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Archives for May 2018

Share Market Seasonality

Come across the aphorism “sell in May and go away”?  Perhaps heard reference to the “Santa Claus rally”?  Many people believe there are seasonal patterns to share prices.  Some months are typically good with prices going up, and some not so good with prices going down or sideways.  Let’s look at some history using the S&P/ASX 200 Index.

This index shows the aggregate performance for the biggest (by market capitalisation, worked out by multiplying the number of shares on issue by the price per share) 200 Australian Stock Exchange (ASX) listed enterprises.  This index only shows price movements (does not include dividends) and the larger companies carry more weight in the index than the not-so-large ones.

Of course, if the index of 200 companies is going up this does not mean all the companies in the index are going up.  Only that a larger number of market capitalisation went up.  Individual companies may have their own seasonal price patterns.  However, let’s keep it simple and look at the S&P/ASX 200 Index (also known by its ASX code XJO).

This chart shows the average (arithmetic mean) of monthly price movements for the index for the last 12 years (May 2006 to April 2018).  The figures on the right edge of the chart show the average level of the index at the end of each month, using a figure of 100.0 as the starting point.  So, if the average of the index at the end of December is 101.2 this means the average price increase for the month of December for the period examined was 1.2%.  The figure for November is 98.4 and this means the average price decrease for the month of November for the period examined was 1.6%. The blue diamond above the April bar shows the result for April 2018 – a better than average one.

Based on the last 12 years the month of April has been a good one for the price of the S&P/ASX 200 index.  April 2018 was a better than average one.  Based on the last 12 years the averages for May and June have seen decreases.  This certainly does not mean that May and June 2018 will be negative ones, only that May and June have been weak months on average over the last 12 years.  No suggestion that any portfolio changes would be necessary.

We can look in more detail at these historical data in future articles.  For instance, a different chart will show the best and worst performances for each month as well as the average.  For something a bit outside the square, we can also arrange the data so it looks at performances on dates divided up on an astronomical basis (Aries, Taurus, etc.) rather than calendar months.  Keep watching for future articles.

Please note this article is providing general advice and information. It has not taken your personal or financial circumstances into consideration, if you would like more tailored financial or investment advice, please contact us today. One of our advisers would be delighted to speak with you.

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Get Your Insurance Organised This EOFY!

End of financial year is fast upon us yet again. To make sure you’re ready and to maximise your tax savings, I’ve prepared some tips and tricks:

1. Reviewing your insurance coverage might save you $

We all know that our circumstances can change at the drop of the hat. Therefore, as our situation changes, so does our need for risk protection. If you’ve had your cover in place for some years and it’s been just as long since you’ve reviewed it, now’s the best time. Even if the amount of cover is still appropriate, you may want to modify the way in which you fund the premiums to make them more tax effective.

2. Bring forward your expenses

From a personal point of view, you might consider the option to pay a year ahead on your income protection policy. All income protection premiums paid by the individual are tax deductible at their highest marginal tax rate, this will mean a greater tax deduction at tax time.

From a business perspective, you may wish to do the same. However, the tax deductibility on certain policies such as Key Man and Buy/Sell will be determined whether the policy is meant for revenue or capital purposes. Speak to your Risk Adviser or Accountant to find out more.

3. Speak to an expert

As with anything not directly relating to your own field of work, we employ the services of specialists for certain tasks. I recommend you speak with your Financial Adviser, Risk Adviser and Accountant before making any changes to your current arrangements and to seek advice on how to maximise your tax savings this financial year.

Please note that the above is provided as general advice. If you would like more tailored advice regarding your insurance needs or in the lead up to the end of financial year, please contact us today. One of our advisers would be delighted to speak with you.

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2018-19 Federal Budget Wrap Up

The 2018-19 Federal Budget handed down last week by the Treasurer, Scott Morrison focused more on minor adjustments rather than sweeping reforms. It was a Budget designed to create short sharp election headlines, but there were also many measures that will improve individuals’ financial position.

Below is a summary of three main areas:

  1. Superannuation
  2. Taxation
  3. Social Security & Aged Care

Superannuation

  • Super fund membership
    • The maximum number of members allowed in a Self-Managed Super Fund (SMSF) will increase from 4 to 6.
    • SMSF Trust Deed’s may need to be amended.
    • May appeal to some, i.e. intergenerational wealth planning.
    • From 1 July 2019.
  • SMSF three yearly audit cycle:
    • SMSFs that have clear audit reports over 3 consecutive years and have lodged annual reports in a timely manner will be able to move to a three year audit cycle.
    • This will reduce compliance costs for some.
    • The Government has undertaken to consult with industry stakeholders.
    • From 1 July 2019.
  • Work test exemption:
    • Individuals between 65 and 74 who have super balances below $300,000 will be able to make voluntary contributions in the first financial year following the year that they last met the work test.
    • The measure will provide individuals with low super balances with some additional flexibility and may assist with small business CGT concessions.
    • From 1 July 2019.
  • Other items:
    • Individuals earning over $263,157 from multiple employers will be able to nominate that their wages from certain employers be NOT subject to SG from 1 July 2018. Avoids unintentional breaching of the $25,000 concessional contribution cap.
    • Opt-in arrangements for default insurance inside super applying to accounts with balances below $6,000, under age 25 where account has been inactive for more than 13 months,from 1 July 2019.
    • Fees capped to 3% pa on passive fees on super account balances below $6,000 from 1 July 2019.
    • Inactive super accounts with balances below $6,000 to be transferred to the ATO.

