Personal Finance Impact from Gillard Government.

The re-election of a minority Australian Labor Party (ALP) will have a number of consequences for our money. These is a summary of the election and policy promises which may be amended or rubbished as a result of the minority government being formed.

Taxation

Mining tax

Labor has formed a Policy Transition Group (PTG) to consult with industry and provide advice on the implementation of the resource taxation reforms. The PTG will commence its work now that Labor has been re-elected. Further information on the PTG's terms of reference and design principles of the resource tax reforms is available at this link

Small business

The re-elected Labor Government will allow small businesses to instantly write off assets costing up to $5,000 from 1 July 2012. In addition small businesses will receive a company tax rate cut to 29% from 1 July 2012, a year earlier than large companies. These measures were previously announced in the Government's response to the Henry tax review.

Family Tax Benefits

Eligible families will be entitled to the following from 1 July 2011:

- $500 upfront payment of the baby bonus.

- Arrangements for the advance payment of family tax benefit will be simplified and made more flexible, with an overall maximum advance payment of up to $1,000.

Child care rebate

The Government will give families the option to receive Child Care Rebate (CCR) payments fortnightly from 1 July 2011. Families will also be able to choose whether or not they have their CCR paid directly to their child care service and receive an immediate fortnightly fee reduction, or whether they continue to receive the CCR directly.

Families who wish to continue to receiving the rebate quarterly will be able to do so.

Superannuation

Response to Cooper Review on superannuation

The Government will work closely with the superannuation industry and employers to improve the administration of the superannuation system, including in making superannuation payments or finding lost accounts.

A full response to the Cooper Review will be released by the Government by the end of 2010, following further industry consultation; however, comments have been made in relation to other aspects of the Cooper Review, outlined below.

MySuper

From 1 July 2013 the Government will allow super funds to offer a simple, low-cost superannuation product called "MySuper". MySuper product providers will be required to meet standards, including:

· No entry fees, with exit fees limited to cost-recovery.

· A ban on commissions and conflicted remuneration structures in relation to retail distribution and advice in line with Government's financial advice reforms.

· New duties that require superfund providers to deliver value for money or be stripped of their license by the regulator.

· A single, simple and easy-to-understand investment option designed to maximise a person's retirement income.

· Standardised reporting requirements in plain English.

· MySuper funds will be licensed by APRA, who will also monitor and publish MySuper investment returns and costs;

· Anyone eligible to contribute to superannuation will be able to open a MySuper account.

Tax file number to be primary identifier for super accounts

The Government will introduce legislation to ensure that from 1 July 2011, the tax file number would be the primary identifier used to locate lost super accounts, consolidate super funds and to switch super accounts.

Securing superannuation

Labor will consult with industry on the implementation of the following measures:

· Employers to report actual Super Guarantee (SG) and salary sacrifice contributions on payslips;

· Funds to notify members and employers on a quarterly basis if regular contributions cease to be made;

· Enhance the enforcement powers of the ATO and Fair Work Ombudsman to ensure businesses pay their employees SG contributions.

Confirmation of response to Henry Tax Review

The Government has confirmed its position on the Henry Tax Review performs as follows:

· Increasing the superannuation guarantee to 12 per cent. The Government will also extend the superannuation guarantee to cover older workers up to age 75.

· Providing a new concession worth up to $500 for low income earners.

· Doubling the contributions cap to $50,000 from 2012-13 for people aged over 50 with super balances under $500,000.

Self-Managed Superannuation Funds (SMSFs) investments

The Government will allow SMSFs to continue to invest in collectables and personal use assets provided they are held according to new legislative standards. These standards will require these assets be stored according to new rules to prevent them from giving rise to a personal benefit. Existing assets that do not adhere to these rules will need to be sold within 5 years.

Social Security

Work Bonus for pensioners

The Government will introduce improvements to the age pension Work Bonus:

· The Work Bonus will disregard every dollar of income up to $250 a fortnight, rather than the 50 cents in the first $500 arrangement that currently exists.

