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How the 2019 Federal Budget affects you

The following links take you to that section of the 2019 Budget that affects you most.

           

Easy to watch videos and written detail covering the four main areas of the 2019 Federal Budget, plus, for those who like to read, a link to the Budget documents themselves.

Your Budget:

Lower Taxes

Guaranteeing Essential Services

Investing in our Community

Budget Documents

 

 

Source:  www.budget.gov.au

Federal Budget 2019 – Overview

The Government’s economic plan and this Budget are building a stronger economy and securing a better future for all Australians. This Budget and our economic plan are:

  • Returning the budget to surplus
  • Delivering more jobs
  • Providing lower taxes
  • Guaranteeing essential services like Medicare, schools, hospitals and roads

The following video outlines Australia's plan for a bright and robust future for all Australians.

         

 

Source: www.budget.gov.au

 

Budget Time – How’s Australia going?

A quick look at these facts and figures and you'll be totally prepared for Tuesday's Budget.

       

 

An up-to-date snapshot of Australia's vital statistics.  

Please click on the following link to see all this interesting information. The areas covered are:

  • Overview
  • Markets
  • GDP
  • Labour
  • Prices
  • Money
  • Trade
  • Government
  • Business
  • Consumer
  • Housing
  • Taxes
  • Climate

 

Access all this data here.

 

Consumers misunderstand types of advice

The need to be studious about our financial future never goes away and ASIC is pushing hard to help us all understand this.  Advice is very important but so to is having a good understanding of what is being proposed. 

         

 

The latest Australian Securities and Investments Commission (ASIC) research has revealed a basic misunderstanding among consumers of what constitutes general financial advice and what constitutes personal financial advice.

Commenting on the corporate regulator’s “Financial advice: Mind the gap” report, ASIC deputy chair Karen Chester said: “This disturbing gap in understanding whether the advice they are getting is personal or not means many consumers are under the false premise their interests are being prioritised, when no such protection exists.”

Results of the study showed 53 per cent of respondents correctly identified general advice and 40 per cent of those surveyed incorrectly believed the adviser had an obligation to take their personal circumstances into account when providing general advice.

The regulator has identified this lack of knowledge regarding the different types of advice as presenting significant risk to consumers as with the continued evolution of financial products.

“ASIC is seeing increased sales of complex financial products under general advice models – so not tailored to personal circumstances – leaving many consumers, especially retirees, exposed to the potential risk of financial loss. And while the financial services royal commission and the government’s response dealt with the most egregious risks of hawking of complex financial products, consumer confusion about what is personal and general advice needs to be addressed,” Chester said.

ASIC said it regards the results of the report as a reinforcement of the Financial System Inquiry findings that found the use of the term general advice is likely to lead to unrealistic consumer expectations about the value and level of protection available to them when seeking financial planning services.

“This consumer research is timely. It comes as the government is considering policy recommendations on financial advice from the Productivity Commission’s twin reports on Australia’s financial and superannuation systems. And at a time when the financial system itself undergoes much change, following the intense scrutiny of the financial services royal commission, including considering new financial advice and distribution business models,” Chester said.

The study was conducted by independent firm Whereto Research and asked participants to identify what type of advice was being provided in hypothetical situations.

 

Darin Tyson-Chan
March 28, 2019
smsmagazine.com.au

 

 

Don’t just plan for retirement; Plan for your life

In the financial services industry, advising people to spend money is like being a doctor encouraging ice-cream consumption. 

         

 

There is a good reason why investment firms recommend setting aside as much as possible for retirement: many people in or approaching retirement fall short of what they need to be comfortable, according to the Association of Superannuation Funds of Australia standard for a comfortable retirement, so the adequacy question is real enough.

But it is a discussion with two sides, and increasingly data and research is pointing towards an unexpected issue which is that people in retirement appear to be being unnecessarily frugal.

While it is generally not smart (or sustainable for most people) to go out and spend at will (or to eat nothing but ice cream), a good way to view the spend / save relationship is through an “everything in balance” approach.

