Recent releases from the Reserve Bank of Australia and Treasury have pointed to a continuation of the resources led boom in Australia underpinned by continued growth in nearby Asian economies.

In a recent talk Deputy Governor of the Reserve Bank Ric Battellino stated :-

“More generally, economies in the Asian region have responded well to accommodative ... policies and economic activity has rebounded.

This is positive for Australia as Asian countries are our major trading partners. While the world economy as a whole is forecast to remain relatively sluggish next year, economic growth for the group of countries that comprise our major trading partners is expected to recover to a relatively normal pace.”

In relation to the oft sighted question: “How can Asia grow while the US and Europe are struggling?” - Battellino offered the following response:-

“… we should not lose sight of the fact that most of the growth in the larger Asian economies comes from their own domestic demand. In the case of China, for example, domestic demand contributed on average close to 9 percentage points per annum to growth over the past decade, while net exports contributed about 1 percentage point. Importantly, the authorities in most of these countries have plenty of scope to pursue policies that sustain domestic demand.”

This theme was also supported by Treasury secretary Ken Henry in a recent Senate estimates hearing. Henry stated that a return to full employment in coming years was a “conceivable possibility.”

“It now appears the impact of the global financial crisis on the Chinese economy and the Indian economy hasn’t been nearly as large as many feared, ……….It seems that’s likely to support relatively high commodity prices, that is prices for Australian export commodities, for a considerable period of time, quite possibly for some decades.”

BHP recently stated that India and China would drive a 40 percent surge in demand for energy. The two nations are expected to account for over half the world’s incremental electricity demand.

The two countries this year signed liquefied natural gas (LNG) supply contracts worth tens of billions of dollars from Australia’s massive Gorgon gas field. This is Australia’s largest-ever resources development and the world’s largest LNG plant. More large projects will follow.

Gorgon LNG gas deal

• Largest Australian trade deal ever
• Expected to generate $A300bn dollars in export earnings
• $A50bn in exports over next 20 years
• 6,000 jobs
• Import $A33bn of goods & services over next few years
• Will provide $A40bn of tax revenue to government over next 20 years

China was Australia’s number two trading partner in 2008, recording two-way trade worth 73.93 billion dollars (68.50 billion US), up 13.3 percent on the previous year. Iron ore comprised more than half of Australia’s $32.48 billion in exports to China, doubling to $18.0 billion over the year. Even though coal and iron ore prices are down from their peaks before the Global Financial Crisis, prices are still the second highest in history.

The Federal Government and the Reserve Bank have cited trade links with China as a main reason for Australia’s success in weathering the global financial storm as the fastest-growing economy in the developed world.

Australian debt levels are better than the rest. In spite of the current sizeable deficit, Australia is in an enviable position compared to other major economies. From now until the end of 2014, the average net debt levels in major advanced economies are estimated to increase to over 80% of GDP – compared to Australia’s peak in 2014 of only 14%.

 

Australian consumers have remained comparatively positive throughout the global crises and have been willing to spend the government stimulus payments helping Australia to avoid the recessionary gloom evident in other countries.

 

Australia is the only major Western nation to avoid a recession in the worldwide slump and posted growth of 0.6 percent in the three months to June - the best in the developed world.

Australia is definitely the place to be for a lot of reasons but particularly for our economic stability, sound financial systems, strong regulatory environment and vast resource deposits which will underpin solid economic growth into the foreseeable future.

Andrew Condell

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Salary sacrificing to super is a great way to save tax and boost your retirement nest egg. Essentially you are sacrificing some of your pre-tax salary and diverting it into your superannuation fund. The super fund pays tax at 15% on the contributions providing a tax saving to those on higher marginal rates.

In addition, the subsequent investment returns in super are taxed at the lower rate. Through the power of compounding, this accelerates your wealth creation over time. Salary sacrificing to super can be a powerful strategy for boosting your retirement savings.

What is a Salary Sacrifice Agreement?
Essentially it involves establishing an arrangement between an employer and employee, whereby the employee agrees to forgo part of their future salary in return for additional super contributions equivalent to a similar value. It is important that the agreement relates to future entitlements and is not retrospective. Appropriate tax advice should be sought to ensure the employee agreements achieve the desired aim.

How to Calculate Tax Savings

1. Calculate your top marginal tax rate
• >$180,000 46.5%
• $80,001 to $180,000 41.5%
• $34,001 to $80,000 31.5%
2. Minus tax on contributions - 15%
3. For every $1,000 extra salary sacrifice within concessional caps the potential tax saving is:-

• 46.5% - 15% = 31.5% X $1,000 = $315
• 41.5% - 15% = 26.5% X $1,000 = $265
• 31.5% - 15% = 16.5% X $1,000 = $165

Considerations
Tax savings can be a significant benefit. Below are some of the key issues you should consider. This list is not exhaustive and you should seek advice specific to your needs before entering a salary sacrifice arrangement.

