Market Update May 2017 | Budget Special

With the budget having been delivered a quick look at the current state of affairs is in order.

The ASX has been making good gains since the beginning of the year and the reporting season that finished in early March showed healthy profits with little downside.  At the time of writing the ASX All-Ords index is sitting at 5890 having pulled back from the year to date high of 5968 mainly due to concerns over North Korea.

US and British markets have made significant gains in the past 12 months and while the latter dropped away sharply on the back of the snap election that PM Theresa May called in April it has made significant recovery since.  The election was not due until 2020 but she is seeking a strong mandate for Britain to exit the EU.  The US meanwhile has been continuing its good run.  Growth in the US is expected to continue at about 2%, business reporting was strong and the concerns over interest rate rises have diminished.

At the same time, other non-mining sectors are seeing a rise in business investment thanks largely to the ongoing low borrowing costs.  I have seen this as an issue for many years that business investment has not been strong enough although interest rates are so low.  It is good to see this increase of confidence.

Lastly, exports of commodities have been increasing and prices of these commodities has increased.  This should flow through to a higher level of company profits and reduce the impact on the Federal budget deficit.  China recently indicated that they will aim for growth of about 6.9% (up from 6.2% a few months ago) for the financial year and imports of our commodities has increased.

The latest economic indicators showed that business confidence in Australia is still above long term trends and business conditions are still very much above the long-term average.  Consumer confidence has been quietly rising but is still subdued and the matter in North Korea won’t be helping the situation.

Exports are up over 30% from a year ago so despite a stable dollar around the US76c mark overseas buyer demand is good for the local economy.

Local spending is stagnant and unemployment has risen slightly over the past three months however job vacancies have increased.  The latter is at a 6-year high now and therefore unemployment figures are not a concern in the broader scheme of things.

https://au.finance.yahoo.com/news/hows-aussie-economy-going-235714729.html

In this small snapshot of the global economies things are progressing well.  The thorn in the side of continual market rising is always going be a North Korea type situation and this is to be expected.  As an investor, you need to be prepared for markets to pull back in the face of negative situations as it is likely many investors are jumping ship and trying to time the market in order to minimise losses.  We don’t believe that such a play is profitable or smart.  Staying the distance has been shown to consistently be more profitable than jumping in and out.

Before getting into the highlights of Tuesday night’s federal budget, please remember that the proposals all require the passage of appropriate legislation before they can be implemented.  We will endeavour to monitor the outcomes and provide further information in the future.

The items mentioned here are significant and impact the financial planning industry and therefore you, our clients.

The following information has been compiled from updates provided by MLC and AMP Capital.

From 1 July 2017, small businesses with a turnover of less than $10 million will be able to claim an immediate deduction for eligible assets costing less than $20,000

From 1 July 2018, the annual income threshold at which the Higher Education Loan Program (HELP) repayments commence will be reduced to $42,000 down from $54,869 and the repayment rate will progressively increase from 1% to 10% depending on taxable income.

From 1 July 2019, the Medicare Levy will be increased by 0.5% from 1 July 2019 to fund the National Disability Insurance Scheme (NDIS).

Current marginal taxation rates are unchanged from 2016-17

Travel expenses incurred to inspect, maintain or collect rent on a residential investment property will no longer be tax deductible from 1 July 2017.  Other currently deductible expenses will continue.

Depreciation deductions for plant and equipment on residential investment properties will be limited to the actual expenditure incurred.  Please speak to your accountant about this or if you do not have one please call me and I will put you in contact with one.

Contributions from Downsizing the Family Home

From 1 July 2018, Individuals aged 65 years or older will be eligible to make a superannuation non-concessional contribution of up to $300,000 from the proceeds of the sale of the family home.  The home must have been continuously owned for 10 years or longer.  There is no work test criteria that needs to be applied in this situation.

With the proceeds being released from a Centrelink exempt asset there will potentially be negative income outcomes for current Centrelink income support recipients.

Example: A couple can therefore contribute up to $300,000 into a superannuation account each from the sale of the family home and immediately convert the account into an income stream.at minimum drawdown rates the potential income will be a maximum of $30,000 pa for the couple.  This can potentially increase their income and provide access to capital for other purposes without using a reverse mortgage or other equity release product.

There is no stamp duty relief on the purchase of a smaller home if this option is exercised.

First Home Buyers Scheme

From 1 July 2017, first home buyers will be permitted to make concessional and non-concessional superannuation contributions of up to $15,000 pa, and a total of $30,000, in order to fund their first home purchase.  The contributions along with earnings will be able to released to help fund the purchase from 1 July 2018 but will be taxed at the person’s marginal tax rate less a 30% tax offset.

SMSF Borrowings

When a new limited recourse borrowing arrangement is established the loan balance will be included in an individual’s total super balance which potentially affects the ability to make non-concessional contributions, be eligible for the government co-contribution or spouse contribution tax offset, and make catch-up concessional contributions from 1 July 2018.

Pensioner Concession Card

From 1 July 2017 individuals who lost the entitlement to the Pensioner Concession Card from changes to the assets test on 1 January 2017 will be reissued with the card.

Those currently qualified for the Age Pension, Disability Support Pension and the Service Pension will be eligible for a one-off Energy Assistance Payment of $75 for an individual or $125 per couple to be paid on 20 June 2017.

Residency requirements for the Age Pension or Disability Support Pension eligibility is changing from 1 July 2018.  Claimants will need 15 years of continuous Australian residence unless they have:

• 10 years continuous Australian residence, with 5 years of this being their working life, or
• 10 years of continuous Australian residence without having received an activity tested income support payment for a cumulative period of 5 years.

Changes to Newstart activity test for individuals over 55 and under 59 will come into effect from 20 September 2018 permitting up to half the participation requirements to be met through volunteering.  Those over 60 years and up to Age Pension age will have a new activity requirement of 10 hours per fortnight that can be met through volunteering.

For those living in south-east Queensland there is some good news that the Bruce Highway section from the Pine Rivers Bridge to Caloundra will receive significant funding to improve the condition of the road.

There are also other measures announced to improve various roads in the state.

A very vanilla budget to say the least.  I am not in favour of the Medicare Levy increase that puts pressure on low income earners.

If you have any questions or concerns feel free to contact us and we’d be happy to assist.