About John Manuel

John joined the firm in 1998 as a Senior Accountant and moved up the ranks to became a Prosperity Director in January 2004.

He is a Chartered Accountant and Financial Planner with the Institute of Chartered Accountants recognising him with a Financial Planning Specialist designation.

John was named as one of five finalists in the 2013 Australian Private Banking and Wealth Awards in the category of Outstanding Investment Adviser. John has also been listed as one of Australia's Top 50 Financial Planners by the Australian Financial Review Smart Investor Magazine and named on their Masterclass Top 50 Honour Roll.

Government freezes super guarantee

The government has announced that it will freeze the superannuation guarantee at 9.5% until 2021.  Under previous plans, the super contributions paid by employers had been set to increase in 0.5% increments from the current rate of 9.5% until they reached 12% in 2019/2020. It will now be 2025 by the time the guarantee reaches 12%. The rationale behind the freeze on super is that it will ease pressure on the federal budget, due to the significant tax concessions associated with superannuation contributions.

There have been many claims by superannuation industry representatives about how this will impact the size of future superannuation accounts. While these figures can only amount to speculation because nobody can accurately predict wages, fund growth rates and the future taxation of superannuation, it is certain that these changes will result in smaller superannuation accounts. It is also likely that the freeze will disproportionately affect younger Australians, women, low-income earners and part time/casual employees.

There are, however, some strategies that may be useful to individuals seeking to counterbalance the impact of the freeze:

  • Salary sacrificing into your super is a great way to offset the impact of the superannuation guarantee freeze. The money that you salary sacrifice into super, known as concessional contributions, will be taxed at 15%, which for most people is significantly lower than their marginal tax rate. Therefore, salary sacrificing is a particularly effective tax strategy for high-income earners. Concessional contributions are capped at $30 000 per year for most people and $35 000 per year for over 50s. For low-income earners, the government co-contribution is a great way to boost super balances. If you earn under $34 448, the government will contribute 50c for every $1 you put into your super account from your after-tax income (up to a total co-contribution amount of $500). If you earn anywhere up to $49 448, you may also be eligible for reduced co-contribution payments.
  • If you are a low-income earner or are taking a break from work, it may be worth investigating the possibility of your partner making super contributions on your behalf. If you earn less than $13 800, then your partner will be eligible for a low-income spouse tax offset with a maximum value of $540.
  • It may also be beneficial to re-examine your superannuation investment strategy, considering the returns and risks involved with different investment options. Your investment strategy choices should be informed by your age, retirement goals and level of comfort with risk.

Regardless of whether or not the super guarantee freeze has affected your superannuation plans, now is a good time to start putting some serious thought into your superannuation, and the retirement that you want.

Transferring a business property into your SMSF

Under a limited set of circumstances, it is possible for SMSF members to make non-cash contributions, also known as in-specie contributions, to their funds.  One way in which this can be done involves the transfer of a ‘business real property’ to an SMSF.

Using a combination of the non-concessional contributions cap and the CGT retirement exemption, it can be possible for business owners to transfer their commercial property into their SMSF with a number of tax advantages.

Property requirements

For a property to be considered a ‘business real property’ it must be used wholly and exclusively for business purposes. In order to be transferred into the SMSF, it must be unencumbered, meaning that it cannot have any outstanding debts or loans associated with it. If you are interested in transferring a ‘business real property’ with outstanding debt, you may be able to do so provided that you settle the debt before you transfer the property. The commercial property may be a shop, industrial space or a farm, and there are some slight exemptions to the exclusive business use specification for farms.

Transferring the property

The property must first be valued by an independent and appropriately qualified party. The transfer of the property must be recorded at market value and will also trigger a CGT event. If your SMSF has enough liquid capital to purchase the property outright, then this is allowable.  However, as many SMSFs do not have sufficient capital to do this, it may be possible for you to use your non-concessional contributions cap to cover the outstanding balance. For example, if your property is valued at $500 000, and your SMSF has $300 000 cash, you may be able to transfer the property, and count the remaining $200 000 as part of your non-concessional contributions cap. It is also possible for your SMSF to use an LRBA to borrow money to acquire the property. However, this has complex compliance requirements, and it is advisable to seek legal advice if you wish to pursue this course of action.

Using the CGT retirement concession

The CGT retirement concession allows business owners exemption from CGT on business assets up to the value of $500 000 over a lifetime.  If you are over 55, there are no associated conditions, however, if you are under 55 then you must place the money into a superannuation fund to receive the exemption.  This means that if you are under 55 and wishing to transfer a ‘business real property’ into your SMSF, you can potentially do so without incurring any CGT liability (up to the value of $500 000).

