graham_financial

Market Event Update

Wed, 11 Mar 2026 05:23:58 GMT

Middle East Conflict, Oil Prices & Market Volatility

The ongoing conflict involving Iran, the US and Israel has added a new source of uncertainty to global financial markets. Events in the Middle East are always closely watched by investors, given the region’s importance to global energy supply, and the current conflict has already begun to affect investor sentiment.

At present, the Strait of Hormuz supply channel is effectively closed. This narrow shipping route is one of the world’s most important energy corridors, and disruption to traffic through the Strait has pushed oil prices sharply higher.

Periods like this can understandably create anxiety for investors. Market moves can be rapid, and headlines can shift quickly as events unfold. While the seriousness of the situation should not be understated, it is also important to keep some perspective. Financial markets have navigated many geopolitical shocks in the past, and the initial phase of volatility rarely tells the full story of how markets ultimately respond.

Why the Strait of Hormuz matters

The Strait of Hormuz is one of the world’s most important shipping corridors. A significant share of global oil exports moves through this narrow waterway each day, making it a critical route for energy supply. With shipping traffic through the Strait now effectively halted, markets have quickly priced in the risk of supply disruption.

Because energy sits at the centre of the global economy, movements in oil prices tend to transmit rapidly into financial markets. Higher energy costs can ripple through the broader economy, affecting transportation, manufacturing, and consumer spending.

The graphic below highlights how dependent global energy trade is on the Strait of Hormuz. A large share of oil exported from Saudi Arabia, Iraq, the UAE and other Gulf producers passes through this route before reaching international markets.

Importantly, most of these flows are destined for Asia. Countries such as China, India, Japan and South Korea rely heavily on oil shipments that pass through the Strait, making their economies particularly sensitive to disruptions in the region. By contrast, the US is far less exposed due to its domestic energy production.

What this could mean for inflation and the economy

Energy prices are one of the main channels through which geopolitical events affect the global economy.

If oil prices remain elevated for a sustained period, higher fuel costs can feed through to transportation, manufacturing and food prices. This dynamic was evident following Russia’s invasion of Ukraine in 2022, when energy and agricultural supply disruptions pushed inflation higher around the world. Earlier episodes in the 1970s showed similar patterns, with prolonged oil supply disruptions contributing to higher inflation and weaker economic growth.

The risk is also broader than oil alone. The Strait of Hormuz is a critical route not just for crude exports, but also for liquefied natural gas, with about one-fifth of global LNG trade passing through the Strait, largely from Qatar. Natural gas is a key input in nitrogen fertiliser production, which means a prolonged disruption could also place upward pressure on fertiliser and, over time, food costs.

The ultimate economic impact will depend largely on how long energy prices remain elevated.

Market reaction so far

Global markets initially reacted in a relatively measured way to the early stages of the conflict. However, as oil prices rose and the disruption to shipping became clearer, selling pressure intensified across Australia, Asia and Europe.

Overnight, sentiment improved. US markets recovered from early losses, volatility eased, and Australian share futures pointed to a sharp rebound at the open. The improvement appeared to reflect several factors, including oil pulling back from its intraday highs, comments from President Trump suggesting the conflict may end sooner than feared, and indications that G7 countries stand ready to support global energy supply if required.

This remains an oil-led market. Brent crude briefly surged toward US$120 a barrel as traders priced in the risk of a prolonged supply shock. Prices have since fallen sharply and are now trading just below US$90 a barrel as immediate fears of a sustained disruption have eased.

Bond markets have also responded. Higher oil prices raise the risk that inflation may prove more persistent than expected, complicating the outlook for interest rates. As a result, government bond yields have risen as markets reassess the path of central bank interest rate decisions.

During episodes like this, markets often become focused on a single dominant variable. At present, that variable is oil prices.

What the oil market is signalling

For markets, the key question is not simply how high oil prices rise, but how long they remain elevated.

Near-term oil prices initially spiked as traders priced in immediate supply risks. However, prices further out along the futures curve — which shows the price the market expects oil to trade at in the months and years ahead — remain noticeably lower. This suggests markets currently expect supply conditions to stabilise once tensions ease.

The chart below compares the oil futures curve before the conflict escalated with today’s curve. Near-term prices have jumped sharply, but prices further out remain similar, suggesting markets still expect the shock to be temporary.

This distinction is important. The economic impact of an oil shock depends heavily on its duration. A temporary spike in energy prices can usually be absorbed by the global economy. A prolonged period of elevated oil prices would be more problematic, placing pressure on inflation, company earnings and household spending.

Possible paths from here

Given the uncertainty surrounding the conflict, it is helpful to think about a range of potential outcomes.

One possibility is that tensions remain elevated but contained. In this scenario, oil prices remain volatile, but energy supply ultimately continues to flow, limiting the broader economic impact.

A second scenario would involve further escalation, keeping oil prices elevated for longer. This would increase inflation pressures and weigh more heavily on global economic growth.

The most severe outcome would involve a sustained disruption to shipping through the Strait of Hormuz. This remains a lower-probability outcome, but would represent a more significant supply shock to the global energy system.

At present, markets appear to be pricing conditions somewhere between the first two scenarios, with the most extreme outcome still considered a tail risk.

What history tells us

Geopolitical events often trigger sharp short-term market reactions. However, history shows that markets recover relatively quickly from geopolitical shocks.

The table below highlights how the US share market has performed following the outbreak of several major geopolitical conflicts over the past seventy years. While markets often experience volatility in the weeks immediately following these events, most episodes have been followed by positive returns over the subsequent six to twelve months.

This pattern reflects the forward-looking nature of financial markets. Once investors become confident that an event will not permanently impair global economic activity, attention typically returns to the underlying drivers of markets such as earnings growth, interest rates and liquidity.

For long-term investors, this historical perspective is important. Short-term volatility during geopolitical crises is common, but it has rarely altered the long-term trajectory of markets.

What this means for portfolios

Periods of uncertainty are an unavoidable part of long-term investing.

Our focus remains on the fundamentals of the assets held within portfolios and how evolving conditions may affect them. We continue to monitor developments closely, particularly the path of oil prices, inflation expectations and global economic conditions.

At this stage, remaining invested remains the most sensible course of action, as market rebounds often occur quickly once uncertainty begins to ease.

If the current disruption proves temporary, markets could recover just as quickly as they have fallen. If the situation evolves into a more prolonged supply shock and markets move lower from here, periods of volatility may also create attractive opportunities to invest in high-quality assets at more compelling valuations.

Maintaining discipline during periods of market stress has historically been far more effective than reacting to short-term headlines. Well-diversified portfolios are designed with exactly these kinds of periods in mind.

We're here to support you through all market conditions. If you have any questions or would like to discuss anything about your portfolio in more detail, please don't hesitate to reach out.

Aged Care

Wed, 11 Mar 2026 05:23:45 GMT

Care in Retirement

While it is often associated solely with residential facilities, the sector is broader in scope, comprising both Residential Care and Support at Home . Residential care provides ongoing assistance in purpose‑built facilities, whereas support at home delivers services to individuals in their own homes, enabling them to maintain independence for longer.

The sector has faced intense financial pressures, prompting the introduction of new rules in November 2025 aimed at ensuring long-term sustainability and creating a fairer system for all members of society.

The reality of caring for so many people has highlighted a substantial increase in expenses during the years when disability and frailty become common. However, while the reforms aim to address sustainability, they have also added complexity, potentially making access more challenging rather than easier.

Care is available

There are options to suit your lifestyle, preferences, and budget – whether that means staying at home with tailored support or choosing a community-based setting.

Identify the support you need

Identifying areas where external support can enhance your quality of life is the first step to maintaining your independence for as long as possible. Understanding which services meet your needs-and how to fund them-provides confidence and peace of mind.

Our Services

We believe it’s essential for our clients to plan for the full retirement journey, including the later years when frailty may become a reality. Graham Financial has invested in training and internal infrastructure to give you the clarity and guidance this complex area demands.

With our team, you’ll have expert advice and personalised support at every step. We help you make confident, informed decisions that protect your financial position, ease stress, and give your family peace of mind.

Season's Greetings

Wed, 17 Dec 2025 00:42:33 GMT

Season's Greetings

Thank you for an Amazing Year

From all of us at Graham Financial, thank you for your support over the past 12 months. We’re excited to continue working with you to achieve your goals in 2026. We wish you and your loved ones a joyful holiday season and a healthy, prosperous New Year.

Holiday Closure Notice

The office will be closed from Friday, 19 December 2025, and will reopen on Monday, 5 January 2026.

For urgent assistance during this time, please contact Martin via email or mobile.

Aged Care

Wed, 17 Dec 2025 00:42:31 GMT

Aged Care

The right advice now helps you make the best choices for future care, security and happiness.

In 2025, the aged care funding model underwent a significant transformation. The sector has faced intense financial pressures, prompting the introduction of new rules in November aimed at ensuring long-term sustainability and creating a fairer system for all members of society. These changes acknowledge the growing costs associated with supporting a large cohort of individuals who require care. The reality of caring for so many people has highlighted a substantial increase in expenses during the years when disability and frailty become common. However, while the reforms aim to address sustainability, they have also added complexity, potentially making access more challenging rather than easier.

We believe it’s essential for our clients to plan for the full retirement journey, including the later years when frailty may become a reality. Thoughtful planning helps you maintain control and independence, even as your care needs evolve over time. We understand the added complexity these changes bring to retirement planning and have invested in training and internal infrastructure to deliver the level of service this area demands. Jody Dening will lead our aged care offering, supported by the Graham Financial administration team.

Aged care is increasingly complex and costly. With Jody and our team, you have access to specialist advice and the support this important area deserves. We’ll revisit this topic in 2026, but in the meantime, we encourage you to reach out to our office to learn more about our aged care advisory service—or simply bring it up at your next meeting with us.

Market Observations

Wed, 17 Dec 2025 00:42:29 GMT

Market Observations

Slow and Steady Wins

Global economic conditions continue to progress at a steady, measured pace, defying repeated predictions of an imminent downturn. Although delays in official US data have blurred the view, alternative labour-market indicators suggest the economy is sturdier than many expect, with stress gauges and private-sector employment pointing to a mild easing rather than any significant weakening. Across major economies — the US, Europe, China and Japan — services activity remains in expansion, and consumer spending has held up despite ongoing uncertainty. Overall, the backdrop is neither booming nor faltering but quietly stable, with room for upside if confidence improves.

The New Gold Rush

Gold’s rapid rise has become one of the standout market stories of recent years. Since early 2020, prices have jumped more than 170%, far ahead of most major asset classes and raising understandable questions about how long the rally can continue. Much of this strength, however, appears to come from lasting forces rather than short-term speculation. Central banks have become major, steady buyers as they reduce reliance on the US dollar and look for protection from geopolitical tensions, fiscal concerns and the growing use of financial sanctions. Many emerging-market countries have been especially active, and investment flows into gold ETFs have picked up again after several years of outflows, adding renewed support.

This rising demand meets a supply side that has struggled to keep pace. Gold mine output has plateaued after years of limited investment and increasing operational challenges, making it difficult to bring new supply to market quickly. Recycling — which often increases when prices rise — has only lifted slightly, leaving the overall supply of gold relatively tight. This imbalance has helped keep prices supported, even as occasional sharp pullbacks remind investors that gold can still be volatile.

In this environment, interest in gold from some investors has become more visible, particularly as shares and bonds have at times moved more in tandem. These features mean gold is often discussed as a potential diversifier, with a history of mixed behaviour during recessions, inflationary periods and geopolitical stress. It is also an asset with clear limitations — it produces no income, experiences periods of volatility and does not suit all investment approaches.

For these reasons, views on gold’s relevance vary widely, and its appeal ultimately depends on each investor’s circumstances, objectives and preferences. Our role is to remain aware of these evolving dynamics while ensuring portfolios continue to be positioned appropriately for their intended outcomes.

Market Outlook

Wed, 17 Dec 2025 00:42:26 GMT

Market Outlook

As we look ahead to 2026, the macro environment remains supportive. Inflation is moderating, financial conditions are easing across many major economies, and corporate earnings remain resilient. Central banks are unlikely to move in unison, with the US Federal Reserve expected to ease gradually, while Australia still faces the possibility of further rate rises due to persistent inflation and a tight labour market. These differences in policy direction are likely to influence global market sentiment throughout the year.

Several opportunities stand out. Falling interest rates in major economies should support activity and benefit sectors that are sensitive to financing costs. Corporate earnings have held up well despite softer patches in economic data, and credit markets continue to offer attractive yields, particularly in higher-quality segments. Investment linked to artificial intelligence remains one of the defining forces shaping markets. AI is becoming increasingly capital intensive, driving demand for infrastructure, hardware, software and energy systems. While financial benefits may emerge unevenly, the growing breadth of the AI ecosystem presents opportunities across a range of industries, not just among the largest US technology companies.

At the same time, a number of risks warrant attention. Valuations across major sharemarkets remain elevated, leaving limited room for disappointment if earnings growth slows. Policy uncertainty, especially around US tariffs and fiscal settings, may continue to affect global trade flows, inflation dynamics and currency markets. Bond markets may again respond sensitively to shifts in inflation expectations and fiscal pressures, even if yield movements were more orderly through 2025. Labour markets in some regions appear to be softening slightly, raising questions about the durability of household spending and broader economic growth.

In this environment, diversification remains essential, although it may need to be applied more deliberately as traditional relationships between asset classes become less predictable. Structural forces such as artificial intelligence, geopolitical realignment and evolving fiscal priorities are likely to shape investment outcomes for many years. A disciplined, fundamentals-driven approach, supported by thoughtful portfolio construction, remains the most effective way to navigate uncertainty. Although periods of market fluctuation are likely, moderating inflation, resilient earnings and continued innovation provide a constructive foundation for long-term investors as 2026 unfolds.

2025 Year in Review

Wed, 17 Dec 2025 00:42:23 GMT

2025 Year in Review

2025 unfolded against a backdrop of heightened geopolitical tensions, shifting central bank policy, and uneven global growth. Markets began the year cautiously, with Donald Trump’s return to the US presidency renewing tariff uncertainty and contributing to early volatility as investors assessed potential impacts on trade, inflation and corporate earnings. Confidence gradually improved as inflation moderated across major economies and expectations for steadier policy settings emerged. A powerful theme in markets was the accelerated investment in artificial intelligence, which became a central driver of global market leadership as the year progressed.

US mega-cap technology companies dominated global returns, contributing to strong performance for the US market. Europe and Japan also delivered solid gains, supported in Europe by easing inflation pressures and resilient corporate earnings, and in Japan by continued structural reforms and improving profitability. Emerging markets outperformed developed markets over the year, driven largely by strong gains in China, where supportive policy measures and stabilising economic data helped lift investor confidence.

Australian shares delivered strong results but lagged global peers, reflecting a narrower set of market drivers and domestic headwinds. Materials supported the local index, aided by strong commodity prices, with a notable share of small-cap gains coming from resource companies, particularly gold miners, benefiting from the rally in gold. However, weakness in health care due to tariff related policy uncertainty and softer performance from the banks weighed on returns. The market also remained more sensitive to shifting inflation expectations and uncertainty around the RBA’s policy path, which tempered valuation expansion compared with overseas markets.

Fixed interest markets provided stability through 2025, with bond yields reflecting the balance among moderating inflation, slower global growth and central bank policy. US Treasury yields declined over the year, helping global bond markets deliver positive returns, while Australian government bond yields rose as local inflation proved more persistent. Australian fixed interest delivered solid outcomes, supported by the higher-yield environment. Credit markets performed well across regions, with Australian and global credit generating steady gains, and global high yield recording strong results.

Be Scam Aware

Thu, 04 Sep 2025 03:45:02 GMT

Be Scam Aware

Technology is helping scammers reach more people than ever before and we see scams becoming more sophisticated and harder for people to detect. Scamwatch received more than 6,300 reports of financial loss to shopping scams in the first half of 2025: the highest of any scam type. Scamwatch data shows that scammers achieved this by creating convincing online shopping platforms, advertising fraudulent products and luring consumers with deals that appear too good to pass up.

Is This a Scam or Legit?

Government bodies and financial institutions will never ask for login credentials or include clickable links in emails. Instead, they direct users to search for official websites and follow secure instructions.

While it’s distressing to see so many people affected by scams, it’s encouraging to know that Australians are speaking up, seeking help and sharing what they know. This information helps us to continue to disrupt scam networks.

SPOT THE RED FLAGS

Unexpected contact from a ‘financial advisor. ’ Criminals may claim to be from a bank, financial institution or investment company, sending you a fake prospectus or link to a website that copies the company’s branding.
It seems too good to be true. You’re promised low-risk investments with higher-than-average returns, often involving shares, foreign currency exchange, treasury bonds, term deposits, cryptocurrencies and real-estate schemes.
Alternative payment methods. You’re asked to make payment using cryptocurrencies, gift cards and money transfers like Western Union.
Unsolicited advice. Never take investment advice from someone you’ve met online. If the advice is from someone you know, like family or a friend, they may have unknowingly fallen for a scam.
Remote access requests. Criminals may ask you to download remote access software, often claiming they need to ‘set up a trading platform,’ which could infect your computer or device with a virus.
Celebrity endorsements. Criminals create ‘news’ stories, online ads and videos using artificial intelligence (AI), so it looks like celebrities are promoting an investment.

STOP

Scammers will create a sense of urgency to pressure you into acting quickly.

Don’t rush to make decisions about money or sharing personal details, take a moment to think.

Say no, hang up, or delete suspicious messages.
Don’t let anyone pressure you into immediate action.
Trust your instincts if something feels wrong.

CHECK

Make sure the person or organization you’re dealing with is real.

Always verify who you’re dealing with before taking any action.

Contact them directly via phone or email from their official website.
Research investment opportunities or offers through official sources like ASIC.
Get a second opinion from your financial advisor.

PROTECT

Act quickly if something feels wrong.

The sooner you act, the better you can protect yourself and others from scammers.

Contact your bank immediately.
Change passwords and security details if they’ve been compromised.
Contact us at Graham Financial 07 4613 0514.
Report to Police. www.cyber.gov.au
Report to Scamwatch. www.scamwatch.gov.au help to protect others

Productivity

Thu, 04 Sep 2025 02:10:31 GMT

Productivity

Productivity has been getting a lot of attention recently and for good reason. We thought it would be a great opportunity to explore this topic in a bit more depth.

What is productivity?

Put simply, productivity measures how efficiently inputs (say, labour, capital or raw materials) are used to produce outputs (goods or services).

Productivity growth occurs when the economy finds new and better ways of using its resources, including through discovering and investing in new technologies, shifting resources to better uses, and increasing the skills of its workforce. Productivity growth is not about working harder or longer, but rather smarter to produce more.

Here is a simplified example. Rob currently makes hand-made watches. He can make 100 a month, working a 40 hour a week. He makes $100 profit on each one, therefore he makes $10,000 a month. If he wants to lift his standard of living (real income), he either needs to make more watches, or increase his profit on each watch. Assuming he can’t lift his profit, he will need to make more watches. Working longer hours is an option, but this is not a productivity gain. A productivity gain occurs when he finds efficiencies to make more in the same amount of time. So, whilst working longer will make you more money, productivity gains are what increase your standard of living in real (inflation adjusted) terms.

Many of the biggest productivity improvements have come from things that have made work easier, such as machines, robots and computers.

Why is it so important?

Economist Paul Krugman said “Productivity isn’t everything, but, in the long run, it is almost everything. A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker.”

Most of Australia’s standard of living increases over the last two decades have come from our terms of trade boom in various commodities, most notably iron ore. Unfortunately, this tailwind appears to be over as our key commodity prices soften.

Therefore, if we want to continue to increase our standard of living, we will need to find productivity gains.

How have we been doing?

As the chart below shows, productivity hasn’t been great for some time, but from March 2022 to March 2025 we have had the worst productivity performance on record, with a fall of 5.3%. This has seen a significant fall in our real net disposable income per hour and a corresponding decline in our standard of living.

Productivity growth is the key driver of real wages growth in the long run - as this allows real wages to increase.

To understand this better, it may be helpful to come back to our example with Rob the watchmaker. What if he just lifts his prices every year over and above inflation instead of making more watches? Wouldn’t this be an easier way to improve his standard of living? Whilst this may be temporarily possible (and potentially permanent for some rare businesses), when this happens economy wide, all we get is increased inflation. So, whilst Rob increases his earnings by say 5%, if everything Rob buys costs 5% more, Rob is no better off.

Another way of demonstrating this is the correlation between labour productivity and real per capita consumption over this period. For the first time in decades, per capita consumption in real terms actually fell.

In addition to the inflation issue, there is a competition issue. If other countries are becoming more productive at the same time as we stagnate, the things we make will be comparatively more expensive. All else being equal, this will mean Rob sells fewer watches - ultimately accelerating his decline in living standards.

How are other advanced economies performing? As shown in the chart below, broadly productivity has slowed in most countries with the United States being a notable exception.

There has been extensive work and discussion analysing the reasons for this productivity slowdown. Some of the primary drivers in Australia include:

1. Uncompetitive tax rates - By comparison to other advanced economies, Australia’s corporate income taxes are very high. Our statutory company tax rate (30% for medium and large businesses) is the fourth highest in the OECD.

2. Capital shallowing - Australia has experienced rapid population growth - an increase of 8.7 million people this century, primarily through immigration. However, this influx hasn’t been matched by sufficient investment in infrastructure, housing, machinery, or technology.

3. Weak business investment - Depressed business investment has stalled the growth of Australia’s capital stock. Without robust investment, especially in sectors that drive innovation and efficiency, productivity gains are limited.

4. Expansion of the non-market economy - Government-funded sectors like the NDIS have grown rapidly. While socially beneficial, these sectors typically have lower productivity growth compared to market-driven industries.

5. Soaring energy costs – In particular high gas prices have increased operating costs for businesses, reducing competitiveness and productivity. Industrial energy prices in countries like the US and Canada are less than half that of Australia.

6. Industrial relation policy - Australia’s IR regime has become overly rigid and costly, especially for manufacturing and small businesses. The lack of flexibility in hiring and wage negotiations is seen as a barrier to innovation and efficiency. The Albanese Government’s August 2025 productivity summit explicitly ruled out IR policy from its agenda, despite calls from economists and analysts to address it. This decision was seen as politically cautious and a missed opportunity to tackle structural reform.

7. Regulation - The Productivity Commission and business groups have identified excessive regulation as a major drag on productivity. In a recent speech, Commission Chair Danielle Wood warned that Australia’s “regulatory creep” - the steady expansion of rules and conditional terms in legislation - has dampened growth by prioritising short-term fixes over long-term reform. This sentiment was echoed by Assistant Minister for Productivity Andrew Leigh, who called for “thickets of regulation” to be reduced to improve outcomes.

8. Housing - Australia is experiencing a deep housing crisis, with affordability deteriorating sharply. The average home now costs over $1 million, and the house price-to-income ratio has reached 8.0, meaning the median house costs eight times the median annual household income. This financial strain reduces disposable income, limits consumer spending, and forces workers to live farther from employment hubs, increasing commute times and reducing labour efficiency.

Where is productivity going?

On 12 August, the Reserve Bank of Australia (RBA) cut rates 0.25% to 3.6%. At the press conference post the announcement, the focus was not on the rate cut, but their downgrade of the productivity growth assumptions from 1.0% to 0.7%. This is a 30% reduction in productivity expectations in the medium term. They stated “For some time, our forecasts have implicitly assumed that productivity growth was temporarily weak and would gradually return to, and be sustained at, higher historical growth rates. More often than not, this has not eventuated, resulting in the RBA’s implied productivity forecasts consistently overestimating the actual outcomes… In recognition that some of the lower productivity growth in recent decades is attributable to persistent factors, we are downgrading our medium-term trend productivity growth assumption. We now assume that productivity growth will return to 0.7 per cent by the end of the forecast period, rather than 1.0 per cent.”

This is not an encouraging development. If these forecasts are accurate, this not only results in lower real wages growth, but also increases the risks to inflation being elevated.

Market Volatility - “Liberation Day” Tariffs

Thu, 03 Apr 2025 06:46:44 GMT

Market Volatility ― “Liberation Day” Tariffs

What has happened in markets?

Markets have once again responded sharply to escalating trade tensions, as President Trump overnight announced sweeping new tariffs on key US trading partners — branding it a “Liberation Day” initiative aimed at reshaping global trade. The reaction has been swift. In Australia, the S&P/ASX 200 initially dropped more than 1% after a new 10% tariff was imposed on Australian exports to the US. Prime Minister Albanese described the move as “unwarranted” and announced targeted support for impacted industries. Across Asia, markets also retreated, with Japan’s Nikkei 225 falling nearly 3% and South Korea’s Kospi down close to 1%, following US tariffs of up to 25% on goods from both countries. European and US share markets are expected to follow suit, with futures pointing to declines when trading opens later this evening.

What is causing the recent market volatility?

President Trump’s latest tariff announcements have added further fuel to the market volatility that began in late February 2025. Financial markets remain unsettled, with shifting US trade policies creating ongoing uncertainty. Trump has previously warned that the US economy may face some “short-term pain” — a remark that has weighed on investor sentiment.

The broader sell-off reflects rising concerns that renewed trade tensions could lift inflation, disrupt global supply chains, and place pressure on economic growth. Continued uncertainty may prompt central banks — including the Reserve Bank of Australia — to consider further interest rate cuts as a precaution.

As outlined in earlier updates, while the US tariff saga has been a key trigger for recent volatility, it follows a period of strong performance. The S&P 500 rose by more than 20% in each of 2023 and 2024, pushing valuations to elevated levels. From this starting point, markets have become more sensitive to shifts in the outlook, making them particularly reactive to any emerging uncertainty around future growth expectations.

What are we doing in response?

While market conditions have become more turbulent, our view remains unchanged. We continue to monitor developments closely and, while there is no need to adjust your portfolio at this stage, we are thoughtfully considering whether some minor changes may be appropriate in light of recent events. Your portfolio remains anchored by a well-diversified mix of growth and defensive assets, managed by high-quality fund managers — a structure designed to provide stability and resilience through periods of market volatility.

Why market volatility is not a reason to panic

Markets don’t move in straight lines. Ups and downs are part of the normal investment cycle, influenced by factors such as interest rates, inflation, economic shifts, and global events. While short-term drops can be unsettling, history shows that markets tend to recover — and reward patient investors over time.

Whether you’re building retirement savings or drawing income in retirement, your investment portfolio has been structured to meet your needs. This means balancing short-term stability with long-term growth, so temporary market fluctuations shouldn’t derail your financial goals.

Growth assets reward patience

Investing in shares and other growth assets has historically delivered higher returns over time, while more defensive investments like cash and bonds help cushion short-term volatility. Consider these key points:

Markets recover — While short-term declines are expected, long-term trends have remained upward.
Growth outperforms — Historically, shares have outpaced inflation and outperformed defensive assets.
Timing the market is risky — Missing even a few key rebound days can significantly reduce long-term returns.

Staying the course

For those still accumulating wealth, downturns can be an opportunity to buy more at lower prices. For those in retirement, portfolios are designed with income-producing and defensive assets to support your near-term needs. No matter your stage, the best approach remains:

Stay invested
Stay diversified
Stay focused on your goals

We’re here to support you through all market conditions. If you have any questions or would like to discuss anything about your portfolio in more detail, please don’t hesitate to reach out.

Budget 2025

Tue, 01 Apr 2025 01:20:09 GMT

Budget 2025 - Spend, baby, spend!

The budget has been largely overshadowed by the announcement of the election on 3 May 2025. The daily news cycle is much better suited to covering soundbites and the antics of politicians as they try to grab your attention — and hopefully, your vote.

The narrative of the budget, as delivered by Dr. Chalmers, is one of a nation in crisis — a budget handed down in an environment where the Government is morally obligated to come to the aid of its citizens. However, the measures continue to lock in structurally higher spending and budget deficits for the medium term.

The cavalier nature of the spending commitments in this budget is worrying, especially as it contrasts starkly with the budget delivered by Dr. Chalmers just a year ago.

In the 2024 budget, Treasurer Jim Chalmers emphasized the need for fiscal restraint and responsible economic management. He drew from the concerns raised in the 2023 Intergenerational Report, which highlighted significant future pressures on Government spending due to an ageing population, rising healthcare costs, and increasing demand for aged care and disability services.

Despite these warnings, the 2025 budget reveals a notable increase in actual spending. Government spending as a share of GDP is expected to average 26.7% over the longer term — an historical high well above the pre-COVID average of 24.8%.

Successive budgets had forecast lower revenue and have been pleasantly surprised by significantly larger revenue flows from higher personal tax collections and elevated commodity prices. These are welcome — albeit temporary — surprises. However, in setting the budget, the Government has used these temporary windfalls to increase permanent spending commitments.

For example, the budget estimates that ‘growth’ in NDIS spending will be 8% and decrease over the next decade. Putting aside the validity of such an estimate (growth has never been below 10% to date), the spending these forecasts relate to is not temporary.

As long as we keep getting revenue surprises, this cavalier approach to spending might be sustainable. But what happens when the revenue surprise goes against us?

Spending 26.7% of GDP on Government expenditure only holds if revenue remains consistent. If unemployment rises or commodity prices fall, revenue also falls. A material drop in revenue could easily push that 26.7% figure closer to 30%. What then?

When will Australians be treated like adults and told the truth? Dr. Chalmers acknowledged this issue in 2024 — that we need to take responsibility for our expenditure today, rather than relying on future generations to pay for our profligacy.

The 2025 budget forecasts deficits for the next decade — despite record revenue and historically high terms of trade. When will we see a Government prepared to address these underlying deficits while the economic conditions are still in our favour?

When the budget goes into deficit, the money a politician promises is borrowed money. The question all politicians should be asked over the next five weeks: Why do you believe that our kids — and yours — should pay for the spending decisions of today?

Budget Measures announced and passed in the Senate bill

Taxation

All taxpayers will receive tax cuts starting from 1 July 2026. The 16% tax rate on taxable income between $18,201 and $45,000 will reduce to: 15% from 1 July 2026, and 14% from 1 July 2027.

This will mean super guarantee payments made by employers will be taxed at a higher rate than the marginal tax rate up to $45,000.

Cost of living

Energy bill relief extended for six months: All Australian households and eligible small businesses will receive an additional energy rebate of $150. The rebate will be automatically applied to electricity bills between 1 July and 31 December 2025, in two quarterly instalments of $75. It’s expected that the eligibility rules that apply to small businesses will remain unchanged.

Student loans to be cut by 20%: Student loans will be reduced by 20% before the annual indexation is applied on 1 June 2025. The changes will apply to all HELP Student Loans, VET Student Loans, Australian Apprenticeship Support Loans, Student Start-up Loans, and Student Financial Supplement Scheme.

Reduced student loan repayments: The income that can be earned before student loan repayments need to be made will be increased from $54,435 in 2024/25 to $67,000 in 2025/26. Repayments will be calculated on only the income earned above the $67,000 threshold, not on total income.

Lower cap for PBS medicines: The maximum cost of Pharmaceutical Benefits Scheme (PBS) medicines will decrease from $31.60 to $25 per script from 1 January 2026. Pensioners and Commonwealth concession cardholders will still only pay the subsidised rate of $7.70 per PBS script until 1 January 2030.

Medicare bulk billing incentives: Incentive payments will be introduced to expand bulk billing to all Australians from 1 November 2025. Also, a new Bulk Billing Practice Incentive Program will be introduced for general practices if they bulk bill every visit under Medicare.

Expanded ‘Help to Buy’ program: The Help to Buy program is expected to commence later in 2025. The Commonwealth will provide an equity contribution up to 30% of the purchase price of an existing home and up to 40% of the purchase price of a new home. The income cap and property price caps used to determine eligibility will increase. For singles, the income cap will increase from $90,000 to $100,000. For joint applicants (and single parents), the income cap will increase from $120,000 to $160,000. The property price cap depends on the location of the property.

Social Security

‘3-day guarantee’ for childcare subsidy: Families will be eligible for at least 72 hours per fortnight (three days per week) of subsidised Early Childhood Education and Care (ECEC) without having to meet certain activity requirements (such as paid work, volunteering, and studying). This measure is legislated to start from 1 January 2026.

Market Update December 2024

Thu, 12 Dec 2024 23:58:17 GMT

Financial Update December 2024

The highlights:

Donald Trump secured a return to the White House, and the Republican party achieved a clean sweep in Congress. This resulted in a continuation of the so-called “Trump trades” that had begun in anticipation in October, with investors favouring market sectors expected to benefit from Trump’s policies.

International shares enjoyed solid gains in November , but the returns were mixed regionally depending on the perceived impacts of a Trump presidency.

US shares surged ahead but Asia and Europe lagged. Meanwhile, Australian shares rebounded in November to set new record highs.

Global and local fixed interest markets finished the month positively , rebounding from early volatility. Bond yields initially climbed on fears that Trump’s inflationary policies might lead to prolonged higher interest rates, but later declined as these concerns eased.

Market observations

November 2024 saw robust gains across financial markets, driven primarily by the outcome of the US presidential election. With Donald Trump securing a return to the White House and the Republican party achieving a clean sweep in Congress, investors leaned into “Trump trades”, anticipating policy shifts favourable to certain sectors and the broader economic outlook.

The rotation into assets poised to benefit under a Trump administration began in October, as expectations of a Republican victory strengthened. Once the election results were confirmed, the pace of this shift accelerated. US shares rallied strongly, led by the financials sector, which will likely benefit from a more lenient regulatory environment under Trump. The consumer discretionary sector also performed well, with sector heavyweight Tesla leading the charge as markets viewed the improving relationship between Trump and Elon Musk as a tailwind. Small-caps delivered notable outperformance in November, buoyed by optimism around a robust US economic outlook and the potential for more business-friendly policies. The US dollar continued to strengthen.

Bond yields initially rose as investors considered the inflationary implications of Trump’s policies.

The yield on the 10-year US Treasury climbed to 4.45% by mid-November, briefly dampening share market enthusiasm. However, yields eased off in the latter half of the month, providing relief for shares globally and pushing the US market to new highs.

While US shares flourished, markets in trade-focused economies such as Europe, Japan, and China were sold off on concerns over the prospect of trade tariffs. In contrast, Australia grappled with internal economic challenges. A weaker-than-expected GDP print underscored the strain on Australian households, marking the seventh consecutive quarter of per capita GDP contraction. The nation remains in a ‘per capita recession’, with headline growth propped up by strong immigration. Nevertheless, shares in the Australian banks continued their remarkable rally, with the Commonwealth Bank of Australia now trading on a lofty 26x forward price-to-earnings (PE) ratio.

