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Why investors need to be wary in 2019

Why investors need to be wary in 2019

By Ben McCaw, MLC,  SMSFAdviser 22 February 2019 

The rise in share market volatility is a reminder of vulnerabilities that have accumulated in the financial system.

The fragilities underlying the prolonged strong returns of the past few years became more apparent in the final quarter of 2018. 

Returns have been generated on the foundation of ultra-low interest rates and central bank asset purchases since the global financial crisis.

The key fundamental change has been tightening liquidity. During the March quarter of 2018, we saw the first challenge to the perception that the strong return environment will persist.

The stronger US wages data resulted in a sharp interruption to the US share market’s relentless rise.

The surge in equity volatility was a reminder of these fragilities that have accumulated in the financial system.

Investor behaviour has, to some extent, shifted towards “selling the rally”. This is in contrast to what has been a perennial “buy the dip” mentality over the past decade.

However, a sustained shift in investor expectations requires repeated confirmations that the future is not as rosy as previously presumed.

In the final December quarter of 2018, monetary policy, global trade and related concerns about global and Chinese economic growth, as well as the US budget impasse, all combined to more clearly shift investor expectations.

This resulted in the worst year since 2008 for share markets.

Bond villains

However, in contrast to 2008, when government bond yields fell and their returns surged, bonds have mostly not been effective diversifiers of risk during 2018.

During 2018, both bonds and shares declined in value at the same time. This means that the only reliable way to limit downside risk has been to accept lower returns.

Our understanding of this reality is the reason why our real-return portfolios have been positioned so defensively.

What does the future hold?

While it can take a long time, the fundamentals will ultimately drive investment outcomes. Asset prices that are high suggest low future return potential.

While there are some exceptions such as emerging market shares, our assessment is that asset prices are mostly not cheap and, in some cases, as with US shares and nominal bonds, are still high.

However, the path of returns will depend on how investor expectations change. A trade deal between the US and China that is favourable for economic growth is still possible. The argument over the Mexico border wall can be resolved.

We also know that the US Federal Reserve (Fed) is “data dependent” and that US economic growth is still robust.

So, a positive mindset could resume across global financial markets, and we have seen some of that during January in response to soothing words from the Fed and hopes for a US-China trade deal.

A new direction for the Fed

However, liquidity is tightening and has turned into a headwind. The rise in share market volatility is a reminder of vulnerabilities that have accumulated in the financial system.

We also know that the Fed understands the imperative to build policy options for the next economic downturn.

Indeed, the Fed, under the leadership of Jerome Powell, has partly removed the “lower for longer” bias that distorted the outlook for US interest rates. This is a very important change for all risk asset markets.

The presumption of interest rates remaining “lower for longer” has been a core driver of stretched valuations across asset classes

Even small movements in long- term discount (interest) rates can have a profound effect on the periods when inflation is volatile valuation of all assets. Share prices, for example, can move significantly if the market revises its cost of capital assumption.

Further interest rate rises by central banks would likely drive the market’s perception of the “natural” interest rate higher again. 

Yet, even if the real economy remains strong enough for interest rates to normalise, a strong economy by itself will not drive a strong share market.

Taking risk may not reward investors during periods when inflation is volatile or stubbornly low.

In this vein

In this vein, perhaps the most threatening aspect for shares of a strong US economy is that higher inflation could lead to the erosion of the high corporate profit margins across most industry sectors.

Tight labour markets continue to threaten wage growth, while higher borrowing costs will eventually dampen net profit margins.

Thus, while corporate sales revenue growth may persist given a strong US economy, there is no guarantee that profit growth will keep up with expectations.

This leaves investors potentially facing the double penalty of a rising cost of capital and declining profit growth.

Taking risk may well reward investors over the coming year, but this may prove unwise if one chooses to ignore elevated share valuations and global political risks.

We believe that focusing tightly on risk control while taking opportunities when they present themselves will be beneficial. This is a challenging period that will test all investors.

Dr Ben McCaw, portfolio manager, capital markets research, MLC

By |February 27th, 2019|investors, retirement, Self Managed Super Fund News, Uncategorized|Comments Off on Why investors need to be wary in 2019

Franking changes tipped to ‘strangle’ SMSFs

Franking changes tipped to ‘strangle’ SMSFs

The federal opposition’s proposal to end refunds of excess imputation credits will potentially “strangle” existing SMSFs and drive them into retail and industry funds, says the Tax Institute. SMSF  Jotham Lian  04 December 2018 from www.accountantsdaily.com.au

Speaking to Accountants Daily, the Tax Institute’s senior tax counsel, Professor Robert Deutsch said retail and industry funds would be in a much stronger position to withstand Labor’s proposal due to their capacity to utilise excess franking credits against other income internally within a fund across a broad combination of members who are in pension and accumulation mode.

“Retail and industry funds invariably have a combination of members – one group being in pension mode the income from which is tax-free and another group being in accumulation mode the income from which is taxed at 15 per cent. To the extent that one can marry the excess imputation credits derived by the pension mode members against the extra tax which needs to be paid by the accumulation mode members, Labor’s policy will have no impact,” said Professor Deutsch.

“SMSFs by comparison, have a much smaller capacity for utilising this principle since they are often two-member SMSFs where both members are in pension mode, or SMSFs with younger members who are all in accumulation mode. Situations where SMSFs have a combination of both pension mode members and accumulation mode members will be fairly limited.

