2019 May Newsletter
May is here, and as the weather begins to cool the political climate is heating up. The federal election this weekend bookends a busy period on the national political and economic front which began with the Budget on April 2.
Australian financial markets were surprised by an unexpected fall in inflation. The Consumer Price Index, Australia’s main inflation measure, fell from an annual rate of 1.8 percent to a record low of 1.3 percent in the March quarter. This is well below the Reserve Bank’s 2-3% target and leaves the door open to a cut in official interest rates to stimulate economic growth. The cash rate has been unchanged at a record low of 1.5 percent since August 2016. Australia’s 10-year bond rate is at 10-year lows of 1.78 percent, indicating the market expects slower economic growth.
The Australian dollar fell half a cent on the inflation news and speculation about a rate cut, finishing the month at around 70.5 US cents. But Australian shares jumped to an 11-year high in line with Wall Street where shares hit a record high in response to better-than-expected company profit reports. The news from China was also positive, with economic growth steady at 6.4 percent in the year to March.
The good news is that inflation is now well below average wages growth of 2.3 percent. Australian consumers remain positive on the back of lower prices and a strong jobs market. Unemployment held steady at 5 percent in March, near decade lows, while the ANZ-Roy Morgan consumer confidence index rose to a four-month high in April, before dipping slightly in the final week.
Policy Guide to the 2019 Australian Election
This link from the Guardian provides a quick summary of the Coalition and Labor Parties' policies around tax, climate change, industrial relations, education, health, immigration, and foreign affairs. We have highlighted below a few items noted in this article.
Tax - One of the key dividing lines between the two main parties, with clear policy differences that affect low- and middle-income earners, housing investors and retirees
- A $158bn 10-year income tax cut package consisting of: immediately doubling the low and middle-income tax offset to benefit 10m taxpayers including 4.5m middle-income earners who will receive the full $1,080; raise the threshold for the 19% tax rate from $41,000 to $45,000 in July 2022; flatten tax brackets so everyone earning between $40,000 to $200,000 pays a marginal rate of 30% from 2024.
- Continue to give cash payments to self-funded retirees as a rebate for franking credits despite them paying no tax in that year.
- A further $1.05bn over four years to increase tax cuts for 3.6m people earning less than $48,000, including a $350 tax cut for workers earning up to $37,000. Labor says 10m Australians will get “the same or bigger tax cut” than under the Coalition. But Labor opposes the second and third stages of the Coalition’s income tax plan, including the flattening of tax brackets from 2024.
- Abolish negative gearing for investors who buy existing houses from January 2020. Investment properties bought before then will still attract negative gearing, as will investments in new properties.
- Halve the capital gains tax discount for investment properties purchased after January 2020.
- End cash rebates for excess franking credits, preventing self-funded retirees receiving refunds when they do not pay tax that year, to raise an estimated $10.7bn over four years. The measure exempts pensioners and people with pre-existing self-managed super funds.
Industrial Relations - Most of the policy debate will be about union priorities such as the minimum wage, whether for or against, with less attention on the increasingly casualised workforce and the gig economy.
- Stop employees who were misclassified as casuals from being back-paid entitlements, preventing them “double-dipping” and accessing both the casual loading and entitlements of permanent workers.
- Create a right for casual workers to request permanent full-time or part-time work
- Give the Federal Court power to deregister unions or disqualify officials for repeated or serious breaches of law and introduce a public interest test for union amalgamations
- Prevent enterprise agreements mandating which fund to pay workers’ superannuation into
- Change the rules the Fair Work Commission uses to set the minimum wage, reverse Sunday and public penalty rate cuts for retail and hospitality workers and prevent labour hire undercutting wages
- Introduce a new gender pay equity objective and lower the bar for making an equal pay order to boost women’s pay
- Amend laws to “improve access to collective bargaining, including where appropriate through multi-employer collective bargaining”
- Abolish specialist union regulators, the Registered Organisations Commission, and the Australian Building and Construction Commission.
- Reintroduce road safety body to set pay and conditions for truck drivers, including owner-driver independent contractors
Education - Any prospect of a bipartisan, long-term approach to school funding has gone, with a return to competing for ad hoc agreements on public, Catholic and independent schools.
- A $4.6bn package for Catholic and independent schools, to come on top of the $23.5bn committed over 10 years by the Turnbull government to provide private schools with 80% of the schools resourcing standard and public schools with 20%.
- A two-year freeze on the growth of funding for a commonwealth supported places in university to save $2bn, with reviews in train about freedom of speech on Australian campuses and performance funding for universities.
- Extend taxpayer funding for 15 hours preschool for four-year-olds until 2021, at a cost of $453m.