Avoiding uncommercial borrowing conditions

The ATO has recently warned that SMSF income generated from limited recourse borrowing arrangements (LRBAs) deemed to be uncommercial may be subject to high tax rates.

If a LRBA is found to be uncommercial then all income derived from the related asset can be taxed at up to 45% including rental income, dividends, interest and capital gains.

At this point no detailed guidelines have been released, and LRBAs are being assessed on a case by case basis to determine whether or not the high tax rate will be applied to related income. As such it is advisable to ensure that all loans taken out by your SMSF meet commercial terms. It is also recommended that all documentation is retained in case you are required to provide evidence of commercial loan conditions.

What makes a LRBA uncommercial?

A LRBA may be considered uncommercial if the terms result in a greater return than would be expected from a standard industry loan. Factors that may be considered by the ATO when assessing the terms of a loan include the loan to value ratio, interest rates that are below market value, and unusually long repayment periods.

The ATO has also indicated that LRBAs used to purchase assets with limited material security, for example shares, will be more likely to attract the higher tax rate, as it is unusual for commercial lenders to approve loans for these types of investments.

New penalty scheme for SMSF trustees

From July 1 2014 the ATO will have increased powers to issue a range of penalties to SMSF trustees found to be in breach of superannuation laws.

The new regulations will give the ATO increased flexibility in dealing with non-compliant SMSF trustees. This will improve the ability to deal with cases fairly and appropriately.

Previous Penalties

Up until now the SMSF penalty options available to the ATO have been relatively harsh, including barring a person from being an SMSF trustee and subjecting the fund’s assets to a penalty tax.

As these penalties are disproportionate to many minor infringements by SMSF trustees, they have been used sparingly. As such there was no capacity for the ATO to deal with less serious non-compliance issues. Under the new system, the ATO will be able to apply a range of penalties to SMSF trustees including rectification orders, educational directions and administrative financial penalties. Trustees found to be in violation of superannuation law may subject to any combination of these penalties.

Rectification Orders

If a trustee is given a rectification order, they will be required to undertake specific action to rectify the non-compliance issue. Evidence of the rectification action will need to be provided to the ATO.

The ATO has indicated that it will take into consideration potential financial detriments to the fund that may be expected as a result of the rectification action.

Educational Directions

Trustees who are given educational directions will be required to undertake and complete an education program within a specified timeframe. Again, evidence of completion will need to be provided to the ATO.

While no fees can be charged for trustees who undertake a course as a result of an educational direction, any other related costs (such as travel) must not be paid or reimbursed by the relevant SMSF.

Administrative Penalties

The new administrative financial penalties are the most significant changes to current legislation. Financial penalties ranging from $850 to $10,200 can be issued for each individual non-compliance issue, and must be paid by the trustee personally.

Funds cannot be withdrawn from the SMSF to pay the penalties, nor can the trustee be reimbursed by the SMSF.

Using dividend franking credits

By investing in fully franked Australian shares, SMSF trustees can significantly reduce the amount of tax payable by their fund.

This is because these shares are issued with a franking credit, also known as an imputation credit, which can be used to offset the tax payable by the SMSF.

What are franking credits?

When companies pay out dividends to their shareholders, the income has already been subject to company tax. In order to avoid double taxation, where both the company and the shareholder have paid tax on the dividend, Australian dividends often come with a franking credit. This essentially means that the company tax that has already been paid is awarded to the shareholder as a franking credit, and the shareholder is then required to pay tax on the dividend at their marginal rate.

The benefits of imputation credits are also available to SMSFs who invest in fully franked Australian shares.

Franking credits and superannuation

From July 1 2015 the company tax rate will be 28.5% (cut from 30%), whereas the maximum amount of tax paid by an SMSF is just 15%. This makes acquiring fully franked shares with high yielding dividends an attractive tax break for SMSFs. If a significant portion of the fund’s investment portfolio is made up of fully franked shares, then their net tax bill can be considerably reduced.

If an SMSF receives a fully franked dividend in accumulation phase then the franking credit can offset the tax payable on the dividend. Franking credits can also be used to reduce or eliminate tax owed on any other income from the SMSF including capital gains tax, rental income and concessional contributions tax. If the SMSF has no other taxable income, the ATO provides the SMSF with a cash refund on the company tax paid.

In pension phase, when the SMSF tax rate is reduced to 0%, franking credits become even more beneficial as the entire value of the franking credit is returned to the SMSF.

Franking credits can be particularly advantageous for high income earners seeking to limit the amount of tax paid on concessional super contributions. For individuals earning over $300,000, the tax on concessional super contributions is set to increase from 15% to 30%. Instead of balking at investing additional funds into super, individuals seeking circumvent this tax hike may look at increasing their SMSF’s investment in fully franked Australian shares.