As markets head into the final stretch of 2024, expectations remain high. Investors will closely watch the Trump administration’s ability to deliver on growth policies, central banks’ stance on rate cuts, and corporate earnings growth. With the MSCI World Index trading at a forward PE of 19.9x, valuations appear stretched. The sustainability of these recent gains hinges on robust growth materialising in 2025.

Economic review

Australia

Australia’s economic landscape remains challenging, with core inflation — the Reserve Bank of Australia’s (RBA) preferred measure of inflation that excludes volatile items — rising to 3.5% in October. The RBA held the cash rate steady at 4.35% during its December meeting, without considering a rate cut. However, Governor Michele Bullock expressed increased confidence that inflation is trending toward the 2-3% target range, raising the likelihood of a rate cut by April or May next year. Notably, the RBA dropped its previous stance of "not ruling anything in or out" regarding further rate hikes. This shift was widely interpreted as a dovish signal, suggesting the possibility of rate cuts, rather than rate hikes, ahead.

Australia’s labour market remains resilient, with the unemployment rate for October flat at 4.1%. The labour force participation rate declined marginally to 67.1%, suggesting a small reduction in workforce engagement. Early Black Friday discounts and improved consumer sentiment saw retail sales increase by +0.6% in October, marking the third consecutive month of growth. Despite these developments, declining labour productivity raised concerns about living standards and economic sustainability and prompted calls for structural reforms to enhance productivity and economic growth.

The US economy remains strong, with consumer spending increasing more than expected, indicating sustained growth momentum into the final quarter of the year. Inflationary pressures persist, as core PCE inflation rose 2.8%, up from 2.7% in September, with rising services costs outweighing declining goods prices. The US labour market rebounded in November, following October’s hurricane-affected figures, but the unemployment rate rose slightly to 4.2%.

In response to the mixed but broadly positive economic indicators, the Fed reduced the federal funds rate by -0.25%, resetting the target range to 4.50%–4.75%. Fed Chair Jerome Powell stated, “the US economy is in good shape,” and “significant progress” had been made in lowering inflation toward the Fed’s 2% goal. He emphasised that future monetary policy decisions would be data-driven, aiming to promote maximum employment and price stability.

Donald Trump’s presidential victory and the Republican party securing a majority in both the Senate and House of Representatives fuelled expectations that the next government’s policies would extend American exceptionalism in the economy.

Europe

Eurozone inflation rose to 2.3% in November from 2.0% in October, driven by base effects as last year’s energy price declines faded. Despite inflation increasing, eurozone growth remained weak, with the European Central Bank (ECB) expected to trim its deposit rate by 0.25% when it meets in mid-December to support the economy. With price pressures in the UK easing and inflation now below the Bank of England’s (BoE) 2% target, the central bank cut its key rate from 5.00% to 4.75%.

Asia

Chinese inflation fell to a five-month low in November, indicating that Beijing's recent measures to boost economic demand have had limited success. This outcome persists despite ongoing government stimulus efforts. As the world’s second-largest economy faces the prospect of new tariffs under a potential Donald Trump presidency and contends with existing economic challenges, further policy support may be required to stabilise fragile growth.

Core inflation in Japan's capital accelerated in November and stayed above the central bank's 2% target as price pressures broadened, keeping alive market expectations the Bank of Japan (BOJ) would raise short-term interest rates from the current 0.25% at its next policy meeting in December.

Asset class review

Australian shares

Australian shares rebounded in November. Record highs across multiple sectors pushed returns for the local market ahead of most other major markets, with the exception of the US. The S&P/ASX 200 Index posted a gain of +3.8%. Smaller companies’ recent run of outperformance relative to their larger counterparts ended, although the S&P/ASX Small Ordinaries Index still recorded a solid +1.3% return for the month.

Sector performance was broadly positive in November, with only a pair of detractors. Information technology (+10.5%) surged on strong US tech performance and positive domestic earnings updates. Falling yields were a tailwind for interest-rate-sensitive utilities (+9.1%), consumer discretionary (+6.9%) and real estate (+6.4%), which all made strong gains. Financials (+7.0%) also enjoyed a strong month, buoyed by further gains from the major banks. Materials (-2.6%) and energy (-0.7%) underperformed with the prospect of US tariffs on China weighing on miners and easing Middle East tensions pressuring oil prices despite talk of potential OPEC+ production cuts.

International shares

International shares delivered mixed returns in November, with the US surging ahead and Asia lagging. A slight decline in the Australian dollar saw unhedged returns edge out hedged returns for the month. The MSCI All Country World Index climbed +4.3%, while the hedged index advanced a similar +4.1%. Global small companies were one of the biggest beneficiaries of Trump’s victory and the prospect of policies that will spur growth domestically. The MSCI World ex-Australia Small Cap Net Return AUD Index jumped an exceptional +7.2%. Sector performance continued the broadly positive theme. Consumer discretionary (+9.6%) made outstanding gains due to falling interest rates and strong earnings updates from key retailers. Financials (+8.4%) and energy (+5.4%) sectors performed well, benefiting from expectations of de-regulation under a Trump presidency. While information technology (+5.3) and industrials (+5.0%) recorded solid gains.

US shares led global markets as the prospect of further rate cuts in the new year eased concerns about Trump-induced inflation towards the end of the month. The S&P 500 Index advanced an impressive +5.9% in November, while the tech-concentrated Nasdaq Composite Index moved +5.7% higher. The FTSE 100 Index gained +2.6% in November. This performance was primarily driven by a weaker pound, which enhanced the value of internationally focused companies within the index. Conversely, the Euro Stoxx 50 Index retreated -0.4% for the month, with uncertainty about future US trade tariffs and weak demand from China weighing on export-focused companies. Turbulence in the yen and mixed domestic economic indicators dampened investor sentiment in Japan, with the Topix Total Return Index giving back -0.5%. Emerging markets also retreated. The MSCI Emerging Markets Index (Hedged) moved -2.8% lower in November, lagging most developed markets. Chinese shares experienced a weaker month as concerns around trade tensions impacted returns. The MSCI China Net Total Return Index fell -4.1%.

Property and infrastructure

Further policy easing in the US and declining bond yields boosted returns for interest-rate-sensitive global property and infrastructure assets. Rebounding in November, the FTSE Global Core Infrastructure 50/50 (Hedged) Index gained +3.2%, while the property-focused FTSE EPRA Nareit Developed Index (Hedged) rose +2.6%.

Fixed interest

Fixed interest markets closed November on a positive note, overcoming early-month volatility. Bond yields initially climbed on fears that Trump's inflationary policies could compel the Fed to maintain higher interest rates for longer. However, yields later retreated as markets reconsidered the timeline and potential impact of these policies, leading to renewed optimism in bond markets. The 10-year US Treasury yield eased -0.12% to 4.17%, while the 10-year Australian Government Bond yield retreated -0.16% to 4.34%. Falling yields were a tailwind for returns from global and Australian bond indices. The Bloomberg Global Aggregate Bond Hedged Index gained +1.2% for the month, while the Bloomberg AusBond Composite 0+ Yr Index rose +1.1%. Tightening spreads (the additional yield a corporate bond offers over a government bond with the same maturity) in November was a tailwind for global credit markets (corporate bonds). Global investment-grade credit, as measured by the Bloomberg Global Aggregate Credit Total Return Index Hedged AUD, advanced +1.3%. Spreads also narrowed for global high yield credit, with the Bloomberg Global High Yield Total Return Index Hedged AUD rising +1.3%. Returns from the Australian credit benchmark were more modest, with the Bloomberg AusBond Credit 0+ Yr Index advancing +0.9%.

US Election Result 2024

Thu, 07 Nov 2024 22:36:54 GMT

2024 US election result: Market implications

The immediate market response has been strong, reflecting both the relief of reduced uncertainty and anticipation of significant policy shifts. US shares surged 2%-4% overnight, led by gains in small-to-mid-cap shares. Fixed interest (bond) markets sold off with a sharp rise in 10-year US Treasury yields, and the US dollar strengthened.

Market outlook

With a pro-growth agenda, the Republican victory has sparked market expectations for tax cuts, deregulation, and increased fiscal spending — all likely to boost company earnings and encourage business investment. Small-to-mid-sized companies, and sectors like energy, pharmaceuticals, and financials will likely benefit most. Plans to reduce or reverse immigration may lead to labour shortages in construction, restaurants, and healthcare sectors.

Expectations that the fiscal deficit will rise may push bond yields higher — a potential outcome of fiscal spending is that it stimulates economic growth and leads to fewer US Federal Reserve (Fed) rate cuts. Additionally, higher fiscal deficits mean more US Treasury debt issuance, putting further pressure on bond yields to rise. Higher interest rates may attract greater foreign investment into US markets, pushing the US dollar higher.

Key risks

Higher bond yields could weigh on returns from shares and bonds, particularly if driven by a rise in inflation. The Fed may slow or pause its anticipated rate-cutting path or even hike rates if growth accelerates and triggers a pick-up in inflation. Trump’s proposed tariffs on imported goods could also be inflationary, harm growth, strain global trade, and ultimately impact company earnings.

Implications for investors

Markets have responded positively to the growth prospects under the Trump administration, but investors should remain watchful amid risks of rising bond yields and possible trade tensions. Although Trump’s win signals opportunities in certain sectors, a selective approach will be key for investors navigating the post-election landscape. While elections can cause short-term volatility and shifts in investor sentiment, medium to long-term market performance is ultimately influenced by economic fundamentals and global events.

Inflation

Thu, 19 Sep 2024 06:28:02 GMT

Inflation

Inflation and the “cost of living crisis” have been constant topics in the media over recent months. Dr Jim Chalmers has led a narrative that the current Government budget settings and focus on household expenses has been the correct path to reduce domestic inflation.

With federal and several state elections due to be held in the coming months, politicians have been calling on the central bank to start to cut interest rates to compliment budget subsidies and increased Government expenditure.

Dr Chalmers has cited global forces as a key driver of domestic inflation and watching Canada, European Central Bank, New Zealand Central Bank and the US Federal Reserve all commencing cutting cycles has him and his Government focussed on when the Reserve Bank of Australia (RBA) might commence a similar process.

Much to the chagrin of Dr Chalmers and other Labor politicians, Michelle Bullock the RBA Governor has held her ground explaining it is too early to make this sort of call stating that if there was to be a cut it is not likely until early 2025. In a recent speech she went further, explaining that the domestic inflation surge is largely a product of excess expenditure by Federal and State Governments.

This piece of home truth has led to some fractures in the relationship between the RBA and the Government. Dr Chalmers had a few more guarded comments, but the former treasurer Wayne Swan went on record with quite a spray of emotional language suggesting Ms Bullock was making the incorrect decision.

Where is inflation today and why is the Governor reluctant to suggest cuts anytime soon?

Inflation in Australia peaked in December 2022 at 7.8%. In response, the RBA raised interest rates 13 times in 18 months increasing interest rates from 0.1% to the current 4.35%. This increase is the quickest and largest increase in history.

Inflation in Australia has fallen steadily since its 2022 peak towards the preferred band between 2% and 3%, however the last quarterly report showed an increase from 3.6% to 3.8%.

Another perspective on this situation is to analyse "real" interest rates, which is the cash rate minus inflation. In countries like the US, core inflation is slightly above 3%, while their interest rates were 5.25-5.5% (now 4.75%-5.0%). Prior to being cut, their real rate was well over 2%. In contrast, Australia’s real rate is just above 0%, as illustrated in the chart below.

It would be highly unusual to cut rates when the real rate hits 0%, especially during the most severe inflationary period in decades. For example, the last time Australia faced significant inflation was back in 2007/08, when the cash rate was 7.25% and real rates exceeded 3%, as shown in the chart.

In a speech on September 5, Michelle Bullock noted, "the level of demand for goods and services in the economy is higher than the ability of the economy to supply those goods and services. So there’s still a gap there. So even though it’s slowing, we still have this gap….That’s why inflation is still there.” She further stated, "In our August forecast, underlying inflation is expected to be back in the target range by the end of next year, and to approach the midpoint in 2026.” Notably, the RBA extended the timeframe for achieving target inflation compared to their May forecast.

Governor Bullock emphasised that this outlook is uncertain, highlighting a chart (see below) showing the range of expected outcomes and their probabilities.

While the market and market commentators are pricing in significant rate cuts, the RBA data suggests there is a significant probability that we may still have further interest rate rises to come before this cycle is complete and inflation is back to its target point.

Why is inflation important?

Inflation is the increase in the price of goods and services. A small level of inflation is the preferred outcome in an economy, however inflation that is higher will impact on every household to varying degrees.

Inflation hurts all households, but it hurts the poorest households the most as they tend to allocate more of their spending towards essentials, such as food, utility bills and rent. A higher income household may feel the impact through having less money to allocate to discretionary spending.

Inflationary pressures in non-discretionary items leave very little room for household budgets that are already under stress. This is perhaps the aspect of the current inflation cycle that has our political class so concerned. It makes sense that a government would want to provide support to those within our society that are in genuine need.

However, the inflation pressures today are demand driven. A government and to an extent a central bank that looks to provide support in the short term to meet their own agendas without having the courage to discuss and tell society how that support might prolong inflation in the economy in the medium term is negligent.

Inflation requires the suppression of demand or the increase of supply. Increasing supply when you have full employment means productivity must increase. Unfortunately, productivity improvements have been low for some time, but in recent years, productivity has actually been going backwards.

A society can choose to feel short-term discomfort today and address the inflation issue, or we can choose to risk a much deeper and far more painful adjustment that is beyond our control in the future.

The impact of inflation on the vulnerable is the reason why returning inflation to the acceptable band is so important. The small chance that elected officials might choose the short-term sugar hit of rate reductions instead of maintaining the necessary path of higher rates that will reduce inflation, is the key reason we have the separation of fiscal and monetary policy powers and why the RBA remains independent of government.

Has Government expenditure helped?

Inflation is the product of excess demand chasing scarce resources. Demand will come from households, business, government and internationally via exports. The recent national accounts showed Government consumption had increased 1.4%. Without this growth the quarterly report would have turned negative.

Dr Chalmers can accurately cite that without this increase in Government expenditure growth in Australia had stalled. But it is equally accurate to ask if this expenditure has contributed to inflation as has been suggested by the Governor.

The mandate for the RBA addresses inflation but also the pursuit of full employment. Inflation and unemployment are intertwined meaning the goal of each mandate can’t be achieved in isolation of the other.

The RBA defines full employment as the maximum level consistent with low and stable inflation. So, it follows that a labour market operating at above full employment will add inflationary pressure. The graph below is a bit busy but the point to note is that while the full employment indicators have fallen (orange dots moved to blue dots) they remain at the top end of the average observations since the year 2000 (at the top end of the historic range).

This indicates two potential outcomes. The first is that the economy must shed more jobs before we reach the equilibrium between unemployment and inflation, or the nation must increase productivity to absorb the surplus labour capacity.

It is difficult to see any Government policy (state or federal) that has been developed and implemented that will or even could increase productivity within the economy.

This is the rub the current Governments need to understand. Government consumption is supporting a labour market that remains too tight. They must either accept the money the Government is injecting is creating jobs that are taking labour away from more productive areas of the economy, or the various regulations they are putting in place have restricted other areas of the economy from increasing productivity to absorb the surplus labour demand.

Summary

Inflation is heading in the right direction, but it has some way to go in Australia. Unfortunately, we have higher inflation than our peers (US, UK, Canada and NZ) – we also did not go as hard on rate increases. In addition, our state and federal governments are increasing spending which is adding to demand and hence inflation. As such, as our peers begin their cutting cycles, it is not a given that Australia will be able to do the same. In fact, given the current suite of data, it’s hard to see any significant interest rate cuts in the short term. Of course, the data could deteriorate quickly, and this would facilitate a change in this outlook. However, we would urge people to be careful what they wish for.

Budget 2024 Measures

Tue, 21 May 2024 03:21:33 GMT

Budget 2024 Measures

Cost of living

Energy bill relief: All Australian households will receive an energy rebate of $300 and eligible small businesses will receive $325 from 1 July. It’s not yet known when rebates will be applied to accounts.

Student debt indexation changes: Higher Education Loan Program (HELP) loan holders will benefit from changes to indexation, with debts to be increased by the lower of inflation and wages growth. Currently, these debts are indexed to inflation annually on 1 June. The change will be backdated to 1 July 2023 and an indexation credit may be provided to reduce outstanding loan balances. If a voluntary payment is made to reduce the HELP balance and any indexation, it’s important to leave enough time after the payment is made for it to be processed by the ATO prior to 1 June 2024. The ATO publish the cut off dates on their website.

Freeze on cost of PBS medicines: The maximum Pharmaceutical Benefits Scheme (PBS) co-payment of $7.70 will be frozen for pensioners and Commonwealth concession cardholders until 31 December 2029. For all other Medicare card holders, the co-payment of $31.60 is frozen until 1 January 2026. The co-payment is the amount that must be contributed towards the cost of PBS subsidised medicines.

Social Security and Aged Care

Deeming rates to stay frozen in 2024/25: The deeming rates that are used to assess income from financial investments (such as bank accounts, shares, and managed funds) will remain unchanged until 30 June 2025. Instead of assessing actual investment and bank account earnings, deeming rates are used to determine the income that certain financial investments earn for the purpose of calculating entitlements to government payments and benefits such as the Age Pension.

Support for renters: On 20 September 2024, the maximum Commonwealth Rent Assistance payment will increase by 10%, in addition to the regular half-yearly indexation. Rent Assistance may be available for people who pay rent and receive certain payments from Services Australia.

More work flexibility for carers: From 20 March 2025, Carer Payment recipients will be able to work up to 100 hours at any time in a four-week period without losing their payment. This is known as the ‘participation limit’ and it’s currently a maximum of 25 hours every week. Also, travel time, education and volunteering activities will no longer count towards the participation limit; only actual hours worked.

More home care packages: An additional 24,100 home care packages will be made available in 2024/25. These packages will provide ongoing care to help older Australians to stay in their homes for longer.

Business Taxation

Instant asset write-off extended: Small businesses with a turnover below $10 million will be able to claim an immediate tax deduction for the full cost of eligible assets costing less than $20,000 for another 12 months until 30 June 2025. The $20,000 threshold applies to each eligible asset purchased. Also, the asset must be first used or installed ready for use between 1 July 2024 and 30 June 2025.

Personal Taxation

Tax cuts for all taxpayers: From 1 July, 13.6 million taxpayers will pay less tax compared to the current financial year, when the re-worked Stage 3 tax cuts take effect. The tax savings depend on taxable income. The table below outlines the new rates and thresholds from 1 July 2024, as well as the current financial year.

Superannuation

Super on Paid Parental Leave: Superannuation Guarantee contributions will be paid to all recipients of Government-funded Paid Parental Leave from 1 July 2025. Contributions will be at the same rate as employer contributions under the Superannuation Guarantee, which will be 12% from 1 July 2025.

Key Superannuation Rates and Thresholds: The table below outlines the new rates and thresholds from 1 July 2024 compared to the current financial year.

Budget 2024 - What is it trying to achieve?

Tue, 21 May 2024 03:20:58 GMT

Budget 2024 – What is it trying to achieve?

Dr. Jim Chalmers has delivered his third budget in two years, with some pundits suggesting it may be his last before an early election is called. Overall, the commentariat has not been favourable, with some exceptions.

Every budget has a showpiece that is turned into a soundbite to promote its political sell. The 2024 budget focuses on “cost of living” and “a future made in Australia”, encapsulated by the political soundbite “everyone will be better off”. However, it could equally be phrased, “have everything today and let your kids pay”.

The development of public policy in the modern era is increasingly reactionary. Success is measured by what is achievable over the next 6 to 12 months. Spending $3.5 billion to provide a $300 subsidy to every household is considered prudent, based on the logic that it will reduce inflation – at least for the current year.

There is little recognition that, like all subsidies, this might lead to additional spending in other areas. Nor is there any narrative about what will happen to individuals next year when the subsidy is unavailable. In Dr. Chalmers' world, being better off this year trumps any pain that may be felt when the subsidy runs out next year.

Like many budgets before it, this one exhibits a short sightedness, using examples of individual economic pain as rationale to continue expanding budget expenditure measures. Despite some attempts to reduce fraud, the NDIS remains an unconstrained expense measure, continuing to increase its stranglehold on the Budget position.

Introduced in 2013, the NDIS was developed as a “person-centred model of care and support”. The eligibility thresholds are based on individual needs rather than a budget limit, making it unconstrained. The cost of the NDIS has exceeded bureaucratic forecasts every year since its introduction. Reporting in the AFR in 2024 estimates costs will exceed $125 billion a year by 2034.

The "future made in Australia" theme has the budget allocating $1 billion to support innovative manufacturing facilities in Australia under the Solar Sunshot program. This program is designed to provide support to the solar industry incentivising private capital with the goal that we become competitive with the Chinese manufacturing juggernaut.

The $1 billion announcement has all the hallmarks of political shock and awe but in reality, it has no rigour or support as to why this is too much or too little capital. History suggests this program will be back in successive budgets requiring additional capital.

Politicians announce bold projects with unbridled optimism, and when they go awry, they hide the evidence. The Turnbull Government’s Snowy 2.0 project was originally a 4 year, $2 billion project that required no taxpayer funding. Estimates now have it at $12 billion and 11 years and hidden deep in the budget papers you will find an allocation of $7.1 billion to support Snowy Hydro’s continued construction.

The budget lacks supporting evidence of why Australia might have a comparative advantage in manufacturing. How can it? In the same week the budget was presented, the CEO of Mondelēz, which owns Cadbury, offered a sobering view of Australian manufacturing capability. High energy and transport costs, along with an overly complex reporting regime, combine to make manufacturing in Australia among the most expensive in the world.

When the CEO of an existing company manufacturing a mature product publicly comments on the benefits of moving their manufacturing elsewhere, it is difficult to see how a new entity entering a saturated global market will be more successful.

Perhaps Treasury should ask the Government where it has a comparative advantage. Is it in developing a productive industrial relations regime, a cheap and reliable energy source, infrastructure networks supporting manufacturing hubs, a competitive company and personal tax regime that encourages risk-taking … or do bureaucrats and politicians excel in seeing investment opportunities where private capital does not?

Second-order thinking is a powerful tool that needs to be implemented in all strategic decision-making. It asks the “what if” questions that successive governments, both federal and state, have ignored for the past decade. Asking the difficult questions and considering the range of outcomes from decisions can be a good antidote to jingoistic grandstanding.

Delivering public policy in soundbite chunks allows politicians to gloss over decisions that will impact future generations. This budget's approach to Australia’s debt position is farcical. It delivers a slim cash surplus on the back of record tax receipts from individuals thanks to wage rises, and from mining companies thanks to continued record terms of trade.

Celebrating the slim surplus, Dr. Chalmers has nothing to say about the biggest collective loan in history and even less about any plan to pay it back. In fact, the Treasurer plans for the loan to worsen with deficits extending into the foreseeable future.

Debt repayment is set to be the largest single item in the budget for years to come. The only historical method to reduce this impost is to increase productivity. The Reserve Bank has called for months for measures to increase productivity. In his budget speech, Dr. Chalmers did not even mention the word.

Public policy that focuses on appeasing individual pain with money will only find more people in pain wanting more money. It is a self-perpetuating cycle that will continue to erode our standard of living for generations.

Successive governments need the courage to approach budgets with policy settings that improve our overall economic outlook. Policies should reward risk and allow individuals to feel the consequences of their mistakes. Without this shift, Australia will continue down a very insecure economic path.

Merry Christmas

Mon, 18 Dec 2023 01:44:59 GMT

Merry Christmas

From all of us at Graham Financial, thank you to all our clients and friends for your support over the past 12 months. We look forward to continuing to work with you to achieve your goals in 2024.

The office will be closing for the Christmas break on Friday 22nd December 2023 and reopening on Monday 8th January 2024. If you have an urgent query over the break, you can reach Martin by email or mobile phone.

We wish you and your loved ones a joyful holiday season and a prosperous and healthy new year.

The Impact of Artificial Intelligence

Mon, 18 Dec 2023 01:44:55 GMT

The impact of Artificial Intelligence

The impact of artificial intelligence (AI) is touted by commentators as being the transformative force of our time. We thought what better way to demonstrate the capabilities of AI than to ask ChatGPT for its opinion as to how the impact of AI might compare to the Industrial Revolution (1760 – 1840) or the Renaissance period that ran from the 14 ^th to the 17 ^th centuries?

The response below has been reproduced from ChatGPT.

AI's potential to be a greater transformative force than both the Industrial Revolution and the Renaissance lies in its pervasive impact across numerous facets of human existence:

Compared to the Industrial Revolution: While the Industrial Revolution marked a shift from manual to mechanized production, fundamentally altering the economy and the nature of work, AI is poised to take this transformation further. It extends beyond manufacturing into every sector of the economy, including services, healthcare, education, and entertainment. AI's ability to automate not just physical tasks but also intellectual ones means its impact on job structures and economic models could be even more profound. Moreover, AI's integration into everyday technologies, from smartphones to home appliances, signifies a deeper and more personal integration into daily life than the machines of the Industrial Revolution.

Compared to the Renaissance: The Renaissance spurred an intellectual and cultural awakening, reshaping art, science, and philosophy. AI, however, could catalyze a new kind of renaissance by augmenting human intelligence, creativity, and capacity for innovation. It's not just a tool for artistic and scientific creation but a collaborator, pushing the boundaries of what's possible in fields like medicine with personalized treatments, in arts with new forms of AI-assisted creativity, and in science with unprecedented data analysis capabilities. The Renaissance disseminated knowledge through the printing press; AI spreads knowledge through the internet, making it more accessible and democratizing innovation on a global scale.

In essence, AI's impact might surpass these historical periods by reshaping not only economic and work structures but also fundamentally altering the way we interact with information, approach problem-solving, and engage in creative pursuits. Its potential extends to redefining human experience and societal structures, heralding a transformation that could touch every aspect of human life.

Conclusion

The response feels like someone has written it because ChatGPT is a language processing tool that gives an output that feels like a human response. It demonstrates a cognitive process rather than a search engine output of relevant links. The simplicity of its use completely belies the complexity that underpins this technology.

We have read many opinions and views on where AI may take humanity. Whilst it’s impossible to be definitive, history suggests that some of the benefits will be exaggerated, and others underestimated. We must also expect the technology will be used for nefarious intent. Governments and the associated legal systems are already grappling with how to regulate this space, however given the speed of innovation versus the glacial pace of our legal and political system, this will be challenging.

AI in its form of ChatGPT was introduced to the public a little over 12 months ago. Experts in this space are touting that for the first time in history, society will be dealing with something that demonstrates greater intelligence than the most intelligent people on earth… and that this could be a reality within as little as three years.

The Industrial Revolution gave us the power of mass production, the Renaissance empowered humanity, but this one is yet to be determined. However, the thought leaders in this space suggest it is plausible that what we will see in a decade is beyond what our current imagination can conjure.

A tribute to the remarkable life of Charlie Munger

Mon, 18 Dec 2023 01:44:51 GMT

A tribute to the remarkable life of Charlie Munger

By Ben Graham

On 28 November 2023, just 34 days shy of his 100 ^th birthday, the world lost not just one of the great investors, but one of the great contributors to society.

Charlie Munger was the lesser-known business partner and friend of Warren Buffett. Like most, I only became aware of Charlie because I was fascinated with Warren Buffett. And whilst I have an incredibly deep respect for Warren, I found I was even more drawn to Charlie. His exceptional insights, relentless curiosity, and witty way of communicating wisdom left an indelible mark on those that he touched.

I was fortunate enough to meet Charlie (albeit very briefly) back in 2007 when I took my first trek to Omaha Nebraska for the Berkshire Hathaway AGM. Back then, international shareholders were able to meet both Warren and Charlie and whilst our interaction was brief, I have the memento of a signed $USD 1 note that still sits on my desk 16 years later. Fortuitously I took the opportunity to head over again this year (although the meet and greet for international holders was no longer possible due to the sheer number) which sadly turned out to be the last AGM as we know it.

There have been so many great things written and said about Charlie since his passing. And I would encourage anyone interested to read or listen to some of his speeches or if you’re really game his book “Poor Charlie’s Almanack” - I am sure you will find it worthwhile.

It’s impossible to sum up his remarkable life in a few short words, but I thought the following response to a question asked just a month before his passing says so much about who he was. Charlie was a billionaire, yet he chose to live in the same house in California for 70 years. In response to why, he answered ″Warren and I are both smart enough to have watched our friends who got rich build these really fancy houses, and I would say in practically every case, they make the person less happy, not happier.” A basic house has utility, said Munger, noting that a larger home could help you entertain more people — but that’s about it. “It’s a very expensive thing to do, and it doesn’t do you that much good. Another drawback to owning a mega-mansion, is that such an ostentatious display of wealth could spoil your kids by encouraging them to “live grandly”. Warren and I both considered bigger and better houses, I had a huge number of children, so it was justifiable even. And I still decided not to live a life where I look like the Duke of Westchester or something. I did it on purpose ... I didn’t think it would be good for the children.”

In my opinion, it’s this humility, conduct, intellect and lack of material greed which made his words resonate so deeply. Charlie was only too happy to call out poor behaviour when he saw it – even within the financial industry in which he worked. He did so articulately and simply – very few people in his position would have the courage to say such things, but even fewer had the reputation and historical success for it to have such a profound impact.

I will finish with some of my favourite quotes from Charlie.

“I constantly see people rise in life who are not the smartest, sometimes not even the most diligent, but they are learning machines. They go to bed every night a little wiser than when they got up and boy does that help — particularly when you have a long run ahead of you.”

“How to find a good spouse? The best single way is to deserve a good spouse.”

“Envy is a really stupid sin because it’s the only one you could never possibly have any fun at. There’s a lot of pain and no fun. Why would you want to get on that trolley?”

On investing “It's not supposed to be easy. Anyone who finds it easy is stupid.”

“I want to think about things where I have an advantage over others. I don't want to play a game where people have an advantage over me. I don't play in a game where other people are wise and I am stupid. I look for a game where I am wise, and they are stupid. And believe me, it works better. God bless our stupid competitors. They make us rich.”

Economic Update - October 2023

Fri, 06 Oct 2023 06:09:43 GMT

Economic Update - October 2023

In the ever-changing landscape of global economics, we often find ourselves in what can only be described as "interesting times". These words, spoken by Robert Kennedy in 1965, hold a unique relevance today, as inflation takes centre stage in the global economic arena.

It's important to note that while inflation rates might have peaked at 7%, a figure not unfamiliar to those with a longer financial memory, what truly makes these times intriguing is the uncertain path inflation rates are expected to take. Currently, the prevailing belief among mainstream finance commentators is that inflation will gently recede, allowing central banks their ideal soft landing outcome, avoiding harsh economic downturns associated with rapid rate hikes.

However, recent market movements have added a layer of complexity to this narrative. Bond yields, a key indicator of market sentiment, have experienced a sharp rise, challenging the prevailing notion of a gentle inflationary slowdown. The bond market, often a reliable predictor of economic trends, suggests that central banks might not be done tightening their policies just yet.

This newsletter will try to unpack two propositions that we see as important from this observation:

1. Central banks are unable or unwilling to reduce interest rates – interest rates remain high?

2. In the event economic conditions do deteriorate to a point where a response from governments and central banks is expected from the broader population - what actions can they take?

To think this one through we need to consider that any response will sit in two broad categories.

Fiscal response – this is the use of spending or tax policies to influence market conditions or in other words governments spending money to create demand. Some more famous historical spending measures were the construction of halls in schools and insulation schemes in 2008/09 and direct payments to compensate for forced isolation in 2020.

Monetary response – central banks reduce interest rates and/or increase the supply of money. The price of money is at the core of all investment decisions so if the price becomes cheaper then it follows that investment and hence demand should increase. Rates went from a high of 4.75% in October 2011, reducing to 0.1% in December 2020.

The current tightening has taken rates from 0.1% in April 2022 to 4.1% in July 2023. The cost of money has materially increased.

Fiscal response

Governments’ core role is the creation and protection of law, after this they become redistribution machines. Government decisions can be reduced to the basic functions of taxing and spending.

If we consider tax, short term impact can be achieved by waiving future tax liability for specified periods. This is what occurred during the pandemic. Changing tax rules or implementing new taxes to adjust economic decisions are all long-term strategies. Consider the capital gains tax or franking regime that have changed investment decisions over the past 30 plus years.

Spending is the “go to” policy for governments and politicians. It can have an immediate impact on the economy (positive or negative) and is something politicians can announce. Spending or not spending are decisions that are expressed in the budget each year.

Government budgets

Sometimes governments need to spend more than they earn in any given year and to do this they take some of the expected future income and spend it today – in the personal context think of using the credit card for a large, unexpected expense and taking a few months to pay it off.

All budgets recognise the need to spend will not always align with expected revenue. This is why governments will talk about balancing the budget over the cycle or any similar phrase that allows time for future revenue to catch up with today’s “necessary” spending.

This balancing part was briefly touched in 2018 but hasn’t really occurred in a sustained manner since the 2008 financial crisis. Perhaps more importantly both the federal and state budgets have gone into steep deficits since the pandemic and projections show these deficits to continue into the foreseeable future.

When a government decides to spend but the money is not available, they borrow by issuing bonds. A bond is an instrument that will pay the holder a preset amount each month and then the full principal back in the future.

Governments (State and Federal) have borrowed consistently over the past 15 years. Federal Budget papers show that every year since 2008 successive governments have spent more than they have received. The amount of bonds on issue is a direct consequence of these deficits - the money must come from somewhere. Whilst there are short periods where the borrowing has slowed, no part of the debt has been paid back and neither state nor federal governments have announced any intention to commence this process anytime soon.

A bond requires the purchaser receive the full amount at time of maturity. If the government of the day doesn’t have the capacity to pay this back, in cash, then it will refinance. Should the government choose to continue to spend more than they receive it follows that, in time, it will have to refinance all existing debt.

Price of debt

Commentators have to date dismissed the increasingly higher debt levels as immaterial because of the low interest rate environment. This argument always carried an implied assumption that debt could be paid down quickly in the “unlikely” event the price of that debt increased or that revenue continues to strongly grow to cover the expense.

Budget papers show the most recent annual interest expense was $21 billion, implying the average yield of issued bonds is a touch over 2%. This reflects that most bonds currently on issue have been issued prior to 2022 when yields were low.

To give some perspective of the impact of the recent changes in price, if the entire government debt had to be re issued today the interest cost would go from $21 billion to $45.6 billion each year. Perhaps more importantly any fiscal response will require the government issue more debt taking the interest bill even higher.

How long can a government continue to issue debt? Credit quality of the Australian Federal Government as well as the State Governments are not currently in question. However, the situation in Victoria where credit ratings are the lowest in the country is concerning.