· Pensioners will also be able to build up any unused amount of their $250 bonus every fortnight for up to 12 months, up to a maximum $6,500. A pensioner could then earn up to $6,500 a year extra, through part-time or seasonal work, without it affecting their pension.

Greater protection on reverse mortgages

Through reforms to banking regulation and credit laws, the Government will:

· Extend protection for reverse mortgages and home reversion schemes, including greater disclosure of the features and fees on these products.

· Introduce a statutory protection against negative equity so consumers aren't left with a debt significantly greater than the value of their property.

Veterans' affairs

Out of pocket medical expenses

The Government will provide eligible veterans with a reimbursement for out-of-pocket pharmaceutical costs incurred from 1 January 2012. Reimbursement amounts will be calculated automatically and paid annually, with the first payment being made in early 2013 to reimburse out-of-pocket expenses for the 2012 calendar year. Eligible veterans do not need to make a claim.

Reimbursements will not affect pension payments.

Workers' entitlements

The Fair Entitlements Guarantee

The Fair Entitlements Guarantee will protect redundancy pay, up to a maximum of four weeks for each year of service. This will replace the existing General Employee Entitlements and Redundancy Scheme (GEERS), which provides for a maximum of 16 weeks redundancy pay.

Strengthening Corporate and Taxation Law

The Australian Securities and Investments Commission (ASIC) will be given increased powers and strengthened penalties to take action against companies that do the wrong thing.

Reforms will be introduced that target 'phoenix' company arrangements.

The mechanics tools to set your financial goals

This week I caught up with Zoe Lamont, one of the brains and inspiring energy forces behind the 10thousandgirl campaign. We were having a coffee and chatting, among other things, about goal setting and the complexity and challenge that can occur with putting a dollar amount around your goals.

We both agreed that going through this process can either be a supporting influence or could cause you to realise that your goals may not be as realistic as you first thought! For example, saving $100,000 for a house deposit might be a little unrealistic in a two-year timeframe, depending on your income level, however extending this out to five years might be more achievable.

Once you have set your SMART goals (the ones that are Specific, Measurable, Actionable, Realistic, with Timeframes) the next phase is doing some financial planning to work out how to achieve your goals and if your goals and determine if those timeframes are realistic.

Shorter-term calculations can be pretty easy. For example if you wanted to save $5,000 in 12 months time, you can divide the $5,000 by 12 to work out what you need to set aside each month to achieve your goal.

Medium and longer terms goals might be a little harder as rates or return and other elements come into play.

I have put together a couple of calculations you can use as tools to see how much you need to set aside and what the effect of different rates of return can have on the outcomes.

Some points to note are that this is not an exact science. It can be a helpful way to cross check that your goals are on track and achievable and also a great negotiation tool if you need to review the timeframes on your goals.

If your goal isn’t achievable in your initial timeframe, don’t loose hope. Instead be inspired that you now have a more realistic timeframe on your goals and more clarity on what is required to achieve your outcome.

Tool 1: The Rule of 72

This is a financial rule of thumb that is used to estimate the number of years an amount will take to double assuming a specific rate of return. This formula dates back to an early Mathematician Luca Pacioli (1445–1514). Roughly translated from Wikipedia: “In wanting to know for any percentage, in how many years the capital will be doubled, you bring to mind the rule of 72, which you always divide by the interest, and the result is in how many years it will be doubled.”

For Example: When the interest is 6% per year, dividing 72 by 6 gives you 12. This means at a 6% rate of return, the capital will double every 12 years. So if you had $1,000 in a cash account earning 6%, without adding any further capital it would take 12 years for this to become $2,000.

A summary of different returns is here.

Here is an exercise for you to work with some of your own goals or plans for life.

Determine your goal and when you want it _____ number of years.
= $______________ lump sum required.

What rate of return do you need to achieve your goals? Is it realistic?

Your Starting Lump Sum $___________


Your Goal Lump Sum $__________


When do you want it? ____________ (A) # of years.