 

Economic update : the state of the economy and the markets leading up to the Federal Budget

The budget is coming.  With just two weeks to go it looks like, the Government will deliver a budget with a strong long term outlook and an amount of short-term pain including the introduction of a debt levy. Not surprising really given the state of the domestic economy and the sheer number of baby boomers that will leave the workforce in coming years.  

Over the last three months, our economy has behaved with relative stability.

The last quarter, and in particular, the last month has seen the Australian dollar rise adding more pressure to rebalance the domestic economy. On the flip side, housing prices have continued to rise over the quarter combined with an increasing level of building approvals showing confidence is certainly in place.

Interest rates have remained unchanged throughout the quarter at 2.50% and RBA Governor, Glenn Stevens has commented that further rate cuts are unlikely in the short term. The board appear more comfortable with the global outlook and are predicting a reasonable pick-up this year. In Australia, the housing market has rallied in recent months and household spending has continued to increase, encouraged by our historically low interest rates.

In international markets, the US and Euro Regions have shown improvements in recent months. The US Federal Reserve made the announcement in March to reduce asset purchases by a further $10 billion a month to $55 billion. Following on from this announcement, US 3-year and 10-year Government Bond Yields rose by 0.07% and 0.32% respectively.

Overall International Bonds outperformed global equities in March, with the Barclays Global Aggregate (Hedged) $A Index increasing by 0.31%. Treasury stocks and corporate bonds gained by 0.35% and 0.36% respectively for the month.

Australian equities posted modest gains in March, with the ASX 300 rising 0.21% for the month. Commodity prices declined by 2.0% for the month in terms of Australian dollar terms, largely coming from the fall of iron ore, coking coal and steaming coal. On a market capitalisation basis, large company stocks performed better than smaller companies. The S&P / ASX 50 Leaders Index increased by 0.33% in March, while the S&P/ASX Small Ordinaries Index posted a loss of 1.16%.

On a sector basis, Financials (ex-Property) was the best performing and gained 2.92% in March. All the big four banks also recorded another round of strong gains in March. Materials and Healthcare were the weakest sectors declining by -2.89% and -2.07% respectively.

While residential dwelling investments continue to expand, commercial properties (office buildings and large shopping centre investments) declined over the month. The Australian Listed Property Market posted a loss of -1.58%.

In international equities, the Fed’s further decision to taper and indication that quantitative easing could end earlier (possibly within the next 6 months) has resulted in a more optimistic growth outlook. The MSCI North America (Local Currency) Index posted a small return of 0.68% in March.

The best performing region was India with 4.75% over the month due to political optimism. Japan was one of the worst performers losing -7.51% in the first quarter of 2014 due to the sudden 3% sales tax threatening to endanger their recovery.

China lost -1.74% and Europe reversed its previous months strong position and lost -0.65% in March.

Global resources performed poorly in the month with the FTSE Gold Mines Index and HSBC Global Mining Index declining by -11.14% and -5.42% respectively.

Over the coming three months we expect, if there are no sudden changes to the global environment….

1. A Federal Budget that takes some positive steps to reduce the deficit, cutting welfare payments to those not working and incentivising mothers into the workforce; and

2. A stable interest rate environment that is supportive of business and consumer confidence.

Could you be eligible for the Commonwealth Seniors Health Card?

If you are ineligible for the Age Pension due to your wealth but still have an annual income below $50,000 pa for singles or $80,000 pa for a couple, you might be eligible to receive the Commonwealth Seniors Health Card (CSHC).  And the benefits are nothing to shirk at. 

As a holder of the card, you can access a whole host of things you might never have known about, the first of which is cheap medicine.  And it is worthwhile noting up front that there is no assets test to qualify.

The main attraction of CSHC is that eligible pharmaceuticals under the PBS are available at just $6.00 per script.

In addition to this, you can receive a Seniors Supplement from the Government of up to $858 pa (singles) and $647.40 (for each member of a couple). You may also be able to take advantage of bulk billed GP appointments and a range of other benefits at concessional rates.  So if you think you might qualify, it is definitely worth a look.

More money in your pocket
As detailed above, CSHC holders are entitled to receive the Seniors Supplement and the Clean Energy Supplement, both annual payments made to cardholders. The maximum seniors supplement is currently $858 pa for single people and $647.40 pa for each member of a couple, paid quarterly. The clean energy supplement is currently $356.20 pa for a single person or $267.80 pa for each member of a couple.

