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Downsizer Super Contribution

Australians who are 65 years old or older may make a downsizer contribution into their superannuation of up to $300,000 from the proceeds of seeling their home.

         
 
The downsizer contribution can still be made even if the contributor has a total superannuation balance (TSB) greater than $1.6 million.
 
A few points are:-
 
  • will not affect the TSB until 30 June at the end of the financial year
  • can only be made for the sale of one home
  • not tax deductible and will be taken into account in determining eligibility of the Age Pension
  • there is no requirement to purchase another home 
  • must have held an ownership interest in the home for 10 years 
  • limited to the lesser of $300,000, or the total capital proceeds received from the sale of the interest in the home
  • can be both owners (i.e. $300,000 each)
  • within 90 days of the change of ownership.
 
Early planning will ensure you don’t miss the boat.
 
 
 
 
 
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‘Retrospective’ LRBA measures tipped to cause headaches

With the government reintroducing its total super balance measure for SMSF loans, technical experts have warned that the retrospective nature of the change could pose issues for SMSF clients purchasing property this year.

           

 

Last week, the government introduced Treasury Laws Amendment (2018 Superannuation Measures No. 1) Bill 2019 into parliament. The bill includes a previously lapsed measure that will see the outstanding balance of an LRBA added to a member’s total super balance for certain SMSFs.  

SuperConcepts general manager of technical services and education Peter Burgess said the bill, which applies to all LRBAs entered into from 1 July 2018 onwards, was expected to pass imminently given other politically sensitive measures in the legislation had been dropped.

“The SG [super guarantee] amnesty measure has now been removed and the remaining measures are largely integrity measures, [so] this bill is no longer controversial from a political perspective, and therefore, we expect it will receive an easy ride through parliament,” Mr Burgess told SMSF Adviser.

Australian Executor Trustees senior technical services manager Julie Steed said the retrospective nature of the bill poses an issue for SMSF professionals looking at property strategies in the current financial year.

“The 1 July 2018 proposed start date for the LRBA measure may mean clients looking to undertake transactions in 2019–20 need to factor the varied total super balance calculation into their actions,” Ms Steed said.

However, Heffron SMSF Solutions head of SMSF technical and education services Lyn Formica added that not all trustees would be affected by the rule changes, so it was important to look at the specifics of the legislation before changing a client’s strategy.

“The first thing would be to identify whether the SMSF will be caught by the proposed changes — many SMSFs won’t be as the bill only captures new LRBAs… where the lender is a related party of the fund or the member has satisfied a condition of release with nil cashing restrictions,” Ms Formica said.

“Even if the member will have a proportion of the outstanding LRBA debt included in their TSB, that may not be disastrous if they weren’t planning on utilising any strategies for which TSB is relevant, e.g. making non-concessional contributions [or] utilising the catch-up concessional rules.”

For now, however, SMSFs preparing their annual return for the 2019 financial year still need to abide by previous reporting rules when it came to LRBAs, Ms Formica said.

“SMSFs should complete their 2019 annual return reporting the members’ proportion of the outstanding LRBA debt of all LRBAs, regardless of whether or not the LRBA will be captured by the new measures,” she said.

“We expect new instruction will be released if or when the bill receives royal assent, as otherwise the ATO will have no way of correctly calculating each member’s total super balance.”

 

 

Sarah Kendell
30 July 2019
smsfadviser.com

 

The global economy at midyear: How our views have changed

A lot has happened since Vanguard published its global economic and market outlook for 2019 at the end of last year.

           

 

Decelerating global growth, increasing U.S.-China trade tensions, and disagreement in the United Kingdom on how best to exit the European Union frame an environment in which major central banks have signaled a readiness to loosen monetary policy to support growth.

“Despite these events, our forecasts have not meaningfully changed,” said Jonathan Lemco, Ph.D., principal and senior investment strategist in Vanguard Investment Strategy Group. “We expected a global deceleration to take place, and we expect economic growth to continue to slow for the rest of 2019.”

