity prices have increased a little, however not nearly enough to offset the losses we have seen over the past couple of years. The RBA believes that our economy is continuing to rebalance following the mining investment boom. Governor Stevens noted that there have been consistent developments in the labour market, GDP growth has gained momentum, inflation is close to target and the pace of lending to businesses has also picked up. These indicators are all very positive for our economic outlook.

The RBA has again indicated that it will continue to exercise accommodative monetary policy to complement the adjustment in the economy and smooth fluctuations. The field is divided on whether there will be further cuts or a continued prolonged period of rates on hold. We tend to believe that rates will remain steady for some time to come.

Our terms of trade remain to be quite a lot lower than in previous years. The December quarter saw a decade low, down more than 50% from the peak in 2011, and 30% below the long term average. This is a result of low commodity prices and decreased demand for key resource exports. Another factor is the rise in import prices and reducing Australian household disposable incomes.

Real net disposable income – a key measure of living standards – has fallen for 6 consecutive quarters and has put pressure on household budgets and consumer spending. Consumer confidence fell 2.2% in March after surging 4.2% in February. The index is 0.4% lower than this time last year and below the long term average. This is largely attributable to the continuing uncertainty of employment conditions as the non-mining sector continues to find its feet.

A recent highlight is the boost in business confidence. This indicator has doubled since February and its current level of 6 is the highest reading since September 2015. Economists believe that this lift is a result of lower risks of contagion from global uncertainty and some degree of assurance that gains in conditions will be sustainable. The average for business confidence from 1997 to 2016 was 5.75%.

Another positive indicator for our economy was the fall in the unemployment rate from 6% to 5.8% in February 2016. As mentioned in our last update, this is an important indicator for stability and economic growth. Keeping the rate at or below 5.8% will see strong positive change in the economy and we are on the right track to achieve this. Wage growth is still sluggish however, with wages increasing only 0.5% last quarter compared with 0.6% the previous one.

GDP was higher than expected in the December quarter, expanding 0.6%. This result was a pleasant surprise for economists and the RBA and a considerably positive outcome following the biggest slump in the mining sector of our lifetimes. The financial and insurance sectors, construction, public administration, safety, health care and social assistance were all big growth sectors, with a residential building boom and the aging population stoking demand.

Treasurer Scott Morrison said the GDP data explains a string of strong employment figures late last year and highlights the successful transition from the mining boom to broader growth. “We are growing faster than every economy in the G-7, we are growing faster than the United States and United Kingdom, and more than twice the pace of comparable resource-based economies like Canada,” he said.

The weak commodity prices and persistent volatility in the Australian share market has Australian’s feeling that the economy is weaker than the headline GDP figures and key indicators imply. The quarterly declines in per capita income are nowhere near as large as those recorded during the 1990s recession or global financial crisis, but have been much more sustained – a slow grind down, rather than a sharp drop. Nonetheless we will undoubtedly need to continue to ride this economic adjustment for some time yet.

Property Market Update

Source CoreLogic RP Data

Weekly rents increased by a mere 0.2% at a combined capital city level in March. Despite the monthly increase in rents, rental rates across the combined capital cities are -0.2% lower over the past year.

Over the year, Melbourne recorded the biggest increase in rental rates at 2.0% followed by Sydney at 1.4%, Canberra 1.2% and Hobart 0.3%. On the flipside, the cities to see a drop in rents included Darwin -11.5%, Perth -8.4%, Adelaide -1.0%, and Brisbane with a -0.7% drop.

In its March Rental Review, CoreLogic RP Data confirmed that the combined capital city house rents were recorded at $489 per week in March 2016 while unit rents were $469 per week. Over the past month, house rents have increased by 0.1% and unit rents by 0.4% over the past three months, house rents rose 0.5% compared to a 0.9% rise in unit rents.

The March results show that recent rental increases are likely to be seasonal which is further highlighted by the fact rents are lower over the year. Over the past 12 months, house rents were -0.5% lower and unit rents increased by 1.5%. It is important to note that a much higher proportion of total unit stock is rented compared to housing stock.