The question is what current expenditure will future political parties choose to forego to service the burgeoning interest bill?

Policy makers may need to recognise that inflation has materially increased the cost of money. Whilst it suits a narrative of government and some commentators to discuss this increase as an anomaly, what if it’s not? What if the previous decade of low rates has been the anomaly and the current 4% to 5% cost or higher is the new norm?

Why the increase in debt?

Total debt has increased some $100 billion each year since the 2008 financial crisis. The Federal Government’s own forecast has gross debt passing $1 trillion in the current year (this excludes State debt).

A sustained borrowing program can be indicative of long term economic hardship either domestically or globally. However, RBA data suggests this is simply not the case. Some of the broader indicators show the Australian economy is historically strong.

Terms of Trade measure the ratio of exports to imports. Currently we are at record highs, we are selling more than we are importing by a good margin. This has been attributed to commodity prices, think Iron Ore, Coal, Liquid Natural Gas – the world has been buying our natural resources and paying us handsomely.

Commodity demand is inherently cyclical and longer term reliance can be problematic. There can be only so much iron ore required and presumably with the push to net zero carbon emissions globally, coal and gas will decline in time. The key drivers of our strong terms of trade have been much lower historically.

Is it that successive governments have had to spend to prop up a failing labour market? Unemployment can be devastating for communities and there can be a strong moral argument to allow the budget to go into deficit to support the creation of jobs in the economy. But that is not what is happening today.

Australia is experiencing the lowest unemployment in decades. Demand for labour is pushing wages higher as a result. To find demand for labour as strong you need to go back to the post war years of the 1960’s when we had artificial restrictions on who could enter the workforce. What is artificial? Consider pre 1966 when married women could not work in the Commonwealth public service.

So, if we are all at work and as a country, we are also selling more than we are buying, then it must be that our tax system is broken – are we collecting an adequate sum of money from the economic activity being generated?

The data suggests we are doing okay here as well. At best the graph might suggest revenue growth has been volatile because of the disruption from the pandemic but growth in revenue has remained commensurate with the previous decade.

Successive governments have delivered budgets as if the country is in deep economic trouble, but the truth is today we are earning more, more of us are employed and the tax revenue remains historically strong. An outsider looking at this data might well conclude that the economy is strong, our revenue is strong and perhaps we are simply looking at a spending problem!

Productivity

Economic textbooks will argue that an increase in the cost or in the volume of debt has little economic impact as long as that increase in debt is matched by an associated increase in productivity. This is where the phrase “growing the pie” will get used by politicians. The more wealth that is created the more there is to go around.

Productivity is generally measured in terms of how much a business pays to produce a given output. A café makes 100 coffees a day and costs the business $100 to make those coffees. An increase in productivity would mean the café could make 105 coffees for the same $100 outlay. Productivity in this example might have come from improvements in the coffee machine or perhaps efficiency training for the employees.

The concept is that increases in labour costs (paying workers more) is not inflationary when there is also an associated increase in productivity.

The RBA measures unit cost of labour and the data shows Australia is falling behind. Average earnings per hour are shifting slightly higher but productivity per hour is moving sharply lower. Labour productivity per hour is at its lowest point in decades. When inflation is running high employees are understandably seeking increases in wages. But these increases are not being offset by any change in productivity so it stands that there is a strong likelihood wage increases will simply add to the current inflation pressures.

In a world of increasing cost of capital, increases in productivity is where an economy makes up the difference. It might be that the data is showing some short term anomaly, however if this deterioration in labour productivity continues its negative trend, inflationary pressures will also increase.

It is an observation that changes in unit labour costs is an area of the economy that is influenced through changes to industrial relations laws. Industrial relations has been, and continues to be, a strong focus of the current government.

The political position

Successive governments over the last decade and longer have made decisions to lock in expenditure that neither forecasted nor actual revenue can cover. The best example of unconstrained ongoing expenditure is the National Disability Insurance Scheme. The push to renewables is also requiring large budget commitments be carried on the nation’s balance sheet for much longer before the forecasted benefits can offset the cost. Think the Snowy hydro scheme 2.0.

In the event economic conditions deteriorate you would expect Terms of Trade to fall, unemployment to increase and with less people in work, tax revenue to fall. For as long as productivity also deteriorates this scenario will heighten budget sensitivity to debt and interest expense.

You might expect that at some point the population will turn their focus onto those politicians with courage and experience to recognise the current anomalies in our spending and take the hard decisions to address these imbalances. We look forward to seeing which party they turn up in.

Exploring Estate Planning

Tue, 05 Sep 2023 03:06:39 GMT

Exploring Estate Planning

We all lead busy lives and as such it’s easy to make estate planning tomorrow’s job. Let’s face it, the likelihood of something happening today is very low. The problem is if something does happen which requires an enduring power of attorney (EPoA) or a will, it’s likely to coincide with a very traumatic and unexpected event. This will not be a time when you have the energy or patience to deal with complex government and legal bureaucracy. We have compiled a brief Q & A below to provoke some thought and hopefully some action for those who haven’t thought about these topics before.

It is typically recommended that all adults should have a will and EPoA in place. Sudden illness, injury, or demise can happen at any time. Taking time to reflect on how you want your assets managed when you are no longer able to, provides clarity to your loved ones and ensures your intentions are honoured.

It's crucial to emphasise that the information provided here offers general guidance. Estate planning is intricate and personalised, with laws varying across jurisdictions. Therefore, the insights here should complement, not replace, tailored legal advice that fits your unique situation.

What happens if I lose the capacity to manage my affairs?

An enduring power of attorney (EPoA) empowers you (the principal) to appoint a trusted individual(s) (the attorney(s)) to make decisions on your behalf in the event of incapacity. This covers both temporary incapacity due to an accident and permanent incapacity due to deteriorating health. Choosing your attorney(s) thoughtfully is paramount, as they'll wield significant power over your affairs, and their decisions are legally binding.

An EPoA generally remains valid until it is revoked or replaced with a new EPoA. EPoAs are only valid while the principal is alive. Upon death, the EPoA ends, and all decisions are made by the principal’s executor, as per their will.

What happens if I don't have an EPoA?

If you lose capacity without a valid EPoA in place, the only option is for a family member, close friend or a trusted professional (such as a lawyer or financial adviser) to apply to the relevant state authority to appoint a person to be your administrator (to make financial decisions) and/or your guardian (to make personal and health decisions). This situation can lead to unnecessary stress and long delays to any decisions that need to be made.

Why is having a will important?

A will outlines the distribution of your assets upon your death, also encompassing guardianship for minor children, ongoing trusts, and even your funeral preferences. Appointing an executor ensures that your wishes are fulfilled, and your debts are appropriately managed. It’s important to note that wills can be contested, so having one doesn’t guarantee the distribution of your assets as per your stated wishes.

What happens if I die without a will?

Dying intestate, or without a will, results in asset distribution based on state laws, not your intentions. This could trigger unintended beneficiaries and potential family disputes. Having an up to date will safeguards the intended recipients of your assets.

What assets potentially sit outside a will?

Certain assets, such as those held in joint tenancy, superannuation, life insurance policies, and trusts, may not be governed by your will. These assets often pass directly to beneficiaries you've designated or as stipulated by the ownership structure.

What's unique about superannuation in estate planning?

While excluded from your will, superannuation necessitates careful handling. Binding nominations offer certainty by directing the trustee on distributing your super benefit. Some super funds only offer binding nominations that lapse every three years, so it’s important to check that your nomination remains in force. Conversely, non-binding nominations grant flexibility, with the trustee making final decisions. A reversionary pension nomination ensures a seamless income stream to a beneficiary after your passing. There are rules regarding who you can nominate as a superannuation beneficiary, so seek advice from your super fund or adviser to ensure your nomination is valid.

What is probate and will I need it?

Probate is the legal validation and execution of a will's instructions. It entails confirming the will's authenticity, appointing an executor (if named), and overseeing asset distribution. Not all estates require probate; it depends on factors like the type and value of assets. The process can extend up to six months.

How does the estate finalisation process work?

Even with the aforementioned documents in place, distributing your assets to beneficiaries takes time. At a minimum, beneficiaries must provide a death certificate and proof of identity before assets are released.

In the intricate landscape of estate planning, seeking advice from legal professionals is indispensable. This ensures that your unique circumstances are accounted for, aligning your intentions with legal requirements and offering your loved ones the security they deserve.

Woodstock for Capitalists

Tue, 05 Sep 2023 03:06:30 GMT

Woodstock for Capitalists
by Ben Graham

In May this year, I made the very long trek to Omaha Nebraska to attend the Berkshire Hathaway AGM – often referred to as “Woodstock for Capitalists”. Whilst many of you may not have heard of Berkshire Hathaway, you almost certainly have heard of its Chairman, Warren Buffett. Since inception in 1964 Berkshire returns have been an eye watering 3,787,464%.

Joining him as always was Warren’s right hand man and Vice Chairman Charlie Munger. In addition, and for the first time ever, Greg Abel and Ajit Jain also answered questions. Greg was announced back in 2021 as Warren’s successor when he finally retires - voluntarily or otherwise. Greg currently oversees all of Berkshire’s non-insurance businesses. Ajit is the Vice Chairman of the insurance operations. Both have been integral to the success of Berkshire to date having been there 23 and 37 years respectively.

The event is now recorded and made available to the public, so for those who are interested you can watch this and prior years’ presentations online. https://buffett.cnbc.com/annual-meetings/

Whilst this makes it hard to justify sitting on a plane for over 50 hours, there is something very special about being there live with over 30,000 like-minded people to witness the spectacle. I think it’s a must do for every investment enthusiast.

The one thing that is still exclusive to those in attendance, is the short satirical movie that Warren and Charlie do with the help of several well-known celebrities. This year’s movie included some montages of past meetings – there was a question from the 1994 meeting where Warren (63 at the time) was asked the perennial question “what happens if, God forbid, something happens to Warren Buffett”. Warren responded with “Well, I’m glad you didn’t say Charlie Munger.” The fear of Warren’s retirement/passing has cost investors a lot of money over the years – back in 1994 Berkshire was trading at $16,000 a share and today it’s over $500,000 a share!

Question time goes for about five hours which is almost unheard of in any AGM in Australia, made all the more remarkable by the fact that Warren is now 93 and Charlie 99!

The AGM’s questions ranged from the recent banking collapses to artificial intelligence and how it will change the world.

Warren’s ability to distill complex financial concepts into easily digestible nuggets has made him one of the world's most influential voices in investment circles. He is able to blend wit, wisdom and authenticity in a way that makes his words resonate - ensuring that his messages are both understood and remembered.

To this end and clearly expecting a question on the banking crisis he had prepared two signs which he placed on the table when asked the question – one read “available for sale" and the other read “held to maturity.” These are the accounting classifications that many banks, including Silicon Valley Bank, had been using to “appear” solvent. Of course, holding something to maturity is only possible if the depositors are also happy to leave their deposits until this same maturity - which in the case of Silicon Valley Bank - they did not. The old Buffett quote of “It's only when the tide goes out that you learn who has been swimming naked” applies here.

Warren and Charlie were also critical of the incentive structure in banking noting that “If a CEO gets a bank in trouble, the CEO and directors should suffer. When that doesn't happen it teaches the lesson that if you run a bank and screw it up, you are still a rich guy… that is not a good lesson to teach the people who are holding the economy of the world in their hands.”

Not surprisingly it’s often some of the non-financial aspects of their wisdom that shines through. Warren observed that if you want to know how to live a happy and fulfilled life, write your own obituary and reverse engineer it.

Federal Budget May 2023

Wed, 10 May 2023 05:12:22 GMT

Federal Budget May 2023

The Treasurer Dr Jim Chalmers delivered his second budget forecasting an underlying cash balance surplus of $4.2 billion, an impressive $41 billion turnaround from the same forecast made in October 2022. Dr Chalmers used 82% of this increase in revenue and allocated it to paying down existing debt. This reversal in budget fortunes is a remarkable result.

Budget papers attribute the change to higher commodity prices and strong employment growth boosting tax receipts. Notwithstanding the strong economic conditions, Australia’s gross debt continues to grow and is forecasted to pass $1 trillion by the 2025/26 financial year at 36.5% of Gross Domestic Product.

The budget papers state that inflation, while still high, has peaked and is moderating. The budget has several measures aimed at providing relief against cost-of-living increases primarily focused on those people that are already in receipt of government support. The various support measures add an additional $21 billion of expenditure that the Treasurer went to some length in post budget interviews to argue is not inflationary.

We recently wrote about housing, noting the importance in the short term of increasing the average number of people in each house rather than relying on building more houses. If indeed we are to increase the average household size, the housing measures of this budget need to be balanced against the financial incentive to pool resources and increase the number of people in each house to Pre Covid levels.

The budget continues the focus on transitioning the economy to sustainable energy with a goal to become a renewable energy superpower. Australia has enormous natural resources and demand for these has helped push our terms of trade to historical highs. Whilst a focus on sustainability is commendable, it will require that as an economy we forego our current advantages in coal and gas and replace them with an as yet unknown advantage such as hydrogen.

Moving our economy to carbon neutral is a stated goal of this government. Achieving this shift without creating unintended disruptions to the economy has enormous challenges.

This budget, like others before it, relies solely on growing the economy with no real effort to curb expenditure. Despite ever-increasing terms of trade and low unemployment providing unsurpassed revenue streams, we are continuing to increase debt for future generations to address. Government continues to increase in size with highlighted issues being matched with new schemes and new funding with new bureaucracies to administer them.

At some point in the future, it is not inconceivable that our terms of trade fall and our unemployment will start to trend upwards from record lows. At that point, the government of the day is going to be forced to reverse this trend and present a budget that reduces overall expenditure. The Treasurer and budget that faces up to that reality will require some courage.

We have provided a summary of the key measures announced in this budget that are most likely to be applicable to personal finances. If you have any queries about these or wish to discuss how they may impact on your circumstances in greater detail, please contact the office to organise an appointment.

Cost of living

Energy bill relief: An electricity bill credit of up to $500 will be available in 2023/24 for:

- Pensioners

- Commonwealth Seniors Health Card holders and other concession card holders

- Recipients of Carer Allowance and Family Tax Benefit A and B

- Veterans, and

- those eligible for existing State and Territory electricity concession schemes.

Eligible small businesses will receive a credit of up to $650. The amount of the credit will vary depending on the location, with no further details revealed in the Budget.

Pharmaceutical Benefits Scheme changes: Individuals will be allowed to buy twice as many common medicines for the price of one script under changes to the Pharmaceutical Benefits Scheme from 1 July 2023. This will allow a patient access to 60 days’ worth of medicine for each script.

The change will save general patients up to $180 a year per subsidised prescription. Concession card holders are expected to save up to $43.80 a year per medicine.

Increased bulk billing: Children under the age of 16, pensioners and other Commonwealth concession cardholders will have increased access to free healthcare under this measure, with bulk billing incentives being tripled for the most common consultations. This includes face‑to‑face, telehealth and video conference consultations.

Household energy upgrades: Several low-cost loans will be provided to access energy-saving home upgrades, such as battery-ready solar panels, modern appliances and other energy efficiency improvements.

Superannuation

Better targeted superannuation concessions: The Government will reduce tax concessions on certain superannuation accounts for individuals with a ‘total super balance’ (TSB) of more than $3 million (unindexed). The earnings on any balance that exceeds the $3 million threshold will be subject to an additional tax of 15% (up to 30% in total).

Individuals with a TSB less than $3 million will not be impacted by this change, and investment earnings on the accumulation balance will continue to be taxed at the maximum rate of 15%.

Increasing the payment frequency of employer super payments: Employers will be required to pay their employees’ super at the same time as their salary and wages from 1 July 2026.

Social security

Increase to working age payments: The fortnightly rate of JobSeeker Payment and certain other benefits will increase by $40 ($1,040 pa) on 20 September 2023.

The minimum age for the higher rate of JobSeeker Payment will also reduce from age 60 to 55 and over for those who have received the payment for nine or more continuous months. Single recipients aged 55 to 59 with nine continuous months on payment will receive an extra $99.40 pf because of both changes.

Increasing Rent Assistance: The maximum rates of Rent Assistance will increase by 15% on 20 September 2023. This will provide recipients with up to $31 extra per fortnight.

Increase to Home Care packages: As part of a package to improve the in-home aged care system, the Government will increase the number of Home Care packages by 9,500 in 2023/24. This may help reduce the wait time for individuals who are waiting for a package to be assigned to them.

Personal Taxation

No changes to personal income tax: The Budget did not contain any measures announcing changes to personal income tax. This includes:

- no changes to the Stage 3 tax cuts which will take effect from 1 July 2024, and

- no extension of the Low and Middle Income Tax Offset, which ended 30 June 2022.

Increasing the Medicare levy low-income thresholds: The Government will increase the Medicare levy low-income thresholds for singles, families and seniors or pensioners from 1 July 2022. This means low-income earners will be able to earn more income before being liable to pay Medicare levy.

Small business taxation

Small Business Energy Incentive: Small businesses with an annual turnover of less than $50 million may receive an additional 20% deduction on spending that supports electrification and more efficient use of energy.

Up to $100,000 of total expenditure will be eligible for the incentive, with the maximum bonus tax deduction being $20,000 per business. Eligible assets or upgrades will need to be first used or installed and ready for use between 1 July 2023 and 30 June 2024.

Examples of eligible assets include electrifying heating and cooling systems, upgrading to more efficient fridges and induction cooktops, and installing batteries and heat pumps.

$20,000 instant asset write-off: Small businesses with an annual turnover of less than $10 million will also be eligible to immediately deduct the full cost of eligible assets costing less than $20,000 for assets that are first used or installed ready for use between 1 July 2023 and 30 June 2024.

Small businesses can instantly write off multiple assets as the $20,000 threshold will apply on a per asset basis.

Housing

Changes to eligibility for home buyer guarantee schemes: From 1 July 2023, joint applications may be made by friends, siblings and other family members under the First Home Guarantee and the Regional First Home Buyer Guarantee. Non-first home buyers who have not owned a property in Australia in the last ten years will also be eligible.

Eligibility for the Family Home Guarantee is also expanding to include eligible borrowers who are single legal guardians of children such as aunts, uncles and grandparents.

The number of guarantees available and other eligibility criteria are unchanged.

Disclaimer

Sources: www.budget.gov.au

This communication has been prepared by Actuate Alliance Services Pty (ABN 40 083 233 925, AFSL 240959) (Actuate), a related entity of Insignia Financial Ltd ABN 49 100 103 722.

The information in this communication is factual in nature. It reflects our understanding of existing legislation, proposed legislation, rulings etc. as at the date of issue, and may be subject to change. In some cases, the information has been provided to us by third parties. While it is believed the information is accurate and reliable, this is not guaranteed in any way. Examples are illustrative only and are subject to the assumptions and qualifications disclosed. Past performance is not a reliable indicator of future performance, and it should not be relied on for any investment recommendation. To the extent that the information in the communication contains general advice, it has been prepared without considering any person’s individual objectives, financial situation or needs. You should consider the appropriateness of the general advice in light of your own objectives, financial situation or needs.

This communication is not available for distribution outside Australia and may not be passed on to any third person without the prior written consent of Actuate.

Whilst care has been taken in preparing the content, no liability is accepted by Actuate or any member of the Insignia Financial group, nor their agents or employees for any errors or omissions in this communication, and/or losses or liabilities arising from any reliance on this communication.

Housing and its contribution to inflation

Thu, 27 Apr 2023 02:53:38 GMT

Housing and its contribution to inflation

The quarterly consumer price index (CPI) data for the period ending March 2023 was released this week showing inflation has slowed marginally to 7%. Only time will tell if this is sufficient to keep the RBA cash rate at the current 3.6%. A key take out however is to recognise we now have a negative real cash rate of –3.4% (inflation less cash rate).

Inflation is the increase in price between two points in time. To give this some context if you were to assume your expenses are being paid entirely from the interest earned from your cash holdings, then your spending power is reducing by 3.4% each year.

The quarterly release showed price increases across each one of the 14 groups are well in excess of the RBA preferred 2% to 3% band. Housing costs make up 22% of the CPI basket and include rents, new dwellings and electricity. As such this sector will have a large impact on inflation and therefore interest rates themselves. For this reason, we have decided to focus this discussion on housing inflation.

The total value of residential housing in Australia is $9.4 trillion making it the largest single domestic asset and close to three times larger than the total superannuation market. Construction of residential housing is important because it creates flow on effects. Economists call this the “multiplier” effect. Building a house generally requires local tradespeople and local materials. The money those local tradespeople and hardware stores receive is then spent again to purchase groceries and to educate children and so on, resulting in a multiplier of maybe two or three times the initial money spent.

In aggregate, residential construction has one of the highest multipliers across the economy. This is why residential housing is a favourite of successive governments to stimulate economic activity. Think of the first home builders grants and the broader first homeowner grants, the substantial renovations grants during COVID etc.

Rental costs increased by over 5% in March and commentary is noting the associated impact on the social fabric of society. At the individual level the examples of hardship due to lack of housing are real. The commentary implies, however, that the only solution is to increase construction of new dwellings and ignores the average number of people that reside in each existing house.

How many homes do we need? A simple calculation will take the population size and divide it by the average number of people that live in each home. In a perfect world we would then construct more houses in line with the growth in population.

As the chart below shows we have achieved this with dwelling stock largely in-line or above population growth for the past few decades.

The Covid 19 pandemic forced change in our society. Lockdowns forced us to work from home, JobKeeper, JobSeeker and associated tax breaks subsidised these changed living conditions. Perhaps it was a mix of these incentives, or some other lifestyle choice but by the time the pandemic conditions were lifted there were materially less of us in each home as the graph below shows.

Whilst a reduction of 0.06 people per home doesn’t sound like much, extrapolating that across the country means that we would require about 235,000 extra homes to house the same number of people.

Covid reduced our population growth sharply and this meant the housing shortage due to smaller households was less severe. But as the population growth snapped back it’s no surprise to see why we have the housing shortage we have today.

A solution to alleviate rental pressure is to increase the number of people that live in each house. This is a market forces dilemma. Given time, cost of living pressures caused by inflation might address this apparent imbalance. Interest rates certainly will if they are kept high enough for long enough. Consider the university student that may choose to come back to the family home or an aging parent that might make use of a spare room or perhaps the younger “pre family” workforce choosing to pool resources and share a house.

Like the government housing subsidies that have played a part in increasing house prices, market forces will be tempered by a government looking to alleviate cost of living pressures. Lifestyle decisions such as returning home or pooling resources are only made in reaction to sufficient financial pressure.

If increased average household size can’t eventuate, then we need more houses. Certainly, increasing housing supply is a valid solution but construction takes time. Disregarding the severe inflationary impact of forced building and the challenge to supply materials, labour, release of land and necessary associated infrastructure simultaneously, we cannot expect any material increase in housing supply for many years.

This is the challenge for any government housing programs – stimulating supply of housing and reducing inflationary pressures within the housing sector at the same time is arguably impossible. What of the two remaining variables that influence housing inflation: new house prices and electricity?

Interest rates will eventually constrain increases in house prices provided no further subsidies are thrown at the sector. The capacity to borrow is, and only ever can be, a product of your income and the price of the borrowed money (interest rate). As rates rise your borrowing power decreases, all else remaining the same.

The data shows electricity usage has remained stable in the face of population increases. The price of electricity is what has increased materially. Price is subject to global pressures on the price of coal and natural gas alongside the pursuit of net zero carbon policies. The interaction of these variables within the context of the transition to cleaner energy makes any reduction in the price difficult at least in the medium term.

Inflationary forces in the housing sector are, on balance, lifestyle choices led by the number of people who choose to live together and not solely the number of available houses. It will be interesting how fast we adjust our lifestyle expectations as cost-of-living pressures increase. Material changes will require the Government to have the courage to restrain from subsidising the very costs that are going to influence these lifestyle decisions.

Proposed Changes to Taxation of Super

Thu, 02 Mar 2023 06:32:13 GMT

Government’s proposed changes to the taxation of super

There has been much discussion in the media this week about the Government’s proposed changes to how superannuation is taxed.

It is important to understand that this is currently just a proposal, and the earliest that it could be implemented is 1 July 2025. Between now and then:

- There will be consultation, likely resulting in amendments to the proposal

- A federal election will occur

- The proposal needs to be legislated.

As such, it is too early to make any specific recommendations regarding individual circumstances.

The information included below is based on the announcement made on 28 February by the Government and a Factsheet that has since been released by Treasury with some additional information.

What is proposed to change?

Currently, tax on investment earnings within the accumulation phase of superannuation is at a maximum rate of 15%. It is proposed that for certain individuals with a ‘total super balance’ (TSB) that exceeds $3 million, additional tax of 15% will apply on a portion of ‘accumulation’ account earnings.

An accumulation account is a superannuation account that you have prior to retirement or commencing an account-based pension, which may receive personal, employer and other contributions.

If your total super balance is less than $3 million, this change will not impact you, and investment earnings on your accumulation balance will continue to be taxed at the maximum rate of 15%.

The proposed change will not apply to earnings that are in a ‘retirement phase pension’, where earnings are taxed at 0%. For more information about these accounts and the separate limit called the ‘transfer balance cap’ that applies to these types of accounts, see ato.gov.au.

What is ‘total super balance'?

Generally, your TSB is the sum of all amounts you have in the superannuation system (certain exceptions apply*). At a high level, it includes:

- your accumulation account balances

- your superannuation pension accounts; and

- the outstanding balance of a Limited Recourse Borrowing Arrangement (if you have a self- managed super fund which has borrowed to invest), in certain circumstances.

* Exceptions and modifications may apply, for example if you’ve made a personal injury contribution to super. Calculating TSB can be complex, so it is important to seek advice.

There are a few ways you can track your TSB. A useful source of information is your MyGov account. Other options include contacting your superannuation funds and looking at your fund’s statements and records.

When reviewing your annual statement, the TSB figure your fund reports to the ATO is usually referred to as ‘exit value’ or ‘withdrawal benefit’. This may be different to the 30 June ‘closing balance’.

When will this change start?

At the moment, this is a proposal only. Based on the information released by the Government, it is currently intended that this change will commence on 1 July 2025, and that notices of additional tax liability will first be sent in the 2026/27 financial year. Law will need to pass to implement the proposal. Also, some of the details about the proposal may change.

How will earnings on my account be determined and any tax liability calculated?

To simplify the process and to ensure superannuation funds aren’t burdened by additional reporting requirements and system changes, a simplified method has been proposed to calculate fund earnings and any resulting tax liability. Broadly, this looks at your TSB at the beginning and end of the year, as well as any contributions and withdrawals that you’ve made during the year. Once your earnings have been determined using this simplified method, another formula will be applied to work out how much of these earnings relate to your accumulation account before tax is applied on this amount at a rate of 15%.

If you don’t have any earnings and are instead assessed as having a loss for the year, it has been proposed that you’ll be able to carry this loss forward to a future year, to offset a tax liability you may have in the future under this proposed regime.

More detail about this formula and some worked examples can be found on the Treasury’s Factsheet.

How will the additional tax be paid, and will I need to report my balances to the ATO?

The ATO will use data from superannuation funds to work out who is liable for the additional tax and the amount of tax payable. It is expected that the ATO will issue tax notices when the time comes, separate to personal income tax. There is limited detail on how the measure will work and the Government will consult further on practical implementation issues.

Can I withdraw any of my superannuation to reduce my balance below $3 million?

Unless you’ve met a ‘condition of release’ the information made available on this proposal does not indicate that you’ll be able to withdraw any amounts from super to prevent the additional tax. Super law limits the conditions under which you can access your funds. Generally, this is limited to when you reach age 65, meet the definition of retirement, and in certain other limited and exceptional circumstances when you’re in financial hardship. For more information about conditions of release, see ato.gov.au

What if I have more than one fund?

As explained above, TSB takes into account the sum of all of your superannuation interests, including all of your accumulation accounts and superannuation income streams. The $3 million threshold is cumulative, meaning it is not a limit per super fund, but instead looks at your combined balances.

How will the additional tax be paid?

The Government’s factsheet indicates that the excess tax can be paid directly by you to the ATO, or by making an election to release the funds from super. If you hold multiple funds, you can elect the fund from which the tax is paid.

I have a defined benefit fund. Will this apply to me?

Yes. The Government intends to include defined benefit funds in the measure. However because defined benefit funds operate differently to other types of super funds such as public offer funds and self-managed super funds (SMSFs), there will need to be further discussion with the industry to work out how defined benefit funds will be captured.

I have an SMSF. Will this apply to me?

Yes. There is no exemption for SMSFs.

Should I make any changes now to my retirement savings strategy and is superannuation still worthwhile?

For many people with super savings above $3 million, superannuation may still offer concessional tax rates on earnings when compared to your marginal rate of tax, which could be as high as 47%. It is important to understand that the answer to this question will be different for everyone and may even change as your personal circumstances change.

There are other potential benefits to superannuation, aside from what for many is a concessional rate of tax on earnings. It is important to remember that this is currently a proposal only, and if formally made law, some of the final details relating to this measure may change from what has been announced.

Please contact your financial adviser if you’d like more information about how this proposal could apply to you if it does become law, and to ensure the strategies you put in place are right for you.

Important information and disclaimer

This document has been prepared by Actuate Alliance Services Pty Ltd (ABN 40 083 233 925, AFSL 240959) (‘Actuate’), a member of the Insignia group of companies (‘Insignia Group’), for use and distribution by representatives and authorised representatives of Actuate, Godfrey Pembroke Group Pty Limited, Consultum Financial Advisers Pty Ltd, Bridges Financial Services Pty Limited, Bridges Financial Services Pty Limited trading as MLC Advice, Lonsdale Financial Group Ltd, Millennium3 Financial Services Pty Ltd, RI Advice Group Pty Ltd, Shadforth Financial Group Ltd and Australian Financial Services Licensees with whom any Insignia Group member has a commercial services agreement. Information in this document is of a general nature only and does not take into account your objectives, financial situation or needs. You should seek personal financial, tax, legal and such other advice as necessary or appropriate before relying on the information in this document or making any financial investment, insurance or other decision. If this document is provided to you in conjunction with a Statement of Advice (‘SOA’), any personal financial advice relevant to the financial planning concept/strategy referred to in this document will be contained in that SOA.

Season's Greetings 2022

Wed, 14 Dec 2022 23:46:41 GMT

Graham Financial in the Community

Each of us at Graham Financial believe in the importance of giving back to our community and supporting those in need.

We are proud to continue our sponsorship of the Toowoomba Hospital Foundation Guiding Stars volunteers. We’ve enjoyed meeting many of the volunteers and hearing about the work they do supporting patients and staff across the Darling Downs region, from Taroom in the north to Texas in the south and west to Talwood.

This Christmas, the Graham Financial team has begun a new tradition of donating blood together. We were shocked to learn that Australia needs over 1.7 million donations per year, or three every minute, to meet demand. The process was easy and painless and something we’ll definitely continue to do regularly. Did you know that after donating blood, you’ll find out exactly where it’s gone? Ours travelled to Bundaberg and Brisbane this time.

Season's Greetings

The team at Graham Financial would like to thank all our clients and friends for your continued support this year. We appreciate the opportunity to work with each and every one of you.

The office will be closing for the Christmas break on Thursday 22 ^nd December 2022 and reopening on Monday 9 ^th January 2023. If you have an urgent query over the break, you can reach Ben or Martin by email or mobile phone.

We would like to wish you and your loved ones a safe and happy holiday season. We look forward to working with you in 2023.

Federal Budget October 2022

Wed, 26 Oct 2022 23:08:05 GMT

Federal Budget October 2022

The Treasurer Jim Chalmers delivered the Albanese Government’s first budget on Tuesday, fulfilling their election commitment to reprioritise expenditure allocated by the previous Government in March of this year.

To this end, the Treasurer has made modest changes that largely reflect the priorities of the new Government as outlined in their election platform. Additionally the Treasurer has demonstrated restraint in pushing recent windfall revenues from strong commodity prices through to the bottom line, reducing the deficit materially for the current year.

The economic environment surrounding the two budgets of 2022 is materially different. The narrative that deficits are acceptable in response to the extraordinary circumstances of the pandemic has been replaced with the burgeoning understanding that the budget must provide for increasingly higher interest payments to service this debt and a recognition that the unconstrained nature of budget measures introduced in past years must be addressed.

The increase in the National Disability Insurance Scheme (NDIS) payments should not be a surprise, but addressing it today will be a challenge akin to the unwinding of free tertiary education introduced in 1974 with fees being reintroduced in 1989.

The NDIS is a case study in the challenges of legislating social policy that has individual merit but unknown parameters. As noted in our 2013 newsletter when discussing the introduction of the disability scheme (when $1 billion was allocated and $10 billion pushed to some point in the future) … Perhaps DisabilityCare is an expenditure that is socially responsible but the decisions as to what we as a nation are going to forego to find this money have all been pushed into the future.

In 2018 the budget forecasted the cost at $9 billion. Today it is $35 billion and forecasted to reach $52 billion in 2032. Our view back in 2018 was as follows and this view has not changed… The NDIS is a good example of how programs can impact the budget for many years simply because of the subjective nature of the policy’s intent. It will be challenging for future Governments to curtail this expenditure because each individual example will have social merit to be funded. It is only collectively when an expenditure appears unsustainable.

The Budget papers show expenditure to cover debt repayments and the NDIS are each increasing at 14% per annum. These two figures already account for two thirds of the increase in spending pressures over the next decade. These payments must be brought under control before a government (of either side) could comfortably consider introducing new expenditure initiatives.

The Treasurer noted the need for the Government to make the difficult decisions many times but didn’t articulate any details. When you consider the politics of the 3 year Federal Government election cycle, the upcoming Budget in May 2023 becomes the best opportunity to bring bold measures that address the budget’s structural challenges.

This Budget is largely well accepted without material surprises. The priorities are consistent with what the incoming Government said they wanted to prioritise. We are likely to have to wait until May 2023 to gauge the conviction of the Albanese Government in addressing the structural deficiencies in the Budget that are highlighted in these documents. The measures provided in Tuesday’s Budget are summarised below.