Even in this uncertain environment, fixed income markets have remained strong and equity markets have approached record highs, factors Mr. Lemco attributed to a shift toward accommodative policy stances by major central banks. For the first half of 2019, the FTSE All-World Index returned 16.25% in U.S. dollars, and the Bloomberg Barclays Global Aggregate Float-Adjusted Composite Index returned 6.22%.

At some point, Mr. Lemco said, markets may need to consider the underlying strength of economies in the context of further stimulus. “There's a limit to markets interpreting bad news as good news because it may result in interest rate cuts,” he said. Comments from the U.S. Federal Reserve after its July 30-31 policy-setting meeting may shed some light.

China's slowdown is in the spotlight

China has been at the forefront of global economic developments this year, a trend Vanguard expects to continue.

Vanguard expects China's economy to grow at a below-trend pace of around 6.2% in 2019, its lowest rate in nearly 30 years, with risks tilted toward the downside. Despite China's efforts to stabilise near-term growth, softening market sentiment and escalating trade tensions with the United States suggest that more aggressive stimulus measures might be needed to bolster private enterprise.

But with any stimulus, China would need to strike a balance between near-term growth and medium-term financial stability, said Vanguard economist Adam Schickling. “We expect China's economy to continue slowing in 2020, growing between 5.8% and 6%,” he said.

Fiscal stimulus measures have helped stabilise consumer spending, while the property and construction sectors have thus far been resilient. However, China's industrial sector faces challenges as automakers transition to new emissions standards and the risk of Producer Price Index (PPI) deflation re-emerges. (PPI deflation means producers are lowering prices, causing industrial profits to fall.) A truce in trade tensions would help boost near-term economic momentum, but, as we discussed in our 2019 outlook, structural issues affecting China's economy will be critical for the country's long-term growth trajectory.

Meanwhile, the Chinese yuan depreciated about 3% against the U.S. dollar in the second quarter, but easier monetary policy by central banks in Europe and the United States has removed further significant downward pressure. “We don't expect the yuan to fluctuate substantially in the near term, as currency valuations will remain a key component of U.S.-China negotiations,” Mr. Schickling said. Further, he said, previously enacted capital control measures “reduce the probability of a scenario in which a depreciating currency leads to higher capital outflows, which lead to further depreciation.”

Winners and losers of “deglobalisation”

Trade tensions caused in part by deglobalisation (the process of diminishing integration between countries and regions) are a big reason for Vanguard's below-consensus forecast for China's economy. “We were particularly bearish because Chinese companies had been frontloading their exports in 2018 in anticipation of escalating trade tensions,” Vanguard economist Jonathan Petersen said. “We believed the benefits of this strategy would dissipate in 2019.”

The current 25% U.S. tariffs on $250 billion of Chinese imports is likely to shave 35 points off China's GDP in 2019, Mr. Petersen said. A further 25% tariff imposition on all U.S. imports from China—though unlikely—could nearly double the impact, to 60 basis points off Chinese growth, he said. (A basis point equals one-hundredth of a percentage point.)

The U.S.-China trade dispute will likely end with only marginal changes

But any increase in tariffs will have negative repercussions.

The most likely outcome of the U.S.-China trade dispute is a modest tariff escalation (65% chance). But an escalation in tensions (25% chance) is possible, and this could have a more dramatic impact on global growth. The least likely scenario is a bilateral deal (10% chance) in which China agrees to buy more U.S. goods and the U.S. removes tariffs with a preliminary agreement on structural issues such as intellectual property rights.

Source: Vanguard estimates.

Naturally, winners and losers will emerge from increased trade tensions and a broader slowdown in China. The United States, Mexico, Africa, and Southeast Asia will generally be less affected than Europe and most emerging markets.

Vanguard expects annual growth in emerging markets overall to decelerate from its original forecast of 4.6% to 4.4% as slower growth globally, particularly in China, weighs on emerging-market industrial production.

Our view on growth in North America

The United States is likely to hold up better simply because it is less dependent on global trade than the rest of the world. Nonetheless, Vanguard in June cut its outlook for U.S. economic growth to slow to an annualised pace of 1.7% by year-end, with 2019 full-year growth around our 2% expectation.