The annual change in capital city rents has been tracked by RP Data since 1996 and this is the first time they have seen rental rates falling. The extra accommodation supply, as a result of the current building boom, along with the recent record high levels of investment purchasing is adding substantial new dwelling supply to the rental market at a time when the rate of population growth is slowing from quarter to quarter. Furthermore, wages are increasing at their slowest annual pace.

These results also highlight a swift easing in rental market conditions over the past year. The ease has been attributed to a variety of influences such as falling real wages, excess rental supply in certain areas and lower rates of population growth which have impacted on demand for rental accommodation.

With new dwelling approvals recently at record highs, construction activity set to peak over the next 24 months and many new properties still to settle, the rental demand weakness is expected to persist. In all probability, there won’t be much scope for landlords to lift rental rates given current conditions.

While rental rates remain at record highs in Sydney and Melbourne, rents are lower than their previous peaks in all remaining capital cities. Declines from their peaks are recorded at: -0.9% in Brisbane, -1.2% in Adelaide, -12.8% in Perth, -0.1% in Hobart, -15.6% in Darwin and -7.4% in Canberra.

Falling in love is a magical and wondrous experience, but once the heart flutters have settled a little and two people move towards a more serious relationship, various challenges may need to be addressed. Many of these challenges can be easily resolved when we’re young and carefree, but what happens when Cupid appears – or reappears – later in life?

Unlike earlier relationships, when love blossoms late in life careers have slowed down or ceased, the children have left home, and health and fitness may not be what it had been, meaning that a ‘lifetime’ of togetherness may not be as long as first anticipated.

From a less romantic perspective, the financial implications of beginning a relationship at this time of life are serious and need to be considered carefully. In many circumstances, the couple’s children are adults whose voices want to be heard, particularly in relation to matters of the Will. Parents who re-partner without considering the broader families and important people who took part in their life journey are at risk of unknowingly creating negative repercussions. For example, ‘new’ partners who pass on their estates only to each other, leaving at least one of the couples’ children with nothing while the other partner’s children inherit all, can cause long-term hurt and pain. In many cases, this act may not be intentional.

Another financial aspect unique to this stage of life emerges when there is a high level of financial disparity between the two partners. While one partner has accumulated a lot of wealth, the other may have not. Questions are then raised in regard to how finances are distributed between the couple while they are alive and after one or both die.

Other implications can relate to health issues. They include questions such as, who would be the primary carer for a sick partner? The sick partner’s children or the new spouse? What are the role divisions between the children, other family members and the spouse?

Take advice and make a plan

Whilst every situation will be different, here are some guidelines for addressing the unique features of financial planning in later life. In particular, emphasis is given to the inter-generational and multi-stakeholder aspects of this relationship.

1: Involve everyone long before the will is read

For many years it was customary to not involve children and other relevant stakeholders in formulating a Will. History books are filled with disputes and hurt feelings over Wills that were read leaving the beneficiaries astonished and devastated over the deceased’s final decisions. Don’t wait until it is too late. Financial matters that can have serious impacts on the future lives of your loved ones need to be discussed well in advance with all relevant stakeholders. Preferably before your Will is signed and sealed.

2: Plan for the present with a view to the future

New relationships require new financial arrangements. For example, if buying a property together, what are the consequences of sharing a dwelling?

Below are some examples:

a) When purchasing property consider the estate planning implications

When couples decide to purchase a property jointly it has immediate consequences for the beneficiaries of the couple following the death of a partner. Joint assets will pass automatically to the surviving spouse, which can then see the deceased partner’s children left out of the picture. This issue can be addressed by registering the property owners as “tenants-in-common”, ensuring that the deceased’s beneficiaries will inherit their appropriate share of the property. Couples may give themselves a “life interest” in the property to allow each to remain living there after their partner’s death. The implication of this for the beneficiaries is that they will only be allowed to receive their inheritance after both partners have died.

b) Potential age pension changes

An age pension payment will change as a consequence of living together. This can occur when one partner is still working and the other is retired and receiving the pension; or both partners have previously been eligible for a single pension. The difference between the age pensions for a single person is $873.90 per fortnight compared to $1,317.40 as a combined couple – $443.50 less per fortnight.