Superannuation

Expanding eligibility for the downsizer contribution: Legislation has been introduced to reduce the downsizer eligibility age from 60 to 55. This measure will take effect from the first quarter after passing into law, which is expected to be 1 January 2023.
SMSF and tax residency: The Government confirmed its intention to continue with the 2021/22 Budget measure of extending the temporary trustee absence period from two years to five years and removing the ‘active member’ test. These changes will help SMSFs continue to maintain their Australian tax residency even while members are overseas and allow them to continue to contribute to their funds even if they become non-tax residents.
Three-year audit cycle for SMSFs not proceeding: Originally announced as part of the 2018/19 Budget, it was confirmed the current Government will not proceed with this measure.
Superannuation Guarantee: Legislated increases to continue in accordance with original timetable. Currently, Superannuation Guarantee (SG) is 10.5%. It is legislated to increase by 0.5% at the start of each financial year until it reaches 12% on 1 July 2025. There is no change to the legislated increase of SG.
No extension to the halving of superannuation income stream minimums: There was no announcement in relation to extending the halving of the minimum amount members are required to withdraw from their pension account beyond the 2022/23 financial year.

Social Security

Increased income thresholds for Commonwealth Seniors Health Card: The Government has committed to increasing the income thresholds for the Commonwealth Seniors Health Card to $90,000 for singles and $144,000 combined for couples.
Deeming rate freeze: The Government has also confirmed its intention to retain the current deeming rates until at least 30 June 2024.
Plan for cheaper medicines: From 1 January 2023, the general patient co-payment for Pharmaceutical Benefits Scheme treatments is expected to reduce from $42.50 to $30.
Reducing assessment of former home proceeds: For individuals on social security benefits, the temporary assets test exemption of home sale proceeds is to be extended from 12 months to 24 months. Additionally, these proceeds will only be deemed to earn a return at the lower deeming rate (currently 0.25% per annum) for this period. Note: This exemption only applies to the portion of the proceeds expected to be used in a new home purchase.
Work Bonus deposit for older Australians: Age pensioners and veterans over service pension age are expected to receive a one-off credit of $4,000 into their Work Bonus income bank. The Work Bonus typically offsets $300 per fortnight of income earned from employment or self-employment activities, allowing pensioners to receive a higher age pension whilst still working.
Childcare subsidy changes: As part of a package of reforms to encourage parents to return to the workforce, the maximum childcare subsidy from 1 July 2023 will increase to 90% for families earning less than $80,000. For every $5,000 earned over this threshold the subsidy will reduce by 1% - reducing to zero for incomes $530,000 or above. The higher rate of subsidy for families with multiple children in care will continue under its current arrangements, ceasing once the eldest child reaches six years old or has been out of care for 26 weeks.
Paid parental leave increases: Announced before the Budget, from 1 July 2024 the Paid Parental Leave Scheme will increase the maximum period of leave by two weeks each year, reaching a maximum of 26 weeks by 1 July 2026. Further, from 1 July 2023 both parents will be able to access leave at the same time or enter into more flexible arrangements than currently available under the limited Dad and Partner Pay limits, and requirements to take 12 weeks as a continuous period. The paid parental leave income test will also be extended to include a $350,000 family income test, which can be used to help families who do not meet the individual income test.

Personal Taxation

No changes to personal income tax: The Budget did not contain any measures announcing changes to personal income tax. This includes:

- no changes to the Stage 3 tax cuts which will take effect from 1 July 2024, and

- no extension of the Low and Middle Income Tax Offset, which ended 30 June 2022.

Helping enable electric car purchases: For purchases of battery, hydrogen, or plug-in hybrid cars with a retail price below $84,619 (the luxury car tax threshold for fuel efficient vehicles) after 1 July 2022, fringe benefits tax and import tariffs will not apply. Note: Employers will still need to account for the cost in an employee’s reportable fringe benefits.

Home Ownership

Housing affordability measures: A key focus of the Budget were measures to help individuals secure housing. This is expected to occur largely via the Housing Accord – which will bring Federal, State and Local Governments together to work on housing affordability and homelessness. Measures announced include:

- A commitment to the ‘Help to Buy’ scheme which will support first home buyers to buy a home with the Federal Government being a part owner, resulting in a lower balance to be funded by the individual themselves.

- A Regional First Home Buyer Guarantee from 1 October 2022 which, similar to the existing First Home Deposit Guarantee scheme, is expected to provide up to 10,000 first home buyers with a guarantee over their mortgage, removing the need for lenders mortgage insurance.

Aged Care

The Government is increasing funding to reform aged care, including:

- Establishing an aged care complaints commissioner, introducing new financial reporting requirements, supporting the sector in providing better food for residential and home care recipients and establishing a national registration and code of conduct for workers.

- Capping administration and management fees in the Home Care Packages Program and abolishing exit fees.

- Requiring all facilities to have a registered nurse onsite 24 hours per day, 7 days a week from 1 July 2023 and increasing care minutes to 215 minutes per resident per day from 1 October 2024.

- Improving aged care infrastructure and services that support older First Nations people, and older Australians from diverse communities and regional areas.

Education

Free technical and education courses: The Government is providing 480,000 fee-free TAFE and community-based vocational education places to give Australians access to the skills they need for the jobs of the future. A $1 billion one-year National Skills Agreement will deliver 180,000 fee-free TAFE and community-based vocational education places throughout 2023, with a further 300,000 places to follow from 2024.

NDIS

The Government will provide additional funding over the next three years to support people with disability and their families:

- $385 million in 2023/24 in additional funding to the National Disability Insurance Agency (NDIA) for operational funding to support NDIS participants.

- $21.2 million over three years from 2022/23 for NDIS Appeals providers to support people with disability and their families with the Administrative Appeals Tribunal (AAT) appeals process.

- $18.1 million over two years from 2022/23 to review NDIS design, operations and sustainability.

- $12.4 million in 2022/23 to introduce an expert review pathway to resolve disputes arising from NDIA decisions, reduce the number of appeals to the AAT, and provide better and earlier outcomes for NDIS participants.

Advancing gender equality measures

Women’s safety: The Government announced they will provide funding for an additional 500 frontline service and community workers across Australia to increase the support available for women and children experiencing family, domestic and sexual violence.
Tackling the gender pay gap: This Budget puts forward several measures to close the gender pay gap, including embedding gender equity in the Fair Work Commission’s decision making process requiring the Commission to consider gender equity when setting minimum wages.

DISCLAIMER: We suggest that you do not act on the basis of the material contained in this article because the items herein are general comments only and may be liable to misinterpretation in a particular circumstance. Also, changes in legislation sometimes occur quickly. We therefore recommend that advice be sought before acting in any of these areas.

Spring Clean your Finances

Wed, 14 Sep 2022 00:46:52 GMT

S pring Clean your Finances

We all lead busy lives and taking the time to review the administrative details of our finances can be a headache. We often consider this task unnecessary because it is clear in our own minds where our financial affairs are sitting. However, spare a thought for the person who must pick up these details in the event you can no longer manage them. It has been our experience that even the simplest of tasks can become complex when you are dealing with affairs other than your own.

Whilst professional service firms like ours can help with this financial administration, there is a limit to how much we can do. With privacy and identity theft laws ever tightening, financial advisers and institutions are unable to help you if you can’t provide evidence of your identity and ownership of your assets.

You can make life much easier for yourself and your family by spending some time documenting and organising your personal affairs. Find the source documents where you can and put them in a safe place. Ideally, scan copies of important documents and save them to the cloud or email them to a trusted family member or adviser.

If you do nothing else this spring, spend some time working your way through the following list.

Power of Attorney

Ensure your Power of Attorney (PoA) documentation is up to date. Many of us have our spouse as our PoA, but as we age it might be worth considering adding a child or younger trusted relative to take on this role. To act on a PoA, you will generally need to show a certified copy of the PoA document and a certified copy of the attorney’s identification.

Will

Your Will specifies who you want to receive your assets in the event of your death and allows you to appoint an executor to manage the distribution of your assets in line with your wishes. A Will should be reviewed regularly, but particularly following any major change in personal circumstances (such as marriage, divorce, birth of children or death of a spouse).

Did you know that a Will typically only applies to personally held assets and therefore may not deal with a significant portion of your wealth?

For example, the proceeds from your superannuation and life insurance policies don’t necessarily form part of your estate. They can pass directly to certain beneficiaries, who may have been nominated by you, or go to your estate where they’ll be dealt with by your Will. Note, these nominations can lapse over time, so it is worth checking that you still have a valid nomination in place.

Some assets never form part of an estate, like jointly owned assets or assets held in a discretionary family trust.

Identification and contact details

It’s very difficult to close a bank account or sell shares without valid photo identification. Even when you’ve given up your driver’s licence and passport, it’s useful to obtain a proof of age card from the state government to make identifying yourself much easier.

Similarly, it’s imperative that your name and address are correctly recorded with all your financial providers. Having your maiden name on your superannuation account, or an old address on your share holdings can cause huge headaches and delays when trying to transact.

If you’re moving house, search ‘change of address checklist’ online for dozens of printable lists to help you track who you need to notify.

Bank accounts

Having money spread across multiple bank accounts does not necessarily increase security. The Financial Claims Scheme (FCS) is an Australian Government scheme that provides protection for depositors of banks, credit unions and building societies that are incorporated in Australia for deposits up to $250,000 per account holder per institution.

If you have several accounts and are losing track of where your money is going, it may be beneficial to reduce this number. Before closing the surplus accounts, ensure any regular debits and credits are moved to the remaining account. By setting up direct debits for as many regular bills as possible, you can save time and the worry of missing a payment.

myGov account

In recent years it has become almost impossible to interact with Australian Government services such as Centrelink, DVA or Medicare without a myGov account.

Linking your myGov account to the ATO is a great way to keep track of your superannuation. You can view your superannuation account balances, contributions made, contribution limits, search for lost super and request payment of any ATO-held super money.

Superannuation

Whilst there can be very good reasons to have more than one super account, for most people one is all you will need. Having one account will reduce paperwork, fees (potentially) as well as reducing the risk of becoming a lost member. Consolidating your super can be easy to do, but it is important to remember, like most things in life there are some hidden complications. Unfortunately, many of these complications in super are irreversible - such as your eligible service date or combining tax components. You may also have an insurance policy (linked to your super account) that is cancelled as a result of a rollover. As such it is important to check these and other aspects before consolidating. If you are unsure, you should always seek professional advice before hand.

Insurance

As your circumstances change throughout your life, your insurance requirements will change too. It’s important to keep track of your policies and ensure you understand what you are covered for. Understanding the limitations of your cover and when it will pay out can require advice from a suitably qualified and experienced adviser. Having multiple insurance policies doesn’t necessarily mean you can make multiple claims. Insurers often ask for evidence that other policies have been cancelled before they will pay out a claim.

It’s easy to lose track of your shares over time. The most important detail to keep track of is the SRN or HIN number (usually a 10-digit number starting with an I or an X) that is used to identify you as the owner of a parcel of shares. This number is vital if you want to transact, transfer or sell your shares. This number is usually shown on the original holding statement, but not on the regular dividend statements.

Looking after the future you

Regardless of your stage of life or financial position, it’s important to keep your finances organised and uncluttered. Talk to your partner, children or trusted adviser about your financial situation while you are well; it’s much harder for them to manage these things when you are no longer able.

Inflation and interest rate expectations

Wed, 14 Sep 2022 00:44:27 GMT

Inflation and interest rate expectations

Background

Interest rates and inflation expectations are large drivers of investment markets and consumer behaviour. With the cash rate moving from 0.1% to 2.35% in four months, the cost of capital is once again the key variable to investors and mortgage holders alike.

Inflation has been below the Reserve Bank Australia’s (RBA) touted preferred band of 2% to 3% for many years, falling as low as minus 0.3% in June 2020 but then increasing rapidly to the current 6.1% with expectation of higher readings to come.

Inflation is a measure of the change in price. For example, a good that moves in price from $100 to $103 will record inflation of 3%. But if the next period it stayed at $103, inflation will be recorded as nil. So, when commentators talk about inflation they are really talking about the change as relative to the last price measure. Whether the price is considered high or low is immaterial - a good can be expensive but not inflationary or cheap but inflationary.

Inflation numbers are published by the Australian Bureau of Statistics (ABS) and capture a snapshot of goods and services in the economy. A good is something tangible like a car. A service is something that is done for you such as legal advice or education. It is an accurate, but importantly an historical number. Predicting future inflation is subject to many disparate variables.

The variable mortgage rate will generally match the cash rate increases so an increase to date of 2.25% has an immediate and measurable consequence. The average mortgage in Queensland is estimated to be a little over $500,000. Depending on how your loan is structured, expect to have to find an additional $600 or more in after tax dollars each month. Retirees with cash holdings of say $100,000 will have an additional $187 to spend each month. This subtle shift of fortune from borrowers to savers hides the underlying impact these changes can be expected to have across the economy as consumer expectations and business decisions adjust.

Forecasts and Predictions

As market participants we need to have the humility to accept that our forecasts will have errors - the future can be notoriously difficult to predict. Anyone who doubts this should review the bold prediction made by the RBA Governor Philip Lowe who stated confidently all through 2021 that interest rates would not rise until 2024 – yet here we are less than 12 months later at 2.35% and expecting more to come.

It needs to be noted that while it may have been a mistake to make these bold predictions in 2021 there can be no doubt the RBA has now firmly admitted this error and is addressing inflation head on in 2022.

The RBA is not alone in demonstrating human frailty around predictions and forecasts. When the pandemic hit in 2020, globally there was absolutely no idea how it would play out. Authorities turned to the recognised experts for a pathway. The forecasted deaths from various epidemiologists were, thankfully, outrageously incorrect. These forecasts did however form the basis of the massive stimulatory response globally to prepare economies for the worst-case scenario that, we should be forever grateful, did not occur.

We are left to wonder what inflationary impact would have occurred from the size and scope of stimulus and associated lockdowns if the virus had wreaked the damage to lives as predicted – but the predictions were wrong. So, we are left to deal with the consequences of governments delivering the largest financial stimulus in history in tandem with a complete lockdown of economic activity.

ABS data shows goods made up 79% of the last quarter inflation increases reflecting high freight costs, supply constraints and prolonged strong demand. All these factors are a direct result of the measures taken during the Covid lockdowns. To date, services inflation has remained stable but we should expect that to change as wage claims and price demand stemming from record low unemployment flow through to the broader economy.

Consumer behaviour responds to the expectation of what prices will be in the future, based on what we see today. If we see car prices rising, we may feel compelled to buy quickly before the price moves out of our financial reach. Conversely if we see them falling, we might wait to get a better deal. Inflationary forces form the expectations that shift consumer behaviour.

Up until the war in Ukraine began in February 2022, commentary on inflation had almost universal acceptance that deflationary forces would continue to play out globally. The forces often cited are ageing population, technology and innovation giving us increasingly better goods at cheaper prices, globalisation and freedom of movement for labour supply among others. The current narrative implies these forces are no longer relevant. However, we suggest there is little evidence to support this.

Outcomes

Market pricing of interest rates expect the RBA cash rate to peak mid 2023 at around 3.85%. If this is correct, then we are a little over halfway into this rate rising cycle. There are households that have much larger mortgages than the average and these will pay a lot more than the estimated increase of $600 a month.

The more households have to reallocate towards mortgages the more this will reduce demand for goods and services and in particular non-essential goods and services. Lifestyle and home goods stores such as Harvey Norman should not expect sales volume to be as high this coming year.

As many commentators have observed, house prices in most cities have started to decline as the exuberance of ultra-low rates fades. How far will they fall? No one knows but given the rapid and significant price increases post Covid, a fall exceeding 20% seems very plausible. It would be a fair observation to note the primary factor causing this decline is the cost of money.

Whilst banks typically pass on rate rises (for variable rate loans) pretty quickly after the RBA raises rates, there is a lag between this and home loan repayments. Fixed rate loans are another issue altogether. The RBA notes nearly 40% of all new loans were fixed at the start of 2022. These loans will soon roll back to variable - with the majority set to expire in the second half of 2023. Most of those on fixed rates should already be factoring in higher repayments before their fixed rate expires, however there are sure to be some that won’t be ready for what will be a significant jump in repayments.

Assuming residential housing does experience a decline around 20% across the country, it is certain that we will be seeing examples of negative equity. This could put a lot of pressure on those homeowners, as they are unlikely to be able to refinance to take advantage of better rates and they are also unlikely to be able to sell unless they can fund the negative equity shortfall.

How much further will interest rates have to rise before the economy slows sufficiently to address the inflation concerns? Interest rates are not a subtle instrument. The goal is to slow the economy, not crash the economy. The mantra from the RBA and other commentators will inevitably include language around trying to achieve the nirvana of the so called “soft” landing. Make no mistake – this will be very hard to achieve.

We will see reports that indicate demand is slowing such as retails sales, loan approvals, unemployment, consumer and business sentiment surveys as well as increases in company inventories. No data points are considered in isolation. Arguably the most important measure, inflation, is measured quarterly - and that data is made available four weeks after the end of the quarter.

This lag in data makes the RBA’s job very challenging as they are wielding a blunt instrument with information that is already months old. To better understand this, imagine trying to set the temperature of your shower if the time between moving the tap and the water temperature changing was one minute. As you can appreciate, you’d likely make many adjustments up and down before getting it right. A “soft landing” will require the RBA to perfectly execute this the first time.

Further complicating this, is that the interest rate hammer wielded locally won’t impact inflation from globally traded goods such as oil. It is going to take time and the impact will be felt disproportionally across the different sectors of the economy – just as the benefits of easing interest rates were disproportional.

It may be useful to reflect on the last rate raising cycle. The last one commenced way back in October 2009 – which is extraordinary in itself. That started with a rise from 3% extending some 26 months until November 2011 where the rate peaked at 4.75%. The one prior started in May 2002 extending for 70 months where rates increased from 4.25% up to 7.25% in March 2008. Inflation expectations can take a long time to be absorbed into changes to consumer behaviour.

This discussion deliberately ignores any influence by a newly elected government keen to put its mark on the economic landscape. Any fiscal response in the upcoming budget that is out of step with the RBA goal or changes to industrial relations that impact industry wide bargaining of employment conditions or remuneration could increase the inflation challenge. There are more chapters of the current inflation story yet to be written.

Each cycle has different circumstances and the sheer volume of debt in the economy does make this one a little different, however it may be worth considering the possibility that this tightening cycle could last for longer than many commentators are currently suggesting.

Rate Rise

admin@dddigital.com.au (Motifo Master) — Fri, 27 May 2022 01:18:35 GMT

Rate Rise

On 3 May 2022 the Reserve Bank of Australia (RBA) lifted the cash rate for the first time in nearly 12 years from 0.1% to 0.35%. The cash rate was dropped to these levels in 2020 to deal with what was expected to be one of the most severe economic slowdowns in history. To put the severity into context, the RBA considered the pandemic would cause unemployment to exceed 10% and deflation i.e. negative inflation would persist.

Today’s reality couldn’t be more different - we have record low unemployment levels and the current 5.1% inflation is well above the RBA target range of 2% to 3%.

The key question being asked by mortgage holders and the investment community is just how high will interest rates need to get to before the RBA is satisfied inflation is back within the acceptable band of 2% to 3%? Ultimately no one definitively knows, but as mentioned last year, the interest rate markets have been far better predicators of future rate moves than the RBA itself.

What are markets predicting currently? By December 2022 the cash rate is expected to be about 2.5% and by June 2023 it will peak somewhere close to 3.25%.

Whilst most borrowers would prefer to have low rates forever, savers have the opposing view. As a general rule, the cash rate should not be below the inflation rate for an extended period of time. Normalising this imbalance is a healthy sign our economy is recovering.

1st July 2022 Changes

admin@dddigital.com.au (Motifo Master) — Fri, 27 May 2022 01:17:08 GMT

1st July 2022 Changes

Various changes have been made to the superannuation environment through the year that all have the commencement date 1 July 2022. Many of these changes were announced as part of the Budget introduced in April of this year.

Changes to the superannuation environment are important. Super is usually the most tax concessional environment available to investors, especially those that are entering into retirement. These changes will help people to move more money into the superannuation environment to fund their retirement.

Removal of the work test

Currently if you are between the ages of 67-74 you need to meet the work test (worked for at least 40 hours in a consecutive 30 day period in the financial year) to be able to contribute to superannuation.

As of 1 July 2022 you do not need to meet the work test. This means that it is easier for you to make contributions to super.

You will still need to meet the work test if you want to claim a tax deduction on any of the contributions you make.

Bring forward rule for under 75

The bring forward rule allows you make up to three years of contributions in one financial year. Currently you need to be less than 67 to be eligible to use the bring-forward rule.

From 1 July 2022, if you are under 75 years of age at any time in a financial year you may be able to make non-concessional (after-tax) contributions of up to three times the annual non-concessional cap in that financial year. Other eligibility rules will continue to apply, such as the total super balance limits.

The following table summarises the maximum non-concessional contributions (NCC) that can be contributed in 2022/23 based on your total super balance (TSB) as of 30 June 2022:

Downsizer contributions to superannuation

Downsizer contributions allow eligible individuals to contribute some or all of the proceeds of the sale of their home, without impacting other contribution caps. Unlike NCCs, downsizer contributions do not have a total super balance limit, or an upper age limit. This means it could be a great, final way to boost super for those who don’t meet other eligibility rules to contribute, or where the NCC cap has been earmarked for other purposes.

From 1 July 2022, the eligibility age is reducing from 65 to 60. The age reduction increases the number of individuals who may be eligible to make a downsizer contribution and boost their retirement savings.

Provided certain other conditions are met, it may be possible to contribute up to $300,000 per person (or $600,000 per couple) from the proceeds of selling your home.

Downsizer contributions won’t count towards your concessional or non-concessional contribution caps.

You’ll need to make the contribution within 90 days of settlement of your sale, and you need to complete the required forms to notify your fund that you’re making a downsizer contribution, no later than the time your contribution is made. You must have reached the eligibility age at the time of contributing.

The First Home Super Saver Scheme

The First Home Super Saver Scheme (FHSSS) allows you to make voluntary contributions of up to $15,000 per year within your concessional and NCC caps. You can later withdraw an amount equal to those voluntary contributions plus earnings (calculated at a set rate by the ATO on the amount you withdraw).

The maximum amount of voluntary contributions that you can withdraw increases from $30,000 to $50,000 from 1 July 2022. This boosts the amount that can be accessed from super and directed to buying your first home.

As the scheme allows the withdrawal of voluntary contributions, consideration must be given to not only whether using super is the right approach for you but the type of contribution you will make. For example, salary sacrifice amounts (if an employee), personal deductible contributions or non-concessional contributions.

There is a range of criteria to withdraw your super under this scheme as well as ensuring the funds are used to purchase your first home which is outlined on the ATO website.

More employees eligible for superannuation payments

Superannuation Guarantee (SG) requires employers to pay a minimum level of super support for eligible employees. One criteria for an employee to be eligible is based on that employee’s monthly earnings being at least $450 per month. However, this threshold is abolished from 1 July 2022 allowing all eligible employees to receive SG paid into their super fund. Employees will still need to satisfy other eligibility requirements.

This measure primarily assists low-income earners to have employer contributions paid to super, boosting their retirement savings.

SG contributions count towards your concessional contribution cap and should be taken into consideration when determining any other contributions made.

To check if you need to pay super for your employees, head to the ATO Super Guarantee eligibility tool: https://www.ato.gov.au/business/super-for-employers/work-out-if-you-have-to-pay-super/

Increase in Super Guarantee

From 1 July 2022, the percentage rate for the Super Guarantee (SG) increases from 10% to 10.5%. Employers are required to contribute additional money into their employees’ super accounts in line with the higher SG percentage rate.

The SG rate has been 10% since 1 July 2021 and under the current schedule of legislated increases, the percentage rate will rise again to 11% on 1 July 2023. It will continue rising 0.5% each year until it reaches its final rate of 12% on 1 July 2025.

Minimum drawdown rate

The Government has extended the measure introduced in March 2020, allowing retirees to withdraw half the normal minimum amount from their super. Retirees can now leave more money in their super without having to pay additional tax on their earnings.

This extension applies to the end of June 2023.

2022 Federal Budget Analysis

admin@dddigital.com.au (Motifo Master) — Wed, 30 Mar 2022 04:17:13 GMT

This year’s Federal Budget covers a range of measures aiming to reduce the pressure from increased costs of living and help more people into homes.

Note: These changes are proposals only and may or may not be made law.

Personal taxation

Cost of living tax offset: The Low and Middle Income Tax Offset (LMITO) will increase, providing an additional $420 to reduce tax payable for eligible taxpayers in the 2021/22 financial year. This offset is non-refundable and available to those earning up to $126,000 per annum. However, individuals earning over $126,000 per annum will not benefit. Further, LMITO was not extended, meaning it will not apply for the 2022/23 or later financial years.

Halving of fuel excise: For six months from 12:01am 30 March 2022, the excise on fuel and petroleum-based products will be halved. Whilst not a direct tax, the expectation is this should result in lower fuel prices during this period. Half the current excise on fuel and diesel is 22.1 cents per litre.

Indexation of the Medicare Levy thresholds: The Medicare Levy low-income thresholds are indexed each year. From 1 July 2021, the thresholds are expected to be as follows:

For singles $23,365 (increased from $23,226)
For families $39,402 (increased from $39,167) plus $3,619 per dependent (increased from $3,597)
For single seniors and pensioners $36,925 (increased from $36,705)
For family seniors and pensioners $51,401 (increased from $51,094) plus $3,619 per dependent (increased from $3,597)

Home ownership

Affordable housing measures: The First Home Loan Deposit Scheme and Family Home Guarantee allow eligible individuals to purchase a home with as little as a 2% deposit, and the Government will guarantee the loan, removing the need for lenders mortgage insurance. Currently, guarantees are limited to 10,000 per year. From 1 July 2022, changes to the existing home guarantee schemes will be made by allocating a total of 50,000 guarantees as follows:

35,000 places under the First Home Guarantee (formerly the First Home Loan Deposit Scheme)
5,000 places under the Family Home Guarantee targeting single parents regardless of any previous home ownership
10,000 places under a new Regional Home Guarantee targeting individuals who have not owned a home in five years who relocate to a regional location and can supply a 5% deposit.

The Family Home Guarantee and Regional Home Guarantee places are provided until 30 June 2025, whilst the 35,000 First Home Guarantee places are proposed to continue indefinitely.

Business taxation

Small business training deductions: The Government is proposing to allow a deduction of 120% of eligible costs incurred in training staff in small businesses (ie businesses with an aggregated annual turnover less than $50 million). Generally, training must be delivered by an external registered training organisation in Australia and is only deductible if it relates to employees. For example, if an employer pays an external training company $5,000 to deliver eligible training to its employees, the employer can deduct $6,000 in its tax return. This measure is proposed to apply from 29 March 2022 to 30 June 2024.

Small business technology deductions: Small businesses may be eligible to deduct up to 120% of eligible business costs which support the business adopting digital technologies, such as cloud services or cyber security systems. Eligible expenditure will be capped at $100,000 per financial year and the measure is expected to operate from 29 March 2022 to 30 June 2023.

Changes to Pay As You Go (PAYG) instalments: The Government proposes to allow PAYG instalments for businesses to be calculated from approved software systems, based on current financial performance from 1 January 2024, subject to industry feedback. This aims to calculate more accurately withholding rather than having businesses wait until they have lodged a tax return to receive a refund of over-withheld amounts.

Increase to JobTrainer: The Government has proposed an additional 15,000 places in their JobTrainer program, which provides free or subsidised vocational training in select industries such as aged care and disability support.

Superannuation

Continuation of the reduced minimum pension drawdown: The budget proposes to extend the minimum amount that needs to be drawn from account-based income streams to the 2022/23 financial year. This means individuals with account-based pensions or term allocated pensions will be required to draw less from their savings, in line with the current year minimums.

Social Security

Cost of living payment: Eligible social security recipients resident in Australia will receive a one-off $250 payment in April 2022. Eligible payments include the Age Pension, Disability Support Pension, Carer Payment and Allowance, JobSeeker Payment (and equivalent DVA payments), as well as individuals holding a Pensioner Concession Card or Commonwealth Seniors Health Card. Like previous relief, the payments will not be means tested and will be tax-free. Individuals will only receive one payment even if they receive multiple qualifying benefits.

Paid parental leave changes: Parental leave pay is proposed to be combined with Dad and Partner Pay resulting in a single scheme of up to 20 weeks leave which can be shared between parents as they see fit. This leave can be taken at any time within two years of birth or adoption. The new payment is proposed to be subject to an additional household income test designed to increase eligibility. Single parents are also expected to be able to access an additional two weeks of leave.

Lowering the Pharmaceutical Benefits Scheme (PBS) safety net: From 1 July 2022, the Government proposes the PBS safety net to come into effect earlier, with 12 fewer scripts being required for concessional patients and 2 fewer scripts for general patients each calendar year before the safety net activates. Once within the safety net, concessional patients do not pay for PBS medicines whilst general patients only pay the concessional co-payment rate (currently $6.80 per script).

Any questions?

Please contact Graham Financial on 07 4613 0514 or admin@grahamfin.com.au

Important information and disclaimer

Sources: www.budget.gov.au

This document has been prepared by Actuate Alliance Services Pty Ltd (ABN 40 083 233 925, AFSL 240959) (‘Actuate’), a member of the IOOF group of companies (‘IOOF Group’), for use and distribution by representatives and authorised representatives of Actuate, Godfrey Pembroke Group Pty Limited, Consultum Financial Advisers Pty Ltd, Bridges Financial Services Pty Limited, Bridges Financial Services Pty Limited trading as MLC Advice, Lonsdale Financial Group Ltd, Millennium3 Financial Services Pty Ltd, RI Advice Group Pty Ltd, Shadforth Financial Group Ltd and Australian Financial Services Licensees with whom any IOOF Group member has a commercial services agreement.

Information in this document is of a general nature only and does not take into account your objectives, financial situation or needs. You should seek personal financial, tax, legal and such other advice as necessary or appropriate before relying on the information in this document or making any financial investment, insurance or other decision. If this document is provided to you in conjunction with a Statement of Advice (‘SOA’), any personal financial advice relevant to the financial planning concept/strategy referred to in this document will be contained in that SOA.

Information in this document reflects our understanding of relevant regulatory requirements and laws etc as at the date of issue, which may be subject to change. While care has been taken in preparing this document, no liability is accepted by Actuate or any member of the IOOF Group, nor their agents or employees for any loss arising from any reliance on this document.

If any financial product is referred to in this document, you should consider the relevant PDS or other disclosure material before making an investment decision in relation to that financial product.

Ukraine

admin@dddigital.com.au (Motifo Master) — Wed, 16 Mar 2022 01:38:28 GMT

Ukraine

We sit in Australia geographically safe from the atrocities of war and (at least personally) without any real understanding of just how catastrophic this event must be on the people that are impacted both in Ukraine and in the neighbouring countries that are providing support. Australia is a very diverse population, and we extend our thoughts to all of you who have connections with Ukraine.

In a speech on recent economic developments (9 March 2022) the RBA Governor describes the war as a new major risk to the global economy. The rationale for this description appears to recognise that the war is constantly evolving and it remains unclear what the full implications will be. His speech discusses the main economic effects [today] are largely higher commodity prices. As evidence he cited since the start of February European gas price doubling and oil and coal prices up 40%. Base metals and agricultural commodities have also experienced material price rises. We have seen similar rises in Australia. It’s worth noting at the time of writing these increases have continued.

The scarcity of these basic commodities in Europe is likely to have an inflationary impact at the same time as slowing the economies of most European countries. It stands to reason that these price shifts will be a negative shock to the European economy. However, the Governor indicated the RBA felt it will be net positive to the Australian terms of trade as we are a commodities exporter.

There is very little room for policy error with this war. The International Monetary Fund (IMF) in a statement issued on March 5 argue that while the sanctions on Russia are deemed appropriate the sanctions in themselves have the potential to impact negatively on the global economy in the future.

Whilst it is a note specific to conflict in isolation and does ignore other factors but perhaps as a positive note Dr Shane Oliver AMP Chief Economist reminded us that historically share markets that experience an initial fall due to conflict commencing, when measured a year later, have experienced material gains. We need to remain humble and recognise we do not know the future, but if we have time on our side, and we understand the purpose of the capital we are allocating to risk assets we can take the opportunity to purchase quality assets if/when they become cheap.

Inflation

admin@dddigital.com.au (Motifo Master) — Wed, 16 Mar 2022 01:38:25 GMT

Inflation

Inflation refers to the general increase in the price of goods over time. If prices were to decrease it would be called deflation. Consensus amongst economists is that inflation is better than deflation but only while it remains within accepted parameters. The Reserve Bank of Australia (RBA) has a long stated policy aim of maintaining inflation between 2% and 3%.

Inflation is generally synonymous with strong economic growth. If an economy is growing faster than its current capacity, you can expect inflation to rise. Interest rates are the primary monetary policy tool used by the RBA to address inflation. An increase in interest rates will slow the economy and therefore inflation should also slow.

Investment markets will respond to the expectation of future interest rates because this is the key variable used to price the value of any future cashflow in today’s dollars. In mathematical terms the value of any future income stream will be higher if you discount using a lower interest rate and lower if you discount using a higher interest rate.

It pays to remember that markets don’t like surprises. We have seen higher than expected inflation numbers and as a direct consequence we have seen increased volatility as markets recalibrate company valuations.

For as long as the expectations of future interest rates remain uncertain you should expect market volatility. The RBA meet 11 times a year and at the end of each meeting they will provide analysis and thoughts around the question of interest rate expectations. Dr Lowe has been leading these meetings since September 2016 and is yet to see economic conditions that warrant a rise in interest rates.

The current monetary settings were put in place in response to the pandemic as it broke in March 2020. Inflation at that time was in the negatives and unemployment spiked to 7.2% and was forecast to exceed 12%. It was truly a scary time and governments and central banks globally responded with historically large stimulus packages.

When the RBA put its emergency settings in place in 2020 it also went to great lengths to give confidence that it would not remove these settings until at least 2024. This was presumably to give consumers and investors the confidence to gently recover from the shock of the global pandemic. History has shown that the guarantee of cheap money has had unintended consequences.

Inflation is now at decade highs, house loans are at decade highs, house prices have grown over 20% in some areas, unemployment is at 4.2% and falling. The economy is running well beyond current capacity.

However, as late as October 2021 the RBA had continued with forecasts that inflation will not reach a point that requires the cash rate to be increased until 2024. The market had not supported this forecast with the bond yields rising materially in the past six months. The RBA has recently replaced this courageous long-range prediction with the notice that they will only raise rates when actual inflation is sustainably within the 2 to 3 percent target range.

Gone are the days of adjusting the interest rate lever due to predictions of future economic activity. This has been replaced with the RBA waiting until they can see real “sustainable” evidence of changes to economic activity. In a speech in November 2021 Dr Lowe stated that “…it is hard to precisely define what ‘sustainably in the target range’ means”.

Statistically, inflation data has a lag to it. The data we see today is really some months old. The fact the Dr Lowe has never yet raised rates as the Governor of the RBA is simple trivia. There seems to be little doubt that Dr Lowe will raise rates in his career. The risk is that now the RBA is waiting until they have actual evidence of inflation, they will contribute to volatility rather than smooth volatility.