A comfortable retirement is a long-term goal, and you need a plan to achieve it. Consistent contributions via a diversified, low-cost portfolio are a good place to start. Ideally start young so that compound interest can help you across the finish line. Avoid unnecessary debt. Do all these things, but if you also love model railroads, crave a baking career, or just want to visit Coober Pedy before you die, isn't that part of the reason you are saving today?

Ideas for matching your financial planning to your personality abound. You are no longer locked into logging every dollar you spend into a spreadsheet, unless you like doing it that way. There are lots of neat new online tools to help with budgeting, saving and keeping track of spending that can work for you.

One of the strengths of the Australian super system is its mandatory contribution regime but when it comes to drawing down those hard-earned savings in retirement the system is still immature, so it is not surprising that people are conservative about drawing down from super when they (a) don't know how long they will live for (b) what investment performance they can expect or (c) what provision they need to make for health and aged care costs as they grow older.

Government regulations dictate that we have to withdraw minimum amounts from our super pensions each year – for those aged under 65 that starts at 4% a year, rising to 5% for those between 65 and 74 and so on until it reaches a maximum withdrawal amount of 14% for those over 95.

The government rules are designed to ensure that savings that benefited from super's tax concessions eventually come out of the system. So these rules are driven by tax policy and were never intended to be the recommended way for retirees to spend their super.

But in the absence of any other guidance, it is hardly surprising that many people treat these as recommendations and only withdraw the minimums, just as many people only save the mandatory 9.5% in the savings phase.

So while there is understandably a lot of focus on saving enough in super to pay for retirement, perhaps the next focus needs to be helping people develop lifestyle spending plans.

Remember too, that many of the personal finance numbers you see are averages and may not be relevant to your situation. Some of you may inherit a portion of the estimated $2.4 trillion in wealth expected to be transferred from Baby Boomers to the next generation. Longer lifespans also may mean you can work and earn for more years than previous generations did.

Now, sit down, scoop yourself a healthy-sized portion of ice-cream, and start planning.

 

Written by Robin Bowerman,
Head of Corporate Affairs at Vanguard.
25 March 2019
vanguardinvestments.com.au
 

ATO flags PAYG obligations for SMSFs with legacy pensions

The ATO has reminded SMSFs that are paying capped defined benefit income streams to members to ensure they are meeting their PAYG obligations.

         

 

In an online update, the ATO said that since 1 July 2017, SMSFs have had pay as you go (PAYG) obligations to withhold tax from income streams they’ve paid to members where the member is 60 years of older or the member is under 60 years old, and it’s a death benefit capped defined benefit income stream where the deceased was 60 years old or over when they died.

“If the amount of tax you need to withhold is nil, you are required to provide the individual with a pension payment summary and lodge a PAYG withholding payment summary with us, usually by 14 August, following the end of the financial year in which the payment was made,” the ATO explained.

“Trustees with these obligations also need to ensure they are registered for PAYG withholding.”

Trustees with these obligations, it said, also need to ensure they are registered for PAYG withholding.

If you’re paying a capped defined benefit income stream to a member, make sure you have met your obligations.

SMSFs should register for PAYG, provide your member and the ATO with your member’s payment summary information and comply with the withholding obligations on your activity statement, the ATO said.

“Your members may also need to lodge or amend their personal income tax return,” the ATO said.

“Your members can use our defined benefit income cap tool to understand if and how income from these pensions needs to be included in their assessable income.”

 

Miranda Brownlee
21 March 2019
smsfadviser.com

 

What investors can expect as key moves affecting markets await

Investors saw increased market volatility and uncertainty at the end of 2018, largely because of a changing investment landscape and slowing global economy. 

           

 

Investors saw increased market volatility and uncertainty at the end of 2018, largely because of a changing investment landscape and slowing global economy. Although things seemed to settle down in January, the outcomes of several forthcoming policy decisions could again intensify market gyrations.

In this Q&A, Roger A. Aliaga-Díaz, Vanguard chief economist, Americas, discusses the potential short and long-term market impacts of specific policy debates that could play out in the weeks ahead.

Investors around the world have had a lot to keep their eyes on lately. What key market-moving events are on the horizon, and how should investors think about them?

