I can’t remember an election campaign that had as much at stake for Australian investors and small business owners. In the end, a ‘steady-as-she-goes’ Coalition won over a ‘big-picture-reform-and- redistribute’ Labor platform. The end of election uncertainty and the more investor-friendly policies of the Coalition produced a very brief relief rally on financial markets. The Australian dollar bounced back above US69c having fallen to three-year lows the day before the election in anticipation of a Labor win. Local shares surged to an 11-year high on Monday before losing some of their gains the following day.
The big story this month has been the continuing trade tensions between the US and China. There are no winners from this game of economic Russian roulette, and it is very hard to see how President Trump won’t end up on the wrong end of the bargain as the Chinese take such a long-term view.
In Australia, the Reserve Bank has trimmed its economic growth forecast for 2019 from 3.0 per cent to 2.75 per cent where it is expected to stay until at least June 2021, despite rising iron ore prices. The Reserve Bank’s move to cut interest rates to an all-time low is likely good news for mortage holders but another blow for retirees.
A lift in the unemployment rate from 5.1 per cent to 5.2 per cent in April and a slide in business sentiment will see the Reserve Bank and the Government seeking to stimulate growth at all cost.
Having enjoyed five years of relative economic stability, the new reality of trade tensions means that investors can expect considerable uncertainty on financial markets over the next six months as economies inevitably slow.
These periods test us emotionally as steady share market returns are replaced with uncertainty. During these uncertain periods it is important for investors to remember that their portfolios should have been built for, and stress tested against these scenarios. Every Capital Partners client can have that confidence.
Election 2019 Update
The Coalition is promising sweeping tax cuts for individuals and continuity for investors with no big changes to existing investment or superannuation policies. One of the first items of business for Prime Minister Scott Morrison will be to reconvene Parliament to pass legislation on a low and middle-income tax offset. We hope that this doesn’t become the first partisan battle of the new Parliament as the tax cuts will be necessary for consumer spending in the economy.
Individuals to pay less tax
Providing the legislation is passed quickly, from 1 July Australians earning less than $37,000 will receive a tax offset of up to $255 (effectively a cash rebate) with their tax returns. Income earners between $48,000 and $90,000 will receive the maximum amount of $1,080, and the offset then scales down to zero for those earning over $126,000.1
From July 2022, the Coalition plans to raise the top threshold of the 19 per cent income tax bracket to $45,000. Then from July 2024, it plans to reduce the 32.5 per cent tax bracket to 30 per cent and do away with the 37 per cent rate entirely.
If adopted, these proposals will result in a flat 30 per cent tax rate for anyone earning between $45,000 and $200,000. If this is politically achievable it will be an important reform and a genuine incentive for those Australians’ aspiring to improve their lives.
Support for first home buyers
In a proposal that could also help stimulate the flagging residential property market, the Coalition has promised help for first home buyers trying to get a foot on the property ladder.
From January 2020, the proposed first Home Loan Deposit Scheme would allow eligible first home buyers with income of up to $125,000 (or $200,000 for a couple) to buy a home with a deposit as low as five per cent without incurring lenders mortgage insurance. 2
Help for small business
Small business has not been forgotten. As announced in the recent Budget, the popular instant asset write-off will be increased and extended to businesses with turnover of up to $50 million (previously $10 million).
Eligible businesses will be able to write off assets up to the value of $30,000 (previously $25,000) against their taxable income. Previously, small business needed to depreciate these assets over several years, so the change reduces complexity and improves cash-flow for businesses.
Investment tax concessions to stay
Investors can breathe easy now that controversial changes to dividend franking credits and negative gearing proposed by Labor will not go ahead.
Individuals, including those with a self-managed super fund, will continue to be entitled to a cash refund of franking credits attached to their share dividends if the franking credits exceed their tax liability.
Property investors have also earned a reprieve, with no changes to negative gearing rules.
Super changes at the margins
Australians hoping to boost their super in the run up to retirement will continue to enjoy existing tax concessions.
Investors will still be able to make catch-up concessional (pre-tax) contributions if they meet certain conditions. From the 2019-20 financial year, individuals who have not used their full $25,000 annual concessional contributions cap will be able to carry forward the shortfall for up to five years and claim a personal tax deduction. To be eligible, the individuals total super balance must be below $500,000 on June 30 the previous financial year.3
The non-concessional (after tax) contributions cap will remain at $100,000 a year for people with a total super balance below $1.6 million. Those under 65 can still bring forward up to three years’ contributions (or up to $300,000) with a proposal to increase the age limit from 65 to 67 from 1 July 2020.4
The Coalition also plans to allow older Australians to make voluntary contributions until age 67 without meeting the work test. Subject to legislation, this measure would also begin on 1 July 2020.
With the election out of the way, Australians can get back to the business of planning their finances with more certainty.
We can only hope that the toxic nature of recent Australian politics can be replaced by a more bipartisan conversation in the National interest. This will require our politicians to stand up and Lead, (capital L is intentional).