- A $525m skills package – of which only $55m is new money in the 2019 budget – including a target of 80,000 new apprenticeships in areas with skills shortages through doubling employer incentive payments and a $2,000 payment to new apprentices.
- Abandon the funding formula adopted by the Turnbull government which provides non-government schools with 80% of the schools resourcing standard and public schools with 20%.
- Deliver an additional $14bn over 10 years to public schools, with $3.3bn spent in the first three school years of a Labor government, and a further $250m in the first two years to Catholic schools.
- Universal preschool access for three and four-year-olds, with 15 hours a week taxpayer-funded early childhood education at the cost of $1.7bn.
- Increase university places by 200,000 by reversing the freeze on Commonwealth grants.
- A $1bn package for Tafe and vocational education including $200m for facilities, $380m to create 100,000 fee-free places, and $330m to deliver 150,000 apprenticeship subsidies in areas with skills shortages.
Health - Labor’s centrepiece promise of huge investment in cancer treatments has overshadowed all other policy offerings
- A range of new drugs for kidney, bladder, liver and skin cancer will be subsidised by the government. This includes $81.5m for cutting the cost of one drug from $155,000 a year to $40 for each script and breast cancer will be cut from $55,000 a year to $40 a script.
- Additional $461m for a youth mental health and suicide prevention strategy, including $111.3m for another 30 Headspace services, bringing the total number to 145 by 2021, and $152m to reduce wait times across the network.
- Another $5.5m over four years will provide extra mental health services for people in Tasmania, Victoria and Queensland who have been affected by natural disasters.
- $5m over four years to implement suicide prevention initiatives targeted at Aboriginal and Torres Strait Islander people, funded separately from the department of prime minister and cabinet.
- $496m package for medical facilities in Victoria for cancer treatment, hospital infrastructure, mental health services and medical research.
- Indexation of Medicare rebates for about 90% of all diagnostic imaging from July 2020.
- $2.3bn Medicare cancer plan, including $600m for out of pocket costs on diagnostic imaging and up to 6m free cancer scans funded through Medicare, $433m to fund 3m free consultations with oncologists and surgeons.
- An expected $1bn in future announcements made during the campaign relating to cancer treatment.
- A promise that every drug recommended by experts to be listed on the Pharmaceutical Benefits Scheme will be funded out of general revenue.
- $2.8bn for hospitals, which includes $1bn for emergency departments and new wards and $1.8bn to restore the federal component back to 50-50% with the states, as opposed to the Coalition-imposed current ratio of 45-55%.
- Set up a permanent policy-making body called the Australian HealthReform Commission, similar to the Productivity Commission, with commissioners appointed for five years working with the Council of Australian Governments.
- Restore indexation for Medicare rebates in the first 50 days of a Labor government.
- Cap private health insurance increases to 2% for two years prior to further reforms, as opposed to the current rates of on average 4-5% a year.
How much super is enough?
The more money you squirrel away in super during your working years, the rosier your retirement options will be. The question is, how much is enough?
Estimating your needsFinancial commentators often suggest you will need around two thirds (67 percent) of your pre-retirement salary to enjoy a similar standard of living in retirement.i Lower income households may need more because they typically spend more of their income on necessities before and after retirement.
The latest ASFA Retirement Standard estimates that a couple retiring today needs a retirement super balance of $640,000 to provide a comfortable standard of living. This would provide an annual income of $60,977.ii
Singles need a lump sum of $545,000 to provide a comfortable income of $43,317 a year. These figures assume people own their home and include any entitlements to a full or part Age Pension.
How do I compare?According to the latest figures, the mean super balance for all workers is $111,853 for men and $68,499 for women. The mean balance at retirement (age 60-64) shows most people retiring today fall well short of the amount needed for a ‘comfortable’ retirement. iii
The gap between men and women persists at all ages. By the time women reach their 60s they have 42 percent less super than men on average and are more likely than younger women to have no super at all.
How can I boost my super?If your super is not tracking as well as you would like, there are ways to give it a kick along. When your budget allows, or you receive a windfall, consider putting a little extra in super. Even better, set up a direct debit or salary sacrifice arrangement.
- You may be able to make a tax-deductible contribution up to the $25,000 annual concessional cap but be aware that this cap includes employer contributions and salary sacrifice.
- You may also be able to contribute up to $100,000 a year after tax, or $300,000 in any three-year period. You can’t claim it as a tax deduction, but earnings will be taxed at the maximum super rate of 15 percent rather than your marginal rate and you can withdraw the money tax-free from age 60. Your age and the amount you have in super can restrict the amount of contribution caps.