Whilst a glib interpretation, it is like us turning on the heater in November because we were cold in July. Decisions have historically been made to nudge economic conditions towards stability which is why it is sensible to put the jumper on to prevent you getting cold rather than because the data is showing that you were cold some time ago. The use of outdated data is likely to expand the highs and lows of monetary policy decisions.

When you are giving some thought to inflation and how it might impact your portfolio also consider that market expectations of inflation are more likely to have stabilised before the media or the RBA can see the actual inflation data to confirm it has occurred.

A final upside about inflation and its associated rise in interest rates is that this is not bad for all asset classes. The returns from bonds and cash improve as interest rates stabilise at higher levels. This will be a real plus for portfolios as it provides increased returns from defensive assets into the future.

Economic Update

admin@dddigital.com.au (Motifo Master) — Wed, 16 Mar 2022 01:38:09 GMT

Economic Update

The start of 2022 has seen a strong reversal of recent trends in investment markets. Oil ended 2021 around the USD$70 mark and three months later is pushing past USD$120 a barrel. Much of this change has come in the first week of March. Share markets globally have seen large falls in the first months of 2022. There has been a strong shift away from so called growth companies with many of the growth style fund managers giving up their gains of 2021.

The headline rationale for these movements, as attributed by media pundits, is of course the sharp rise in inflation across much of the developed world and the despicable invasion of Ukraine. If history is a guide, we should expect these events to influence investment markets for some time to come.

The question is… should you be adjusting your portfolio in response to these increased risks?

Portfolio management requires a little humility. Fundamental to this approach is to recognise no one can accurately and consistently predict the future. Perhaps the best we can do in the short term is to recognise and prepare for specific risks, but equally we need to understand these risks will evolve. Invariably hindsight demonstrates the best forecasts and the actual outcomes are rarely the same.

At its core an investment portfolio is a basket or pool of assets. The purpose is to either grow in value (accumulation) or to provide you with an income stream (decumulation). The assets available to fill a portfolio are limited to stocks, bonds, cash, property, infrastructure and alternatives.

Traditional portfolio theory suggests that when you are looking to accumulate you will have a greater proportion of growth assets such as stocks and property. Conversely if you are looking to fund your lifestyle expenses (decumulation) you might have greater income producing assets.

Income assets such as bonds and perhaps cash will demonstrate lower volatility. They also provide lower returns. In 2010 you could get 5% for cash, today you can get 0.1%. A portfolio holding bonds and cash would have provided you with the required 5% return 10 years ago - but not today.

The current low interest rate environment has twisted traditional portfolio theory increasing the focus on risk assets (largely equities) to provide income. When the purpose of a portfolio is to provide an income of 5% of the portfolio balance, it simply is not feasible to allocate large portions to defensive assets. Disregarding short term tactical allocations, a decision to hold all cash is a decision to draw down your capital to fund lifestyle expenses.

So, it follows to get the required returns we must also experience more volatility. Textbooks and media will portray volatility as risk. We agree that volatility can be scary, but risk should be viewed as a permanent loss of capital not volatility.

A portfolio in decumulation that has sufficient cash to fund required income payments means you are not a forced seller of growth assets. When you are not a forced seller your portfolio rising and falling should not materially change your day. Volatility is even less scary if viewed over a longer time. Many seasoned investors will view volatility as opportunity.

It is very rare to witness an investor with the skills and foresight to see risk and consistently execute exit and re-entry strategies. We countenance against trying to time market movements. History is littered with bad experiences from those that try. There is also the challenge of understanding where your risk asset actually is. If inflation indeed creates successive interest rate rises you may find more risk has been lying in wait for you in traditionally stable bond portfolios.

Portfolio management is rarely an all or nothing approach, it is measured and subtle. Decisions must be made against the personal risk appetite and the overriding purpose of the portfolio in question and never in haste. If you are considering large changes to your portfolio, it may be worthwhile discussing your ideas with a seasoned investment professional before you commence.

2021 Wrap Up

admin@dddigital.com.au (Motifo Master) — Sun, 19 Dec 2021 23:08:04 GMT

2021 Wrap Up

Around the Office

Covid restrictions have again required us to do things a little differently this year. For the second year in a row seminars and conferences have been removed from the training calendar to be replaced with additional hours of personal study and online meetings to keep up to date.

There have been some positives however, with video conferencing technology gaining acceptance we have recorded an increase in face time with our fund managers over the year.

Video conferencing is proving to be a powerful tool in mitigating the tyranny of distance. We are hoping to offer this facility to more of our clients in 2022.

In addition to the normal training, the team attended a seminar focusing on the importance of listening and empathy. This training has proved invaluable in fostering the long-term relationships with our clients.

Something different, we have stepped out of our comfort zone and in front of the camera, having new photos taken and creating our first videos. Take a look at www.grahamfin.com.au/about. Perhaps it’s safe to say we won’t be quitting our day jobs to pursue a modelling or TV career!

Stability and professionalism are hallmarks of our team and with Kate celebrating her tenth year at Graham Financial we are confident our clients will have the best support available going into 2022.

Support ing our Community

Taking the opportunity to sponsor the Toowoomba Hospital Foundation Guiding Stars volunteers has been a great experience. The volunteers do fantastic work for the community, and we are proud to provide this support again in 2022.

Giving back to our community is very important to the entire team and we are again participating in The Toowoomba Chronicle’s Adopt a Family campaign. A hamper of food and gifts is going to a Toowoomba family in need this Christmas. The Adopt a Family campaign has been running for over 25 years helping to bring the Spirit of Christmas to struggling families.

Christmas Hours

Every year has to end, and the office will be closing for the Christmas break on Wednesday 22nd December 2021 and reopening on Monday 10th January 2022. If you have an urgent query over the break, you can reach Ben or Martin by email or mobile phone.

The team at Graham Financial would like to thank all our clients and friends for your continued support this year.

We would like to wish you all a very Merry Christmas and a prosperous and healthy new year. We look forward to working with you in 2022.

Supporting the Toowoomba Hospital Foundation

admin@dddigital.com.au (Motifo Master) — Thu, 07 Oct 2021 22:47:23 GMT

Supporting the Toowoomba Hospital Foundation

Giving back to the community is very important to the Graham Financial team. In our search for an organisation that has a positive impact, we have been fortunate to find the Toowoomba Hospital Foundation.

The Foundation supports a large area that includes 22 hospitals and associated health services. The Foundation raises funds for state-of-the-art equipment, research and staff development to ensure the best possible services are available to the Darling Downs community. The Foundation manages a team of around 280 volunteers across the region, who assist with everything from working in the hospital cafes and accommodation services, to providing courier services and assisting with fundraising events.

Graham Financial is proud to sponsor the Toowoomba Hospital Guiding Stars volunteers. The Guiding Stars are the friendly faces helping patients to check in, find their way around the hospital and make it to their appointments via their golf buggy service. We’ve been fortunate to meet several of the volunteers and have been impressed by the dedication and joy they bring to their role.

We are looking forward to continuing to support the Toowoomba Hospital Foundation in their mission to ensure that every patient who visits our region’s hospitals receives the best possible care.

Navigating Low Interest Rates

admin@dddigital.com.au (Motifo Master) — Thu, 07 Oct 2021 22:45:48 GMT

Navigating Low Interest Rates

Possibly the most common question we are fielding at the moment relates to the very low returns on cash and term deposits. So we thought it would be an opportune time to discuss the defensive part of your portfolio in more detail.

Why are rates so low?

As many of you would know, our central bank - the Reserve Bank of Australia (RBA) - sets the cash rate target, and it has chosen to set it at an historic low of 0.1%. In addition, it has undertaken other measures to keep longer term rates low as well. It has done this to assist the economy recover from the recession/slowdown due to the Covid 19 pandemic. The chart below shows the historical cash rate. As you can see, current rates are materially lower than the depths of the Global Financial Crisis (GFC) in 2008.

How long will low rates persist?

Ultimately no one definitively knows. The best guess historically has been to look at the longer-term interest rate market. This shows that rates will likely be higher than they are today, but materially lower than they have been historically.

The market is factoring in a cash rate of close to 1% by 2024. Interestingly, RBA Governor Phillip Lowe has publicly stated that expectations are too high. For what it’s worth, the market has a better record of predicting rates than the RBA itself.

There are a lot of factors that influence rates. The two primary ones being economic growth (GDP) and inflation (CPI). Prior to the most recent lockdowns, both of these measures had rebounded strongly as shown below.

However, the recent lockdowns will see a sharp reversal in the September quarter – obviously this data is yet to be published. As restrictions ease, we would expect to see the recovery resume, however it remains unclear to what extent restrictions will continue to be imposed. This is because we simply can’t know how the virus will evolve – but suffice to say how it evolves will be the primary influencing factor to the direction of the economy and hence interest rates.

Most people would recognise the need to cut rates when faced with last year’s recession. It is less common to recognise the need to normalise rates once the recovery has set in. Therefore, if you believe economic growth will return to trend (or close to trend), you should expect rates to move higher, possibly materially depending on the strength of the recovery.

What are your options?

It’s important to understand that whilst it appears there are infinite investment choices, there are really only four broad asset classes to invest in: cash, fixed interest, property and shares.

You should expect over the long term that cash will be the worst performer. Going along the “risk curve” the returns should increase with shares being the best performer. Conversely, cash will have the lowest volatility and once again this increases along the risk curve with shares having the most volatility. Therefore, cash is not chosen for its return attributes, but for its low levels of volatility.

Most people understand this because they’ve observed it – while their shares, property and infrastructure assets perform the best over time, these assets fall the most in times of distress such as the GFC or March 2020. To combat this risk, having some low volatility assets such as cash and bonds will provide a safe liquid asset base that you can draw on, which means you can wait for your other assets to recover as opposed to selling them at greatly reduced prices. What percentage of safe liquid assets you need will vary, but if you’re in retirement and living off your asset base it would be prudent to have a reasonable amount.

Can you get a better return?

In short, the only way is to take on more risk. Investors tend to think about return and risk separately and unfortunately the focus tends to be risk after the market falls and returns after periods of good returns. This is despite history showing us very clearly that the time to focus on risks is after periods of good returns and the time to focus most on returns is after large falls.

Reducing exposure to cash and bonds and increasing your exposure to shares, property and infrastructure will likely result in higher long-term returns. However, it will only do so as long as you do not need to liquidate these positions at times of distress – which may not be an option if you need to draw on your assets.

Therefore, if you are going to explore changes to your asset allocation to increase returns, be very clear why you are pursuing them and understand the downsides to this strategy before implementing any changes.

A cautionary note about Corporate Bonds

Due to the low returns offered in cash and Government bonds we are seeing many investors starting to replace these assets with corporate bonds. We believe they are doing so with the false belief that this is a way of getting better returns without any real increases in risk. History tells a very different story. A corporate bond (sometimes called credit or debt) is effectively a loan to a business, while a Government bond is a loan to the Government.

The key differences between corporate and Government bonds:

1. Corporate bonds have a higher yield (interest payments) than Government bonds. The less credit worthy the business, the higher the yield

2. In times of distress corporate bonds fall in value, often dramatically. Government bonds typically rise in value as investors flock to safety, driving the price higher.

The chart below shows the spread (difference) in yield between a corporate bond and a Government bond. The Government bond is set at the zero line. When the lines rise dramatically as they did in 2008 the value of your corporate bond fell as dramatically!

As you may observe, these credit spreads increase at exactly the same time as the share market falls. Therefore, if your original reason for holding cash and Government bonds was for a source of safe liquid funds that you can draw on in times of distress – corporate bonds are not a substitute.

In addition, spreads (prices) currently imply the upside is only marginally better than the alternative safe asset. A “BBB” corporate bond will return a little over 1% at the moment versus a term deposit of say 0.4%. However, the downside of BBB corporate bond may be a negative 50% if the GFC is any guide. This type of return profile could be best described as “picking up pennies in front of a slow-moving steam roller”.

Whilst we think there is a time and a place for this asset class, it is important investors understand the very significant differences between ‘cash and Government bonds’ and ‘corporate bonds’ before investing.

Federal Budget 2021 Review

admin@dddigital.com.au (Motifo Master) — Fri, 04 Jun 2021 02:03:48 GMT

Federal Budget Review 2021

This year’s Federal Budget covers a range of measures including superannuation, tax and support for home buyers. The Advisers at Graham Financial give a quick overview of some of the key takeaways from this year's Budget. As always if you want to know more give us a call.

Background to the 2021 Federal Budget

admin@dddigital.com.au (Motifo Master) — Fri, 04 Jun 2021 01:59:21 GMT

Background to the 2021 Federal Budget

Over a year has passed since governments around the globe realised they were dealing with a pandemic, and the impact of the Covid-19 virus has been far reaching. In Australia, the front-line health response and responsibility for ongoing protection of the community was left to each State Government, while the Federal Government implemented financial support measures such as JobKeeper and JobSeeker. These were designed to protect jobs whilst allowing isolation of the population.

These measures and outright financial support from governments have been successful in creating economic growth. The 2021 forecasted underlying cash balance deficit of $161 billion is an improvement of some $36.7 billion from the forecasted $197 billion disclosed just six months ago in the mid-year update in December 2020. In addition, the various policies by the Reserve Bank have given the domestic economy a huge boost.

The forecasted deficits over the next four years as a result of this support are the largest in Australia’s history. Economists are quick to point out the cost is manageable due to low interest rates globally. Debt servicing costs when measured as a percentage of gross domestic product remains at a historical low of around 0.7% of GDP.

The 2021 Federal Budget is a continuation of the fiscal support that started in March 2020. The stated goal of this continued support is to drive the unemployment numbers to pre-Covid levels or lower.

Just what consequences will come of such large stimulus packages will only be shown in the future. The logic that debt can be paid by proceeds of growth is compelling, however it would perhaps be naive to expect there is no possibility of negative consequences from such large and sustained fiscal and monetary stimulus.

The Budget measures are outlined in a summary form below. If you consider any of these measures relevant to your circumstances, please feel free to reach out to discuss these in more detail.

Note: These changes are proposals only and may or may not be made law.

Summary of Budget Measures

admin@dddigital.com.au (Motifo Master) — Fri, 04 Jun 2021 01:59:02 GMT

Summary of Budget Measures
More flexibility around super

Repeal of the work test: Currently, Australians aged 67 – 74 must satisfy a work test (or the work test exemption) to be eligible to make super contributions. The work test will no longer apply when making non-concessional super contributions or salary sacrificed contributions. People in this age group will also be able to access the non-concessional bring forward arrangement, subject to meeting the relevant eligibility criteria.

Downsizer contributions age reduced: The age at which people are eligible to make a downsizer contribution will reduce from 65 to 60. This will allow an after-tax contribution of up to $300,000 per person when they sell their family home.

Removal of minimum income threshold for super guarantee: The Budget removes the current $450 per month minimum income threshold under which employees do not have Superannuation Guarantee (SG) paid by their employer. The Government says that around 300,000 individuals will receive additional SG payments, 63% of whom are women.

Access to lump sums under Pension Loan Scheme (PLS): The PLS is a voluntary, reverse mortgage type loan provided by the Government. It is designed to assist older Australians boost their retirement income by unlocking equity in their Australian property. Through the PLS, people can receive regular fortnightly payments with the payments accruing as a debt secured against their property.

A new option is to receive up to two lump sums of up to 50% of the Age Pension in a 12-month period. The maximum lump sum amount will depend on whether the individual is single or a member of a couple.

Legacy retirement product conversions: Consumers will be provided with a temporary option to transition from some legacy retirement products to more flexible retirement products. Currently, individuals are locked into certain products that restrict access to capital and flexibility of drawdowns.

Products covered include market-linked and life-expectancy retirement products commenced prior to 20 September 2007 from any provider, including self-managed superannuation funds (SMSFs), and lifetime products from SMSFs.

A two-year period will be provided for these retirement products and is expected to commence from 1 July 2022. Individuals would need to consider social security consequences and any income tax cost.

Home ownership proposals

First Home Super Saver Scheme (FHSSS): The FHSSS, which was introduced in the 2017/18 Budget, allows people to save money for their first home inside their super. The Government will increase the maximum amount of voluntary contributions that can be released under the FHSSS from $30,000 to $50,000.

Family Home Guarantee for single parents: The Government has introduced the Family Home Guarantee as a way of providing a pathway to home ownership to support single parents with dependants. This is regardless of whether they are a first home buyer or a previous owner-occupier.

From 1 July 2021, 10,000 guarantees will be made available over four years to eligible single parents with a deposit of as little as 2%, subject to an individual’s ability to service a loan.

New Home Guarantee: The Government is providing a further 10,000 places under the New Home Guarantee in 2021/22. This is specifically for first home buyers seeking to build a new home or purchase a newly built home with a deposit of as little as 5%.

Personal tax relief

Extension of tax offset: The Low and Middle-Income Tax Offset (LMITO), worth up to $1,080, has been extended for an additional 12 months to cover the 2021/22 financial year. LMITO will be received once individuals lodge their tax return for the 2021/22 financial year.

Business tax incentives extended

Temporary full expensing: The temporary investment tax incentive announced in last year’s Budget has been extended for a further 12 months until 30 June 2023 giving businesses additional time to utilise the incentive as well as extra time for projects requiring longer planning times. Businesses with a turnover up to $5 billion will be able to deduct the full cost of any eligible asset they purchase for their business, including the cost of improvements to existing assets, until 30 June 2023.

Temporary loss carry-back provision: Companies will now be permitted to carry back tax losses for an extra 12 months from the 2019/20, 2020/21, 2021/22, and now 2022/23 income years to offset previously taxed profits in 2018/19 or later income years. This too applies to businesses with an aggregated turnover of less than $5 billion.

Aged care

Response to the Royal Commission into Aged Care Quality and Safety: The Government announced an additional $17.7 billion over five years for aged care. Some of the proposals include:

80,000 additional Home Care Packages over the next two years
introducing a new star rating to allow Aged Care recipients and their families to compare Aged Care providers on performance, quality and safety
implementing a new funding model
increasing the Government’s Basic Daily Fee supplement by $10 per day per resident, and
from early 2022, informal carers and older Australians will benefit from increased funding to improve access to respite care and support through the Government’s Carer Gateway.

MLC Merger with IOOF

admin@dddigital.com.au (Motifo Master) — Fri, 04 Jun 2021 01:57:55 GMT

MLC Merger with IOOF

As many of you may already know, MLC Navigator was owned by the National Australia Bank (NAB). Sometime ago IOOF agreed to purchase this business. This required various regulatory approvals which have now been granted and the transaction has now completed.

How does this affect you? Whilst you can read more about the changes here www.mlc.com.au/ownership from a practical standpoint nothing will change. It’s important to remember that the MLC Navigator platform is largely a technology solution. As the new merged entity will be the largest platform business in the country, we hope this would provide some scale benefits going forward. However, as always we constantly scan this space for better, more competitive products – and if one emerges we would certainly let you know and if appropriate we would recommend you change.

50% Pension Reductions Extended

admin@dddigital.com.au (Motifo Master) — Fri, 04 Jun 2021 01:57:28 GMT

50% Pension Reductions Extended

On 29 May 2021 (well after the Budget), the Morrison Government announced that the temporary 50% reduction in the minimum amount members were required to withdraw from their pension account will be extended to 30 June 2022. This was a big surprise, most notably because it was announced after the Budget.

So if you are currently drawing the reduced minimum from your pension account, you can continue to do so for the next 12 months. As always, if you wish to make changes to the amount you are withdrawing from your account, feel free to contact the Graham Financial Admin team.

Beware of Scammers

admin@dddigital.com.au (Motifo Master) — Wed, 31 Mar 2021 00:44:54 GMT

Beware of Scammers

The term ‘scammers’ sounds sort of hip, but let’s call it what it is … these acts are criminal, and the perpetrators are low life thieves. It is entirely likely that you will know someone who has been impacted by a scam. Scammers target people of all backgrounds, ages and income levels across Australia. There's no one group of people who are more likely to become a victim of a scam; all of us may be vulnerable to a scam at some time.

Scams succeed because they look like the real thing and catch you off guard when you’re not expecting it. Scammers are getting smarter and taking advantage of new technology, new products or services and major events to create believable stories that will convince you to give them your money or personal details.

You should not feel ashamed if you suspect you might have been caught. Like most crimes, scammers flourish when the victims stay silent. Scammers will use all forms of communication; email, phone, websites. No matter what the format, the scam and the scammers rely on engaging you to cooperate with them.

It is a mistake to underestimate the skills of these criminals. They are experienced at coercion and they very quickly create a sense of urgency to encourage you to do their bidding. They will pretend to be from government agencies like Centrelink or the Tax Office. They will falsely represent Telstra or other large organisations that are well known and trusted in the community.

What can you do to protect yourself? Your best defence if you are in doubt is to STOP the interaction. Do not give any information to a scammer – just hang up or turn off your computer and walk away. If you are concerned, talk to your trusted adviser or a family member. Be confident knowing there is no legitimate business that will push you to give them your personal or financial details. Every real business or government agency is prepared to wait until you are satisfied of their bona fides.

Tips to protect yourself from scams:

Ignore cold call phone calls that ask about your computer or phone.
Never provide a stranger remote access to your computer, even if they claim to be from a company such as Telstra or the NBN Co.
Keep your personal details secure – shred documents with your name and address on them.
Don’t click on hyperlinks in text messages, social media messages or emails, even if it appears to come from a trusted source.
Type website addresses into your browser’s address bar rather than clicking on any links that you’ve been sent.
To verify the legitimacy of a contact, find the organisation through an independent source such as a phone book, past bill or online search.
Be wary of unusual payment methods like iTunes cards.

What do you do if you think you have been scammed? Contact your financial institution immediately and report any financial transaction you have undertaken. There is likely to be an opportunity to recover your funds if you act quickly. Prepare yourself to be contacted by the scammers again and ignore these attempts. Scammers - like other thieves - will come back to where they have been successful.

Most of all be alert. The Australian Competition and Consumer Commission (ACCC) Scamwatch website states there have been 6,120 scam reports that mention the coronavirus with more than $8 million in reported losses since the outbreak of the COVID-19. The risks are real.

I've retired!... Now what?

admin@dddigital.com.au (Motifo Master) — Wed, 31 Mar 2021 00:44:26 GMT

I've retired!... Now what?

Graham Financial has been assisting people meet their retirement goals since 1985. Our primary focus is of course around our clients’ financial security. As a team we enjoy our work, and we consider ourselves fortunate to have the opportunity to work with people at this stage of their life. We have seen and helped many fulfilled and happy retirees.

“How much money will I need?” and “Am I saving enough?” are common questions we hear from those preparing for retirement. We absolutely agree that financial security is important, shifting your income from what you earn, to living off what you have saved can be stressful – but expertise from firms like ours helps with this.

So, what makes your retirement happy?

Money alone will not provide you with happiness in retirement. Retirees should also prepare mentally and emotionally for the changes that come with this new phase of life. Those who are looking forward to a life of leisure in retirement may find it hard to believe, but for many, feelings of loneliness, purposelessness or lack of purpose or identity can lead to depression and other health problems.

Whether we realise it or not, work provides many of the ingredients that fuel happiness, including social connections, a steady routine, and that very necessary component “a sense of purpose”. When people stop working without a plan to replace these elements, they may find that their mental health suffers.

Our observation is that retirees who maintain a sense of purpose in their lives are the happiest. It is worth stating again that maintaining a sense of purpose is entirely unrelated to the amount of money you may happen to retire with.

Below are some observations that we have seen give our clients reason for happiness and fulfillment in retirement.

Structure

Pre-retirement, you probably had a structured daily routine. While your days don’t need to be rigid, having a set wake-up time and routine can help you feel more normality now that you aren’t going to work. Sticking to a routine and ticking things off a to-do list help you maintain a sense of purpose and the feeling that you’re actually getting something done, even if it’s meeting friends for coffee or mowing the lawn.

Pets

Pets can be a great addition to your retirement, especially with all of the mental and physical wellbeing benefits they can provide. As pets rely on you for every one of their needs, these daily activities can provide a sense of structure and purpose. If you live alone, pets can provide a great sense of companionship. Pets can also help provide the motivation to get outside and exercise. Even if you don’t have a dog to walk, playing with your cat indoors, picking up toys and dishes or cleaning a litter box can help keep you moving.

Volunteer

One of the best ways to take care of yourself in retirement is by taking care of others. Studies show that seniors who incorporate volunteering in their life report more satisfaction with life and fewer symptoms of depression than those who don’t volunteer. This is likely related to the expanded social ties that volunteering provides or the sense of purpose a person can feel by committing to charitable causes.

For those who want to give back, the possibilities and the needs are endless. Go to www.govolunteer.com.au to find opportunities near you, or just call your favourite charity and ask how you can help.

Take your time

There are many different ways to spend your time. And fortunately, there’s no need to figure it all out right away. It will likely take some experimenting to help you find just the right balance of how you want to spend your time. It’s up to you to design the type of day—and kind of life—that you want to live.

The last word on happiness we leave to a quote by the renowned Austrian psychiatrist, Viktor Frankl

“Don’t aim at success. The more you aim at it and make it a target, the more you are going to miss it. For success, like happiness, cannot be pursued; it must ensue, and it only does so as the unintended side effect of one’s personal dedication to a cause greater.” — Viktor Frankl

Market Update

admin@dddigital.com.au (Motifo Master) — Wed, 31 Mar 2021 00:43:49 GMT

Market Update

On the 23rd of March 2020, the Australian share market bottomed with an intra-day low of 4,402 points. One year on and we are yet to see our local market recover to its prior high reached in February 2020, but indices such as the Dow Jones and S&P500 (in the US) have actually surpassed their prior highs.

Locally our employment data was very strong with unemployment rates falling to 5.8%, which was much better than expectations. In addition, the percentage of the population working also rose to 62.3%, albeit slightly below the pre-Covid level of 62.7%. This is far better than expected and supports the view that the JobKeeper expiration may not be as painful as many suggest.

Not surprisingly population growth has slowed dramatically due to immigration largely ceasing. This will cause some headwinds for overall economic growth and housing demand, but it will assist the unemployment rate. We do however note housing demand is currently very strong. Going forward we suspect a hot topic politically will be immigration, particularly given Australia’s attractiveness has likely increased as a result of Covid.

Is Covid-19 almost over?

We of course hope so. But the reality is that no one knows, as we don’t know how this virus will mutate over time.

There is a lot of information available for those who are interested, but we thought a very brief summary would be helpful.

Vaccines work with the immune system. The vaccine shows our immune system what the virus looks like and gives it the tools to pre-warn it so that it can fight the virus. The issue is that they have only shown the immune system a critical part of the virus called the “spike protein”, not the whole virus. This was done due to time constraints – whilst blueprinting the whole virus is a better option, it is far more time-consuming, and of course time was of the essence. The good news is that the whole of virus vaccine is still being developed.

So, what’s the issue? Well, the virus copies itself millions and millions of times and now and then the copies aren’t perfect replicas. If the blueprint for the spike protein changes, the ability to recognise the virus is impeded. If enough changes happen, the spike protein may become unrecognisable, and an escape mutant emerges. The escape mutant is likely to become the dominant strain.

Copying errors are already occurring and the mutations in Brazil and South Africa have significantly undermined the body’s immune system to recognise the spike protein, resulting in material reductions in the vaccines’ effectiveness. To date the UK and US mutations have not compromised the effectiveness of the vaccines.

Can’t we just recode the vaccines for the mutations? Altering a change of shape in the spike protein should be easy to recode. However, a “stealth change” is another story. This type of change makes part of the spike protein invisible to antibodies and as a result is potentially much more complicated to recode.

These complications have led Hamish Douglas of Magellan to describe the current situation as “the most complex risk environment the world has seen for many years.”

Interest rates

As most of you would be aware, interest rates are at levels we have never seen before. The question many market participants are asking is when will central banks start raising rates and where will they get to?

One of the most critical factors to interest rates is inflation. If inflation rises, it is expected so too must interest rates. Interestingly, market pricing for 2-year inflation expectations in the US is now nearing 3% which is well beyond the Fed’s (US Federal Reserve) 2% target. As such the market is getting quite uncomfortable with the Fed’s stance of continued low rates for some time.

If we do get some inflation as per market pricing, will it be transitory? The Fed seems to think it will be, but the market remains less convinced. Five members of the FOMC (Federal Open Market Committee) are expecting 3 to 4 0.25% hikes by the end of CY2023, whilst 11 see no such increases. For what it’s worth, the market has a better record of predicting interest rate movements than the members themselves.

Economist and former US Treasury Secretary Larry Summers has also given his 2 cents - the US is plugging a 3-4% gap in GDP with 14% worth of stimulus. Basically, this means the US has overstimulated and as a result inflation is coming.

Some advice I was given many years ago - if you’re a share investor, watch the bond market and if you’re a property investor, watch the bond market and if you’re bond investor… watch the bond market. The bond market is the interest rate market, and it is possibly one of the most important markets to understand when investing in any asset class. In short, the lower rates are, the more reasonable it is to pay more for these assets and of course vice versa.

As you can see below, whilst the 10-year bond yield is still low, it has aggressively moved up in recent weeks highlighting the market’s expectations of future rate hikes. This move has particularly affected growth stocks like technology companies.

Where will the 10-year bond yield settle? Assuming an economic recovery, we would expect somewhere in the 3% range. However, if inflation really picked up you could see it breach 4%.

Farewell to 2020

admin@dddigital.com.au (Motifo Master) — Mon, 07 Dec 2020 01:45:07 GMT

Farewell to 2020

2020 - the year that will be remembered for bringing us the terms social distancing, quarantine, isolation, super-spreader and Collins Dictionary’s word of the year: lockdown. As we put the upheaval of 2020 behind us, we look forward to welcoming 2021 with confidence and optimism.

We feel incredibly grateful that our families and friends have remained healthy and we have been able to carry on business as usual here at Graham Financial.

The team at Graham Financial would like to thank all our clients and friends for their continued support this year. We greatly appreciate the opportunity to work with each and every one of you.

The office will be closing for the Christmas break on Wednesday 23rd December 2020 and reopening on Monday 4th January 2021. If you have an urgent query over the break you can reach Ben or Martin by email or mobile phone.

Over the break, you might like to connect with us on Facebook: https://www.facebook.com/GrahamFinancial/

We would like to wish you all a very Merry Christmas and a successful and prosperous 2021. Stay safe and enjoy the festivities wherever you may be.

Community Support

admin@dddigital.com.au (Motifo Master) — Mon, 07 Dec 2020 01:44:30 GMT

Community Support

Graham Financial was proud to recently sponsor the Fairholme College Spring Festival. Despite the necessary changes to the program to comply with COVID-19 guidelines, the College still provided several opportunities for the students, staff and families to come together and connect. The Festival is Fairholme’s biggest fundraiser of the year, with money raised being invested directly back into the College. For Graham Financial it was a great opportunity to support a local school in the Toowoomba region.

Christmas can be a hard time of year for many people but in 2020 the struggle to have a bright and joyful Christmas has been intensified in the wake of COVID-19. Given these challenges, the team at Graham Financial wanted to make a tangible contribution to our local community this Christmas. We are participating in The Chronicle’s Adopt A Family campaign and will be donating a hamper of food and gifts to a Toowoomba family in need. The Adopt A Family campaign has been running for over 25 years helping to bring the Spirit of Christmas to struggling families. The Chronicle is working with charities across the region (Lifeline Darling Downs, St Vincent De Paul Society, UnitingCare Community and Mercy Community Services) to adopt more than 120 families. Contact any of these charities directly if you would like to be involved.

Downsize your home - upsize your super

admin@dddigital.com.au (Motifo Master) — Mon, 07 Dec 2020 01:43:45 GMT

Downsize your home - upsize your super

We often field queries about how you can get more money into super. This is not surprising given how restrictive contribution caps have become. There are actually quite a few methods to get money into super, but one of the lesser known pathways is a direct result of selling the family home. You can use this transaction to make contributions to super of up to $300,000 per person.

The rules are reasonably strict, and the process can become complex. We recommend you seek advice before you start. But you should remember that it is the transaction of selling of the family home that is the trigger and the contributions do not count towards your contribution caps.

The contribution must relate to the proceeds of the disposal of your principal place of residence. This ensures your contribution is less than the gross proceeds received for the house. The funds for the actual contribution can come from anywhere, and the transaction does not require you to buy another house.

There are a number of practical scenarios where this can add material value to your financial situation, as outlined in the following examples.

Jack and Diane are 69 and 68 and both retiring in August. They choose to sell their home valued at $1.3 million and move to a regional community where their children live and purchase a home for $480,000. They have very little super or other savings. They can both make a ‘downsizer’ super contribution of $300,000 and a ‘non-concessional’ super contribution of $100,000 because they had worked in the current financial year. They now have $800,000 to fund their retirement. Also, they will meet the eligibility tests allowing a modest age pension but more importantly the concessions and discounts that come with the age pension.

Ross and Rachael, aged 64, have done a little better and are considering selling their home and moving to the beach house they have recently purchased. Waiting until they turn 65 will allow them to contribute $600,000 to their already large superannuation balances. They don’t need to use the funds to buy another house.

Danny and Sandy, aged 65, each have a superannuation pension account of $1.6 million and jointly hold a $2.5 million portfolio of managed funds. To simplify their affairs, they choose to sell their $600,000 house, contributing $300,000 each into superannuation and then purchase their dream home on the waterfront using the $2.5 million (from the sale of their managed funds). They each have a super balance of $300,000, a pension of $1.6 million and never have to do a tax return again!

These examples are simplified but this measure can be used to restructure your finances and when used effectively, it can add a lot of value to your situation. Whilst the sea change or tree change is not for everyone, if you are thinking about selling your home, the downsizer provisions may be a very real solution for you!

If you are looking to utilise the wealth of your family home, we strongly suggest you seek advice before you enter into the transaction.

Our people, our home

admin@dddigital.com.au (Motifo Master) — Thu, 22 Oct 2020 04:03:34 GMT

Our people, our home

2020 has been a year of changes for everyone. At Graham Financial we have had many changes with one of our long-term employees Trevor deciding that it was time to have a sea change. We know many of our clients loved their time with Trevor.

Behind the scenes we have been building our team to continue servicing the needs of all our clients both now and into the future. Many of you have probably spoken to the team already, but if you haven’t, do not hesitate to call or drop in as the team are here to help.

Another exciting change to Graham Financial is the recent refurbishment of our back office by CEOffice Concepts based here in Toowoomba. The change was driven primarily to accommodate more people, but it was also a great opportunity to redesign the space to make it more efficient.