Mr. Aliaga-Díaz: The enactment of a spending bill in Washington removed the uncertainty and volatility that could have resulted from another partial government shutdown. But several other potentially important events that could affect markets and investors are coming up.

In the UK, Prime Minister Theresa May has failed in her efforts to reach a Brexit agreement with the European Union that satisfies her own Parliament. The UK faces a 29 March deadline to exit the EU. In all likelihood, it will ask for an extension. If by 29 March a deal is not reached, the UK would find itself with no legal arrangements to smooth trade and other transactions with its neighbors, affecting cross-border commerce.

We’re also approaching the US debt limit deadline. The debt limit sets a ceiling on the amount the US Treasury can borrow to cover the government’s existing commitments. Congress last year suspended the debt limit until this coming 2 March, when it will be reinstated at whatever the debt level is then, probably about $22 trillion. Eventually, when the Treasury can no longer borrow money and exhausts other available methods to make payments, the government would be forced to miss, delay or reduce payments it is obligated to make.

March also brings the deadline for a US-China trade deal to be reached. Without a deal or a deadline extension, US tariffs on $200 billion on Chinese goods would increase on 2 March from 10% to 25%.

The next US Federal Reserve meeting takes place the third week of March. Given that the Fed had to adjust its communications in the face of strong market reaction at the end of 2018, we expect it to pause next month on raising interest rates, for the first time in a year and a half. But the markets will be watching closely for any new information on the possible path for rates beyond that.

Any one of these issues, on its own, is unlikely to completely derail the markets. Certainly our economic outlook would not change significantly because of any one of these situations deteriorating.

Where we get concerned is if you have a perfect storm in which the worst cases for all these issues come to fruition. Under such a scenario, market sentiment might start reacting, and this is where you could see higher volatility. So it would really be the combination of all the worst-case scenarios occurring with these events where we would start to become concerned about market impact.

Have you heard more from clients about any one of these issues than the others?

Mr. Aliaga-Díaz: Brexit has been on investors’ minds, and not just investors in the UK and Europe. While economic spillover outside that region may be limited, a negative effect on market sentiment could roil markets globally, especially as the 29 March deadline for the UK to leave the EU approaches.

Policymakers in the UK are going to need more time to resolve the Brexit issue – that’s almost guaranteed. At some point, you get to where you either take a deal or wind up getting a long extension.

I think the US debt limit issue will largely dissipate because the Treasury Department has a number of tools it can use to delay the impact of not raising the debt ceiling before the deadline, and there’s a good chance this issue will be resolved successfully.

As far as the trade deal with China goes, trade policy experts are saying they’ll need more time. So an agreement likely won’t be reached by the 1 March deadline, but there may be some consideration to extend the negotiations.

For each event, there are three options: One, the issue gets resolved; two, it doesn’t get resolved; or three, it gets kicked down the road. Oftentimes option three is the most likely, and it’s not necessarily the best outcome, but it almost dilutes the problem over time, and it’s usually not as bad for markets as option two.

So for all these events, kicking the can down the road seems the most likely outcome. Such uncertainty will continue to challenge markets, whereas swift resolutions would be more positive.

How might the confluence of so many events influence the Fed's decision and remarks in March?

Mr. Aliaga-Díaz: Investors will really be looking to the Fed’s 19-20 March meeting. From a volatility standpoint, the Fed’s language given the uncertainty over Brexit or trade tensions between the US and China could make things worse.

The Fed’s actions will be conditioned by all these market events. Given the uncertainty over global markets in general, we expect the Fed to pause on rate hikes and to continue to offer reassurances on economic conditions and monetary policy in line with investors’ expectations.

How events play out could affect the Fed’s stances. If, for example, trade talks with China deteriorated and market sentiment did too, the Fed might need to acknowledge that by further reducing the number of planned rate hikes communicated in the “dots” – and by that I mean the longer-term views that the Fed’s individual governors and regional bank presidents have on rates.

So we’ll be looking next month for what the Fed says more than what it plans to do in terms of rates. We are looking for Fed officials to communicate something not too different from what the market expects – and what they have been communicating since January – which is to acknowledge market volatility and policy uncertainty.