Number of times your money has to double? ___________ (B)


Number of years to double? ________ (C) = (A/B)

Expected Rate of Return ______________% (72/C )

When you look at the rate of return you need on your capital does it feel realistic? Does it seem too risky? Do you feel comfortable with that rate of return?

The Rule of 72 is all about having a lump sum but what if you have a regular savings plan for each payday or each year?

Tool 2: Regular savings calculator

ASIC’s www.fido.gov.au has some great online savings calculators but if you wanted to play around with the figures yourself, the table below makes the calculation a little easier. It assumes some different rates of return, time frames and takes into account inflation (or the annual increase in the cost of living):

Years to Goal	Assumed Rate of Return (after inflation)
	2%	4%	6%	8%	10%	12%	14%
5	5.31	5.63	5.98	6.30	6.72	7.12	7.54
10	11.17	12.49	13.97	15.65	17.53	19.65	22.04
15	17.64	20.82	24.67	29.32	34.95	41.75	49.98
20	24.78	30.97	38.99	49.42	63.00	80.70	103.77
25	32.67	43.31	58.16	78.95	108.18	149.33	207.33
30	41.38	58.33	83.80	122.35	180.94	270.29	406.74
35	50.99	76.60	118.12	186.10	298.13	483.46	790.67
40	61.61	98.83	164.05	279.78	486.85	859.14	1529.91

_{This table was adapted from Barbara Smith & Dr Ed Koken’s “Superannuation in a nutshell”.}

Look at the first column to determine the number of years to your goal. Example: achieve financial freedom in 20 years.

Now look along that column to determine your expected rate of return, for 8% per annum the figure is 49.42.

Take your required capital amount and divide it by this number. $1,000,000 / 49.42 = $23,573.79 per annum. This is the annual investment amount you need to put aside to achieve the outcome at an 8% return. You can then turn it into a weekly, fortnightly or monthly amount as needed.

Try this for yourself with one of your goals; it could be buying a house in 5 years and needing a certain deposit, or saving enough money to set up your own business, or even the goal of financial freedom depending on your needs.

Your capital requirement = $_______________________ (A)


Estimate of years to reach your goal = ___________________ (B)


Estimated rate of return from your fund = ____________ (C)


Factor from table above = _________________________ (D)


Required amount to save each year = (A) / (D)= ________________

If you need assistance in exploring these further talk to a professional but most importantly, start your journey to creating wealth with understanding.

The information provided on this article is of a general nature only. It has been prepared without taking into account your objectives, financial situation or needs. Before acting on this information you should consider its appropriateness having regard to your own objectives, financial situation and needs.

Wealth Creation, Tax and 'EoFY'

This time of year gets a little crazy in the run up to the end of financial year. With the 30th June being the final date to maximise tax deductions in this current financial year it it time to start planning to ensure you get a good taxation outcome.

Here is my guide to reviewing your wealth creation plans in the run up to 'EoFY'!

Review your portfolio and capital gains / loss position

If you have any capital losses on the books or capital gains now maybe a good time to review the holdings and trim any profits.

Where your capital gains are more than your capital losses you may need to implement a strategy to manage your tax position before 30 June.

Boost any income deductions on your investments before end of financial year

If you have an investment property or share portfolio which has a loan attached it is a good time to review any upcoming costs and see if you can bring forward any income deductions to this current financial year.

This can include revisiting your loan amounts and interest rates (shop around for the best rate) and look to consolidate any property and share loans to reduce the interest you are paying while also boosting your deductions this financial year.

Prepay Income Protection insurance for the next 12 months to bring your deduction forward

If you have income protection insurance in place and you are paying month to month, now may be a good time to try and pay an annual premium amount to bring forward the deduction to this income year. Cash flow will be the key here, along with any debt optimisation you can being into play (see below for more details).

Prepay interest on a investment loan to enhance your deductions and increase your investment capital

If you have not invested in the past but always look at your group certificate and wonder where it all went now is the time to take action. Educate yourself, understand the investment products and strategies that are out there and most importantly get good fee for service advice.