Case study: Moving In Together

Brian and Elizabeth recently moved in together. Brian is semi-retired and received a part-age pension from Centrelink. Elizabeth is still working full-time and earning a salary. When Brian informed Centrelink of his new living arrangement he had to provide detailed information about Elizabeth’s financial circumstances. Based on their combined assets and income, Centrelink assessed that Brian was no longer eligible for any pension, and his payments stopped. As the Centrelink assessment was completed weeks after he had moved in with Elizabeth, Brian had to repay Centrelink the overpaid pension amount.

c) Superannuation beneficiaries need to be reviewed

If new partners are members of a superannuation fund they need to review their instructions regarding which beneficiaries receive a death benefit. For example, if a couple has specified a “non-binding” nomination for their beneficiaries, this will likely be invalid now that they have partnered. This is a complex area of estate planning that requires personalised advice.

3: Design financial agreements suited to the partners’ financial circumstances

A happy relationship is a transparent one, particularly when it comes to money. A good start is to draw up a personal “balance sheet” listing the values of all assets each person owns (eg. property, superannuation, car, bank accounts, etc). All debts and liabilities, such as an outstanding mortgage, personal loans and credit card balances, should also be included.

After both partners are aware of the other’s current financial situation, and if appropriate, a “Binding Financial Agreement” could be considered. This is a legal document that sets out how their property and assets would be divided were they to separate. This is particularly appropriate when there is a high level of financial disparity between partners.

4: Plan health care prudently

Growing old together involves increasing health costs and risks of illness. It is recommended that the partners review their health insurances and redesign them to fit the new life arrangements. Redesigning may also reduce premium costs.

Health care plans need to involve relevant family members who may wish to take part in managing care at times of need. Planning in advance could reduce future friction between the cared one’s family and the new spouse regarding treatment strategies and expenses.

Planning and preparing financially should by no means lessen the excitement of a new love experience, but when addressed properly will allow the newly formed relationship to be a source of growth for the couple and their loved ones, in the present, and into the future.

It is recommended to discuss these matters with an estate planning lawyer and your financial planner sooner rather than later.

Share Market Review

The market shook off the post Brexit shock to finish the September quarter at 5,435.90, up 202.50 points on the 30 June 2016 close of 5,233.40. This represents a gain of 3.87% for the September quarter.

Following this strong recovery in the September quarter the ASX200 is now up 2.64% or 140 points for the 2016 calendar year.

Companies with a 30 June financial year reported during this latest quarter and results were mixed.

The ‘very large cap’ universe – the top 20 or so stocks – are still struggling for earnings growth and on average produced somewhat disappointing results this reporting season. The top 20 stocks delivered earnings per share (EPS) contraction of almost 13%. If you take the top 20 out of the equation, EPS growth came in at a positive 6.7%

The best results were typically in the mid cap area (ASX 25-100), while small cap (ASX 101 -200) results were better than the very large caps, albeit quite mixed.

Looking to the sectors of the Australian market, there was generally stronger performance from the cyclicals, led by Materials (+13.9%), Information Technology (+10.2%), Consumer Discretionary (+8.7%) and Financials ex-REITs (+5.2%). Consumer Staples (+12.4%) also performed well. The worst performing sectors were Telecommunications (-6.4%), Utilities (-2.3%) and REITs (-1.9%).

In resources, cost improvements were a big theme, although top line profits were hit by impairments and high depreciation charges from the boom years. Cash flows are much better and the top end miners (South 32, BHP Billiton and Rio Tinto) are repairing balance sheets and even talking about spending cash again. Results within this sector were positively received by the market, which has seen stock prices turn around as a result.

Growth stocks have outperformed over the past year with the ‘rush to yield’ trend reversing. With interest rates falling investors have been happy to pay for stocks with good and growing cash flow.

The timing of US Interest rate increases are continuing to have an effect on the market with a December rate rise still looking uncertain.

The US market has run significantly and is trading above pre-Global Financial Crisis (GFC) levels while our market is still 20.79% below the market high from 1st November 2007 of 6,873.20, which is now over eight years ago.