Firstly, check whether you can afford to salary sacrifice. You should consider how salary sacrificing to super will affect your take home pay. Can you afford to salary sacrifice?

You also need to consider that once your money is contributed to super, these funds will be subject to superannuation preservation rules which may mean you can’t access the funds until retirement.

If you are self employed or substantially self employed different rules apply that are not covered in this article.

Another important consideration is the contribution caps. There are limits on the amount of contributions that are eligible for the lower tax rate of 15%. If you breach these limits the tax payable on the contribution will be increased to the top marginal rate of 46.5%. It is very important to monitor what is being contributed to super on your behalf so that you don’t inadvertently breach the contribution limits

For employees, Concessional Contributions are those made by your employer on your behalf and include salary sacrifice contributions and the 9% compulsory super guarantee amount. For multiple employers you need to add all the contributions together. Amounts contributed up to the annual cap enjoy the reduced 15% contribution’s tax. Amounts above the cap will be taxed at the highest rate.

How to Salary Sacrifice

1. Before implementing a salary sacrifice strategy you will first need to check that your employer will allow salary sacrifice. If they do, you will need to check how much you can salary sacrifice.
2. The next step is to find out from your employer how they will calculate their Super Guarantee (SG) Liability, that is, the compulsory 9% super contributions. If your employer will base your 9% SG contributions on a lower amount (after salary sacrificing) then you may be worse off by salary sacrificing. If your SG contributions are unchanged then this will not be of concern.
3. You may also wish to check whether any other benefits are affected by salary sacrifice, for example if you have Salary Continuance Insurance and it is based on your base salary or your total package
   including super. Your level of insurance cover may be reduced if you decide to salary sacrifice.
4. Next, determine how much you wish to salary sacrifice. Pay particular attention to contribution limits (see table above).
5. Finally, enter a written prospective (forward looking) salary sacrifice agreement with your employer for future super contributions.
   Salary sacrifice is a highly tax effective way to build long term wealth but there are traps for the unwary. You may have less income now but more wealth in the long term. It really is a case of less is more. Be sure to think your strategy through carefully and speak with your financial adviser to help determine whether salary sacrificing is suitable for you.
   
   

Brendan Gallagher

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The past few months have been characterised by a continued recovery in share markets across the globe, including Australia. That said, we were reminded in October that all isn’t plain sailing and investors should be prepared for a bumpy ride in this recovery phase.

Strong gains were recorded in August and September however during October, share markets stalled, with global equities falling -4.1% and Australian equities posting a -2.1% monthly loss. Having risen very strongly for seven consecutive months, share markets were due for a breather. The confidence that had been feeding the recent recovery dissipated in October when mixed economic data from the US and Europe dampened the mood of investors. The market was strengthened again in November.

 

There was concern over the sustainability of the economic recovery in Europe and North America. Concern too, for the likes of China. There was uncertainty as to the future of these economies once governments withdrew their stimulus packages.

In the US, investors were spooked by mixed signals as unemployment rose to 10.2% and retail sales figures came in below analysts’ expectations. US Motor Vehicle sales in particular were a major detractor, with sales falling 11.8% following the ending of the government’s ‘cash for clunkers’ programme. Notwithstanding these negatives, the US economy enjoyed its first quarter of positive growth in a year during the September quarter. Also, the reporting season in the US was a positive influence on the US share market with a number of important companies exceeding analysts’ expectations.

In late November there was a serious scare with concern that Dubai’s flagship holding company, Dubai World, would possibly default on its large amount of debt. World share markets initially retreated sharply however recovered quickly as concerns eased. There are still lingering concerns over the financial position of some countries including Greece and Spain

In Australia the news was somewhat brighter. Unemployment remained steady at 5.8%. The median capital city house price surged in the September quarter, taking the annual price rise to 5.8% for the past year. This outcome was very different than was forecast by the doomsayers earlier in the year.

The confidence that has been shown with strong employment numbers and rising house prices has lead the Reserve Bank of Australia (RBA) to lift official interest rates by 0.25% in October, November and December, with further rate rises expected during 2010.

The increase in interest rates locally has provided a further boost for the Australian Dollar which is heading towards new highs. By early December the Aussie Dollar had reached US$0.92, £0.55, €0.61, and ¥80. No doubt this is good news for Aussie travellers considering an overseas holiday but not good news for Aussie exporters.

So where to from here? It looks like the Australian economy has escaped the greatest global recession since World War II. As evidenced by recent interest rate rises by the RBA, the Australian economy is expected to grow strongly in 2010. For most parts of the developed world, the substantial levels of government support are expected to remain in place for some time, slowly aiding the recovery of these economies.

International share markets are expected to continue to recover. As we’ve experienced in October, the continued recovery won’t be smooth. We are however seeing improved business conditions around the world which is expected to lead to strengthening share markets during 2010.

Brendan Gallagher

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