Taxation

The Government will introduce a seven year Personal Income Tax Plan over three stages:

1. Targeted tax relief to low and middle income earners

  • Low and Middle Income Tax Offset (LMITO)
  • Effective date: 1 July 2018 – 30 June 2022.
  • Received as a lump sum on assessment after an individual lodges their tax return.
  • The benefit of the offset is in addition to the existing Low Income Tax Offset (LITO).

2. Protecting middle-income earners from bracket creep

  • Effective date: 1 July 2018 – 1 July 2022
  • Affects those individuals on middle incomes

3. Ensuring Australians pay less tax by making the system simpler

  • The 37% tax bracket will be removed entirely.
  • Effective date: 1 July 2024

 

  • Other items:
    • Retaining the Medicare Levy at 2%
    • Extension of $20,000 instant asset write-off for small business
      • This measure allows small businesses with a turnover of less than $10m a tax deduction for the purchase of assets worth up to $20,000. It was due to end 30 June 2018. It has been extended for 12 months to 30 June 2019.

Social Security

  • Increase to the Pension Work Bonus (PWB)
    • The PWB is an income test concession for Age Pensioners who continue to work.
    • Currently, the first $250 of employment income per fortnight is not counted under the Centrelink income test.
    • From 1 July 2019, the Government proposes to increase this to $300 per fortnight (first increase since 2011).
  • Expansion of the Pension Loans Scheme (PLS)
    • From 1 July 2019, the Government proposes to make the PLS available to full and part pensioners as well as self-funded retirees of age pension age.
    • Full rate pensioners will be able to increase their income by up to $11,799 (singles) or $17,787 (couples) per year by unlocking the equity in their home.
    • The current PLS interest rate of 5.25% pa will apply.
    • Only fortnightly pension payments are available (not lump sum amounts).
    • Repayments generally occur from the sale proceeds once the house is sold, however, it can be repaid at any time.
  • Improving access to residential and home care
    • The Government proposes creating 14,000 additional high-level home care packages over the next four years.
    • It is also proposing to release 13,500 residential aged care places.
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Fixed Rate vs Variable Rate Home Loans

In the April meeting, the Reserve Bank of Australia (RBA) kept the cash rate on hold for the 20th consecutive month, at the record low of 1.5%.  The cash rate was reduced from 1.75% to 1.5% in August 2016, and there has not been an increase in the cash rate since November 2010.

Most of the ‘experts’ predict that rates won’t rise until next year due to slow wages growth, and general economic conditions.  Although some of the banks have increased their rates outside of the RBA cycles, many borrowers have taken advantage of the competitive home loan market to access lower rates and save on their mortgage repayments.

Given that we are currently in a record low-interest rate environment, and logic would dictate that rates are most likely to go up, does it make sense to fix your home loan?  Well, as with most financial decisions, there are pros and cons to consider with fixed rate vs variable rate mortgages.

Some of the key features of fixed rate and variable rate loans are shown below:

Fixed rate loans

  • Fixed rate loans can provide peace of mind and avoid the risk of rising interest rates. If interest rates increase above your fixed rate, you will enjoy the savings as your repayments are locked in.
  • At the end of the fixed rate period, the loan may revert to a much higher variable interest rate.
  • If interest rates fall, you will miss out on any savings, as your fixed rate is locked in until the end of the term selected.
  • Fixed rate loans are typically higher than variable rate loans, and charge break costs if you repay the loan early, wish to switch providers, or change to a variable rate before the expiry of the fixed rate term. The break costs are to compensate the lender for the loss of projected earnings on the loan and can be several thousands of dollars.
  • Fixed rate loans may limit the amount of additional payments you can make above the minimum repayment amount. A penalty may be charged for exceeding the maximum repayments allowed each year, or in the fixed rate term.
  • Fixed rate loans offer less flexibility, and do not provide full offset accounts. Some providers offer partial offset accounts, and depending on the provider, you may not have the ability to redraw.

Variable rate loans

  • Variable rate loans typically allow greater flexibility. You may be able to make unlimited repayments without penalty, and redraw the funds as required.
  • Variable rate loans can offer more comprehensive features such as a full offset account(s). An offset account will allow you to reduce interest costs by linking a savings/transaction account.  The balance held in the account will offset your home-loan and allow you to have access to that money as required.
  • If interest rates fall, your lender may reduce the rate so you can take advantage of reduced repayments.
  • If interest rates rise, your repayments will increase to the rate set by your lender.
  • Variable rate loans usually allow you repay the loan before the end of the loan contract without break costs or penalties. A standard discharge fee would apply.
  • If interest rates start to rise unexpectedly, you can convert the loan to a fixed rate. An additional application fee would apply.

Unfortunately, no one has a crystal ball and it can be difficult to predict when rates may rise.  Another option may be to split your loan.

Split loans

A split loan facility allows you fix part of your loan and leave part of the loan on a variable rate.  By splitting your loan, you have protection against increasing interest rates on the fixed portion, and you will have the flexibility of making extra repayments, and the features available on the variable portion.

There are many issues to consider before making any changes to your home loan.  Before you decide on what option would suit your needs, take the time to understand the pros and cons of fixing your home loan.   One of our friendly mortgage brokers might be able to save you thousands over the life of your home loan/s.

Please note that the above is given as general advice. It has not taken your personal circumstances into account. If you would like more tailored advice, or to learn more, please contact one of our lending specialists to determine the costs and benefits, and to discuss your options.

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