Debt Optimisation is the key

The key to getting a good taxation outcome is that you use any tax returns wisely and by this I don't mean on a holiday or other personal expenses. If you have debt including your mortgage pay this non-deductible debt down first and use the taxation savings to optimise your overall position.

A small portfolio loan of $20,000 can result in a tax saving to you of up to $900 (depending on your tax rate). Even this small amount of additional repayment on your mortgage each year can reduce your borrowing term and overall interest payments.

On an average mortgage of $350,000 this additional amount each year could save 4 years off a 30 year loan and $45,000 interest.

If you need assistance in exploring these further talk to a professional but most importantly start your journey to being free around your money and creating wealth with understanding.

Scott Malcolm (scott@money-mechanics.com.au) is Director of Money Mechanics (ph: 6257 5557) a fee for service advice firm who are authorised to provide financial advice through PATRON Financial Advice AFSL 307379.

The information provided on this article is of a general nature only. It has been prepared without taking into account your objectives, financial situation or needs. Before acting on this information you should consider its appropriateness having regard to your own objectives, financial situation and needs.

Henry Tax Review - Is it Super?

This week the Federal Government released their response to the Henry Tax Review which was looking at the areas of Retirement Savings, Personal Taxation and Social Security. With an election looming there were not any major changes to the system at this stage but watch this space as the Federal Budget is released next week.

The Henry Tax Review was over 1000 pages long with 138 key recommendations the changes which the government has released are summarised as below:

• the superannuation guarantee (SG) rate will increase gradually from 9% to 12% from 1 July 2013
  
  
• the SG contribution age limit will increase from 70 to 75 from 1 July 2013
  
  
• a Government super contribution of up to $500 p.a. will be made for people earning up to $37,000 p.a. from 1 July 2012 to effectively refund contributions tax
  
  
• the Concessional Contribution cap will be reinstated to $50,000 p.a. from 1 July 2012 for people aged 50 or over with super balances below $500,000
  
  
• the company tax rate will gradually reduce to 28% by 1 July 2014 (and two years earlier for eligible small businesses)
  
  
• very generous depreciation rules will apply to small businesses from 1 July 2012
  
  
• a 40% Resource Super Profit Tax will be introduced from 1 July 2012

The Government has publicly rejected some recommendations which have some good implications while this government remains in term atleast:

Social Security

• The family home will NOT be included in the means testing;
• Parents will NOT be required to work when youngest child turns 4 to access benefits;
• Rent assistance eligibility will NOT be restricted;
• Age Pension indexation will NOT be reduced;
• Pensioner and low income concessions for utilities, transport and other essential services will NOT be reduced;
• State Governments will NOT be asked to change the market rent for public housing recipients.

Superannuation

• Preservation age and pension age will NOT be aligned;
• The Government will NOT offer an annuity income stream product.

Taxation

• Land Tax will NOT be introduced on the family home;
• No changes will be made to the taxation system to harm not-for-profit sector including removal of tax concessions;
• Capital Gains Tax discount will NOT be reduced;
• Medicare Levy will NOT be removed;
• Dividend imputation will NOT be removed;
• Bequests tax will NOT be introduced;
• Luxury car tax will NOT be abolished; and
• Fuel tax will NOT be indexed to CPI.

Other Comments

• Defence force personal will NOT have remuneration reduced;
• The Government also re-affirmed that it will never increase the rate or broaden the base of GST; and
• The Government also stated it would not remove tax free superannuation payments for individuals who are 60 or over.

My view it that we may see some other changes come through with the Governments final budget before the election campaign begins but being mindful of the election cycle I wouldn't image any major changes to the taxation system would come into the picture.

Watch this space as I will be keeping an eye out on the upcoming Budget and will provide a summary of any changes as they come to hand.