Mexico has captured 50% of the market share of Chinese goods that have been affected by U.S. tariffs, such as LCD monitors and other electronics. A risk for both the United States and Mexico is the fate of the United States-Mexico-Canada Agreement, a trade pact that only Mexico has ratified so far. Vanguard expects all parties to ratify the deal before the end of 2020.

U.K. resilience wanes as all of Europe slows with global trade

Vanguard expects a reversal in fortunes for the United Kingdom after it showed surprising resilience earlier in the year. Investment remains subdued because of uncertainty over Brexit. “We had previously expected a Brexit deal in June and a post-Brexit bounce during the second half of 2019,” Mr. Petersen said. “But given the extension of an exit agreement to October 31, we have pushed our growth forecast for the second half from 0.4% to 0.3%.”

Mr. Petersen said the situation in China is a big reason why Vanguard downgraded its forecasted 2019 growth rate for Europe from 1.5% to 1.0%. “Our call at the beginning of the year had been slightly above trend compared with the International Monetary Fund consensus of 1.3%,” he said. “China is the EU's biggest source of imports and its second-biggest export market. Our views have shifted not only because of the key role China plays in the European economy, but also because of the elevated risk of Brexit and of fiscal tensions related to Italy.”

Developed Asian markets: Continued growth with downside risks

In Japan, domestic demand is likely to offset a global export slowdown, as severe labor shortages and higher demand associated with next year's Olympics drive infrastructure spending and other investments. For these reasons, Vanguard expects Japan's economy to grow 0.6% in 2019 and 0.5% in 2020.

In Australia, real GDP is likely to grow between 2% and 3% in 2019, in line with Vanguard's expectations at the start of the year, with risks to the downside if a potentially stronger-than-forecast slowdown in either the United States or China occurs.

What to expect with the U.S. Fed

Modest deterioration in economic fundamentals amid an escalation in trade tensions has led to a more dovish monetary policy outlook. Vanguard had anticipated one Fed rate hike at the start of the year but in April revised the assessment to no movement in target rates. “We have since changed our Fed call from no change in 2019 to two rate cuts,” Mr. Lemco said. “We have also shifted our European Central Bank and Bank of England view from one rate hike apiece over the next 12 months. We now expect the ECB to lower rates by 20 basis points and restart quantitative easing before the end of the year, and no policy change for the Bank of England with risk skewed toward further easing.”

Our outlook for investment returns

With slowing growth and easing monetary policy across much of the globe, risk-adjusted returns over the next several years are expected to be modest at best. “In the short term, expect bouts of higher volatility in the stock and bond markets,” Mr. Lemco said.

Over the next decade, Vanguard's projections for market returns have not changed, with global equity returns, from a U.S. investor's perspective, in the 5%–7% range. For fixed income, Vanguard forecasts returns over the next ten years of 2%–4%, with deterioration of credit markets a key downside risk. “Throughout the world, we are seeing increased borrowing and credit market downgrades,” Mr. Lemco said. “At some point, continued credit rating cuts could trigger a market downturn as investors dump debt from their portfolios.”

Economic growth is slowing worldwide, and investment returns are likely to be muted

Vanguard expects economic growth to continue to slow and investment returns to be muted.

*Projected annualised 10-year range.
Source: Vanguard estimates.

Investor implications

We counsel investors to focus on things they can control, including setting clear investment goals, ensuring that portfolios are well-diversified across asset classes and regions, choosing well-designed, low-cost investments, and taking a long-term view. This guidance is particularly important when global economies seem poised for change. Recent market gains present an opportunity for investors to ensure that their portfolio allocations reflect their goals.

“In the end, short-term developments are less important to investors' success than the big-picture trends that will shape markets in the years ahead,” Mr. Lemco said.

 

Notes:

  • All investing is subject to risk, including the possible loss of the money you invest. 
  • Diversification does not ensure a profit or protect against a loss. 
  • Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk.