Services and Benefits of the CSHC
The services specifically available through the CSHC may include:

  • Bulk-billed GP appointments, at the discretion of the GP.
  • A reduction in the cost of out-of-hospital medical expenses in excess of a concessional threshold, through the Medicare Safety Net.
  •  In some instances, additional health, household, transport, education and recreation concessions which may be offered by State or Territory and local governments and private providers. These concessions are offered at the discretion of the private providers, and their availability may vary from state to state.

Could you be eligible?
So, could you be eligible? In order to receive the CSHC, certain criteria must be met:

Residence
You must be an Australian resident, or a holder of a special category visa, and be living in Australia at the time of lodging the claim.

Age
You must have reached Age Pension age or qualifying age for DVA recipients.

Payments
You must not be receiving:

  • A social security pension or benefit (eg age pension), or
  • A DVA service pension or income support supplement.

Income test
You must have an adjusted taxable income of less than:

  • $50,000 for a single person
  • $80,000 for a couple

Assets test
There are no asset limitations or requirements.

 

I think I’m eligible, what do I do now?

If you believe you are eligible for the CSHC then contact your Prosperity Financial Adviser who can help with any questions you have. Alternatively you can contact the Department of Human Services on 13 23 00 or visit their  website on:
http://www.humanservices.gov.au/customer/services/centrelink/commonwealth-seniors-health-card

 

 

Green Shoots

The Federal Election has come and gone, leaving the result most business owners and investors were expecting but will the confidence instilled by a more stable Government bring the green shoots Australia needs?

In the week leading up to the election when our Nation’s fate looked sealed firmly in blue tape, the consumer confidence number started to climb, rising by 4.7% in September from August and sitting at 110.6, above the 100 level where optimists outnumber pessimists.

The business confidence numbers also strengthened significantly in this period, with the index rising in August to its highest point since May 2011.  The consecutive cuts in the cash rate may have helped, but seemingly more important were the anticipated political changes.

Nationally, housing is also providing a badly needed sign of life in our economy, with six consecutive weeks of 80%+ auction clearances in Sydney at the time of writing, and Melbourne achieving their highest rate since 2010, at 76% .

Equities, which were struggling under the weight of the Syrian crisis and the end to quantitative easing in the US in August, seem to have lifted their tone with the news that Russia and America plan to do everything they can to avoid full blown conflict.

Could these be the green shoots of Spring in our economy that so many are looking for to invest?

Over the coming three months we are looking for three shifts in the market:

We expect the USA will continue down the forewarned path of reducing its quantitative easing, bringing to fruition something the market already expects.  This could cause some market instability around announcements.

We see the continued weakness in commodity prices and Asian markets driving a gradual and painful weakness across the mining economy in Australia and a continued flow through to other sectors.

And the handbrake coming off Australian business confidence, as the Liberal Government starts to make their policy changes.

One big hope we all have is that the recent reduction in the $A dollar will act as a natural stimulus improving investment and export growth that stimulates our business economy.

Economic Update: The end of quantitative easing troubles markets


The last quarter, and more particularly, the last month has seen a fairly negative bias across most Australian and international equity markets.  Commodity prices fell slightly and gold has continued to plummet.  The Australian dollar has also been decreasing, posting losses against all the major currencies. But economically, this might not be such a bad thing.

Interest rates are being closely watched after the Reserve Bank decided to hold cash rates at 2.75% in June.   RBA Governor, Glenn Stevens explained that the mining downturn has driven a significant depreciation of the Aussie dollar over the past three months. This depreciation has increased the attractiveness of local exports and provided support to our otherwise challenged economy.

In international debt markets, the Federal Reserve in the USA rescinded its indefinite support of fixed income markets causing global corporate bonds to fall 2.36% and emerging market debt to plunge over 4% for the month.

Australian equities followed the global markets down in June, with the ASX 300 falling 2.4% for the month.  Small caps were the worst performers falling by 7.15%.  Information Technology and Materials sectors were the worst affected, falling 6.96% and 10.26% respectively in the month of June.  The materials sector has been significantly impacted by the rapid fall in the price of gold by 22.71% over the last 12 months.  This and the follow-on effects have driven some gold stocks down over 50%.

As is often the case during a downturn, the defensive healthcare sector outperformed the market, rallying by 1.33%.  Property also stayed fairly strong against other industries, with Australian REITs only declining 1.02% in June.

In international equities, the Fed’s announcement that they will wind back quantitative easing sooner than previously expected unbalanced markets.  Global equities subsequently declined by 2.43% during the last month of the June quarter.  Losses in China continued from previous months, with the MSCI China index slipping 7.07% in June, and the HSBC Manufacturing PMI falling to 49.2 which is seen as a slight contraction of the Chinese economy.  (A number above 50 signifies expansion, below 50 signifies contraction).