With any new refurbishment there are always so many decisions to be made and it can be a little daunting. The conceptual pictures provided to us by CEOffice Concepts of what the office could look like made this process much easier. Being able to visualise the end result before construction had even commenced was invaluable. During the process we were able to make changes from the original concept to further fit with our needs

Below are some pictures of the original concept and some before and after shots of the back office. From these you will see how the end product matches pretty closely with the original plan.

We are really happy with the end result and we feel that this will allow for ongoing growth of the business and for us to continue assisting our clients with their financial planning needs.

Before

CEOffice Concept Visualisation

After

The Budget Measures

admin@dddigital.com.au (Motifo Master) — Thu, 22 Oct 2020 04:03:33 GMT

The Budget Measures

Summary

Key proposals include:

Tax cuts for low and middle income earners by bringing forward the ‘Stage 2’ tax relief, increasing the Low Income Tax Offset and retaining the Low and Middle Income Tax Offset in the current tax year.
Tax relief for businesses, including instant asset write-offs and Fringe Benefit Tax (FBT) concessions.
A range of measures to maximise retirement savings for Australians, including a new online YourSuper comparison tool and changes to ensure an employee’s super fund follows them when changing jobs.
Additional payments (comprising two amounts of $250) for eligible income support recipients and concession card holders.
A capital gains tax exemption for granny flat rights supported by a formal written agreement.

Tax Changes

The ‘Stage 2’ changes to marginal tax rates for low and middle income earners that are legislated to occur from 1 July 2022 will be brought forward two years and backdated to 1 July 2020. The Low-Income Tax Offset (LITO) will also be increased and the Low and Middle Income Tax Offset (LMITO) will be retained for 2020/21 only. ‘Stage 3’ tax changes will be implemented, as already legislated, from 1 July 2024.

The proposed changes to tax rates, income thresholds and offsets are shown in Table 1 below.

The maximum LITO amount is increasing from $445 to $700 in 2020/21. The table below summarises the tax offset available.

Table 3 below illustrates the tax payable in future financial years and the potential tax savings compared to 2019/20, for a range of taxable incomes. These figures take into account the proposed personal income threshold and tax offset changes.

Tax concessions for small business

Date of effect: Various

Small business tax concessions

Tax concessions to small businesses with a turnover of up to $50 million will be expanded as follows:

From 1 July 2020, eligible businesses would be able to immediately deduct start-up expenses and certain pre-paid expenditure.
From 1 April 2021, eligible businesses will be exempt from FBT on car parking and multiple work-related portable electronic devices.
From 1 July 2021, eligible businesses will have simplified trading stock rules, a change to calculation of Pay-As-You-Go instalments and changes to excise and customs duty. A two-year amendment period will apply for income tax returns starting 1 July 2021.

Fringe Benefit Tax exemption for training

An exemption from FBT will be provided to employers providing training and reskilling to redundant or soon to be redundant employees. Ordinarily, FBT would apply if the training provided is not sufficiently connected to the current employment. The exemption will apply from 2 October 2020 (date of the announcement).

Additionally, the Government will consult on possible changes for employees that undertake training at their own expense. Currently, a tax deduction is only available where the training relates to the current employment.

Temporary full expensing of capital assets

Date of effect: From 7 October 2020

Businesses with an aggregated turnover of less than $5 billion will be able to deduct the full cost of eligible capital assets acquired from 7 October 2020 and used or installed by 30 June 2022. Also, in that period:

Small businesses with an aggregated turnover of less than $10 million can claim a deduction for the full balance of their simplified depreciation pool, and
Businesses with an aggregated turnover of less than $50 million can also expense second-hand assets.

Temporary loss carry-back

Date of effect: 1 July 2020

Companies with an aggregated turnover of less than $5 billion can carry back losses in each of 2019/20, 2020/21 and 2021/22 tax years against any profits in 2018/19 or later years. The carry back will give rise to cash refunds of tax previously paid.

Superannuation

Superannuation reform

Date of effect: Staged introduction

The Government will introduce a range of measures to improve outcomes for superannuation members. The focus is to reduce the number of duplicate accounts and to protect members from poor outcomes and encourage funds to lower costs. The measures include:

The ATO to develop systems enabling new employees to nominate a MySuper fund through the YourSuper portal. This will also provide an online comparison tool.
Existing superannuation members will have a current account ‘stapled’ to avoid the creation of a new account when the person changes employment. By 1 July 2021, if an employee doesn’t nominate an account when starting a new job, employers will pay their super contributions to their existing fund. While a person may have multiple funds, this will be by choice.
Payroll systems to simplify the process of selecting a superannuation fund by both employees and employers by automating provision of information to employers.
From July 2021, APRA will conduct benchmarking of MySuper products based on net investment performance. MySuper products that have underperformed over two consecutive annual tests will be prohibited from receiving new members until they cease underperforming. This will be extended to non-MySuper products from 1 July 2022. Underperforming funds would need to notify members and refer members to the YourSuper comparison tool.
Additional obligations will be placed on trustees to ensure decisions are in the financial interest of members, including focus on maximising members’ retirement savings and providing better information on management and expenditure within the fund prior to the Annual Members’ Meeting.

Social security

Economic stimulus payments

Date of effect: From November 2020

Two Economic Stimulus payments of $250 each will be paid on 30 November 2020 and 1 March 2021 to recipients of certain Government payments and concession card holders. The payments will be received tax free and will not be assessed as income for means testing.

Both $250 payments will be made to those receiving:

Age Pension
Disability Support Pension
Carer Payment
Carer Allowance
Family Tax Benefit
Pension Concession Card Holders
Commonwealth Seniors Health Card holders, and
Eligible Veterans Affairs payment recipients and concession card holders.

Individuals who are in receipt of more than one of the qualifying payments or concession cards will only be eligible to receive each of the stimulus payments once.

Youth allowance independence test

Date of effect: From November 2020

Individuals applying for Youth Allowance or ABSTUDY, who are aged 21 or younger, will have all periods between 25 March and 24 September 2020 recognised as contributing to the independence test, regardless of whether the employment requirements have been met.

Ordinarily, a person would need to work full time for at least 18 months in total, within a two-year period, to be assessed as independent for these payments. Where an applicant doesn’t meet these requirements and fails to meet one of the other requirements to be assessed as independent, they are assessed as dependant and a parental income test will generally apply to determine eligibility.

In addition, Youth Allowance and ABSTUDY recipients who earn at least $15,000 from work completed in the agricultural industry between 30 November 2020 and 31 December 2021 will automatically meet the independence requirements. Parents must continue to meet current income test requirements.

Granny flat rights and capital gains tax

Date of effect: From 1 July 2021

A capital gains tax (CGT) exemption will apply to granny flat rights that are supported by a formal written agreement. The intention is to strengthen the financial and legal security of individuals entering into these arrangements, by removing often significant tax consequences associated with formalising these types of agreements.

Granny flat arrangements often include an older person transferring:

Legal title of their exiting home in return for a right to occupy the home for life.
Legal title of their home, plus other assets, in return for a right to occupy the home for life.
Paying for the construction of or renovations to another dwelling, or
Transferring cash or other assets, in return for a right to occupy another person’s home.

The CGT implications of granny flat arrangements are complex. Importantly, often significant CGT consequences can arise.

Budget Update 2020

admin@dddigital.com.au (Motifo Master) — Thu, 22 Oct 2020 04:03:20 GMT

Budget Update 2020

There is very little that is familiar about this year’s budget process. Delivered 5 months late and in the midst of a global pandemic, the budget contained an eyewatering deficit and fiscal measures of support that are by far the largest in history. In this newsletter, we unpack the underlying policy intent of the 2020 Budget. The collective analysis of the Budget clearly indicates that the pandemic is going to impact our economy and way of life for many generations to come.

This is a budget of support for an economy that has been materially disrupted by Government decree. The entire economic impact is a direct product of Government intervention to restrict movement of people and shut down commerce in their effort to protect lives.

COVID-19 continues to grip the global population, and authorities’ preferred response is to restrict the spread of the virus by constraining human contact. At this stage of the pandemic, the measurements of success that are published all revolve around health or the loss of life. This budget is largely an attempt to counter the economic cost – the loss of future productivity.

There is no doubt that COVID-19 has cost lives. The loss of life in Australia has been lower both as a proportion of population and in absolute terms than in many other countries. Perhaps this is due to the restrictions we have had imposed on us, perhaps history will show there was a different reason. Only the passage of time will allow the true measures and corresponding judgement of our collective response to this pandemic.

The measures outlined in this budget are definitely in the shock and awe category and it is compelling to believe that this will get us all back to normal - quickly. However, we need to recognise that for as long as new COVID-19 cases are diagnosed, large parts of the Australian economy are likely to remain mothballed - many parts of the economy are still not scheduled to reopen until closer to Christmas and this goal continues to be moved by state authorities.

State Governments are the key to management of the response to the COVID-19 pandemic. The growth goals of the budget assume a return to work and normal trading in the very near future. This assumption will be under some pressure if mitigation strategies such as those adopted by Victoria are used rather than coping strategies such as those used by New South Wales.

No one knows how long we will have to deal with the virus. It is plausible that this virus will stay active for a few years in the absence of a vaccine being developed. When viewed through an economic lens the longer commercial activity is restricted the more challenges the country is going to face into the future.

Eyewatering deficit – what does this mean?

The numbers of this Budget are simply staggering. At the 2019-20 Mid-Year Economic and Fiscal Outlook, the underlying cash balance for 2020-21 was forecast to be a surplus of $6.1 billion (0.3% of GDP) however the reality outlined in the budget in October expects the underlying cash deficit to be $213.7 billion (11.0% of GDP).

In terms of the increase in debt, gross debt is expected to be 44.8% of GDP or $872 billion at the end of 2020-21, with net debt a slightly lower 36.1% or $703 billion.

Can we afford this? Strangely enough, and with the caveat of in the short term - yes, we probably can. As a result of the ultra-low interest rate settings that are now common across the globe the interest payments due today are lower than those incurred in the mid 1990’s. It is also not a historic high point if compared as a percentage of GDP. Gross debt peaked in Australia in 1946 at 120% of GDP. Of course, GDP itself was comparatively small in the years post the second world war. But like your own budget the ability to service a debt is different to paying it down and a servicing measure ignores the potential that the cost increases if interest rates increase.

Many analysts ask if Australia will ever be in a position to be able to pay back the measures outlined in this budget and if so, when? When can we expect to see a budget surplus again? Certainly unlikely in the next decade but really these questions miss the underlying issues.

A better way to view the pandemic response is to ask if the extreme stimulus measures outlined in this budget and largely reflected around the globe, continue to encourage economic growth or will they start to prevent or stifle the economic activity they are so desperately trying to encourage?

Excessive Government intervention leads to the phenomenon of crowding out. Crowding out theorises the inability of market forces to reach some sort of equilibrium due to Government intervention. This theory has been used to explain several different aspects of the economy.

In terms of the cost of money if the Government increases spending and funds this through debt (as it has done) the potential is that this leads to inflation. At least it has been linked to inflationary periods historically and the subsequent textbook response is to increase interest rates. Any increase in interest rates from the current point will be an absolute negative shockwave to the global economy.

However, this is not a problem right now. There is currently no indication of inflation in the foreseeable horizon for Australia or our major trading partners globally. There is no indication that interest rates are going to rise in the short term. They may even be taken to a negative value, but this is a topic for another newsletter. Whatever direction they move (or don’t move) in the short term does not correlate to a reduction in the risk of rising at some point in the future.

Notwithstanding the challenge to envisage an alternative to the current low rates, it is hard to believe that the current interest rate environment will remain the same for the next 5, 10 or even 20 years. Be mindful the very large increase in debt has now made our economy increasingly sensitive to interest rate increases.

Unemployment

The longer commerce and trade are artificially restricted, the longer it is going to take to get back to some sort of normal. If indeed it can. The JobKeeper and JobSeeker programs have been the Government response to retain jobs. The idea is that the Government has decreed that businesses must shut – to prevent the spread of the virus – but has protected jobs until business can reopen again. You might have heard the phrase “bridge the gap” or “build a bridge”.

This measure has also placed large sums of money back into the economy by people on these programs having money to spend. However, 6 months on and the JobKeeper program is also cited as being the cause of employers not being able to get people to return to work. There are a number of examples cited in the media that businesses have advertised positions to no avail. JobKeeper/Seeker is presumably worth more than the advertised positions.

It should be recognised that these programs are being phased out, but this has not stopped the more colourful media pundits labelling them “Job dodger or job sleeper” recognising that Government intervention has discouraged prospective employees from taking up jobs.

The budget focus should address this concern with the phasing out of the JobKeeper and Seeker programs to be replaced with JobMaker and JobTrainer programs to further encourage the employee and employer relationship.

The Support

This budget provides a mix of incentives to encourage business to enter into transactions, encourage individuals to get back to work, as well as protect the many members of our community that remain vulnerable. The details of measures are explained separately; what we are trying to do here is to put some rationale around how the measures might meet the overall goal of restarting the economy.

For those that do have jobs, a tax cut will allow you to retain more dollars in your pocket for the same personal exertion. This is a direct incentive to the individual. The Government has a bias towards lower incomes with the cuts decreasing in percentage terms as income increases with no change over $180,000 p.a. It also addresses the problem of bracket creep that the Australian tax system constantly faces.

There is an incentive for businesses to hire and train employees. This is the JobMaker and JobTrainer incentives aimed at the younger age group of under 35s. Some analysts have commented that this bias excludes many older workers particularly women who are also looking for work. This may prove to be correct, but the fact remains that it is a direct subsidy designed to encourage the employer and the employee to broker agreements, which should assist in reducing unemployment queues.

Business has been a large focus of this budget. The approach is to encourage investment with instant asset write-offs, incentivising people to bring forward purchases and measures to utilise prior year losses. Business groups have largely supported the measures as being the right focus in light of the Government’s stated goals of increasing economic activity.

Monetary policy - lower for longer

The RBA interest rate decision was delivered on the same day the budget was released, keeping rates at the current 0.25% setting. Bill Evans the Westpac Chief Economist and other well respected analysts are on record forecasting the RBA to further reduce the cash rate to 0.1% in 2020. The same economists also forecast continued low inflation into the medium term.

It is interesting to note that the last time the RBA raised rates was almost 10 years ago on 3 November 2010. Based on forecasts, it is a strong probability that we remain at these low rates for perhaps as long as another 5 years. Only time will tell.

Reinforcing this theme is the change from the US Federal Reserve that has amended its inflation approach, now taking a medium term outlook for rates and indicating that a spike in inflation would be ignored when the decision to raise rates in response to inflation is discussed.

If you are an observer of financial markets over time, it is a reasonable observation to suggest we now have fiscal and monetary settings aligned globally and aimed at maximum stimulus to encourage economic activity. The outcome of these settings has no historical precedent. We live in interesting times!

The Importance of Leadership

admin@dddigital.com.au (Motifo Master) — Thu, 10 Sep 2020 02:07:06 GMT

The Importance of Leadership

Do you think we are looking more to experts for leadership during the COVID-19 crisis?

I believe we are being presented with more experts. Both State and Federal leaders have consistently deferred to “experts” to explain what COVID-19 is and how we can best reduce the risk of catching and spreading the virus.

The fear and uncertainty created by the pandemic has provided an environment where the community has perhaps been more willing to accept an “expert” view. This approach has put enormous pressure on our elected leaders to limit questions of experts that can be answered within their expertise. Medical expertise will have opinions on saving lives but perhaps less conviction on saving the economy.

Do you think we are looking more to experts for leadership during the COVID-19 crisis?

The self-awareness that they do not have all the answers and the confidence to accept that this is okay. Leadership requires intellectual humility – a deep understanding of limitations and personal biases.

A good leader will know that they will be forced to make decisions in an environment that is uncertain. To quote “no amount of sophistication is going to allay the fact that all of your knowledge is about the past and all your decisions are about the future” (Ian E Wilson)

Leaders will demonstrate the confidence to seek views that challenge the status quo and the courage to change their mind when the situation changes around them – because it will.

With so much uncertainty about the Australian and global economy, is it now more important to seek professional advice on your finances?

I can accept that COVID-19 has raised anxiety but not uncertainty. Is today’s future really anymore (or less) uncertain than at other points in the past … when we looked into the future?

The global economy is an infinitely complicated web of interconnections that is constantly changing. We need to accept that the only certainty is uncertainty. If we are to learn from the past, we should recognise that financial security is destroyed by poor decisions. History shows poor decision happen all the time.

If professional advice protects you from poor decisions, then you should seek it all the time.

New Financial Year Changes

admin@dddigital.com.au (Motifo Master) — Wed, 15 Jul 2020 02:44:30 GMT

New Financial Year Changes

Minimum pension changes

To assist retirees, the Government has reduced the minimum annual payment required for account-based pensions and annuities, allocated pensions and annuities and market-linked pensions and annuities by 50% in the 2019–20 and the 2020–21 financial years.

Early Super access

The Federal Government is allowing individuals affected by the economic impacts of coronavirus to access up to $10,000 of their superannuation savings in 2019-20 and a further $10,000 in 2020-21 ($20,000 in total). Individuals will not need to pay tax on amounts released, and the money they withdraw will not affect Centrelink or Veterans’ Affairs payments.

Income tax relief for low and middle-income earners

The low and middle-income earners will see a reduced tax amount up to $1,080 per annum.

Taxpayers with a taxable income of less than $37,000 will receive a benefit up to $255.

If taxable income is between $37,000 and $48,000 you are entitled to receive $255, plus an amount equal to 7.5% to the maximum offset of up to $1,080.

Taxpayers with a taxable income between $48,000 and $90,000 will now be eligible for the tax offset of $1,080.

The Australian Taxation Office (ATO) said they will retrospectively implement these tax cuts if the parliament passes the proposed changes to the legislation.

Family Tax Benefits

From 1 July 2020, there will be changes to the Family Tax Benefit. The threshold is set to increase from $94,316 to $98,988. The families above this tax bracket will see a reduced benefit by 30% for every dollar they earn over $98,988.

Tax changes for Small Businesses

From 12 March 2020 until 31 December 2020, the instant asset write-off threshold is $150,000 (up from $30,000).

Eligibility range covers businesses with an aggregated turnover of less than $500 million (up from $50 million). Businesses with a turnover of $500 million or more are not eligible to use instant asset write-off.

From 1 January 2021, the instant asset write-off will only be available for small businesses with a turnover of less than $10 million and the threshold will be $1,000.

Childcare subsidy rates

From July 1, 2020, the subsidy will be contributed based on a family's combined income with the following thresholds:

Up to $68,163 — 85%
More than $68,163 to $173,163 — down to 50%
$173,163 to $252,453 — reducing to 50%
$252,453 to $342,453 — reducing to 20%
$342,453 to $352,453 — 20%
$352,453 or more — 0%

Economic Update

admin@dddigital.com.au (Motifo Master) — Wed, 15 Jul 2020 02:44:02 GMT

Economic Update

The global economy has experienced a severe downturn as countries have sought to contain the coronavirus. Almost every economic measure is quite frankly, awful. In our opinion unemployment levels best encapsulate the economic pain that is being felt now and will be felt in the future. In May 2020, the Australian Bureau of Statistics (ABS) reported seasonally adjusted unemployment levels went from low 5’s to 7.1%. Unemployment at the peak of the global financial crisis (GFC) was just below 6%.

Where are these rates going? The introduction of the JobKeeper payment has significantly reduced the number of job losses that would otherwise have occurred, but the Reserve Bank of Australia (RBA) still expects the unemployment rate to rise to around 10%. In addition, they also expect a decline in the participation rate. If realised, this would be the highest rate of unemployment since 1994.

It is also interesting to reflect where interest rates were globally before the GFC unfolded.

Before GFC During GFC

Australia 7.25% 3.00%

USA 5.25% 0.25%

Euro Area 4.25% 1.00%

Japan 0.50% 0.10%

Switzerland 2.75% 0.125%

As you can see when the GFC hit, central banks had significant room to cut rates in order to stimulate the economy, which they did.

Now look at where interest rates before the global virus crisis (GVC) as compared to the GFC. As you can see, apart from the US there was basically no scope to cut rates at all. Yet this crisis is likely to be a far bigger economic shock.

Before GVC Today

Australia 0.75% 0.25%

USA 1.75% 0.25%

Euro Area -0.50% -0.50%

Japan -0.10% -0.10%

Switzerland -0.75% -0.75%

The good news is that governments and central banks globally have been very aware of the scale of problems that will be caused by this pandemic. The co-ordinated fiscal and monetary policy response has been quite simply extraordinary.

Some context: during the GFC central banks globally printed money – which is called quantitative easing (QE). How much did they print? Well in the US money printed is represented by the Federal Reserve’s balance sheet (see chart below) - the right-hand side of the chart is in millions represented by total asset of millions… which is trillions.

Before the GFC, the balance sheet stood at $870b. That increased to just over $2 trillion as the crisis unfolded. In the years following, it grew and by early 2015 it was about $4.5 trillion. By late last year, it had been reduced to $3.8 trillion as they unwound this program – this is called quantitative tightening (QT).

Not long into QT, cracks started to appear in the financial system and QE started again. Then the GVC hit. In the space of a few weeks this went to $7.1 trillion. So the money printed in the 11 years since the GFC was circa $3 trillion. Which is less than the amount printed in the initial weeks of the GVC.

Australia, which did not resort to printing money during the GFC, announced on 19 March 2020 that it too would begin QE.

In addition to QE, government’s globally have passed the largest fiscal stimulus packages ever seen. As shown below this is the size of stimulus packages as a percentage (%) of Gross Domestic Product (GDP) as at 20 June 2020.

To put some context around this, the Australian stimulus package during the GFC was around $10 billion in 2008 and $42 billion in 2009. The current economic support packages to date so far have amounted to $259 billion.

I think it is important to stop and reflect what a trillion dollars is. A billion is 1,000 million, and trillion is 1,000 billion or a million million. So what does that look like? Credit to pagetutor.com for the images.

You may notice the spec in the left-hand corner. That is the same man in the red shirt and yes, those pallets are double stacked!

Where does all this money come from?

We are borrowing it. Countries issue bonds which are like IOU’s with interest. As interest rates are very low (and negative in some cases) the cost of servicing this debt is very low. However, as countries issue all of this extra debt, will there be enough demand to buy it? Demand is strong but a lot of that demand comes from central banks themselves via QE – which is artificial. Without this intervention by central banks it is likely that supply would exceed demand and therefore borrowing costs would be materially higher.

The obvious question is surely there are consequences to all of this… and yes there are.

The most common effect of QE from a technical basis is a reduction of the value of your currency. However, there are a lot of moving parts here. As an example, without QE it is likely that the economic downturn would be significantly worse, which also has a negative impact to your currency. Therefore, it may actually be better, at least in the short to medium term for your currency to print some money.

In addition, currencies are quoted on a comparative basis – i.e. when you quote what the Australian dollar is, you compare to the USD, Euro etc. Therefore, if everyone prints money, they can’t all fall relative to each other.

Inflation is also associated with printing money. But given the size of global demand shock (which has a deflationary effect) this is most likely not to be felt anytime soon.

Possibly the greatest risk is the voting population (and more importantly politicians) becoming convinced the answer to all our problems is to print money. History has shown that some amount of money can be printed without dire outcomes. In fact, it can even be a useful monetary policy tool when sparingly used. However, there are limits.

Unfortunately, no one knows where these limits lie, but it will be clear once it has been breached. Once crossed, there is no going back to the time before the breach was made to reverse the situation. Venezuela is the most recent example of using money printing in an attempt to solve other structural issues with their economy – sadly, the result has been an economic and humanitarian crisis.

Why isn’t printing money the solution to all of our problems?

Think of it this way - say you have 4 children and a 1 litre tub of ice cream in your freezer. Each child has $1 each which entitles them to 250ml of ice-cream. For those that want more ice-cream, they can either provide something that another child might want in exchange for all or part of their money, or of course make more ice cream.

Giving all the children an extra dollar will not result in them getting more. It will mean it just costs more (inflation) as you have more money chasing the same amount of goods.

There are really only 2 ways to lift a country’s standard of living. Increasing the productivity of the country and/or increase the country’s terms of trade – which is the price we sell our goods/services vs the prices we pay for other countries goods/services. Whilst we’d love to pay less for everything we buy and get more for everything we sell, so does every other country and therefore it usually comes down to supply and demand.

Coronavirus Thoughts

admin@dddigital.com.au (Motifo Master) — Wed, 15 Jul 2020 02:43:39 GMT

Coronavirus Thoughts

‘Annus horribillis’ is Latin for horrible year. Recently someone asked what is Latin for an even worse year… the response was “2020.” As we cross the halfway mark, it is certainly hard to argue differently.

In this article we wanted to put some context around uncertainty, not just in relation to the pandemic we are currently experiencing, but to the unknowable events that we will no doubt experience in the future.

Like many of you, we have read, watched and listened to an almost endless stream of information about the coronavirus, its impacts on the economy and on our way of life.

Within all of this information there were 2 memos written by Howard Marks that really stood out. Howard Marks is the co-founder and co-chairman of Oaktree Capital Management, the largest investor in distressed securities worldwide.

They were aptly titled “Uncertainty” and “Uncertainty II” – both of them are worthwhile reading and they can be accessed in full on Oaktree’s website - but we thought we would provide some highlights.

The world economy is an infinitely complicated web of interconnections. In the years ahead we will learn what happens when that web is torn apart, when millions of those links are destroyed all at once. And it opens the possibility of a global economy completely different from the one that has prevailed in recent decades.

What will it look like on the other side? The memos give a long list of unknowns including:

Will people who’ve had coronavirus and recovered be immune? Will their immunity be permanent?
Will the virus mutate, and will immunity cover the new forms?
Will it be possible to inject antibodies to prevent infection?
How many people have to be immune for herd immunity to effectively stop the further spread?
Will social distancing delay the achievement of herd immunity? Is the Swedish approach better?
Will a vaccine be invented? When? How long will it take to produce and deliver the needed doses? Where will various countries stand in the line to get it?
How many people will refuse to be vaccinated? With what effect?
Will vaccination have to be renewed annually?
Will the virus be with us permanently, and will it be controllable like “just another seasonal disease”?
Will the massive, multi-faceted Fed/Treasury program of loans, grants, stimulus and bond buying be sufficient to offset the unparalleled damage done to the economy by the fight against COVID-19?
To what extent will reopening bring back economic activity, and to what extent will that cause the spread of the disease to resume, and the renewal of lock-downs?

Who can respond to these and many other questions, come up with valid answers, consider their interaction, appropriately weight the various considerations on the basis of their importance, and process them for a useful conclusion regarding the virus’s impact?

Forecasters seem to act as if the future already exists, and all we have to do is be smart enough to discern it. But that ignores the fact that all of us and many other influences are constantly creating the future through our collective activity.

Further, in considering expertise around the virus, we must be wary of some dangerous tendencies in our society:

to confuse general intelligence with knowledge of the facts relative to a given field,
to confuse factual knowledge with superior insight,
to conflate expertise and insight with the ability to predict the future,
to treat experts in one field as if they’re knowledgeable about all others.

Reporters, not being experts themselves, have to consult experts in order to write their stories. But how do they choose and vet the experts they cite? And to what extent are their selections a function of the biases we all tend to confirm and the conclusions they want to justify? In our experience, the more we know about a subject, the less we’re impressed with the related media coverage.

Ultimately these memos are not concluding that because nothing is definitively knowable, why bother researching anything. Quite the opposite. In fact, it’s more about being conscious that there are things you can’t know definitively and accepting that.

Magellan Minutes - Global Macro

admin@dddigital.com.au (Motifo Master) — Thu, 18 Jun 2020 04:15:58 GMT

Magellan Minutes - Global Macro

To say a lot is going on in the world at the moment would be quite an understatement. We thought we’d share an 11 minute video which summarises Magellan Asset Management’s current macro-economic views. The video features Arvid Streimann , who is Head of Macro and a Portfolio Manager at Magellan.

The video covers Magellan’s current economic outlook, and look at how the economy has changed shape as a result of covid-19. They drill down on different regions and discuss a range of different scenarios. Finally, they reflect on the relationship between higher PEs and a protracted interest rate environment and discuss whether this thematic should hold true in a post-covid world.

Keeping You Informed

admin@dddigital.com.au (Motifo Master) — Tue, 24 Mar 2020 23:53:29 GMT

Keeping You Informed

Market Update

It has been 11 weeks since the Coronavirus (COVID-19) outbreak was diagnosed in China. Australia’s first case was detected in Victoria, on 25 January. We can expect that the virus, along with the response to slow its spread, will have significant economic implications for some time to come.

The global nature of the shock continues to be evident in financial markets. Markets started this downturn in a relatively orderly fashion largely in response to the estimated supply side shocks resulting from China isolating affected cities to prevent the virus spreading.

Markets were impacted more seriously as it became apparent that the virus was not limited to China and countries across the globe would have to adopt similar strict social isolation lockdowns. The fear created by this realisation has been the catalyst for unprecedented selling across all asset classes. Assets are being sold indiscriminately and as the selling deepens, there are fewer buyers. This search for liquidity has caused a clear dislocation across all asset classes.

It is reasonable to expect the environment of negative news to continue for several weeks and people will try to understand and measure their economic effects whilst also adapting to the containment measures. We may be in for several weeks of unsettling headlines and continued volatility.

The upshot is that, having priced in a huge drop in earnings, there is a chance the equity market has entered a phase where we could see a rebound as it starts to factor in the effect of fiscal measures feeding through. There is an elevated risk of investors being ‘whipsawed’ here – selling out in an attempt to buy in at lower levels and missing a material bounce.

We are very mindful that the speed and ferocity of the share market falls have been a cause of distress. The social distancing and broader lockdown measures to contain the virus have contributed further to the feeling of anxiety.

This is a very difficult time and we encourage everyone to maintain a focus on personal health, look after your family and try to refrain from focusing on the short-term volatility we are seeing in the financial markets. We firmly believe that financial markets will rebound as stability returns and we will get through this period.

Perhaps unsurprisingly, we all want clarity around when we can expect to see markets stabilise. Respected analysts are suggesting this is dependent on the infection rate of the virus being managed. Confidence in China and South Korea has increased as rates of infection and death rates have started to fall. It is encouraging to hear that these same analysts suggest that if the Chinese and South Korean experience can be replicated, these inflection points could occur as soon as mid to late April for other major economies.

Can we expect a vaccine or treatment to assist in the response to COVID-19? Yes, we consider it reasonable to expect that scientists will identify a drug that can manage the effects of this virus in the short term. A vaccine to prevent infection is more likely to be a year away due to stringent testing requirements. However, we understand that a drug that can treat the effects of this virus will have the greatest positive impact if the community also manages to reduce the underlying infection rates.

The more we, as a community, can adhere to the strict lockdown and social distancing regime being imposed, the greater the chance we have of softening the economic impact of the virus.

The Government and the Reserve Bank of Australia (RBA) are acting decisively to support households and businesses and address the significant economic consequences of the Coronavirus. We consider it is reasonable to consider the Government and RBA will continue to provide support until the economy stabilises.

While we consider this support is critical and will be a huge benefit, we also expect a deep negative economic impact to come from the virus as the control measures impact around the globe.

Summary of Measures

The measures announced by the Prime Minister are reported as having bipartisan support. However, as they are new spending measures they need to pass through normal parliamentary procedures before they can be implemented in full. The final detail will not be available until the relevant bills are brought to Parliament.

The Federal Budget that is usually delivered in May has been delayed until later in the year. It is reasonable to think of these measures as Budget measures that have been brought forward in challenging circumstances.

Social security

• The Government is providing two separate $750 payments to social security, veteran and other income support recipients and eligible concession card holders prior to 12 March 2020. The first payment will be made from 31 March 2020 and the second payment will be made from 13 July 2020.

• A time-limited Coronavirus supplement will be paid over the next six months at a rate of $550 per fortnight. This will be paid to both existing and new recipients of Jobseeker Payment, Youth Allowance Jobseeker, Parenting Payment, Farm Household Allowance and Special Benefit.

• Current waiting periods have been waived and benefit applications are being fast tracked.

• Reduction in deeming rates as of 1 May 2020, the upper deeming rate will be 2.25 per cent and the lower deeming rate will be 0.25 per cent. The change will benefit around 900,000 income support recipients, including around 565,000 Age Pensioners.

Superannuation

Early release of superannuation

• Subject to conditions of financial stress, individuals affected by the Coronavirus are allowed to access up to $10,000 of their superannuation in 2019-20 and a further $10,000 in 2020-21. These payments are tax free and the money they withdraw will not affect Centrelink or Veterans’ Affairs payments.

Temporarily reducing superannuation minimum drawdown rates

• Temporary reduction to the minimum drawdown requirements for account-based pensions and similar products by 50 per cent for 2019-20 and 2020-21.

Support for businesses

There are several measures to assist cash flow for small to medium size business focussed on those businesses that are employing people. The policy is aimed at reducing the potential for an unemployment spike in the short to medium term.

These measures include;

• Lump sum payment to employers who employ people

• Deferment of loan payment for 6 months

• Loan guarantee scheme

• Instant asset write offs

• Accelerated depreciation to 30 June 2021

• Support for apprentices and trainees.

Package Implementation

The Government is moving quickly to implement this package. To that end, a package of Bills was introduced into Parliament on 23 March 2020 for urgent consideration.

Subject to passage of the Bills through Parliament, the Government will then move to immediately make, and register, supporting instruments.

Timing of Assistance

Graham Financial Office

If clients have any concerns or questions please feel free to contact us here at the office on 4613 0514. Ben and Martin are available to speak with you by mobile and email.

The office will be operating as usual unless stricter measures are put in place by the Government. If this does occur and the office is closed, our team has the ability to work from home and can continue to service our clients.

I n the meantime, reviews and meetings will be conducted via phone where possible and all precautions taken if clients do need to come to the premises.

Please take care of yourself, your family and the community during this difficult time.

New minimum adviser standards

admin@dddigital.com.au (Motifo Master) — Thu, 05 Mar 2020 02:01:28 GMT

New minimum adviser standards

In 2017 the Federal Government established “The Financial Adviser Standards and Ethics Authority” (FASEA). FASEA’s role is to set new minimum education, training and ethical standards for licenced advisers.

This has been a long time coming as minimum standards have been woefully inadequate. It may surprise you to know that historically, people have been able to become licencsed advisers in as little as 2 weeks.

The new minimum standards are very comprehensive. To be a licenced adviser going forward you will be required to do 5+ years of full-time study (including a bachelor’s degree), one year of formal training/experience, plus you will need to pass a new national exam set by FASEA. We think these standards are far more representative of the training and experience required in order to give good, well-informed financial advice.