 

 

Vanguard Research
30 July 2019
vanguardinvestments.com.au

Interest rate for SMSF loans set to rise under safe harbour terms

Despite the recent cut to official interest rates, an update in the ATO’s superannuation rates and thresholds indicates that the minimum interest rate for SMSF loans under the safe harbour terms will increase for the 2019–20 financial year.

           

 

The ATO recently updated its superannuation rates and thresholds to include the interest rate amount for the 2019–20 financial year for SMSFs that want to ensure their limited recourse borrowing arrangements (LRBAs) are consistent with the safe harbour terms outlined in Practical Compliance Guideline 2016/5.

Back in 2014, the ATO confirmed that borrowings on non-commercial terms from a related party could cause non-arm’s length income (NALI). In order to avoid NALI, SMSFs had to restructure their LRBAs to ensure they were consistent with an arm’s length dealing.

To assist SMSFs in restructuring their loans on arm’s length terms, the ATO released PCG 2016/5, which set out the safe harbour provisions for what it would consider to be commercial terms.

However, the ATO also confirmed in 2016 that if the safe harbour terms were not applied, the loan would not be subject to NALI if the SMSF could demonstrate that the terms of their loan were consistent with the terms that a commercial provider would offer. 

In a recent update, the ATO stated that the LRBA interest rate for real property assets under the safe harbour terms will rise to 5.94 per cent, up from the 5.80 per cent rate that was set for the 2018–19 financial year.

The LRBA interest rate for listed shares or units will increase to 7.94 per cent for the 2019–20 financial year, up from the 7.80 per cent set for this year.

Following the decision of the Reserve Bank to cut interest rates this month, Reserve Bank governor Philip Lowe stated the board wouldn’t rule out making further cuts to interest rates this year.

“Our latest set of forecasts were prepared on the assumption that the cash rate would follow the path implied by market pricing, which was for the cash rate to be around 1 per cent by the end of the year,” Mr Lowe said.

“There are, of course, a range of other possible scenarios and much will depend on how the evidence evolves, especially on the labour market.”

 

Miranda Brownlee
20 June 2019
smsfadviser.com

 

Control considerations flagged with death benefit pensions for children

When starting retirement phase pension accounts, SMSF professionals and their clients should think carefully about how it might impact the amount of death benefit pension that their children will be able to receive, says a technical expert.

         

 

Australian executor trustees senior technical manager Julie Steed said that, when discussing pensions and estate planning with clients, it’s very important to think about what money will be leaving the super system.

“If we’re going to have excess amounts, do we really want to be holding insurance in super anymore? We may want it outside of super where we can direct it straight through to our estate plans through testamentary discretionary trusts that we can control,” Ms Steed explained at the Chartered Accountants Australia and New Zealand SMSF Day 2019 Workshop.

“Most parents, when faced with the choice between tax efficiency and control for their adolescent children, will nearly always choose control over tax efficiency.”

Ms Steed said that if the deceased has a transfer balance account at any time prior to their death, then the child death benefit amount will be the child’s share of the retirement phase pension accounts.

“So, if I started a retirement phase pension on 1 July 2017 with $1.6 million, and it’s grown to $2 million by the time I die, and I’ve got a single child, my child can receive $2 million as a death benefit pension, even though that’s $400,000 above the general transfer balance cap,” she explained.

Importantly, the process and formula with the child cap increment, she said, also applies to accumulation accounts.

“This means that my children can have zero amounts out of my accumulation accounts. So, if I’ve got $2 million in pension phase, and $3 million in accumulation phase, and I’ve got two children and they’re getting 50 per cent each, they can each have $1 million of my retirement phase pension, but the $1.5 million for each child in my accumulation accounts will have to come out of super,” she said.

“This is really important when thinking about starting retirement phase pension accounts.”

Ms Steed said that if the deceased had no transfer balance account, then the child cap increment is pro-rated to their proportion of the deceased’s total benefit, and insurance proceeds can be included in the deceased’s total benefit.