Economic Update

June saw Australia achieve 100 quarters of GDP growth. This is worth a “Happy 25th birthday without a recession” mention we think. The only country to have exceeded the unbroken growth record is The Netherlands, which achieved a 26-year run before the global financial crisis.

After allowing for inflation, living standards have risen by 66% since Australia’s last recession ended in June 1991.

Our national economy grew 3.3% on the year to June, which was in line with economists’ forecasts and put GDP slightly above average levels. Economic growth is overwhelmingly focused in NSW and Victoria, both of which are enjoying a lift in demand in excess of 3%, and the ACT, with 6% growth. Growth was below 2% in the other states. Western Australia’s domestic demand fell 2.5%, spurring some analysts to believe that the state was in recession.

Overall, analysts remain cautious on the outlook for our economy in spite of the optimistic result. Due to the ‘NSW boom versus the WA bust’ the watch-this-space approach is continued as we transition out of the mining boom.

National unemployment is currently 5.6% – unexpectedly down from the previous month. This is the lowest national unemployment has been since 2013. Western Australia and South Australia jobless rates are 6.3% and 6.4% respectively however, again feeling the effects of the bust. For the last decade the east coast of Australia was green with envy of our westernmost state’s success but that has now very much come to an end.

The Reserve Bank of Australia (RBA) lowered the cash rate to 1.50% in August 2016. Concerns over China’s moderating growth and the subsequent impact on our economy, low inflation, low terms of trade, as well as still soft commodity prices were the primary drivers here. Governor Glenn Stevens reported “Recent data confirm that inflation remains quite low. Given very subdued growth in labour costs and very low cost pressures elsewhere in the world, this is expected to remain the case for some time.”

Governor Stevens also stated “Low interest rates have been supporting domestic demand and the lower exchange rate since 2013 is helping the traded sector. Financial institutions are in a position to lend for worthwhile purposes. These factors are all assisting the economy to make the necessary economic adjustments, though an appreciating exchange rate could complicate this.”

Going forward, economists are split on further rate cuts this year. Our view is that the cash rate will likely hold stable throughout the remainder of 2016. We also expect the low inflation, slow growth state of play to continue for the months to come.

Property Market Update

An oversupply of new homes (particularly units), weaker investor demand and lower population growth will see prices decline in most capital cities over the next three years. The declines are not expected to be dramatic however the forces that pushed prices up now appear to be plateauing.

This expected decline follows four years of consecutive positive growth.

All states except New South Wales are expected to move into oversupply or face growing oversupply. In Sydney supply will not catch up to demand for another couple of years due to a chronic undersupply.

BIS Shrapnel anticipates a record 220,000 new dwellings started construction in 2015-16, translating to a peak in new completions this financial year. A record 49% are expected to be multi-unit dwellings, with many larger apartment projects – with longer construction time frames – set to lead to a high volume of completions in 2017-18.

Investor demand was a key driver of demand in the Sydney and Melbourne markets, but moves by the Australian Prudential Regulatory Authority to curb lending has slowed investor activity.

Nearly all capital cities are building apartments at record rates on the back of the recent strength in investor demand. As these projects are progressively completed, it is likely that there will not be enough tenants in a number of cities to support rents and consequently values upon completion.

The high level of apartment development going on in places like Brisbane, for example, is something to watch out for, as it means you can expect a flood of new developments coming to market at similar times.

The other ugly part of the market to watch is the inner city apartment market in Melbourne. There is a lot of nervousness at the moment with a number of off-the-plan blocks coming up for settlement.

A lot of those foreign and local investors are finding it difficult to get finance and some valuations are coming in below cost. If one of these blocks has trouble completing a reasonable settlement level, then the ripple effect on the market’s confidence could be severe.

With expectations of capital gains reduced, investor demand is expected to weaken further and create more downward pressure on prices. After accounting for inflation, median house and unit prices in all capital city markets are forecast to be lower in real terms by 2019.

