Superannuation, Employer ETP’s, Aged Pension and Aged Care Facilities. In the coming weeks and months deadlines are approaching in each of these areas. The following article explores some of the more important issues to consider and act upon.

Aged Pension and Aged Care Facilities

From 20 September 2007 Assets Test Rules change, making it easier to receive the age pension. Now homeowner couples may receive some age pension if their assessable assets, which exclude the family home, are below $818,000.

In addition, investments made before 20 September 2007 into Term Allocated Pensions or other complying income streams will continue to be 50% exempt from the Centrelink Assets test and 100% exempt from the Aged Care Facility assets test, even after the cut off date. These exemptions will not apply where the investments are acquired on or after 20 September 2007.

This presents an important planning opportunity for those already in receipt of the aged pension, for those seeking to become eligible in the future; or for those who may enter aged care facilities in the future. Investors may wish to convert existing Allocated Pensions in part or in full to Term Allocated Pensions or other complying income streams. These changes may also prompt investors to bring forward retirement plans and or to tip non super investments into the super arena. But there is a limited time in which to take advantage of these opportunities.

 

Investors who are at or close to aged pension age should review their investments in light of these changes. If this applies to you, you should call us at Financial Keys now to have your situation reviewed. The above table shows the new assets test ranges. Please note, to receive a pension applicants still have to pass the incomes test which has not changed.

Superannuation

Financial year end is fast approaching, as is the deadline for taking advantage of the $1 million Non-Concessional superannuation caps.

Investors have until 30 June to make these large contributions to super. Many investors have sold property or other investments to fund contributions or have transferred assets directly into superannuation. Others are borrowing to make the contributions and planning to repay the debt from asset sales in the near future.

Investors are seeking to benefit from the low 15% tax regime of the super environment in the accumulation phase. Retirees are seeking to enjoy the zero tax that applies to their super benefits after commencing their pension income stream. For those aged 60 or over all withdrawals from their super funds as income or lump sums will be tax free.

This is now the most tax effective way to accumulate long term wealth. There is a big flow of funds into the super environment occurring at this time before the $1 million contribution cap closes.

TTR Pension and Salary Sacrifice

Many employees over aged 55 are now drawing down on their super benefit while remaining in the work force. The new Transition to Retirement (TTR) Pensions allow employees or the self employed to substitute higher taxed earnings with lower taxed pension income. The increased income from the TTR pensions is matched by an increase in tax deductible super contributions so that net cashflow remains unchanged. For those aged 60 or over the pension income is entirely tax free.

This option also widens the opportunities for those who are reluctant to transfer wealth into the concessionally taxed super environment because they require access to income from those investments. Investors can draw between 4% and 10% of the account balance annually from their TTR Pension. Once they satisfy one of the tests for access to their super, e.g. retirement, they can access their capital and make lump sum withdrawals.

Employer ETP’s

There is also an incentive to bring forward any Employer Eligible Termination Payments (Employer ETP). In many instances these payments will be taxed much more favourably if rolled over to super before 30 June 2007. After June it will no longer be possible to roll over Employer ETP’s except under transitional arrangements.

The transitional arrangements apply to payments of up to $1 million made before July 2012 in accordance with employment entitlements that were in place before 10 May 2006.

Conclusion

Time is running out on many of these issues. If you consider any of these opportunities may apply to you please call us now for assistance.

Andrew Condell

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Stellar performances from the Australian stock market. Heightened private equity activity buoys markets across the globe.

The China thirst for commodities continues to drive resources prices higher.
Record drought cuts Australian GDP and government surpluses fund more tax cuts and infrastructure spending. It’s been an interesting year with lots more to come with an election ahead.

In late February global developed equity markets experienced the largest one day fall in several years following the Chinese domestic sharemarket falling 9% in one day.
The Australian sharemarket was not immune to this correction however it, like most developed markets recovered strongly during March and April.

The Australian sharemarket in particular has recovered strongly. In April the ASX 300 Accumulation index rose 3.00%. In the past 12 months it has increased 22.50%. The sharemarket growth is being boosted by the amount of merger and acquisition activity, the increase in commodity prices, significant cash inflows and continued profitability of Australian companies. The market also reacted favourably to the tax cuts and spending announced in the May federal budget.

The Australian economy continues to perform well. Unemployment fell to 4.4%, the lowest level since November 1974.

The strong economic growth that has occurred in Australia for more than a decade has resulted in capacity constraints. Low unemployment is the most obvious indicator of this. Other constraints appear to be our capacity utilisation which has reached record levels. Other constraints such as fully utilised infrastructure for resources are being addressed with strong investment in this sector over the past few years by both the public and private sector. However, while efforts are made to reduce production capacity constraints, the tight labour market in particular is increasing costs which are being reflected in rising prices.

 

With the Australian economy and share market continuing to break new records on a number of fronts we have for some months been recommending a more defensive approach taking profits from Australian equities and marginally increasing exposure to international shares.