Scott Malcolm (scott@money-mechanics.com.au) is Director of Money Mechanics (ph: 6257 5557) a fee for service advice firm who are authorised to provide financial advice through PATRON Financial Advice AFSL 307379.

The information provided on this article is of a general nature only. It has been prepared without taking into account your objectives, financial situation or needs.Before acting on this information you should consider its appropriateness having regard to your own objectives, financial situation and needs.

Get a head start on EOFY Superannuation Planning

The end of the 2009/10 financial year is fast approaching, so now's the time to examine your situation and start planning your planning. Here are 6 ways to boost your superannuation.

1. Sacrifice your salary to super

If your marginal tax rate is more than 15 per cent, salary sacrifice can be a great way to boost your superannuation and pay less tax. By putting pre-tax salary into super rather than having it taxed as normal income at your marginal rate you may save tax.

2. Contribute to your super

Whether you make personal concessional (tax deductible) contributions or non-concessional (after-tax) contributions, putting money into super can be very tax effective and even be used to manage capital gains tax positions. This is because earnings on super assets are concessionally taxed at up to 15 per cent, compared with earnings on your personal investments which are taxed at your marginal tax rate, which may be as high as 46.5 per cent.

3. Contribute to your defacto-partner's super

You can claim an 18 per cent tax offset on super contributions of up to $3,000 made on behalf of a low-income or non-working partner. To be eligible for the maximum $540 tax offset, your partner's income must not be more than $10,800 per annum, while a reduced offset is available if your partner earns less than $13,800. Total income = assessable income plus reportable fringe benefits less salary sacrifice super contributions and certain business deductions

4. Qualify for a Government co-contribution

If your total income is less than $61,920, you may be eligible for a super co-contribution from the Federal Government. For each dollar in personal after-tax super contributions, the Government will contribute up to $1 to a maximum co-contribution of $1,000 for those earning less than $31,920.

5. Review your insurances and take them out in your super

Normally personal life insurance premiums are not tax deductible. However, if this insurance is held within your super fund and you make either salary sacrifice or personal concessional contributions, you are effectively getting a tax deduction on your insurance premiums.

6. Take advantage of imputation credits within your super strategy

When Australian companies pay dividends to their shareholders, they have often already paid company tax on the profits that are being distributed at the 30% company tax rate. When this is held within superannuation your fund can therefore claim an imputation credit on the dividend for the amount of tax paid by the company.

So before another financial year is behind us take the time to review your situation before implementing these strategies to avoid common traps and take advantage of some of these opportunities.

No matter what your goals for life, as with all investment strategy and product, seek advice and empower yourself to create wealth through understanding.

Scott Malcolm (scott@money-mechanics.com.au) is Director of Money Mechanics (ph: 6257 5557) a fee for service advice firm who are authorised to provide financial advice through PATRON Financial Advice AFSL 307379.

The information provided on this article is of a general nature only. It has been prepared without taking into account your objectives, financial situation or needs. Before acting on this information you should consider its appropriateness having regard to your own objectives, financial situation and needs.

Market update - April 2010

The ASX200 index rose 5.2% during March as positive economic leads out of the US and the continued positive momentum on home soil drove these gains. On the back of a positive February, much touted Merger and Acquisition activity has begun to emerge with listings in Miclyn Express Offshore and takeovers of MacArthur Coal, Arrow Energy and Lihir Gold. It was pleasing to see two of our preferred coal and gold exposures receive significant premiums as a result of these offers and we suggest this will by no means be the last of this activity. Company balance sheets are in a far better state now and companies are now looking for ways to grow their business by looking at competitors.

US recovery

The signs of recovery in the US continue. Payrolls rose by 162,000 last month, the most in three years, manufacturing grew at the fastest pace in more than five years, service industries showed signs of growth and home sales boosted optimism an economic recovery is gathering steam. At the same time, Fed officials noted slack in the economy reflected in a 9.7 percent unemployment rate and slowing inflation. The Fed hosed down any fears that growth may cause sooner monetary tightening in their March minutes stating,

“While recent data pointed to a noticeable pickup in the pace of consumer spending during the first quarter, participants agreed that household spending going forward was likely to remain constrained by weak labor market conditions, lower housing wealth, tight credit, and modest income growth.”