Demand is still expected to grow, but at a lessor rate than what it has been over the past two years. Supply is expected to outnumber demand hence the potential for lower prices. Other than slower population growth and lower yield, there is also a possibility that foreign demand – particularly from China – could be constrained.

As always, the key with property is to take a long-term approach, borrow within your means and do your research carefully before committing to buy.

Source RP Data & BIS Shrapnel

Share Market Review

The final quarter for the Australian share market for the 2015/2016 financial year was negative with the ASX200 closing at 5,233.40 points on 30 June 2016. The ASX200 finished the previous financial year (30 June 2015) at 5,459, which equates to a drop of 225.6 points or 4.13% over the twelve month period. This is the first negative return from the ASX200 in 4 years.

The market has been a mixed bag with Energy (-24.9%) and Banks (-15.7%) the worst performers and Autos (+28.5%) & Pharmaceuticals (+27.9%) the best performers.

Overall, it has been another challenging year, but one that should provide satisfaction for Australian policymakers. Economic growth has lifted, not slowed. That is despite the transition from the once-in-a-century mining construction boom to mining production and housing-driven growth. The inflation rate has eased, in line with global experience.

Cash rates were cut to record lows in May. Iron ore and oil prices fell, but then rebounded. The US lifted interest rates for the first time in nine years. And the financial year ended with considerable volatility following the UK vote to leave the European Union.

Whilst uncertainty has dominated the market over the last 12 months there are a lot of positive signs including:

• Record low interest rates.
• Falling unemployment now at a three-year low of 5.7%, while the EU is at 8.7%.
• 225,000 jobs have been created in the past year.
• The value of our homes has risen for three years.
• Building approvals in the pipeline are at record highs.
• Consumer confidence hit a two and a half year high in June.
• Business conditions were at a reading of 10, when the long-term average has been 6.
• We’re growing at 3.1% while the US is at 1.1%, the British at 1.6% and Europe at 2.4%.
• Our Government debt to GDP is about the lowest in the Western world (although climbing at a rate mush faster than most).

The market has rebounded positively since the initial panic reaction seen in the days after the Brexit vote. The US market has hit record highs while in Australia the ASX200 is up 4.16% since 1 July 2016 but is still 20.69% below the market high from 1st November 2007 of 6,873.20, which is now over eight years ago.

Economic Update

Happy New Financial Year!

The New Year was born with volatility, uncertainty and confusion, which is not the best start and was evident in the financial markets around the globe. Britain’s historic vote to leave the European Union (affectionately known as ‘BREXIT’) has taken centre stage, as well as our most recent federal election. No one can blame you for that feeling of despondency you may be carrying around. Nonetheless, with all new beginnings come fresh opportunities and the potential for positive change.

The Reserve Bank of Australia (RBA) lowered the cash rate to 1.75% in May 2016, where it has remained since. We are still at historic lows especially when compared to eight years ago where the cash rate was 7.25%. In his announcement this month Governor Glenn Stevens again echoed his previous statements about the economy continuing to grow, albeit slower than expected, sluggish commodity prices, low inflation and low terms of trade. The RBA has however left the door open to further rate cuts this year, potentially as soon as next month, and advised everyone ‘to watch this space’.

GDP grew by 1.1% in the March quarter, taking growth through the year to 3.1%. Employment has strengthened ahead of output. But that now suggests a slowing of employment growth until the economy picks up momentum.

Housing investment recorded strong growth over the past three years. However, the emerging (or now apparent) oversupply in most states and a crackdown in lending to investors will see a small decline eventuate over 2016/17, with larger declines expected in the following two years.

Household consumption spending grew by 2.9% last year and is expected to record similar growth over 2016/17, although slower growth in real household disposable income means households are saving less in order to maintain moderate spending increases.

For non-mining business demand is sluggish, profits are weak and investment subdued. Firms are reluctant to invest until they see certainty in demand. Recovery in business investment will require real investment in plant and equipment as well as investment in soft assets including research and development and in computer software.

The story for our economy going into our first quarter of the New Financial Year is continued uncertainty but there are positive signs for recovery. We remind everyone that this is the time to be patient, look for opportunities in the market and not to make rash decisions.