The changing environment is why we recently revised our expectations for the Fed’s short-term interest rate target in 2019. Our new baseline forecast is for a single additional rate increase, which would be the tenth since December 2015 and perhaps the final hike of the current monetary-policy cycle. This represents a downgrade in the interest rate outlook from our previous expectation of two rate hikes in 2019.

So policy uncertainty persists, but at least market expectations and what the Fed are saying are more aligned. The March Fed meeting should be a confirmation of that.

Has your outlook on equity valuations and corporate earnings changed in light of these events?

Mr. Aliaga-Díaz: Unless all these risks are borne out in their worst-case versions, these events should not significantly affect earnings or valuations in the US market. However, if this type of uncertainty were to persist through the year, we could see market volatility affect corporate earnings, particularly in the case of Brexit.

On the US corporate earnings side, our outlook pretty much goes hand in hand with our economic outlook. We are expecting a slowdown, not necessarily below trend but a slowdown off the highs of 2018. So we don’t expect double-digit earnings growth; we still expect earnings to be positive but in the single digits. A lot of the US corporate earnings growth has occurred because of the initial effects of the tax cuts that took effect last year. After-tax profits have been boosted. With the effects of the cuts wearing off and top-line economic growth slowing, we do not expect earnings to be as strong this year.

Despite the market rebound, the correction late last year was so significant that valuations, while still high, are somewhat more reasonable. Vanguard doesn’t compare equity valuations against historical averages, which would indicate an extremely overvalued market right now. We look at what valuations should be given the low-interest-rate environment we’re in, and that closes the overvaluation gap a little bit. So we expect subdued market returns, but we’re probably not as pessimistic as others.

What if the worst occurs for all these events? What if the worst doesn't materialize for any of these events? What if it's somewhere in between?

Mr. Aliaga-Díaz: During times of uncertainty, it’s important to recognize the market's speed for pricing in certain events. This makes trying to time markets extremely challenging.

Investors with long-term goals should weigh views on policy uncertainty and market volatility only in deciding the right asset mix for their portfolios, including their ability to bear market risk. What’s most important is that investors who remain disciplined, diversified and patient should be rewarded with fair inflation-adjusted returns over the long term.

 

Roger A. Aliaga-Díaz
Vanguard chief economist, Americas
25 March 2019
vanguardinvestments.com.au

Personal super contributions and the 10% test

With Labor threatening to reinstate the 10 per cent test if elected, SMSF clients may want to make the most of their ability to claim deductions for personal contributions this financial year, says a technical expert.

         

 

BDO partner, superannuation, Mark Wilkinson said that clients who are deriving assessable income of any description should be looking to see whether it’s in their interest to make a personal super contribution given the removal of the 10 per cent test.

Prior to the removal of the test from 1 July 2017, the 10 per cent test prevented individuals from being able to claim a tax deduction for personal super contributions if more than 10 per cent of their income was earned from employment, Mr Wilkinson explained.

“So, it’s now a lot easier to claim a deduction this year, but people need to work out whether that’s beneficial,” he said.

Labor has announced that if it wins the next federal election, it will reintroduce the 10 per cent test, which will see personal contributions restricted again.

“The reinstatement of the 10 per cent test would be a bad move that doesn’t make any sense. I just don’t see the justification,” Mr Wilkinson said.

Labor’s plans to bring back the 10 per cent test have copped considerable backlash from the SMSF industry, with SuperConcepts non-executive director Stuart Forsyth labelling it as a retrograde step.

Mr Forsyth said previously that the removal of the 10 per cent test was very much welcomed by the ATO and everybody else because it essentially put everybody in the same position in terms of being able to make a concessional contribution provided they’ve got assessable income.

“I think it’s a policy that would be a retrograde step. I don’t see why it matters whether assessable income is from salary or wages or from other sources. It doesn’t seem to be material and it seems to be a decision to be motivated by the desire to reduce the cost of the concession,” Mr Forsyth said.

He also noted that reintroducing the 10 per cent test now would be especially problematic given the total superannuation balance rules.