“I worked with an adviser last year who had a client that was in her 40s and had a really aggressive form of Parkinson’s disease. It was terminal, but her life expectancy was still 10 years. So, she didn’t qualify under terminal illness payments, but she qualified under total and permanent disability (TPD),” Ms Steed said.

“She had $120,000 in accumulated benefits and $1 million worth of insurance. She heard about the benefits of tax-free investment returns in pension phase and she wanted to maximise her benefit, so she was going to start a TPD pension with her $120,000. Now, fortunately she went and got financial advice, because if she hadn’t, she would have started that pension for $120,000.”

Unfortunately, the client did die much sooner than anticipated, only a couple of weeks after the insurance amount was actually received in the super fund for TPD.

“Now if she had started a retirement phase pension with her $120,000, each of her two children would have only been able to start a death benefit pension for $60,000 each. They would have each had $500,000 rattling around outside of super,” she said.

“Her adviser stopped her from starting the retirement phase pension and so she just left the TPD benefit in accumulation phase and it was unrestricted non-preserved, so she could access some of that money she needed for living. But when the $1 million of insurance came in, her kids were actually able to start a death benefit pension for $550,000 each.”

Ms Steed said the big issue wasn’t so much the tax consequences of that money leaving super, but rather the control issues of that money leaving the super fund.

 

 

Miranda Brownlee
25 June 2019
smsfadviser.com

 

Good investment habits versus damaging biases

In a low-interest, lower-return, more-volatile investment environment, investors have an even greater incentive to keep wealth-damaging behavioural traits or biases under control.

         

 

Individual investors have no control, of course, on the emotions of other investors or the overall state of investment markets. However, you can try to keep your emotions in check when making investment decisions.

And it is under your control to create and stick to an appropriately-diversified portfolio, set achievable long-term goals and have realistic expectations for returns. A disciplined investor guided by a solid financial plan is less likely to allow emotions to get in the way of investment success.

Here are seven of the undesirable traits that behavioural economists generally say investors should avoid:

Overconfidence

Many investors have an unjustifiable confidence in their ability to make smart investment decisions. Overconfident investors often believe they can pick future winning investments and somehow beat the market.

This overconfidence typically leads to frequently buying and selling shares in a chase for winners and being overly optimistic about the future performance of chosen investments.

Loss aversion

An excessive aversion to loss can make investors unreasonably sensitive to investment losses. Such investors tend to sell their winning investments while holding on to losers that are unlikely to recover.
And loss aversion can lead to investors being unwilling to take appropriate investment risks – potentially lowering long-term returns.

Regret

Excessively dwelling on past losses can lead to investors focusing too much on part of their portfolio rather than the portfolio as a whole. This trait, also known as “narrow framing”, can hinder an investor’s efforts to have a properly-diversified, long-term portfolio and make them more sensitive to short-term market movements.

Inertia

Inertia tends to get in the way of beginning to seriously save, saving more whenever possible and developing a long-term financial plan.

Fear and greed

These are the terrible twins of becoming fearful when markets are falling and becoming greedy when markets are rising. Fear and greed often lead to selling shares after prices have sharply fallen, only to buy after prices have sharply risen.

Comfort in crowd-following

Investors often gain a false sense of security by following the investment crowd. As with fear and greed, this usually results in jumping in and out of the markets at the wrong times.

Confirmation bias

This involves deciding on a course of action and then looking around for evidence to support that action while blocking out contrary opinions and research.

As part of your efforts to keep damaging traits or biases in check, try to block out investment “noise” – the abundance of often-conflicting and misleading information facing investors.

Make the most of investment compounding to magnify your long-term returns. (Compounding occurs as returns are earned on past returns as well as your original investment.) Recognising the rewards of compounding can help investors to stay focussed on the long term.

And think about ways to beat investment inertia including putting yourself into a form of saving “autopilot” by making higher salary-sacrificed super contributions.

 

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

 

Critical documentation steps flagged with switching SMSF loans

With an increasing number of SMSF clients looking to switch loans following the exodus of the major banks from SMSF lending, a law firm has highlighted some of the considerations and important steps with documentation in this process.