Property Market Update

Building Approvals

Dwelling approvals dropped in May 2016, a year after they hit a record high. According to the data released by ABS there were 19,276 dwellings approved for construction over the month. Despite a monthly fall in approvals, they remain at historically high levels however, and they are now -9.1% lower than their all-time high achieved in May 2015.

High Rise Approvals

The chart below shows the proportion of total dwelling approvals that are for high-rise unit projects over time for the major states. This chart further illustrates the increasing prevalence of high-rise unit development. The chart also shows how the tide is turning somewhat with relation to high-rise unit approvals with the proportion starting to fall in most states and territories. Over the past six months, the average proportion of total approvals for high-rise units has been recorded at: 46.6% in NSW, 24.4% in Vic, 30.3% in Qld, 10.1% in SA, 10.8% in WA, 0.0% in Tas, 21.6% in NT and 32.0% in ACT. If we go back 10 years and look at the 6 month averages they were recorded at: 19.1% in NSW, 5.6% in Vic, 11.4% in Qld, 7.0% in SA, 3.3% in WA, 1.5% in Tas, 22.4% in NT and 17.1% in ACT.

There are inherently many more risks associated with building higher density unit projects. More pre-sales are required to secure finance in order to commence construction, more things can go wrong during construction of a larger project and settlement can occur several years after the contract is signed when market conditions may be significantly changed from when the project commenced. The higher risk environment and subsequent diminishment in confidence and tighter lending finance for development is starting to result in a slowing of approvals for high-rise unit projects.

Dwelling approvals have eased from their record highs of a year ago but on an historic basis remain at very high levels. We expect that an increasing number of these properties, particularly in the unit segment won’t be built in the current housing market cycle. With a record high number of units set to settle over the next two years we would anticipate developers and lenders will become more cautious around unit projects. Especially given that construction costs are reportedly increasing and population growth and transaction volumes are slowing.

Rental Yields Have Continued to Fall over the Past Year

Based on the CoreLogic May monthly rental review, while rents increased slightly by 0.1% in April, overall, capital city rental rates edged lower, falling 0.2% over the past 12 months.

Auction Clearance Rates

Auction clearance rates in bad times can be as low as 40% – 45%. More recently we have seen Australian clearance rates over 80% and the table below shows that clearance rates have fallen particularly in the key NSW & Victorian markets to approximately 70%.

Stamp Duty Hikes for Foreign Buyers

Stamp duty will be doubled for foreign buyers of a median priced Sydney house under changes introduced in the NSW State budget.

NSW Treasurer Gladys Berejiklian announced that foreign buyers of residential property will be slugged with a 4% stamp duty surcharge on top of the current stamp duty payable by domestic buyers and they will also pay an extra 0.75% land tax from 2017.

The stamp duty surcharge will apply from the June 21 state budget, while the land tax surcharge will take effect from January 1, 2017.

The surcharges will not apply to Australian citizens, permanent residents of Australia or New Zealanders who have stayed in Australia at least 200 days in the last 12 months.

Based on the Sydney median house price of $995,804, the stamp duty bill for a foreign investor will increase by almost $40,000 – from $40,305 to $80,137.

Source RP Data & BIS Shrapnel

Things change.

Often for the better!

We thought we would update you with what has been happening at Level One of late.

If you have been into the office recently, you will know that we have completely renovated our two suites. In addition to the new coat of paint on the outside of the building, our working environment has improved immeasurably.

On the staff front, we have also had some significant changes.