Implementing changes like these are always difficult and will never be executed flawlessly, but continuing with the old standards is simply unacceptable. Unfortunately however, there has been a lot of lobbying by those that want to keep the old minimum standards. As a result, whilst new advisers will be required to meet the new minimum standards from 1 January 2019, it looks as though the new standards will not apply to existing advisers until 2026.

Whilst we think it’s reasonable that there is a grace period for existing advisers, it will mean that for the next 6 years you might be dealing with an adviser that is very qualified or barely qualified that has no intention of practicing beyond 2026. The question I would be asking my adviser – do you meet the new standards yet?

We are very pleased to advise that Graham Financials’ two partners Ben and Martin both met (in fact exceeded) all of the new minimum standards early in their careers. They have also both recently completed the newly required ethics bridging course and passed the new national exam set by FASEA.

Market Update - Part 2

admin@dddigital.com.au (Motifo Master) — Thu, 05 Mar 2020 01:53:49 GMT

Market Update - Part 2

The effect of a low interest rate economy

The Coronavirus has taken the headlines and perhaps rightly so. However, the longer-term issue that as investors we need to understand is that we are currently stuck in an ultra-low interest rate environment and that this continues to affect the economy in ways that traditional textbooks could not have predicted.

It is useful to remind ourselves of the role of interest rates to the broader economy. Interest rates set by central banks influence the cost of borrowing and returns on our savings - lower rates are bad for savers and good for borrowers and vice versa.

However, long-term rates have a material impact on asset valuations and these rates have never been so low. The reason valuations are affected in finance terms is “the discount rate” but in layman’s terms it is simply accounting for the time value of money.

To demonstrate this relationship, it might be easier to work through a simple scenario. What is a future cashflow worth? Well $100 in one years-time if rates are 10% is worth $90.91 today i.e. $90.91 invested @10% today will give you $100 in one years-time. If rates were 5% that number increases to $95.24 and 1% to $99.01.

But businesses (should) produce cashflows for a long time. So, what is 20 years of cashflows of $100 per year worth today? Well if interest rates were 10% - $851, at 5% they would be worth $1,246 and at 1% $1,805.

Whilst this is a theoretical graph and a theoretical scenario it is worth recapping what Australia’s interest rates have done over the past 30 years and reflect on why asset prices have risen so strongly over the same period. The 10-year bond rate (plus a risk premium) is a standard measure used to discount future cash flows and is also the predictor of future cash rate. At the beginning of 1990, the time of the last Australian recession, the 10-year bond rate was in the region of 14%. The RBA cash rate was sitting at 17.5%. Inflation as measured by Consumer Price Index as at March 1990 was 8.6% consistent with the average of the previous decade.

In today’s environment these numbers will illicit very different emotions to parts of the community. If you are retired and looking for an income stream you might be keen to see a cash rate at 17%, however if you are an average borrower in Australia this rate would simply be impossible to service.

Interest rates provide the tools to value all assets, however in the current environment this theoretical relationship between interest rates and asset prices becomes interesting because mathematically when the discount rate hits zero, the time value of money relationship breaks down.

It is also true to suggest that the change in asset price is much higher when interest rates are low. For example, the change in the interest rate moving from say 17% to 15% will result in a much smaller change in the asset price than an interest rate move from 3% to 1%.

The concept of negative interest rates brings a whole new level of complexity into valuations. Whilst we will not elaborate further on the topic in this newsletter perhaps you can spare a thought for German investors where earlier this month a 30-year German Bund traded at (minus) -0.148%.

Investors’ response

As interest rates have reduced, investors have gone searching for yield (income) bidding up the prices of any asset that can demonstrate an income stream. We have seen heavy demand for any assets that provide income higher than the current sub 1% cash rate. Investors have discounted the inherent risk in these assets or in some cases simply disregarded the concept of risk altogether.

All asset classes have been bid up in an attempt to secure some level of income, including debt, equities and property. We are, and should expect to see, increased levels of volatility when very high valuations are exposed to an exogenous shock such as we are seeing with the coronavirus.

While it is trite to play down the concern of a viral pandemic, Shane Oliver has recently published an article highlighting some of the other worries that we have experienced just in the past 5 years that created volatility and investor concern: deflation; commodity/oil crash; Grexit; China worries; Brazil and Russia in recession; manufacturing slump globally; Fed rate hikes; Brexit; South China Sea tensions; Trump; Eurozone elections; North Korea; Germany; Catalonia; Italy; US inflation and rates; Trade war; China slowdown; Aust Royal Commission; Aust housing downturn; US government shutdown; inverted yield curves; impeachment; Aust recession fears; and Iran tensions.

All of these issues were concerning at the time simply because they all represented unknown factors. Unknowns create fear in investment markets as we are currently seeing.

What should investors do?

We need to recognise that whilst market volatility isn’t comfortable, it is normal and it’s the price investors pay for higher long-term returns. The largest mistakes investors can make is letting their short-term concerns excessively influence long term decisions. Whilst we encourage investors to remain aware of current events and how they may impact your investments, tracking them daily provides little benefit.

Trusting the longer-term outcome of an actively managed, diversified investment strategy will reduce short term investment anxiety.

Market Update - Part 1

admin@dddigital.com.au (Motifo Master) — Thu, 05 Mar 2020 01:52:45 GMT

Market Update - Part 1

The current market sentiment has turned sharply negative in response to the global threat of the Coronavirus (COVID-19). At the time of writing markets are down in excess of 12%. While it is generally accepted that a movement in excess of 10% is considered material it may be prudent to remember the market is coming off historically high levels.

Just how virulent and just what the final mortality rate of the coronavirus remains unknown. The reports we have seen suggest this is a global pandemic. The fatality rates from COVID-19 are higher than the current influenza strains. However, the fatality rates are still relatively low and are tilted towards the parts of the population that are already weakened by age or pre-existing medical conditions.

The fatality rate of the common flu is estimated at 0.1%. Initial estimates for fatality rates of COVID-19 are likely to be less reliable due to the difficulty in determining infection rates. However, we have seen estimates from 0.5% in South Korea to 0.8% in China.

Vaccines and drugs to treat COVID-19 symptoms are estimated to be anywhere from 3 to 12 months away. However, once there is certainty around a medical development, we would expect the response to move from containment to mitigation. In the same way as currently happens with the common flu.

To give some perspective to the severity of COVID-19, the World Health Organisation at the start of March reported some 87,000 cases of COVID-19 globally with a tick under 3,000 reported deaths. Fatalities from the common flu during the current flu season solely in the US has exceeded 12,000 deaths and the 2017/18 year exceeded 61,000 deaths. A statistic we may be more familiar with, road crashes, will account for over 37,000 deaths in the US each year.

Are these numbers large? The 2017 global population was 7.5 billion and in the same year 17.79 million deaths were recorded from cardiovascular disease, 2.51 million from dementia, 1.24 million from road accidents, 295 thousand from drowning and 126,000 died from hepatitis. These numbers blur the horrific toll on human life, but it is useful to demonstrate that the loss of life from COVID-19 is at this point in time, relatively minor.

A key lesson learnt from the SARS outbreak in 2003 was the need for containment of the infections to reduce the contagion effect. History may show that this strategy remains the best course of action to restrict the loss of human life, however it is this very response that is at the heart of current market volatility and economic instability.

Shutting down entire cities has restricted the manufacturing heartland of the Wuhan province in China. We are already seeing shocks to the supply chain as the extensive factory closures and travel bans of China take effect. Of Australia’s total exports, over 30% goes to China and 25% of Australia’s manufacturing imports are from China. This is many times more than it was only a decade ago and even at this early point in the epidemic the Australian economy can expect to experience a negative economic shock from the containment policies of Chinese authorities.

With the virus spreading globally and the key preventative response continuing to be containment, these supply side shocks will reverberate around the globe for some time. While not noticeable yet, we should recognise that today’s supply side shock will readily morph into tomorrow’s loss of demand.

The rationale for considering the current supply shock reducing future demand is compelling. Consumer behaviour requires us to continue to seek those items that are truly necessary. However, these items only make up a small component of total consumption in most western societies. This is why the regular “one day only” sales strategies do so well. Consumers buy things they don’t really need and impulsive purchasing patterns are recognised as the norm. If consumers are restricted from their purchasing patterns, demand will fall.

Shift in Market Sentiment

As we have seen in previous corrections, fear of the unknown leads to an exodus from equities and a flow of capital to the safety of bonds. This movement is currently in full swing. Demand for the Australian 10-year bond has pushed it to an all-time historical low of 0.68% as at the end of February and has shown increased volatility in trade every day since.

The economic shock is sufficient that we can expect a fiscal and monetary response. A fiscal response is where the Government will push money into specific sectors that are experiencing negative shocks. Examples historically have been the building sector when the GST was introduced and drought aid for farming communities more recently.

Governments can simply give money to its citizens with the goal of increasing demand as happened in 2008 in Australia or as happened in Hong Kong earlier this month when authorities disbursed HK $10,000 to every Hong Kong permanent resident aged 18 or above.

A monetary response is when the Central bank adjusts interest rates (lower). The consequences of this is explained later in this newsletter. Both are attempts at increasing demand. Neither method is known to successfully support supply.

Probably the most important person to lead this shift is the US federal Chair Jerome Powell and he has already hinted at further reduction in US interest rates. We can expect further stimulus packages to be announced over the coming days and weeks across the globe.

With increased liquidity it may be that this material correction turns into a major buying opportunity for longer term investors. Of course, the timing of shifts in market sentiment is impossible to predict but the longer-term outcome may well be more positive than the market is currently indicating.

Our response to current events is to stay calm and let the active investment approach of our selected managers play out. There are going to be opportunities to buy companies at discounted prices. We can expect increased volatility until the market reaches some level of confidence that the outbreak is containable.

Christmas Trading Hours

admin@dddigital.com.au (Motifo Master) — Wed, 27 Nov 2019 01:42:58 GMT

As 2019 draws to a close, Graham Financial would like to thank all of our clients for their continued support in 2019. We greatly appreciate the opportunity to work with each and every one of you.

Graham Financial will be closing for the Christmas break on Friday 20th December 2019 and reopening on Monday 6th January 2020.

As always, if you have anything urgent during this time do not hesitate to call or email Ben or Martin.

We would like to wish you all a very Merry Christmas and a prosperous New Year. If you are travelling over the Christmas break, please take it easy on the roads and enjoy the festivities wherever you may be.

We look forward to seeing you all in 2020!

Community Support

admin@dddigital.com.au (Motifo Master) — Wed, 27 Nov 2019 01:41:56 GMT

Graham Financial was proud to recently sponsor the Fairholme College Spring Fair - which was held on Saturday 19th October 2019 at the College. The Spring Fair is Fairholme’s biggest fundraiser of the year, with money raised being invested directly back into the College. Judging by the large crowds and happy faces, this year’s Spring Fair was a veritable success!

For Graham Financial it was a great opportunity to support a local school in the Toowoomba region. School fees can be an added expense to the family budget either as a parent or grandparent. Graham Financial can assist clients to prepare for this stage of their life and uncover what is achievable for them.

Below is a table estimating the cost of educating a child from pre-school through to year 12 in Australia. This survey was undertaken in 2013 and has taken into consideration the cost of extracurricular activities, uniforms, necessities, travel and computers. Even though this data has aged a little it gives you an idea of the expenses incurred when educating our children whether choosing the state, catholic or independent school systems.

Here's to a long life

admin@dddigital.com.au (Motifo Master) — Wed, 27 Nov 2019 01:37:42 GMT

Martin Webb was recently invited to contribute to the September issue of the Financial Planning Association's Money & Life Magazine.

The question posed to Martin was: ‘ As more Australians are spending longer in retirement than previous generations, how are you managing your clients’ longevity risk?’

For Martin's response to this question and an easier to read version please click on the image below.

Trade War

admin@dddigital.com.au (Motifo Master) — Thu, 19 Sep 2019 01:43:21 GMT

The trade war between the US and China presents a very sensitive challenge for Australia. On the one hand over 30% of everything we export is purchased by China. On the other hand we have an equivalent dependence on the US for our national security. The implicit protection of the US military is very important to Australia.

Australia has successfully straddled these apparently conflicting goals for many years. Respected analysts of this topic remain confident in Australia’s ability to continue to manage the expectations of both China and the US despite the rise in tension between the two economic behemoths.

Economists argue about a lot of things, yet many would probably agree on the benefits of free trade, which generates wealth by allowing the free flow of goods across international borders, without taxes and other such barriers.

Notwithstanding that there may be a very good reason to impose a restriction on the flow of trade, when a restriction is placed on the flow of goods and services the cost of that good or service will increase. It is also worth noting that any cost increase will flow into similar global markets even when that market has not had the cost directly imposed on it.

Trade agreements will set out the rules that each nation will accept to allow goods and services to flow between them in a mutually beneficial nature. A “free” trade agreement, like any other, must be respected by both parties for it to be successful in practice.

China had been accused of unfair trade practices for many years and Trump had campaigned against these practices on his way to winning the presidency. As President, Trump took steps to address these imbalances as early as July 2017, when he and President Xi Jinping agreed to a 100 day plan for trade talks.

These talks have dragged out over several years with both sides taking increasingly hard positions. We have provided an extract attributed to Hamish Douglass that describes the current situation as well as any.

Hamish is the founder and Chief Investment Officer of the very successful Magellan Financial Group. It is worth noting that Hamish is at this point perhaps one of Australia’s most successful fund managers and arguably one of the most brilliant financial minds this nation has produced for a generation. Douglass says that he doesn't think Trump is right about a lot of things but that he is right about the core issue in the trade dispute – and that is China fighting the trade war on unfair terms.

"They have been stealing intellectual property, they’ve been requiring foreign companies who come to participate in their massive market to effectively transfer their intellectual capital as a cost of doing business," he says.

" If they can't get it they go and steal the technology through cyber theft, and they have massive state-owned enterprises who get huge subsidies and they use those subsidies for taking market share on a global scale. So, that is a very, very real issue and they're trying to reset that relationship. "

The negotiations have been the backdrop for each nation to apply increasingly punitive tariffs on goods and services. The share market is pricing for a conclusion to negotiations and most likely because it would be in Trump’s favour to have a conclusion going into the next presidential election cycle.

There is however a chance that Trump will stick this out and try for a genuine reset of the trade agreement to one based on free market terms. While this may be a better outcome for global trade many years into the future, it will also likely cause volatility in the short term.

It is true that Australia needs both the US and China and it is not an option that we take a side. However, predicting how the trade war will impact Australia in the longer term is not possible.

We are mindful that negative consequences are possible, however, it is worth noting that in spite of media devoting a lot of energy to discuss the potential negative outcomes, Australia has recently recorded a record trade surplus!

Market Update September 2019

admin@dddigital.com.au (Motifo Master) — Thu, 19 Sep 2019 01:26:11 GMT

Economic growth has slowed and share markets around the world are experiencing an increased level of volatility.

Sensationalist media reporting exacerbate fear of market volatility. Our observation is that media will apply an intense short term focus on specific events and use very emotive language to explain their story.

It is understandable how this would be the case. Journalists are incentivised to have their report read widely so they sell more than their competitor. To illustrate this point, the market cap or the collective value of companies listed on the ASX at end of Aug 2019 was 2,074,246 million! That is a little over 2 trillion dollars.

If the market moved 2% that means the market would have “lost” or “gained” over $40 billion dollars. Is this a crash, or a windfall?

It is certainly a very big number, but it is explaining a proportion of an enormous number. It is not helpful to report in percentages and then make an issue about the absolute number. When thinking about an investment portfolio, a swing of 2%, is not unusual, in fact over time investors should expect larger daily movements than this. Whilst very few like volatility, it’s an unavoidable part of investing.

Volatility measures have a use, but they should largely be ignored when making long term decisions around your portfolio settings. We need to remember that as investors we must see events through the lens of a much longer timeframe than the media reports presented to us each day.

Slowing growth?

The data supports the media coverage that the domestic economy is slowing. However, we should recognise that these are lagging metrics and they tell us what has happened and not what is going to happen in the future.

The RBA has already reduced rates and the government has legislated the lower tax rates promised in the recent election.

While we won’t touch on the tax cuts any further in this newsletter suffice to say they are stimulatory, and their impact is yet to be included in the economic data.

Rate cuts

How do lower rates stimulate growth? Lowering interest rates reduces the cost of money. For companies and individuals with debt this will reduce their interest payments, giving them more money to invest and or spend. It also decreases the attractiveness of leaving money in the bank and increases the attractiveness of taking on new debt, which will hopefully be used to make investments into productive opportunities that employ more people. The maintenance of full employment is one of the pillars of the RBA mandate.

The RBA lowered interest rates in June and again in July bringing them to 1%. These cuts are the first time the RBA has moved the cash rates since the last reduction in August 2016. The market is pricing rates in the expectation they will reduce further to perhaps 0.5% or even lower. Should further cuts be required it is expected they will be made in the next 6 to 9 months.

An RBA cash rate of 0.5% will be at the lower range of the capacity for interest rates alone to provide stimulus to the Australian economy. It is likely that should rates get this low we will see the RBA introduce some form of Quantitative Easing (money printing) to bolster the stimulus sought from low rates alone.

Remember in simple terms a slowing economy gives cause for a lowering of interest rates to stimulate growth, while a growing economy gives cause to increasing rates to offset the risk of cost pressures, improved growth in the economy and inflation.

The recent rate cuts (along with some relaxation of the credit rules), has already given a boost to the volume of credit and associated house prices.

RBA data shows investor lending has increased in July. Unsurprisingly so has median house prices with capital cities increasing at an annualised pace of a touch over 6%. While investment into unproductive assets such as existing housing is not necessarily healthy for an economy, it remains an indicator that the reduction in interest rates has increased the flow of money into the economy.

Free market forces remain the most efficient manner to encourage the allocation of money towards productive economic activity. Governments cannot mandate growth. At best Governments can incentivise economic activity in a specific sector but it will always be the market that defines if this activity becomes a productive use of this capital.

In our view, simply increasing the supply of money though reduction in the price [of money] is more likely to inflate the price of existing assets than increase productivity. At some point Australia is going to have to have a discussion around further fiscal initiatives and microeconomic reform as tools to increase productivity.

Time will tell us if this, and future, stimulus will be enough to prevent Australia recording its first recession in over 28 years. However, should we still record the necessary 2 consecutive quarters of negative growth required to form a technical recession, the measures taken to date are likely to shorten any recession and limit the negative impact on the economy.

Valuations

Interest rates are also the key to placing a value on companies or indeed the value of any asset. When investing in an asset you are putting up a lump sum for a future cashflow. When valuing that future cashflow a higher interest rate will give you a lower lump sum value and a lower interest rate will give you a higher lump sum value.

Consider an industrial property that has a lease guaranteed to pay $10,000 p.a. How much would you pay for that income stream today?

Ignoring things like tax, risk premiums etc. what is the first years cashflow worth in today’s dollars? If interest rates were 10%, you would pay $9,091, which is worked out by calculating the amount you would need to receive today to be in the same position in 1 years time by investing it at 10% i.e. $9,091 plus $909 interest = $10,000

Using 1% you get $9,901, or $810 more. But what about 15 years of $10,000p.a. cashflows?

Using ever lower rates for valuation purposes is courageous and is quite possibly a very expensive assumption. It’s worth reminding people that the benefit of increased valuations as rates fall, will work in reverse as long-term rates rise.

Cash as an asset class

There are of course consequences to stimulus measures that result in cash rates below 1% with low returns on cash being quite topical. Cash as an asset class has no capital component so it is logical that when the income falls to such low levels investors might go looking for higher yield.

However, it is perhaps timely to remember that cash remains integral to the overall asset allocation within your portfolio. Cash provides liquidity, essential in pension phase. In Australia, retail cash accounts are still Government guaranteed up to generous limits. Cash is the only asset that will not change in value in response to a short-term market event. As long-term investors attest, cash gives you options when markets are in a downturn.

Finally whilst the average 6 month term deposit rate is in the region of 1.7%, the 10 year bond rate is 1%. So yes cash returns are low but relative to “safe” Government backed fixed income products they remain reasonable. We would counsel caution towards comparing cash as an asset class to investments in higher yielding debt instruments such as hybrids, corporate debt and mortgage funds. While these assets may provide a higher expected return, they are not cash – these assets typically perform very poorly in an economic slow-down and in fact many of these products became unsellable during the 2008/09 correction. This is exactly the time you typically need liquid cash, as selling shares at this point is undesirable.

Investing in these products requires the investor to have an appetite for volatility and risk of capital loss.

What's new at Graham Financial

admin@dddigital.com.au (Motifo Master) — Thu, 19 Sep 2019 01:12:57 GMT

We have long recognised the importance of providing a quality service that is bespoke to the unique needs of our clients.

In an increasingly complex financial world where we are overloaded with information from so many sources, we consider communication with our clients to be more important than ever.

We are investing in improving our clients’ experience, and as part of this we would like to introduce Amy Foster , our newest recruit into the Graham Financial team. Amy comes into our team with a focus on client communications. She has hit the ground running with the new website going live in September.

Recognising that “not everyone needs a financial planner … but everyone needs a financial plan”, the new website includes a focus on the areas that will contribute to the success or otherwise of your financial outcome. Understanding these issues and how they interact with your unique circumstances is important.

We have also updated the way we send our newsletters and intend to send them out to you with greater regularity. T he updated format will make it easier for you to find information that is relevant to you. We wanted to provide our clients with ongoing access to our thoughts and opinions about what’s going on in the financial world in a way that respects your valuable time.

We hope that being able to select the areas you want to explore further and skip topics that you don’t, will provide you with insights specific to your needs in a timely manner.

We have also started a social media presence with the firm now proudly a part of the LinkedIn network.

As we continue to grow, we will roll out improvements in how we communicate with you and as such, we would value your feedback so these improvements can be focused.

If you have topics you would like to explore or ideas as to how we can serve you better, then please get in touch with Amy by simply ringing the office to start a conversation.

RECYCLE DEBT TO REDUCE THE RISK

admin@dddigital.com.au (Motifo Master) — Sun, 07 Apr 2019 02:45:19 GMT

Paying off debt instead of Investing, in effect, a decision to have more debt than would otherwise be the case. The more debt you have, the riskier your situation is. So the first question you really need to answer is: what’s an appropriate level of debt for your personal situation? Unfortunately, Australian households are the most indebted in the world and this has led to a pretty casual approach when it comes to assessing what is a reasonable amount of debt to be carrying.

Variables that will determine appropriate debt levels include age, current and future income, health, current and future tax situation, retirement goals, job security and, of course, tolerance of risk. These factors can be difficult to quantify but there are some basic rules of thumb we use to determine whether you’re ready to consider an investment over paying off your mortgage (we assume you have no other debt or investment assets)...

SUCCESSION PLANNING: AN APPROACH THAT WORKS

admin@dddigital.com.au (Motifo Master) — Mon, 30 Jun 2014 14:55:30 GMT

As the average age of the rural property owner steadily increases the demand for succession planning advice has also risen. While it may be a generalisation, the basic premise of the request for advice is the goal that mum and dad should retire without having to sell the land thereby allowing the kids to run the property and continue a tradition that has been in the family for perhaps many generations.

However, a rural property is no different to any other business that needs to be handed to the next generation – if the current owner has not accumulated sufficient assets to “walk away” in a comfortable financial position then a sale of some or all of the farm assets will have to occur.

The expertise of succession planning or retirement advice comes in assisting the owners and their families to make decisions within their current financial circumstances – there is no magic panacea or alchemy that will allow an outcome that is outside the current asset base without the use of debt for the incoming owner.

We have written previously about the importance of building a portfolio off farm. This is a goal that should be a part of every business model of every rural producer. Put simply those families that have given time to building a portfolio of assets off farm will have far greater capacity to hand that property down to the next generation.

Unfortunately a bit like a prize breeding herd, an off farm investment portfolio is not accumulated over night. Accumulating assets takes time, and is generally achieved with a steady and consistent cash flow being directed towards the purchase of quality assets.

I have given this opinion many times to various audiences and the general response in the first instance is for people to highlight the obvious difficulties of achieving “steady and consistent” when they are in an industry that is famous for irregular cash flows. I get reminded again and again of the harsh nature of rural business with seasonal conditions bringing drought, floods. Persistent low cattle prices or the persistent high Australian dollar are also put forward as the barrier to achieving a constant cash flow.

Unfortunately the same messages of why it can’t be done have been used for generations – I have even used them myself 20 years ago. The truth is that all of us put up roadblocks to achieving something that looks hard or perhaps a bit out of our comfort zone.

While the harsh nature of the industry you have chosen to work in can be fun to discuss at the local show, it unfortunately does not change the facts. If you want to retire and leave the farm to the next generation you have to have accumulated sufficient funds to give you an income stream that is unrelated to the income of the property – otherwise be prepared to sell the asset.

So recognising all the difficulties, what can you do?

The first step is to recognise the business budget and the family or personal budget are different and should be maintained separately. Your personal goals of retirement annual holiday or whatever, will be different to the goals of the business. If this is not reason enough for you, consider this. If it is your intention that you pass the property to your children then at that time you will be forced to have a separate personal budget, so you might as well introduce it sooner rather than later.

A very important consequence of defining a personal budget as different from the business budget is that it implies the business will be giving you, the owner, a nominated wage or salary each year. This is the certainty that removes the most often discussed roadblock to a steady and consistent cash flow. A nominated wage should not be hard to find because you will already have allocated the money to this. It’s just that the expenses will be hidden within the business costs and drawings rather than isolated to you separately.

Once you have come to terms that you, like your staff, are paid for your endeavors from the business you operate, you can start to allocate what you are going to do with the money in your personal budget.

A simple budget approach is to use the 50/20/30 rule. Where 50% of your budget is allocated to essentials. These are literally the essentials of life and generally limited to housing, transport, utilities and groceries. You could perhaps expand these to include education and medical but the idea is that this portion is no more than 50% of your budget and really is only the bare necessities of life.

The next 20% is allocated to financial well being. This is the portion that takes care of personal debt and is the steady and consistent income stream that will allow you to invest for your retirement. The idea is that this portion is after the bare essentials of life but before you use your money for anything else. The order is important.

The final 30% is the lifestyle expenses and will include shopping, entertainment and personal expenses – the fun part. What is important about this category is that it is allocated last – after the 20% allocated to financial well being.

This approach will take some level of discipline to achieve and it will be helpful to articulate why you are doing it. Just like all the self-help books recommend – stating a goal actually does work, just make it achievable. I generally suggest nominating a modest goal in the first instance and raising the bar over time once some discipline has been achieved.

This approach will work, we have been part of some remarkable achievements by people that have chosen to take control of their destiny using this approach. It is too easy to focus on the roadblocks when focusing on the goals will give you so much more financial freedom.

ARE YOU RUNNING A BUSINESS?

admin@dddigital.com.au (Motifo Master) — Fri, 01 Nov 2013 02:13:55 GMT

I came across an old coffee advertisement that was appealing to the romance of the rural lifestyle. …. The picture is familiar – a couple, steaming mugs in hand, watching the sun rise over rich pastures while a gentle morning mist slowly evaporates to reveal grazing cattle. The couple exchange a smile of contentment: another day in paradise.

The images it creates are magnificent and for a moment you wonder who in their right mind would trade life on the land for the rat-race of the city.

Advertisements are designed to be emotive but the truth of course is a bit different. A rural lifestyle should not be confused with the harsh realities of running a rural business.

It’s a business of extremes – extreme highs countered by extreme lows. It’s a business of cycles charted by the seasons – years of abundance interrupted by the unavoidable threat of drought, flood, fire or other natural disaster our great continent is famous for.

We know there are going to be lean years where adverse seasonal conditions are going to occur roughly one year out of every six.

But is this really different from any other business?

Harsh times are going to occur in any commercial venture, this is a known ‘known’, so strategic planning to help you ride out the rough times becomes essential. Remove the emotion of land-ownership and the family traditions that accompany farming and you’re left with a business that experiences good times and bad, profitable years and years of loss. Perhaps unremarkably no-one enters a business with an intention other than making a profit.

Perhaps unlike other businesses, if your farm isn’t profitable, it’s a little more difficult to shut up shop and turn off the lights on your way out.

The business of farming is often difficult to view in such impersonal terms; after all, working the land tends to ‘run in the family’. It’s a legacy passed from generation to generation. But it is a business nonetheless. It exists to supply a commercial demand while producing an income for the people who work on it. It puts food on the table, pays for the children’s education and funds retirement – just as you’d expect of any other business.

Regardless of the nature of that business, successful operators plan ahead and surround themselves with skilled people. For example, you’re the expert at raising beef cattle but at what stage were you supposed to become a tax expert as well? Do you expect too much of yourself?

Which leads neatly into an interesting point: although people who work the land tend to display a marked willingness to offer assistance to others, they rarely seek assistance for themselves. Many – unwittingly – place unfair expectations on themselves by attempting to ‘go it alone’.

The business of running a profitable farm requires specific skills and tenacity. It has some unique complexities that may be specific to that property but finances are not one of these. There’s no reason you should feel you’re alone when faced with producing:

Budgets and cash flow forecasts,
Tracking income and expenditure,
Managing taxation, wages and superannuation,
Building a portfolio of off farm assets,
Assessing appropriate personal insurance.

Let’s return to the stats for a moment. If the odds are that one in six farming years may result in a financial loss to your business, doesn’t it make sense to put a plan in place that helps ride out these years?

A tailored plan is crucial to success.

A financial plan, tailored to the particular business of your property, can mean the difference between borrowing through the tough times and treading water in the good, or having reserve funds for the lean years and surplus for savings and business growth during the productive years.

Timing is also key. Early planning may prevent your business decisions being triggered by events over which you have no control. Planning early puts you in command and increases your options when seasons and markets move against you.

If you could make small changes to your business strategy that allowed your property to be more profitable, wouldn’t you be interested?

Financial advisers with an understanding of rural property management, can work with you to achieve these outcomes.

Development of an appropriate plan for you and your business will provide considered strategies for all the market conditions that you will face.

Consider these points:

Budgeting harks back to the adage of living within your means. It might be handling household expenses or managing the costs of the property. Identifying needs from wants is paramount to keeping operational costs under control.
Many events that impede profitability are outside of your control which raises the question of contingency planning – what you can do now to prepare for these events.
Wealth creation sets up your future. A business with sustainable profitability, even in less lucrative years, will enable you to plan your life through each of its stages from raising a young family to retirement and beyond.

These issues are the same as those faced by the couple running a cafe or the local plumber. The difference lies in the experience and background of the professionals they have behind them helping them to achieve their goals.

Let’s end with a different version of the same advertisement: a sweat-stained man returning to the homestead after an honest day’s graft on the land. He may appear alone, but he has a trained army at his back and a plan for the future.

AUSTRALIAN PROPERTY

admin@dddigital.com.au (Motifo Master) — Mon, 30 Sep 2013 14:53:24 GMT

The historically lower interest rates have increased the media coverage about a sudden increase in property prices. The reported median price of housing in capital cities has increased with clearance rates improving strongly. Sydney in particular has been very strong.

The concern being mooted by analysts is that the continued low interest rates are leading to credit and loan standards being relaxed by lenders. There are suggestions that this is encouraging a price increase in fixed dwellings but this is not flowing to a marked increase in building starts. A property price surge that is not matched by construction that increases supply has all the hallmarks of turning into a “property bubble”.

In an environment of low interest rates, we should expect capital to flow towards fixed assets, after all we have seen it happen before. Interest rates in the US between 2001 and 2004 were held low in the wake of the tech boom and bust, this is the environment that led to the GFC. There are a number of international economists who are questioning whether the economic climate that is being created now to protect us from the last financial crisis is not setting us up for the next one.

Are we in a housing bubble right now? Probably not. Price growth in established dwellings is necessary before construction will pick up. The RBA has openly stated it wants construction to increase and you could not expect building to commence if there was not a prospect of increased return in the future. But, we need to be aware of the issue as the formation of any sort of bubble – be it in bonds, shares, or property has a negative effect on all other asset classes in some manner over the medium term.

Many will consider that because they are not part of any property investment directly, they might be immune to the effects of any price fall. However it is the flow on effects that will hurt all investors. We need to remember that property prices, particularly residential prices, will only increase in response to another buyer having access to a greater amount of money to purchase it. Sounds obvious, but very little property is purchased with outright savings so the money has to be borrowed.

It follows that any fallout from a property bubble has its impact on the credit and finance system. This is an impost on the entire economy. We have seen this played out all over the world in the last 5 years. Regulators will be keen to prevent this happening again if they can.

Regulators have already taken steps in New Zealand, Canada, Switzerland and South Korea by introducing various forms of macro prudential policies, including limits on loan-to-valuation ratios or increased capital requirements.

In Australia, APRA has recently stated a desire to impose tougher prudential standards on banks when assessing lending risks. The September minutes from the RBA meeting noted “Property gearing in self-managed superannuation funds was one area identified where households could be starting to take some risk with their finances; members noted that this development would be closely monitored by Bank staff in the period ahead.”

In our opinion the regulators are right to remain concerned. All risk in fixed asset markets such as residential housing comes back to people borrowing more money than they can repay when interest rates eventually rise. Regulators can’t (and shouldn’t) prevent individuals from making mistakes but they can impact whether lenders are able to provide the conditions for those mistakes.

The level of debt held by Australian households remains a concern. Reserve Bank of Australia (RBA) data shows that households remain highly leveraged. The graph below shows that in spite of savings rates being at all-time highs over the last 5 years, collectively, we have hardly made a dent in the level of debt households are holding. All we have managed to do is to stem the increase.

The majority of house purchase transactions use debt. The greater the amount of debt that is offered to prospective buyers, the more they tend to use. The more debt available the higher the price able to be paid for a house, hence it is the availability of credit that drives house prices ever higher. Demand alone is not sufficient.

Human behaviour is often irrational when it comes to taking on debt. Households will often make long term decisions based on their current experience. Take a 30 year home loan for example – why should current interest rates have any effect on demand? Given rates are likely to move up and down many times during the 30 year period, a rational person should borrow based on being able to afford the payments based on interest rates at the high end of the expected range.

Unfortunately this is often not the case. Low interest rate environments almost always have the effect of lifting house prices and increasing debt levels. Increasing debt in itself is not a problem, but lifting debt past a sustainable level can be a disaster.

To illustrate the effects of low interest rates and debt levels, let’s consider a $500,000 home loan taken out in 2008 over a 30 year term.

In 2008, monthly repayments would have been $4,109 or $49,308 p.a.
In 2013, monthly repayments would be $2,720 or $32,640 p.a.
An annual difference of $16,668

Some households will increase their payments and develop a significant buffer in the loan. But for the majority this temporary wealth effect will typically encourage them to borrow more.