           

 

Last year, the last few major banks that were still offering SMSF loan products decided to withdraw their products for residential property for new customers. Banks such as AMP and Macquarie also decided to exit the SMSF lending space.

As a result, some of the non-bank or second-tier lenders are now seeing increased demand from SMSF trustees who are looking to refinance their loan.

With the recent changes in the SMSF lending landscape, Townsends Business and Corporate Lawyers said some SMSF clients are deciding to remove and replace the current custodian of the holding trust with a new corporate custodian.

The law firm explained there are a number of important considerations and steps when completing this process.

It gave an example of John and Mary who acquired a residential property in NSW using their SMSF under a limited recourse borrowing arrangement (LRBA).

“The finance was provided by one of the big four banks.” said Townsends.

“The first point of reference for John and Mary would be to review the current bank finance trust deed to determine whether the trust deed permits the resignation of the current custodian and the appointment of a new custodian; otherwise, the holding trust deed may need to be amended to effect this.”

The couple would then need to work out whether authorisation is required from their lender in order to change the trustee of the holding trust.

“Holding trust deeds prepared by the banks often limit the custodian company to a company incorporated by the bank,” Townsends noted.

“In John and Mary’s case, this means that they may be required to seek confirmation from the Bank that it would be prepared to execute any necessary documents to remove the current custodian company and replace it with a new corporate custodian.”

They would also need to consider whether the removal and appointment of the trustee of the holding trust may be considered as a resettlement of trust, and also whether the Deed of Removal and Appointment may need to be registered on the local state general register. Townsends said this will depend on the state or territory laws that apply to the deed.

“In Mary and John’s case, the law that applies to the deed is the law of NSW, and it is likely that the Bank they borrowed form will require that the Deed of Removal and Appointment be registered in order to transfer legal title of the property from the current custodian to the new custodian,” it said.

“John and Mary could consider discharging the current mortgage in order to remove the current custodian as mortgagor and to register a new mortgage with a new custodian as the mortgagor.”

 

Miranda Brownlee
14 June 2019
smsfadviser.com

 

Consolidate your super and save

If I offered you a year's pay for an hour or so of work, you would probably jump at the opportunity.

         

 

But many people unwittingly walk away from that opportunity when they maintain multiple super accounts. The end up paying extra fees and insurance premiums that significantly erode balances over time.

In this increasingly mobile economy, it's understandable that so many people have more than one super account. New accounts may have been established as you changed jobs, or you may work more than one job, each with their own super plan.

When it comes to boosting your super, however, one is the friendliest number.

Last year the Australian Productivity Commission estimated that a 21-year old with a full-time starting salary of $50,000 and an average insurance premium of $340 would have $833,000 in her super by age 67 if she has only one account. If she has multiple accounts, her final balance shrinks to $782,000, leaving her with $51,000, or 6% less, to spend in retirement. That's roughly equal to her first year's salary.

It's a common scenario. About one in three member accounts is an unintended multiple, according to the Productivity Commission, and they cost members about $2.6 billion annually.

And it's the compounding effect of these additional premiums and fees that really damage your super balance over time.

In addition to increasing your balance, consolidating your super accounts reduces your paperwork and makes it easier to track your super.

And it only requires a small amount of work.

(Keep in mind that while consolidating makes sense for most of those in defined-contribution plans, it is a more complicated decision for participants in defined-benefit plans. If you are in a defined-benefit plan, consult with an advisor to determine whether reducing accounts is wise.)

Before you consolidate, find out whether your super fund charges exit fees and review how any changes will impact the insurance you may have through super. Also, check whether changing funds will affect how much your employer contributes.

Then, look for a diversified, low-cost fund that matches your risk tolerance and time horizon. It may be a super plan you already participate in, or a new one you find by comparing funds.

Then, let your employer know about your decision. If you are not sure how many super accounts you have, you can find out and continue tracking your super with this tool from the Australian Tax Office.

 

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

 

Australia – the story goes on.

         

 

One great source of data about Australia. Become better acquainted with the country we love.

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.

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