• Michelle Jolliffe (nee Stenhouse) (CA) returned to Level One in 2015. Michelle had previously been with the firm for over 7 years. After a 3 year hiatus in Melbourne, she has returned to us as Practice & Business Services Manager.
• Recent departures include Ben Phipps and Belinda Mellows. Ben and his partner have relocated to the UK for 3 years to travel and work abroad. Belinda took up an internal position with one of our larger clients with whom we have a very close relationship.
• Sue Taylor (CPA) has recently joined us as an Associate of the firm and Business Services Manager. Sue will oversee both our tax and business services teams going forward. Sue has over 19 years’ experience (10 with PWC, formerly Price Waterhouse Coopers, in Sydney) providing advice to individuals and private business owners.
• Martin Parnell (CA) – Business Services – is our most recent recruit. Martin has over 4 years’ experience (3 of which were with Deloitte in Sydney).
• Sonia Strano has joined our team as a bookkeeper, bringing with her over 15 years of experience.
• Keanu Paisley-Topp is an undergraduate accountant, currently studying his first year at university, after serving in the Australian Defence Force for 12 months upon leaving school.
• At reception, we welcome Julie Horton who is joining the team after dedicating over 26 years to Hatch Pty Ltd (previously BHP Engineering). Julie has a wealth of experience including database and document management systems.
• Nicole Burns is expecting her first child and will shortly be taking maternity leave for 12 months. Most importantly, Nicole will be back!! While Nicole is busy being a new mum, Julie will cover our reception and when Nicole returns in 12 months, she and Julie will job share.

Importantly, the tried and tested team below keep marching on:

• Christine Lapkiw (CA) – Senior Associate Business Services – 26 years’ experience, 17 years with Level One
• Joanne Douglas (CFP) – Financial Planning – 17 years’ experience, 12 years with Level One
• Nicole Burns – Administration – 17 years’ experience, 12 years with Level One
• Diana Spaleta – Business Services – 27 years’ experience, 8 years with Level One
• Danae Lacey (CFP) – Financial Planning – 11 years’ experience, 5 years with Level One
• Robyn McLean – Administration – 3 years with Level One
• Georgia Thompson – Business Services – 2 years with Level One

In addition to these changes, we are improving our computer software systems and transitioning to a “lot less paper” environment.

So whilst there has and will be continued changes within the firm, they are positive changes designed to improve our service quality and construct a solid basis upon which the firm can grow going forward.

All the very best.

Doug Tarrant

Overview

With revisions to the Age Pension assets test just around the corner, it’s important to understand how the changes could impact you. These thresholds are the value of assets you can own (excluding your home) before you lose eligibility for the Age Pension.

Under the changes to the assets test, effective 1 January 2017, it is expected that more than 50,000 additional Australians will receive the full Age Pension. Meanwhile, roughly 300,000 retirees on the part pension will have their entitlements reduced, with about 100,000 people losing all entitlements.

The current and post 1 January 2017 Asset Test thresholds are below:

Full-pension Thresholds

Note: these lower thresholds are indexed each year in July.

Part-Pension Thresholds

Note: these upper thresholds will be indexed twice per year in March and September.

How Will the Changes Affect You?

The below tables demonstrate the impact point and effect on your age pension entitlements as calculated by the Asset Test.

Couple – Home Owners

Single – Home Owners

Upside to Losing Your Benefits

People who lose their Age Pension in 2017 as a result of the changes will automatically be entitled to receive a Commonwealth Senior’s Health Card (CSHC) and/or a Low Income Health Care Card (LIHCC). These cards will provide access to things such as Medicare bulk billing and less expensive pharmaceuticals.

If you lose the Age Pension but receive the CSHC or LIHCC, your entitlement is grandfathered. This means that you will not be means tested for these cards and hence will hold these for life.

What Next

• Centrelink will write to you between now and Christmas advising you of the impact to your Age Pension.
• To ensure you receive your correct Age Pension benefit check that your Assets are correctly recorded with Centrelink. You can do this by logging into your MyGov account (if you have one), calling Centrelink on 13 23 00 or visiting your nearest Centrelink branch.
• If you are close to the cut off limits, planning could be undertaken to reduce your assessable assets and enable you to keep your Age Pension. If you are interested in exploring this option please contact our office and organise an appointment.

Proposed Changes to Superannuation Overview

During September and October the Government released the second and third tranches of draft legislation for the proposed changes to superannuation that were previously announced in the May 2016 Federal Budget. A key summary is listed below. We note that at this stage this is proposed legislation only.

New Announcements

Non-Concessional Contribution Cap – From 1 July 2017 the Government will reduce the annual cap on non-concessional superannuation contributions to $100,000 per annum (down from $180,000 per annum). Bring forward which allows you to group three years’ worth of contributions together will still apply however with limitations and complexity.

