Federal Budget 2012 overview

The 2012 Federal Budget contained few surprises as many of the measures had already been legislated or pre-announced.

The main winners were lower income earners, families and the elderly.

Summary

The key new announcements include:

• tax may increase on certain employment termination payments;
• the reduction in the company tax rate isn’t going ahead;
• the increase in the concessional contribution cap for people aged 50 or over with less than $500,000 in super will be postponed until 1 July 2014;
• the tax payable on concessional super contributions by people earning $300,000 pa or more will increase from 15% to 30%; and
• a “SchoolKids Bonus” of $820 a year for each child at high school and $410 for every child in primary school will automatically be paid to parents who are eligible for Family Tax Benefit Part A, replacing the Education Tax Refund.

The Government has also confirmed that:

• people earning under $80,000 pa will receive modest tax cuts;
• the minimum income payments for a superannuation pension/income stream won’t increase until 1 July 2013; and
• funding will go ahead for the landmark changes to Australia’s Aged Care System announced recently.

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Why is cash a bad long-term “investment” ?

When asked, many people will no doubt describe investing as the process of laying out money now in the expectation of receiving more money in the future. We prefer to redefine investing as transferring purchasing power now with a calculated probability of receiving more purchasing power in the future. These two definitions can vary widely. The first definition simply calculates the increase in value in absolute terms. The second implies the loss of purchasing power and keeping up with inflationary pressures.

According to the Australian Bureau of Statistics, a litre of milk in 1990 cost approximately $0.85. By 2011, the average price was $2.50. Accordingly, any investments made in 1990 would have to rise by 200% just to keep up with buying the same litre of milk 20 years ago. In percentage terms, the rate of return in your cash account would have to be at least 5.50% per annum over the past 20 years. Using an average tax rate of 30%, investors will need a gross annual return of 7.85% in order to keep up with the rise in goods.

We have been in an extraordinary period of low and stable inflation since 1990, therefore the above comparison may not seem overly difficult to achieve. The next 10 years may not be so easy for cash to keep up with purchasing power if inflationary pressures come through over the next two to three years.

This blog is brought to you by Financial Decisions, a leading financial planning firm offering a diverse range of services that include investments and superannuation, personal insurance, estate planning, mortgages, tax planning and family office.  Please call us today and take control of your financial future.

US Treasury yields

The US Federal Reserve has indicated several times that it will continue its current “Accommodative” policy stance at least until late 2014. This signifies that the Federal Reserve will continue to keep interest rates where they are now for at least two more years.

Based on recent movements in Treasury yields, markets are clearly experiencing a much improved and far more sustainable economic recovery, particularly in the US. We believe that this policy stance may be challenged earlier if markets continue to see positive growth.

We are of course aware of the many issues that still lie ahead, predominantly in Europe. As such, if the recent sell-off in Treasuries is any indication, we could be seeing a trend toward higher yields and lower long- term bond prices in the months and years ahead, barring any unexpected downturn especially in the US. Like any asset price movement, the move will not be a straight-line and could be gradual over the next couple of years.

We have stayed away from any fixed long-term bonds for some time while focusing on those that are usually no more than five years in duration and that are floating-rate in nature.

It will be important to keep up with the movements in Treasuries and long-term government bonds as that will have longer term implications on stock market movements and valuations around the world. As many important growing regions such as China and Hong Kong are largely pegged to the US dollar, the implications are further and wider than what most investors would expect.

This blog is brought to you by Financial Decisions, a leading financial planning firm offering a diverse range of services that include investments and superannuation, personal insurance, estate planning, mortgages, tax planning and family office.  Please call us today and take control of your financial future.