Over the coming three months we are looking for three slow but realistic shifts in the market,

  • We expect the USA will continue down the forewarned path of reducing its quantitative easing, bringing to fruition something the market already expects.   This could cause some market instability around announcements.
  • We see the continued weakness in commodity prices and Asian markets driving a gradual and painful weakness across the mining economy in Australia and a continued flow through to other sectors.
  • And the conclusion of the Federal Election period should bring the end of the inactivity that results from political uncertainty.

 

John Manuel is a Director of Financial Planning with Prosperity Advisers.

Doom and gloom or the roaring bull?

While interest rates may need to fall a bit further, green shoots of recovery suggest we are at or near the low and more importantly, point to an improvement in economic and profit growth over a 12 month horizon, according to Dr Shane Oliver, Chief Economist from AMP.

“All I hear is doom and gloom… All is darkness in my room”

Dr Shane Oliver opened his Economic Update for our Sydney office last week with a riff from the new Rolling Stones song “Doom and Gloom” released this year.

His pragmatism was clear, despite the recent rise in equity markets that has occurred since December 2012, he wants investors to retain cautious optimism and look forward to more growth.

Many of the worst-case scenarios that economists predicted for 2012 didn’t happen:

  • Italian and Spanish bond yields fell when many expected them to rise,
  • The US didn’t have a double dip or fall off the fiscal cliff,
  • The Australian dollar traded within a narrow range all year; and
  • The world didn’t end on December 21, the end of the Mayan calendar.

Many of the issues that people were concerned about last year can now be seen receding and Shane Oliver himself says he is feeling more sanguine with the world’s economic prospects.

In 2012, listed REITs were the star performers, enjoying a return of 30% in Australia and 27% globally.  Cash on the other hand achieved only a 4% return.

In 2013, he expects the world to grow steadily.  He predicted that China will grow 7.5-8% and that the tail risks in Europe will continue to recede.  “Europe is still in recession right now, but the economy is showing signs of growth,” he said.  “All is starting to look OK in the US, with retail sales motoring along, the fiscal cliff now resolved, and housing starts are picking up.  We are also impressed to see that US debt to GDP ratios has fallen from 11% at the height of the GFC to 6% today.”

According to Dr Oliver, Japan finally seems to be getting it right too with the election of new Prime Minister Abe who has won the election on inflation friendly policies that make it look like it will go down the same recovery track as the USA.

Australia, he says is showing signs of green shoots, despite our determination as a Country to be pessimistic.   Retail sales were up in January, job ads were up in January, and new home sales and auction clearances are looking up too.

“Mining is moving into a cyclical decline, which will force our economy to be more dependent on the non-mining sectors over coming years for stability.  Whilst this presents concerns, the reserve bank is supporting growth and consumer confidence is rising, with it up over 15% in the last year.  Political risks remain and are likely to hang around until we have removed the hung parliament and returned certainty to our Government in September.

He believes that the seven cuts in interest rates we have seen over the last eighteen-month period are starting to be felt right across the Australian economy and that we may now be nearing interest rate lows.

“I believe interest rates are near the bottom of the cycle.  With Banks offering 4.99% on fixed term loans, it simply cannot get much better.”

Dr Oliver was optimistic that the equity market has entered another cyclical bull market.  Our equity market in Australia has been rising since November 2011, about 18 months.  But research by AMP shows that most cyclical bull markets last approximately 47 months, leading him to suggest that there should be more good times ahead.

Equity markets are up 22% in the year to February, primarily due to some growth in company profits.  This has driven up price earning multiples making some of the equities in our market look a little expensive, or indicating potentially that profits might be about to rise as often happens at this point in a cyclical bull market.

What makes him think it can go higher?

“When cash rates get below about 6% people usually start moving out of cash and seeking out risk.  There is about 14% of our Superannuation system currently sitting in cash at the moment in Australia, giving us a strong pool of money that may be tempted to enter the market given a continued improvement in confidence.”

To finish off the evening, Dr Oliver highlighted the risks, which looked a lot less threatening than recent years:

  • Instability in Europe, with many watching Italy for any distress after their recent elections;
  • Any slippage in Chinese growth;
  • Any further ratings downgrades for the US; and
  • Continued softness in Australia’s non-mining economy which we will become more and more dependent on.

Article by John Manuel, Director, Prosperity Wealth Advisers Pty Ltd.  John and our other Advisers provide Financial Planning and Family Office services to our clients from offices in Brisbane, Sydney and Newcastle.