Note: you are only able to make non-concessional contributions to your superannuation fund if your total superannuation balance is below $1.6 million.

Planning Opportunity – if you are in a position to make large non-concessional contributions this financial year you should consider doing it while the higher annual caps are in play (maximum of $540,000 depending on previous contributions). This is particularly important for those who have accumulated more than $1.6 million in superannuation as, from 1 July 2017; you will no longer be eligible to make non-concessional contribution into superannuation.

Updates on Previously Announced Changes

$1.6 Million Superannuation Transfer to Pension Phase Balance Cap – From 1 July 2017 the Government will introduce a cap of $1.6 million on the amount of benefits that can be transferred from an accumulation account into a tax free (pension) retirement account.

Reduction in the Concessional Contribution Cap to $25,000 for all Regardless of Age – From 1 July 2017 the Government will reduce the annual cap on concessional superannuation contributions to $25,000 for everyone (the caps are currently $30,000 for those under age 50 and $35,000 for ages 50 and over).

Planning Opportunity – For those over age 50 you should consider maximising your $35,000 contribution cap this year before it drops back down to $25,000 next financial year (a $10,000 per year drop!). Remember this cap includes employer compulsory contributions (currently 9.5%) as well as salary sacrifice contributions.

Transition to Retirement Income Streams (TRIS) – From 1 July 2017, the tax exemption for earnings on assets supporting ‘transition to retirement’ income streams will be removed.

Review – For those currently running a TRIS your strategy should be reviewed to determine if you should continue with the TRIS post 1 July 2017.

Tax Deductions for Personal Superannuation Contributions – From 1 July 2017, individuals eligible to make contributions to superannuation will be able to claim an income tax deduction for personal superannuation contributions. This will apply regardless of employment status and replaces the previous 10% rule.

Keep In Mind – This may benefit you if a large capital gain is made during a single financial year to reduce your overall tax liability.

Low Income Superannuation Tax Offset (LISTO) – From 1 July 2017, a Low Income Superannuation Tax Offset (LISTO) will apply to reduce tax on superannuation contributions for low-income earners.

The LISTO is a non-refundable tax offset to superannuation funds, based on the tax paid on concessional contributions made on behalf of low income earners. The offset is capped at $500 and will apply to members with adjusted taxable income up to $37,000.

Superannuation Balances of Low-Income Spouses – From 1 July 2017, the Government will increase access to the low-income spouse tax offset.

This provides up to $540 per annum as a tax offset for the contributing spouse and will apply where the low-income spouse’s income is up to $37,000 (increased from the current $10,800).

Taxation of Concessional Superannuation Contributions – Currently those who earn over $300,000 (taxable income plus superannuation contribution) are required to pay an additional 15% contribution tax on their concessional super contributions (i.e. total of 30% contribution tax).

From 1 July 2017, this threshold will reduce to $250,000.

Anti-Detriment Payments – these will be abolished from 1 July 2017.

Abolished, Amended or Delayed

Lifetime Cap of $500,000 for Non-Concessional Superannuation Contributions (Abolished) – A $500,000 lifetime non-concessional contributions was to be introduced. This was to be backdated to capture all contributions made since 1 July 2007.

Fortunately this measure has been abolished with new reduced annual caps introduced instead.

Contribution Rules for Those Aged 65 to 74 (Abolished) – It was proposed that from 1 July 2017, individuals under the age of 75 would no longer have to satisfy a work test and would be able to receive contributions from their spouse.

This proposed change has been abolished.

Catch-Up Concessional Superannuation Contributions (Delayed) – This has been delayed and will now commence 1 July 2018. This measure allows individuals who have not reached their concessional contributions cap in previous years will be allowed to make additional concessional contributions.

The measure is limited to those whose superannuation balance is less than $500,000. Unused amounts are carried forward on a rolling basis for five consecutive years.

What’s Next?

We will continue to update you with progress of the still pending legislation. If you have any queries regarding your personal circumstances please contact our office to speak to one of our financial planners.