All of this was positive for the US market which recorded a 5.8% gain over March and is currently trading at its highest point since September 2008. Together with April generally being a strong month should provide continued positive momentum for equity markets.

Global Economy

Our international economist highlighted this week that OECD leading indicators are pointing to “vigorous growth” in the US and Japan which will offset a slower China. He notes that a slowing China will actually be a positive as it lessens the chances of an inflationary blowout that forces central banks to tighten monetary policy prematurely. Another point of note is the role exchange rates will play. We see extremely positive implications for the global economy as several non-Japan currencies such as the Korean Won rise against the USD, Yen and Euro. If this trend continues it will be very beneficial for manufacturers in the US, Japan and Europe. And go along way to overcoming weaker manufacturing growth in China. Currency strength would also imply a much slower rate of tightening by Asian central banks and any intervention to slow appreciation will give global liquidity a further boost.

Overall the foundations are being laid for global growth to grow above trend until 2012. OECD Leading Indicators suggest that economies with weaker currencies are poised to pick up the baton of manufacturing growth.

Equity Strategy

The economic numbers for the world have continued their steady improvement with the combination of fiscal expansion, monetary easing and the inventory cycle working their normal magic and driving the turn. China was the first to improve from late 2008, Australia joined in by mid-2009 and the US from late 2009. Much of the rest of Asia and Germany are also on the rise. There are laggards, such as southern Europe and Japan, but they detract from the overall picture only marginally.

The US is now in a clear cyclical recovery driven by the largest inventory cycle in 35 years. This, along with net exports, can drive the US economy for most of the rest of 2010. The balance-sheet-challenged consumer is likely to improve only slowly. Nevertheless, as the combination of strong new orders and productivity growth are combining to slowly lift perceptions of job security the consumer will respond in kind with some lift in spending, as the recent data is suggesting.

The major near-term risk to our global recovery view comes not from the US or other OECD countries, but China. China was the first to recover due to negative real rates and a large fiscal stimulus. This has worked almost too well: the dramatic growth surge has already forced authorities to try to control the buoyant situation. An investment property bubble in particular poses risks. While we believe the authorities can successfully bring growth under control (to settle at around 8% pa) there are, however, risks that tapping the brakes is taken too far.

The local economy has recovered quickly and is now growing strongly. Strong coal and iron ore prices will add to the growth in FY11. Supply-side shortages such as skilled labour, infrastructure and housing are already evident. Adding to the heat is rapid growth in government spending with little sign that authorities have plans to slow that momentum. As a result, Australia is looking at the prospect of the most rapid monetary-policy-tightening cycle since the 1980s. Rising rates will soon dampen the cyclical consumer consumption sectors of the economy, whilst the commodity and corporate spending contributions will still grow quickly, in our view.

Equity portfolio rotation remains rapid in response to the fast economic cycle. Last year it was about buying high beta in highly cyclical consumer sectors. With interest rates rising, these sectors, such as housing and discretionary retail, have already been sidelined in share-price performance terms. Lower beta domestic plays in mid to late cyclical sectors such as banking, media and transport are now preferred including CBA, Newscorp and Toll Holdings.

Increasingly the focus is moving towards quality growth sectors and stocks, the very counters that were ignored in 2009 due to their lack of leverage to the then emerging economic recovery. US-exposed stocks also bear a large weight in our recommendations given the still early stage of that country's recovery. These include CSL, QBE and Westfield.

Overall, we continue to see a buoyant equity market for this year with a Total Shareholder Returns still well over 15%. A combination of strong earnings growth and reasonable valuations present a still compelling picture.

The information provided on this article is of a general nature only. It has been prepared without taking into account your objectives, financial situation or needs. Before acting on this information you should consider its appropriateness having regard to your own objectives, financial situation and needs.