Consider for example, that a household decided they had sufficient cash flow to sustain payments at $4,109 per month and they really “needed” that bigger and better house. Using that payment amount their borrowing capacity is now $755,000.

So if they change the loan amount, the situation would look like this:

In 2013 monthly repayments would be $4,109 or $49,308 p.a.
In 2018* monthly repayments would be $6,197 or $74,364 p.a.
An annual expense increase of $25,056.
Assumes interest rates move back to the level they were in 2008.

People need to be aware that the current rates are at all-time lows and decisions about amounts borrowed should be made with a longer term view on interest rates and monthly payments.

Any proponent of strong increases in house prices, year on year, as we saw in the last decade, should give some consideration as to who is going to hold that debt. If households were to increase the level of debt held from the current levels by any significant amount, then we will almost certainly experience significant financial stress when interest rates start to rise again.

A characteristic of the GFC was a plethora of lenders who were willing to lend to people who could not repay when interest rates rose. Regulators globally are not keen for this to occur again.

ARE FARM MANAGEMENT DEPOSITS USEFUL?

admin@dddigital.com.au (Motifo Master) — Wed, 04 Sep 2013 14:00:00 GMT

There has been a lot said about the level of accumulated debt in the cattle industry. Debt has been a key driving force that has shaped the industry over the past decade and the management of that debt will define who remains a part of the industry over the next decade.

But debt is not the entire story of the beef cattle industry. There are properties that continue to make money. At a best guess it will be those that have been fortunate or prudent enough to retain low manageable debt levels that continue to make a profit. The data that does indicate this is the increase in the use of Farm Management Deposits (FMD).

Farm management deposits are a risk management tool to help farmers deal with uneven income. The scheme allows you to claim a tax deduction for deposits you make in the income year you made them. If you withdraw a FMD, the amount of the deduction you claimed is included in your assessable income in the income year the deposit is repaid to you. So basically it moves the tax point into the future.

To be eligible to the scheme you need to be carrying on a primary production business at the time of making the deposit. There is no limit on how many accounts an individual can have as long each account is over $1,000 and below $400,000 in total for each individual.

The number and size of FMD’s is collated and published by the Department of Agriculture and Fisheries. This data is updated quarterly and it is interesting to take a look at what the data might be able to tell us about the cattle industry today.

First up it shows a strong correlation to seasonal conditions which makes sense as you sell livestock the money earned is placed into a FMD and then redrawn to repurchase when conditions are favorable. There is a strong flow of deposits around June each year which again makes sense as it would be recommended by most accountants to shift the tax point forward to reduce the tax impost in the current year.

The data split has some aggregation between beef, beef and sheep and beef and grain. If you look at the total Australia wide there are $1.4 billion in deposits. In the beef category alone there is $778 million. It would be reasonable to consider these producers have very little or no debt as, in general terms it would make little financial sense to increase deposits if you had an associated tax deductible debt as the tax deduction is claimed in either case and the interest expense would be higher than the interest earned on deposit.

It would be a reasonable conclusion to consider the equity position is strong for producers using FMD’s. A further positive note is that the deposit amounts are increasing over time. Comparing the June figures shows the total deposits to increase by around 6% year on year. The only negative year since inception of the scheme is 2009 with 2010 showing no increase on the previous low year. The fact that these years coincide with negative returns across all asset classes suggests not all spare cash goes into FMD’s. Presumably there is a flow of cash into investable off farm assets as well

It is a difficult to draw any accurate conclusion of how many properties would be using these FMD’s because you are not limited in the number an individual can have. But it is not unreasonable to assume the average property might have 2 being in each of the husband and wife’s name, if so, there would be a touch over 3,000 FMD accounts. Now the MLA website provides an estimate of 80,000 properties Australia wide that include cattle. So a bit of loose math’s suggests there are no more than 4% of cattle properties Australia wide that are making use of these instruments. At best if we assumed each account represents an individual property it cannot be more than 8%.

Making conclusions from this analysis might not stand up to strict statistical analysis. It may simply be that producers are seeing better investment off farm and are not choosing to use these instruments. It certainly doesn’t mean only 4% of cattle properties are profitable.

However, if we assume that the money deposited in to FMD and debt are the two options to fund recurring expenditure across financial years it may also be concluded that equity is only being used sparingly and the increase in debt can be attributed to the majority of properties Australia wide.

There has been a lot of analysis done on the increase in debt in the beef industry. In particular the increase in debt over the last 10 years has been extraordinary. Perhaps the most worrying point to make is that over the period of this increase in debt is the capacity to service this debt has fallen.

This is an important point. There has been work done by ABARE and QRAA where they created a set of consolidated accounts for the Queensland beef industry that shows income levels have remained stable and expenses have actually fallen albeit slightly. This work aggregates the data so by definition individual experiences will be different.

In the study they isolated interest expense from general recurring expenditure required to run a property. What this demonstrates is the increase in property prices has not been based on increasing levels of profit that can be made from these operations. Profitability has fallen by the level of interest expense that has been incurred with the accumulation of debt.

There is no doubt that those enterprises that have markedly increased debt over the past decade without any associated increase in profit will be starting to experience some financial pressure at the moment with property values falling. Dry seasonal conditions will merely serve to bring this experience forward.

Investing in fixed assets requires the patience to consolidate after each initial outlay of capital. When prices of fixed assets like property rise quickly the reason portrayed by property experts in the media nearly always settles around the notion that the rise in debt has been in response to the increase in land values. In fact it is nearly always the other way around. Land values are in response to increases in debt. It is the availability of and the willingness to hold ever increasing levels of debt that pushes up fixed asset prices.

It now seems accepted that values of beef properties have fallen since the peak in 2007 perhaps significantly in some areas. At some point prices will settle but in the process there will be a number of properties that will change hands at discounts to the price they were purchased at.

Properties changing hands due to financial stress is hard to watch at a personal level. Some people will not be in the industry when the property prices and debt levels start to level out. However, at a macro level it is important for the industry as a whole for it to happen.

It might be fair to say that people are belatedly learning that business returns are in reality based around revenue not capital. If you borrow against an asset – no matter what that asset value is – you have to service the debt from the cash flow you generate from that asset. Owning an asset that is rising in price (quickly) is exciting, but in itself it does not fund recurring expenditure. If you want capital to fund recurring expenditure it requires the asset to be sold.

Funding recurring expenditure will require the use of debt or equity – there is nothing else. If you use equity then a Farm Management Deposit is a tool available to primary producers that has demonstrable positive uses. It will of course be individual circumstances that direct the benefit or otherwise of actually using this tool and professional advice around this decision should be sought.

WHAT ARE THE CURRENCY WARS?

admin@dddigital.com.au (Motifo Master) — Sun, 01 Sep 2013 14:00:00 GMT

This is a term that some of you may have heard and we suspect over the next few years many more will hear. So what does it mean and why do countries do it? Currency wars, also known as competitive devaluation, is a condition where countries compete against each other to achieve a relatively lower exchange rate for their own currency.

If you are trying to increase export growth (which many countries are), lowering your exchange rate will give you a competitive advantage, as your exports become cheaper and your imports more expensive.

Problem is, if everyone does it, it’s a zero sum game.

Drugs in sport is probably the best metaphor to explain this. If one person cheats and gets away with it, the benefits to that person will be immense. However if all competitors realise this and they all start cheating gaining a competitive advantage will require you to take greater doses and potentially even more harmful drugs. This goes back and forth and the result is a game with only cheats and ironically on a level playing field. So they are back to square 1, but with very serious health consequences to deal with.

It is not surprising then that going down this path should be avoided. However clearly, just like in sport, it would be naïve to think no one is cheating.

There are typically three main tools for manipulating currency – interest rates, rhetoric and direct intervention. It’s interesting to note that Australia has the most overvalued currency and we are almost the least active in intervening. This is having an unwanted dampening effect on our economy.

Warwick McKibben, former Reserve Bank of Australia (RBA) board member, has been one of the more outspoken people on this issue and he believes that the central bank should intervene in currency markets to limit the strength of the dollar, suggesting that ‘safe haven’ demand from foreign central banks is artificially driving it higher even as commodity export prices fall.

Any intervention by the RBA to bring down the value of the currency would be the first since 1992. Apart from regular foreign exchange transactions to cover government positions, the most recent intervention to hold up the Australian dollar was during the global financial crisis in 2008.

Although McKibben is influential, it is probably more relevant to know what the current RBA governor Glenn Stevens thinks. Late in February this year he was asked by the House of Representatives Standing Committee on Economics about the dollar. In simple terms Glenn does not support a policy of intervention unless there is a compelling reason to do so.

We have summarised some of the main points he made in relation to the dollar’s current position and intervention more generally.
Based on the RBA’s empirical work, the dollar is only somewhat overvalued.
Whilst the RBA is surprised it hasn’t come down further, history shows any dramatic overvaluation will be pretty quickly corrected by market forces.
When a strong market correction occurs they believe public debate would quickly swing from fretting about the higher dollar to fretting about a falling one. (This would turn intervention into a political issue).
On intervening in currency markets Glenn commented “you would need to be pretty confident that it is seriously overvalued or that the market is behaving in some quite irrational way before you would launch on large-scale intervention.” Based on their actions, it is clear they do not believe the markets are acting that irrationally.
They recognise the pressure that exists to trade-exposed sectors and whilst they cannot make this pain go away, these factors are considered in a macroeconomic sense in forming interest rate policy.

To flesh out this last point – economic growth on balance is weaker as a result of our high dollar. This has resulted in lower interest rates than would otherwise be expected with a dollar closer to fair value.

In summary it appears that the RBA is reluctant to intervene at this stage; however it appears that they are not adverse to the idea if it was deemed necessary. We think this decision is sensible. The problem with intervention is that it gets turned into a political football and once you’ve intervened once, you have set a precedent. Given the differing views on what “fair value” of the currency should be, these decisions are probably best left to the market in all but the most extreme circumstances.

It is important to mention that given the number of countries trying to seek advantage from devaluing their currency this is an area where constant vigilance is required.

RISK TOLERANCE DETERMINES RETURN

admin@dddigital.com.au (Motifo Master) — Wed, 03 Jul 2013 14:00:00 GMT

Building a low-risk income portfolio, it’s easy to get caught up with the returns while ignoring risk. My advice

would be to spend your time understanding the risks and choose your return based on how much risk you are comfortable with.

Over the years we have seen countless failures in products marketed as “low-risk” (property developer Westpoint Corporation, debenture issuer Australian Capital Reserve, etc). The mums and dads who invested in such assets were looking for safe, low-risk investments with regular income; however, what they got were high-risk, complicated products that had a high chance of failure.

Had they understood the risks, they would almost certainly not have invested. Fortunately, the basics of understanding risk are relatively simple and it all starts with something called the “risk-free” rate. This

is the rate of a return you can get with zero risk. The most widely accepted rate used is the 10-year bond rate and in Australia that currently sits at a paltry 2.4% a year.

Unfortunately for low-risk income investors, the risk-free rate is about as low as it has ever been. And if you think Australia’s 2.4%pa is low, spare a thought for investors in Japan (-0.007%pa in mid-February) and Switzerland

(-0.35%pa), where investors are paying these countries to hold their money!

The next thing to understand is risk premium – the return above the risk-free rate that compensates you for the extra risk. Typically the higher the return, the riskier the investment is. I have broken my recommendation into

two sections: lower-risk income assets and higher-risk growth assets.

WILL AUSTRALIA ALWAYS BE THE LUCKY COUNTRY

admin@dddigital.com.au (Motifo Master) — Tue, 05 Mar 2013 14:00:00 GMT

We were recently in Sydney for a conference and Mark Rider from UBS gave a thorough international comparison between Australia and the rest of the world. It was a very interesting presentation and stripped bare a lot of facts or perceived facts about Australia in an International context. To begin, we thought we would remind readers what GDP is – it stands for Gross Domestic Product and is the total market value of all final goods and services produced in a country in a given year. The larger your GDP the larger your economy is. Some of the facts presented are worth being summarised here:

GDP per capita – We have moved from the 23rd highest (in 2000) to the 5th highest (in 2011) in the world. Some of this can be attributed to the doubling of the dollar over this period, but we are now ahead of the US, Germany and Japan.

Median Income growth (2000-2011) – Ranked 2nd in the world behind Poland. Whilst it is always great to be paid more, the question we need to ask here is – is this growth justified or are we undermining our competitiveness? Greece was ranked 3rd in the world and it has recently become quite clear that this (combined with other bad decisions) very much undermined its competitiveness.

Nominal house price growth (2000-2010) – Ranked 1st . Anyone owning a house over this period would be pleased with this; however this is not so pleasing for those wanting to buy. Strong house price growth is generally good if it’s sustainable. The country that came second in this category was Spain – and clearly those rises were not sustainable.

House prices in Spain have collapsed – causing tremendous pain in their economy. It is generally accepted that sustainable house price growth should more or less equal income growth, but despite having the 2nd highest income growth in the world over this period, our house price growth exceeded this rate by some margin. Pleasingly income growth since 2011 has exceeded house price growth – we see this as a positive reversal of a dangerous trend.

Median Wealth per adult – Ranked 1st in the world – our median wealth is now $US221,704. About 80% of this wealth is in our houses.

Terms of trade growth (2000-2011) – Ranked 1st without a doubt this has been the key to Australia’s success over the last ten years. It has lifted GDP growth, incomes and wealth. Terms of trade is a measure of our export prices divided by import prices.

Terms of trade increases happen when the prices of things we sell go up and the prices of things we buy go down. To put it in simple terms, in 2005, a ship load of iron ore was worth about the same as about 2,200 flat screen television sets. In 2011 it was worth about 22,000 flat-screen TV sets. This was partly due to TV prices falling but more due to the price of iron ore rising by a factor of six.

It is important to point out that our terms of trade increases are not as a result of a policy decisions in Canberra.

Prices we receive and pay are determined by the world market and as such rises are the “free lunch” of economic growth and typically temporary. What is staggering is just is just how fortunate we have been, our increases were over 2.5 times second placed Norway and almost 5 times 3rd placed New Zealand.

Whilst it’s interesting to reflect where we have been, the question is where are we going? Unfortunately our terms of trade is now declining and this is expected to continue – the IMF believe that our rate will decline at 4.0%p.a. compared to the other advanced economies in the OECD in the next 3 years. Once again this is not political; it’s just that the price for iron ore and coal are retreating.

Productivity growth (2000-2011) – Ranked 20th

Manufacturing labour costs – Ranked 1st

Low growth and high costs. These last 2 factors are probably our greatest concerns for the Australian economy. Whilst some blame can be placed on our high Australian dollar, we are simply a very expensive place to conduct business and this has negative consequences for the competiveness of our economy.

Labour productivity is a measure of the amount of goods and services that the average worker produces in an hour of work. The level of productivity is the single most important determinant of a country’s standard of living, with faster productivity growth leading to an increasingly better standard of living.

Terms of trade increases also increase living standards, but as stated earlier we are now more likely to see declines in this measure. Further as a nation we can address and change productivity whereas terms of trade are largely out of our control.

It is worthwhile understanding why being uncompetitive is a problem.

Take 2 petrol stations “A” and “B”. Both sell identical levels of fuel, charge the same and make the same profits. However over time “A’s” costs increased at a rate greater than “B’s” and as a result “A” now charges 5c/litre more for fuel to cover the cost increases.

The market responds to the price change and many of “A’s” customers start buying fuel from “B”. This switch to “B” has meant that “A” sells less fuel and decides to make a 10c/litre increase to cover the shortfall. Unfortunately this drives even more customers to “B”. “A” is now seriously struggling and is forced to lay off staff. Customers recognise that not only is the price more expensive but the service is inferior, driving the last few faithful customers away and sending “A” out of business.

All the while “B’s” business has been booming on the back of the increased patronage from “A’s” former customers – as a result he expands and can employ more people.

When your terms of trade are booming, the need to stay competitive is less urgent as everyone can typically do well regardless. However as our terms of trade (i.e. commodity prices in Australia) fall, this all of a sudden makes things a lot more difficult. Ultimately if Australia does nothing to address our productivity and competitiveness we will end up like service station “A”.

We are encouraged to see more recent data shows that there are some very early signs that Australia’s productivity growth is starting to move in the right direction. However a lot of work needs to be done if we want to continue to increase our standard of living. Like the decision makers in Europe, this is an area where Canberra can help if it chooses to.

THE US REMAINS A LEADING ECONOMY.

admin@dddigital.com.au (Motifo Master) — Sun, 03 Mar 2013 14:00:00 GMT

The fiscal cliff which saw markets get nervous towards the end of last year was not averted per se but delayed. On 1 March, across the board budget cuts came into force due to congressional leaders failing to agree to an alternative budget – these cuts are known as the “sequester”.

On 31 March, the US Congress will again need to lift the federal government’s debt ceiling (in laymens terms ‘raise the credit card limit’), at the same time Medicare cuts from the sequester will take effect. For the sake of brevity these issues will probably come to a head in August when Treasury will run out of cash if nothing is agreed to. We place little probability that it will come to this, however during this time these issues may cause market volatility as they negotiate the details. We remain relatively relaxed that the U.S. will be able to address these issues over the medium term.

With little prospect of help from the politicians in Washington the Federal Reserve late last year committed to buy $US45bn of long-dated treasuries each month with the intention to keep the Federal funds rate at an exceptionally low level until US unemployment rate is below 6.5%, as long as inflation is no more than 2.5%. It is worth noting that this is the first time in a very long time that the Fed has explicitly tied short-term rates to a specific level of unemployment.

This is on-top of the September money printing announcement – known as QE3 for those of you following the acronyms.

There has been concern from some members of the FOMC (the people that make these decisions) that these policies could encourage risk taking as well as adverse consequences for financial stability, namely inflation. Without wanting to be controversial, we believe that the US is happy to have inflation as a consequence – as this is very helpful in reducing the “real” value of their debt burden.

On a positive note, the economic data coming out of the U.S. continues to be encouraging. Longer term there are some exciting developments taking place. To touch on a couple of major ones, manufacturing is experiencing a revival due to the lower labour costs, a weaker US dollar and cheap energy.

The shale oil and gas revolution taking place has US oil production at a 20 year high and the International Energy Agency believes the US will become the world’s biggest oil producer by 2017 and energy independent by 2035. This is a potential game changer both economically and geo-politically.

TURN $5K INTO $50,000

admin@dddigital.com.au (Motifo Master) — Sat, 02 Mar 2013 14:00:00 GMT

I asked several people with limited financial knowledge how they would turn $5000 into $50,000. Their answers almost universally involved gambling or other get-rich-quick schemes as the core strategy. While these responses don’t necessarily surprise me, it is concerning that the consensus view was to try something that’s almost guaranteed to lose money.

A more robust option is to focus on the key variables that impact the ability to turn $5000 into $50,000.

Fortunately, there are only three:

• Time

• Taxation

• Investment returns....

WHAT DOES THE ITALIAN ELECTION MEAN FOR INVESTORS?

admin@dddigital.com.au (Motifo Master) — Thu, 28 Feb 2013 14:00:00 GMT

The European Central Bank (ECB) Mario Draghi’s statement last year of “whatever it takes” has substantially reduced the risk of a financial system meltdown. “Whatever it takes” would most likely involve the ECB printing an unlimited amount of money to buy an unlimited amount of bonds in the countries requiring intervention.

So why is everyone so concerned about the Italian election? Well the sort of money required for an unlimited bond buying programme of a large country such as Italy or Spain would put immense strain on the relationship between ECB and the Bundesbank (Germany’s central bank) – if a country’s politicians were not prepared to agree to an EU-sanctioned austerity programme, this would greatly exacerbate this strain.

The Italian people have spoken and we are pleased to say that the major fear in markets – a Silvio Berlusconi victory (with a radical protest agenda) – was thankfully avoided, although he and ex-comedian Beppe Grillo did receive about a quarter of the vote. The actual outcome was only slightly more desirable – a hung parliament and uncertainty in Italy.

Pier Luigi Bersani’s centre-left coalition won by a very small majority in the lower house but failed to win a majority in the upper house. Technocrat Prime Minister Mario Monti, who resigned in December, was the only politician promising to continue Italy’s economic reforms – he received a mere 10% of the vote. Bersani’s support for such measures was lukewarm, while Berlusconi and Grillo actively campaigned against them.

Given Bersani needs a majority in both houses to govern, he will be trying hard over the coming weeks to form a coalition in the senate. If not it will be back to the polls.

In order to qualify for support from its European neighbours, Italy has to continue its current reforms and spending cuts, but the Italian citizens have all but rejected them. This presents a problem for Europe’s politicians and central bankers. They cannot bail out Italy if they will not agree to do anything in return, but they cannot afford to let Italy fail as its size would have a significant detrimental impact on both Europe and the world.

Italy’s problems are predominately debt related and less budget deficit related. Excluding interest payments for existing debt, Italy would be running an annual budget surplus. However they do have interest payments, so the reality is they are running a deficit of 2.7% of GDP and their public debt sits around 130% of GDP – and whilst Italy continues to run deficits this will grow every year.

How did this happen? Italy’s economy is heavily regulated and uncompetitive which has meant they have had virtually no growth for 14 years. Continued reforms are necessary to get out of this mess. It is worth noting that the International Monetary Fund (IMF) estimates that labour and product market deregulation alone could raise its GDP by over 10% over ten years.

Ultimately there is a lot of work ahead and many European countries face a prolonged period of below average economic growth due to the effects of both fiscal austerity by Governments and the deleveraging of banks and households.

WHAT HAPPENS WHEN PROPERTY VALUES FALL?

admin@dddigital.com.au (Motifo Master) — Sun, 13 Jan 2013 14:00:00 GMT

By chance I came across a 2008 article from the Australian that highlighted some of the massive increases that were occurring in prices for rural properties in the Northern Territory at the time. (Barefoot cattleman walking on gold)

One example quoted was Alroy Downs on the Barkly Tableland, which sold in March 2008 for $70 million, when it had been purchased for $30 million only 3 years earlier.

There are likely to have been numerous examples of similar meteoric rises throughout central Queensland cattle properties during the same period. There were certainly similarly large increases in the residential property market as well.

These rises have led to a general belief that property values, be they rural or residential, always go up.

There has been ample evidence of this over shorter timeframes, but it is misleading to believe that values cannot fall, as the last three or so years have shown.

Why is this important? In a single word, debt.

The results of last year’s QRAA rural debt survey showed a 19 percent increase ($2.6 billion) in the Queensland’s agribusiness borrowings since 2009. The average debt per borrower has grown to $1.073 million – a 17 per cent increase.

The survey states that during this period banks have actually tightened lending criteria, so the only way debt could have increased is due to the increase in property values.

Banks can only lend money on sufficient collateral. If we take the example of a property with a valuation of $30 million, where bank criteria allows borrowings up to 40pc* of this value, the owner can borrow $12 million, but when the value increases to $70 million, the owner can increase this borrowing to $28 million!

The increase in debt increases the repayments from $960,000 to $2.24 million per annum, and this is interest only so no repayment of the principal amount. This is a significant increase in required cashflow that has no sympathy for seasonal conditions.

Making money out of cattle can be a challenging business. But when you have increased the required cashflow in line with inflated property values, and not in line with increases in the productivity of the property in question, you are likely to face financial difficulty at some point.

Any reduction in property values will merely add stress to this scenario. Banks do have strict lending criteria and will be looking to maintain the equity values of the money they have lent out. In other words they will want to maintain the agreed 40pc limit. If values have fallen the borrower will find they may be asked to put up more collateral – which they won’t have – or they may find that the interest rate they are charged is increased as the bank prices in the increased risk of the money not being repaid.

This is a familiar scenario in the corporate world where a company has borrowed too much and the cash flow can’t support the repayments. These companies are sold up in the end and rural properties will be no different. Banks will not continue to lend money to a business that does not have the cashflow or equity to support that lending.

As property prices have increased people have increased their debt but many have not had the associated productivity improvements to cover the increased cashflow required. There will be many people in this situation. The ones that come out of it will be the ones that face up to their situation and take positive steps early. It is important to remember that how you got in this situation is completely immaterial. It does not matter that you might believe the last bank manager encouraged you to borrow more then you wanted, the fact is, if you signed for the money then it was your decision and you have to pay the money back.

Recognising financial difficulty can be a challenge as well. Many will blame seasonal conditions, cattle prices, the level of the Australian dollar for short term loss of cashflow. All these reasons will be valid, but in the end the real test will be to check if you have, over time, improved your financial position or has it deteriorated?

Run some simple tests on your statement of position to see how you are travelling. Have the listed assets decreased in value? Has the debt increased? What would happen if your cattle numbers drop due to adverse seasonal conditions? Have you got sufficient cash buffers to restock? If you have any doubt about your financial capacity you need to face up to the problem early.

We would encourage you to take an impartial and objective view of your situation, and to get a second opinion from a suitably qualified professional who will have the courage to question your business model and projected budgets.

What you do not want to do is to get into a position of default by hoping it will all go away when seasons turn favourable. Repaying a loan requires cash flow, not hope.

Default can be of two types; debt services default and technical default. Debt service default will occur when you have not made a scheduled payment of interest or principal. Whereas a technical default will occur when a covenant is violated. This will be a drop in the loan limits due to a drop in property values or where the debt becomes higher than the agreed 40pc of the value of the property.

If you are heading down the path of default you need to be proactive and discuss this with your lender, your accountant or financial adviser. You also need to be very honest with yourself and your family and recognise if you are going to actually be able to trade your way out.

If you don’t address this early the lender will do it for you. This is a situation that you need to be in control of.

Being proactive will help you retain as much equity as possible, if you allow the lender to take control you will likely pay a very high price for your pride.

Many family situations leave the financial decisions to one person. If that is you then remember, a decision not to act is still a decision and it may well have consequences that you and your family will regret in the future.

Graham Financial is a privately owned boutique financial planning practice which has been in operation since 1985. AFSL 327520. The advice in this article is general in nature; advice specific to your circumstances should be sought before acting on this advice.

*Lending limits, valuations or covenants will vary in line with different lenders and individual circumstances.

This article was originally published on Beef Central

FINANCIAL MANAGEMENT: PROTECTING AGAINST TRAGIC EVENTS

admin@dddigital.com.au (Motifo Master) — Tue, 09 Oct 2012 14:00:00 GMT

We have discussed estate planning in previous articles noting how important it is to plan for a future outside of the property. Some important points we suggested revolved around inter-generational change or put another way, are you leaving a working property, or a working profitable property, to your children?

Perhaps the reality is that the business has not been able to produce sufficient income to build you a retirement plan and the kids are going to have to buy the property.

This strategy has to recognise that if the property has not been sufficiently profitable to allow you to build sufficient off farm assets to allow you to retire; it is not likely to provide the children sufficient income to pay down the debt they are taking on.

Perhaps the answer is the property has to be sold to fund your retirement. This may be the better long term outcome for everyone.

If you are intending to pass on the property to your children then these questions will have to be addressed at some stage. These can be difficult questions but it is always better to prepare well in advance so all the family members can build their lives on solid foundations and realistic expectations. The alternative to this is of course to experience the heartache of broken dreams.

If you think this is something that can be addressed easily sometime in the future then I suggest the next time you see your preferred adviser just ask a few questions and assess how prepared you are right now.

However, this article is going to assume these plans are well in place.

What I wanted to discuss here is how families are able to protect themselves from the financial consequences of tragic events.

Risk Management Plans don’t only apply to businesses – every person and family should also have a plan to help them cope in the event of an unexpected crisis.

This is all about personal insurance. No doubt you have insured your car as the risks of damage are obvious to you on a daily basis. You will almost certainly have insured your home and contents against fire, burglary or storms.

But have you made an adequate assessment of the risks facing you and your family?

Life is full of danger and sometimes that’s half the fun of it. We all hope disaster, in whatever form, won’t land on our doorstep. Often “hoping” just isn’t enough and a more planned approach is required to manage the risks we live with.

Recognising risks is not always as easy as it sounds. For example, if we consider a typical family of mum dad and 3 kids. The property is successful and it is providing sufficient profit to allow a retirement fund to be built off farm.

The youngest child has just left school and without the burden of boarding school fees the expectation is that they will have built sufficient off farm capital to retire in another 10 years.

The eldest son is going to take over the running of the farm; he has been working with dad for several years preparing for this. The two youngest are going to university to study law and medicine respectively. They both want to make their own way off farm. Mum and Dad have provided sufficient capital for them both to pursue their dreams without the burden of tuition fees and living expenses. This has been accounted for as part of the eldest son staying on the property.

In the last week before university commences the youngest son has a tragic accident – suffering a broken neck and severe head injuries. Medical support being as high a quality as it is not only has he survived but he is expected to have a normal life expectancy. But while he will likely live until 70 odd years of age, he is now a paraplegic and requires round the clock support. The cost of this over a lifetime will be huge – the loss of potential earnings alone will run into the millions of dollars.

How does this affect this family? Firstly mum and dad will be the primary carer. There is no way they would not take on this task. There is going to be significant change to housing arrangements, his living space is going to have to be adjusted to meet the needs of a severely disabled person.

Mum and dad’s retirement planning has just been dealt a large financial blow. While they thought they were going to be able to use the next 10 years rapidly building their retirement capital they will be spending this on the care of the youngest son.

The eldest son’s life has been altered also. His expectations of soon being by himself on the farm has been taken away he also is now working to support the ongoing care of his younger brother. Both mum and dad are no longer going to be taking as much interest in the property so he will also likely have to hire extra help for the day to day running of the property.

The disaster is perhaps not preventable, but the financial consequences are.

Appropriate insurance policies can be put in place from age three. The full suite of policies will generally become available from age 15. As cheap as these policies would have been it is unlikely that they would have been able to afford them … but Mum and Dad could have.

Recognising the potential risk and understanding the financial consequences is of paramount importance.

The key issue is to know what risks you are facing and to be able to cope with them. Once you have identified a risk, there are three options available to you.

Reduction: You can reduce a risk by your behaviour. For instance, you can look both ways before crossing the road or drive slower. Most people will look to minimise immediate risks but are more careless with risks that are less obvious – like taking care of their health before something happens!

Retention: You may decide that a risk is small or unlikely to happen. For instance, your freezer may die on you and ruin all the contents or your much-loved family pet gets very ill and needs surgery. Whilst this type of thing may be a little costly, you can choose to protect against losses with your own resources. A common strategy is to maintain an emergency source of cash for such events.

Protection: Some risks are just too big for us to cover alone and for these we turn to insurance. By paying a premium, the risk is shared with many other people and financial support provided to the unlucky ones for whom disaster strikes. The loss of your house, your income, your health or your life is common where insurance is often the best solution.

Assessing personal risk and developing a risk management plan is not always as simple as you’d think. It is hard to be objective and cover all the possible risks. The appropriate solutions will depend on your priorities, your needs and your assets.

Professional guidance is crucial in establishing your risk management plan. You need to consider the extent of your financial commitments and review what assistance may already be in place. This may include insurance cover within your superannuation, employer protection, existing insurance policies or other sources.

Fortunately a range of insurance policies are available to cover the risks you confront. These include:

Loss of Life or Total & Permanent Disablement. By including this in your superannuation it is effectively a tax deduction as your superannuation comes from pre tax income.
Income protection. A critically important cover for income earners. It will provide you with income in the event of sickness or accident for a predefined period. If you are a small business operator you can include the costs of operating your business while you are incapacitated. The premiums are a tax deduction.
Trauma insurance . This is sometimes referred to as critical illness insurance and provides for a lump sum in the event of suffering a specific injury or illness. It is ideal for a non-income earning partner who may not qualify for income protection.
Child insurance. Many families are devastated when a child is struck with a critical illness. This may mean one or both parents having to give up work while the child undergoes lengthy treatment. Some companies are now providing specific policies to assist the family in such a catastrophe.
Health insurance. While free treatment is available through the state hospital systems, this may involve traumatic and expensive delays. It is highly desirable for families to have health insurance cover and the cost may be minimal when you consider the additional Medicare Levy you may otherwise have to pay.

The key message here is that as part of your retirement plan you need to consider the personal risk management plan of the entire family not just yourself. We suggest you take the time to speak to an appropriately qualified adviser to discuss and implement an appropriate risk management plan for your family.

This article was published here on Beef Central

graham_financial

Market Event Update

Middle East Conflict, Oil Prices & Market Volatility

Aged Care

Care in Retirement

Season's Greetings

Season's Greetings

Aged Care

Aged Care

Market Observations

Market Observations

Market Outlook

Market Outlook

2025 Year in Review

2025 Year in Review

Be Scam Aware

Be Scam Aware

Productivity

Productivity

Market Volatility - “Liberation Day” Tariffs

Market Volatility ― “Liberation Day” Tariffs

Budget 2025

Budget 2025 - Spend, baby, spend!

Budget Measures announced and passed in the Senate bill

Market Update December 2024

Financial Update December 2024

Market observations

Economic review

Asset class review

US Election Result 2024

2024 US election result: Market implications

Inflation

Inflation

Where is inflation today and why is the Governor reluctant to suggest cuts anytime soon?

﻿ Summary

Budget 2024 Measures

Budget 2024 Measures

Budget 2024 - What is it trying to achieve?

Merry Christmas

Merry Christmas

The Impact of Artificial Intelligence

The impact of Artificial Intelligence

A tribute to the remarkable life of Charlie Munger

A tribute to the remarkable life of Charlie Munger

By Ben Graham

Economic Update - October 2023

Economic Update - October 2023

Why the increase in debt?

Exploring Estate Planning

Exploring Estate Planning

Woodstock for Capitalists

Woodstock for Capitalists by Ben Graham

Federal Budget May 2023

Federal Budget May 2023

Housing and its contribution to inflation

Housing and its contribution to inflation

Proposed Changes to Taxation of Super

Government’s proposed changes to the taxation of super

What is proposed to change?

What is ‘total super balance'?

When will this change start?

How will earnings on my account be determined and any tax liability calculated?

How will the additional tax be paid, and will I need to report my balances to the ATO?

Can I withdraw any of my superannuation to reduce my balance below $3 million?

What if I have more than one fund?

How will the additional tax be paid?

I have a defined benefit fund. Will this apply to me?

I have an SMSF. Will this apply to me?

Should I make any changes now to my retirement savings strategy and is superannuation still worthwhile?

Season's Greetings 2022

Graham Financial in the Community

Season's Greetings

Federal Budget October 2022

Spring Clean your Finances

S pring Clean your Finances

Inflation and interest rate expectations

Inflation and interest rate expectations

Rate Rise

Rate Rise

1st July 2022 Changes

Summary

Woodstock for Capitalists
by Ben Graham

Summary of Budget Measures
More flexibility around super

Aged care