The Australian inflation rate for the year to March 2007 was 2.4%. In May the Reserve Bank decided to leave interest rates unchanged. However an expansionary federal budget, continued strong consumer demand and rising input costs are putting pressure both on inflation and the possibility of another interest rate rise this year. We have for some time focussed client portfolios on floating rate income style investments with little of no exposure to fixed rate bonds; enhancing yields and offering protection against the capital depreciation that occurs with rising rates.

Another interesting recent development is the appreciation of the Australian dollar.
It continues to strengthen against most currencies with the interest rate differential a major factor in this increase. It rose 2.45% against the US dollar during April to US$82.68 cents.

Listed property trusts have had stellar returns over the past few years however this market suffered poor recent performances with March delivering a -4.0% return. April saw stronger returns which helped contribute to the strong 33.2% return over the past 12 months, however we remain cautious and continue to see this sector as overvalued. In line with our current defensive approach we have focussed clients’ portfolios on income generating property investments with limited exposure to development and gearing risks.

International sharemarkets recovered from the correction of late February. Australians investing in overseas sharemarkets did not see the same growth in their returns due to the strengthening Australian dollar reducing their gains.

In the US, strong employment results eased worries of a US recession. As expected, the US economic growth has slowed. A main contributor to this was the housing related downturn.

In Europe the news is better, with economic and business surveys indicating a robust growing region.

Outlook

The general outlook for the world economies is for growth to continue but at a slower pace. In the US it is expected that economic growth will continue to slow. Growth in Europe however is increasing and this is expected to add support to the US economy. There are however inflationary pressures in Europe and monetary policy remains on a tightening bias.

In China, India and many other developing nations, economic growth is very strong.

Australia is expected to grow at a rate of 3% for 2008. If the rains come and break the Australian drought, the farm sector will add further to Australian growth and reduce some prices of farm produce thereby easing inflationary pressures.

The Australian sharemarket is expected to perform reasonably well this year thanks to record corporate profits. In the US, although there are some weaknesses in the economy, low interest rates, strong corporate growth and a weakened dollar (which will assist exporters) are expected to support the US sharemarket.

Despite global economic growth there are a number of risks that may impact the global economy. The trade imbalance between net exporting nations such as China and net importing nations is growing. This could see investors redirect their funds away from the US and towards the stronger growing economies. Other risks include geopolitical risks as we saw in the Middle East in mid 2006.

You certainly can’t call these times dull and lets hope some decent rain in the near future gives a boost to the farmers and a further boost to the Australian economy. Although one wonders where the workers will come from if farm production does increase with the economy running at full capacity, but that’s another story.

Brendan Gallagher

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Finding the right property for your budget can be difficult. Shared Equity Mortgages allow buyers to reduce their repayments or expand their purchasing power by sharing the future capital growth of the property with the lender.

Recently a completely new type of loan has appeared on the Australian mortgage market, the “Shared Equity Mortgage” (SEM), or “Equity Finance Mortgage”, with claims of making home ownership more affordable.

The product is the result of the Prime Ministers Home Ownership Taskforce, which was focused on how to make entry into the property market more affordable, particularly for first home buyers. One of the key points that came out of the process was recognition of the nature of home ownership, and difficulty for many people in taking that first (giant) step.

A Shared Equity Mortgage allows a buyer to finance up to 20% of the purchase price with an “interest free” loan. The remaining 80% of the property cost is financed with the normal combination of cash deposit and bank loan. Even though the loan is known as “Shared Equity”, the lender does not in fact take ownership of any part of the property – the title remains solely in the borrower’s name.

What does this new loan structure achieve for the home buyer?

• It allows a buyer to purchase the same property, but reduce their monthly repayments by at least 20%.

• Allows a buyer to purchase a 25% more valuable property, for the same repayments

• Perhaps helping the buyer to avoid another move in several years time when their circumstances change, avoiding another round of costs such as stamp duties, agent fees etc.
• Perhaps allowing the buyer to buy in an area with better capital growth.

What’s the catch?

As you would expect, there is no such thing as a free lunch, especially when it comes to loans.

Take for example a 20% SEM. When the property is sold, or the SEM is refinanced, the lender will take their 20% of the initial purchase cost (which they financed) and 40% of the capital gain. In the case of a capital loss the lender will take 20% of the loss. The capital gain or loss is calculated purely on the purchase and sale prices, and is not adjusted for costs, inflation, etc. The SEM provider shares their proportion of any downside, but makes their return on the upside. The additional share of the capital gain is the return the SEM lender makes, and could be described as a delayed rent or interest payment.

 

For properties that experience high growth in a strongly rising property market this cost can be high and the home buyer might regret entering into this type of facility. However, if property prices grow moderately, or even continue to be flat for several years, then this option would be more attractive, especially if it means home owners can buy the property most suitable for their needs at the outset. These facilities are not for everyone but there are those that may find them attractive.

If you would like to discuss a shared equity loan in more detail, please call Matthew on
02 92 333 888.

Matthew Carpenter

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