 

Miranda Brownlee
27 March 2019
smsfadviser.com

 

Paying for health care in retirement

In retirement, an Australian couple needs from $4,700 to $9,400 a year to pay for health care , according to the Association of Superannuation Funds of Australia, and the average cost of private health insurance rose 4.8 per cent in 2017, far outpacing inflation.

         

 

This high and ever-increasing cost of health care, combined with longer life spans, has elevated the need to plan for paying for doctor visits, prescriptions and other medical costs in retirement.

Vanguard’s Roadmap to Financial Security identifies health risk as one of five risks that you need to understand and evaluate when you plan for retirement. The others are:

  • Market risk
  • Longevity and mortality risk
  • Event risk, the risk that large and unexpected expenses, such as property damage, will punch a hole in retirement funds
  • Tax and policy risk, the risk that a change in a government rule or policy will affect your financial plans

Vanguard defines health risk as both the risk of needing care because of deteriorating health and the risk of not being able to afford it because of a lack of insurance coverage, government benefits, or financial resources.

Accounting for health risk is complicated because it encompasses so many uncertainties. Retirement may be many years in the future, outlays vary wildly depending on the length and type of care, and few people can predict how aging will affect their health.

In addition, health risk is intertwined with other risks. Women, for example, face greater longevity risk, but that makes them more likely to require more expensive care in later years. Australia’s aging population may put pressure on government budgets, potentially changing health-care and other funding.

If you are approaching or in retirement, start by calculating your risk in three areas:

  • Overall health. Assessing your current health is a good starting point. If you have good health, you may not need to worry as much about higher costs in retirement. But if you have a chronic illness or know you will have to take a certain medication for the rest of your life, tally up your out-of-pocket expenditures to estimate potential retirement costs. You should also take lifestyle and genetics into account.
     
  • Available coverage. Establishing the level of coverage provided by Medicare and other sources can help clarify which types and what portion of expenses will have to be paid from other assets or private insurance.
     
  • Level of desired care. Consider what kind of care you want and determine how to pay for it. You may choose private insurance, for example, if it offers access to preferred doctors. The level of care you desire can increase or decrease total health-care costs and the amount of assets needed to pay for them. After you take these the factors into account, you can better estimate overall health risk and decide how to cover it. You can then match resources such as personal assets in a contingency reserve, public coverage, insurance, or any combination of the three to your needs.
     

Written by Robin Bowerman, Head of Corporate Affairs at Vanguard.
18 March 2019
 

The problem with getting to 53 years of age.

Here's some food for thought and another reason why getting professional help from a financial planner is worth serious consideration.

         

 

Previous articles in this series, which are based on research conducted by Vanguard Investments Pty Ltd, show that a financial planner adds around 3% to what would be the expected return of an investment portfolio. In other words, they provide the expertise and time needed to help you attain your retirement goals and they can help cover their costs at the same time.

However, more research from the Vanguard Investments stable focuses on the significance of the age of 53.

53 is when most of the costs of parenthood are on the decline, a cause for great celebration, but, sadly, it seems declining also is our 'financial capability'. This research has it’s fair share of confusing terms and definitions such as 'crystalised intelligence' (‘wisdom’ to you and I), 'fluid intelligence' (which peaks, unfortunately, in our early 20's); and 'financial capability'.

When all this is mixed together and the graphs and charts have been drawn the result is that 'the peak age for financial decision-making is…53!'. Ouch!!, and at a time when most of us need the opposite to be true, ‘c'est la vie’.

While many of us are still capable, this research indicate that after we reach 53 another benefit of employing the expertise of a financial planning practice is that their input is provided when we need it the most. That is, during the final 10 year run up to retirement, when there's still time to generate the retirement outcomes you want.

The following are some of the big decisions to be made around the age of 53.

  • How do we make the transition to retirement?
  • How do we structure our finances to generate an income and deliver capital gains?
  • How do we maximise our government entitlements?
  • What tax issues need to be considered?
  • Will we have enough given our current financial position?

These are big decisions and when relying on your own resources, it’s worth remembering that sometimes we just don’t know, what we don’t know!

Peter Graham 
BEc, MBA
General Manager
PlannerWeb / AcctWeb

 

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