- If you earn less than $37,000, your other half can contribute to your super and claim a tax offset of up to $540. The offset phases out once you earn $40,000 or more.
- If you are a mid to low income earner and make an after-tax contribution to your super account, the government will chip in up to $500. To receive the maximum, you need to earn less than $37,697 and contribute at least $1,000 during the financial year. The government co-contribution reduces the more you earn and phases out once you earn $52,697.
- Speak with your employer about directing some of your pre-tax salaries into super. ‘Salary sacrifice’ contributions are taxed at a maximum of 15 percent (30 percent if you earn over $250,000). But stay within your concessional contributions cap of $25,000 a year, which includes employer contributions.
To work out the difference extra contributions could make to your retirement nest egg, try out the MoneySmart retirement planner calculator.
As the end of the financial year approaches and with the federal election looming, this is a great time to utilise your annual contribution caps and get a tax deduction for voluntary concessional contributions. If you would like to talk about your retirement income strategy, give us a call.
i Moneysmart, Last updates 27 Aug 2018, https://www.moneysmart.gov.au/superannuation-and-retirement/how-super-works/super-contributions/how-much-is-enough
ii ASFA Retirement Standard, 1 December 2018, https://www.superannuation.asn.au/resources/retirement-standard
iii Superannuation Statistics, March 2019, ASFA, https://www.superannuation.asn.au/ArticleDocuments/269/SuperStats-Mar2019.pdf.aspx?Embed=Y
Artificial Intelligence: the future of finance
AI is the development of computer systems that have the ability to perform tasks normally requiring human intelligence. These processes include learning, reasoning, and self-correction. The first AI algorithms were in fact written way back in the fifties, but it’s only been in the last twenty years, with huge advances in computer processing power, that we’ve really been able to see the tangible effects of AI in our lives and on our finances.
Big data, changing legislation and technological advances are feeding an AI revolution in the finance sector that is having wide-ranging repercussions for stock market trading and our personal finances.
Impact on tradingSince the late 90s when electronic trading became widespread, the proliferation of AI has totally changed the functioning of the global economy. Most of this is done through algorithmic trading, which, though nothing new, has been enhanced by huge advances in computational power.
Advocates of this sort of trading talk about how it eradicates human error and removes emotion from investment decisions. While others argue that if algorithms aren’t thoroughly back-tested over a long enough period—or if the input data is somehow compromised—people’s assets are at risk. Many point to the inability of AI to predict the GFC as an example of this. The 2010 Flash Crash is another, wiping nearly $1 trillion USD from the market in seconds because of spoofing algorithms (which have since been banned), before rapidly rebounding.i
The truth is, as AI has developed so has its regulation, meaning hiccoughs experienced even ten years ago are less likely to occur today. And you need only look at changing rules around data sharing and instant transactions occurring globally, or the massive returns last year on quantitative hedge funds—which employ algorithms and machine learning to inform their investment decisions—to know that this sort of trading is here to stay.ii
Personal FinancesAI has already had a big effect on how we manage our personal finances. The credit card industry, for example, has benefited from increased data security and reductions in fraud as a result.
Similarly, banks are now able to analyse the data of billions of transactions to predict the spending of consumers and market their products accordingly. This same technology allows individuals to automate their expenditure, with many banking apps now sorting purchases by type and alerting users when they’re reaching their limits.
AI is also changing processes around lending and borrowing. This is especially true in the developing world, where credit scores might not be available. Startups such as LenddoEFl in Singapore are tracking people’s behaviours on their smartphones to glean the likelihood of them meeting their repayments.iii The algorithm they’ve developed recognises behaviours indicative of financial responsibility and therefore can advise lenders, with a high degree of accuracy, on whether the loan should be approved. This technology will be interesting to watch as banks tighten lending standards and start to look not just at salary but also spending habits to determine if a loan is approved.
The robots aren’t coming… yetIn the world of AI, scholars often make the distinction between Artificial Intelligence, which is now commonplace in many industries, and Artificial General Intelligence (AGI), the sort that might mimic a human brain and create links between disparate ideas and deal in abstract notions.iv We are still a long way from achieving the latter. And it has been argued that there are some aspects of the human experience that can’t be replaced by a code, however clever it is.
When it comes to your financial life, technology can certainly provide us with useful tools. There is no substitute however for knowledgeable advice that takes into consideration your unique circumstances, goals and dreams. We can help you navigate this brave new world, while also assisting you in a way that no algorithm is yet capable of.
Please note this information is of a general nature only and has been provided without taking account of your objectives, financial situation or needs. Because of this, we recommend you consider, with or without the assistance of a financial advisor, whether the information is appropriate in light of your particular needs and circumstances.
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