“I don't think the Labor party did this because they set out to make life as difficult as possible for the SMSF industry but it is going to be one of the victims of the change if and when it happens.”

Professor Deutsch believes the proposal will see a less than ideal outcome with SMSF members ultimately driven to retail and industry funds.

“The SMSF industry is an important sector and should be nurtured. People should be encouraged to have their own funds and take responsibility for the performance of those funds rather than leaving it to third-parties who having regards to everything we've seen in the royal commission, one might argue that you're better taking responsibility for your own financial future rather than leaving it to a third party,” said Professor Deutsch.

“People often say we are returning to where we were from 1987 to 2001 where we had this very system with no excess imputation refunds.  The difference is that the SMSF industry back then was in its infancy and wasn't widespread.

“In the course of the last 18 years, we have encouraged the SMSF industry, partly I have to say through excess imputation credits but not entirely, and as a result, there's been an explosion in the number of these funds and it's not right to say we're going back to where we were. Economically, it's a very different environment and we're going to strangle the existing SMSFs because they have built a reliance on excess imputation credits being returned to them and that will cease,” he added.

“We're not enamoured at the idea of carve outs, we're not enamoured of the idea of caps, we believe the system as it stands works well and is consistent with at least one theory of imputation and we think the status quo should remain but we're realistic enough to know that if Labor are likely to win the election, they certainly would have a mandate to do what they are proposing.”

CPA Australia had earlier spoken out against the reforms, calling for other options to be considered to ameliorate the impact on investors, including introducing an annual cap on refundable credits, as well as holistic tax reform.

“One of our key suggestions was that if they were going to go down this path, in the absence of holistic tax reform and looking at other options such as an income tax discount on income from rents, interest and dividends, which is not on the table, then they should be considering whether perhaps there should be franking credit caps introduced for taxpayers so if you’re an SMSF or an individual, you might have a cap where you can only get a refund of say $20,000 per annum instead of just no refund,” said CPA head of policy, Paul Drum.

jotham.lian@momentummedia.com.au 

By |December 4th, 2018|Uncategorized|Comments Off on Franking changes tipped to ‘strangle’ SMSFs

Compliance Hotspots for SMSF 2018-19

Compliance Hotspots for SMSF 2018-19 from Shirley Schaefer, Partner BDO published in SMSF Adviser Magazine Nov/Dec 2018

What the ATO has on their Radar this year

Late or Non-Lodgement of Tax returns. “The ATO has clearly done some work around this and SMSF trustees are realising that they need to get everything into line … Interestingly, for some … it goes back a significant number of years; the ATO seems to be happy so long as the trustees actually engage an accountant or an administrator to take them under their wing and get it done. That’s their main focus, to make sure people get it started if nothing else.”

“We may see them (ATO) focusing on related party limited recourse borrowing arrangements. Now that most of 2016-17 tax returns have been lodged, they’ll be able to identify those funds that have got a related party borrowing arrangement in place, and of course if they’re not at arm’s length terms, then the income from that arrangement could potentially be taxed as non-arm’s length income. Taxed at the highest rate.”

The other thing, which is always on their radar, is early access to super and loans to members. They’ve always got their eye out for those types of things.”

Compliance Hot Spots

Issues with returns for the 2016-17 financial year – “The biggest area of concern, although it wasn’t so much a problem, was just having to deal with the resetting of pension balances down to the $1.6million and then correctly calculating the reset of any asset cost bases and the capital gains tax for the relief.”

2017-18 financial returns, traps that will arise with those – “Nothing that’s really come in so far, but I do expect to see some problems or some issues and errors with contributions made to super in the 2017-18 financial year, with changes in the limits. Concessional contributions caps went down to $25,000 and non-concessional limits were reduced to $100,000. Also, the additional thresholds around non-concessional contributions, the fact that you can’t really make non-concessional contributions if you’ve got more that $1.6 million in super, and just the further complication of those rules. Despite everyone’s best intentions, I think trustees will make mistakes.”

Transfer Balance Cap Reporting – “I still think there’s a lot of accountants out there who don’t know that they were supposed to report by 30 June 2018, the 30 June 2017 pension balances, and they still don’t realise that they need to do regular reporting to the Tax Office of different events … a lot of the smaller accounting firms are not across a lot of that stuff yet”

To read more on this go to www.smsfadviser.com

By |November 8th, 2018|Self Managed Super Fund News, Uncategorized|Comments Off on Compliance Hotspots for SMSF 2018-19

SMSFs to be required to have Retirement Income Strategy

SMSFs to be required to have Retirement Income Strategy from www.solepurposetest.com/news MAY 21, 2018 BY LUKE SMITH

SMSFs would be required to develop a Retirement Income Strategy under changes to superannuation being developed by the Government.

The Government has released a position paper on the Retirement Income Covenant, which would require super funds – including SMSFs – to develop a Retirement Income Strategy for members.

“For too long superannuation has been focused only on accumulating savings. A retirement income framework is a pivotal part of the Government’s reform agenda for superannuation – an agenda squarely focused on protecting and improving outcomes for superannuation members,” said Minister for Revenue and Financial Services Kelly O’Dwyer.

“To fulfil the overarching purpose of superannuation, it is essential that trustees develop a retirement income strategy and consider the retirement income needs of their members.” 

This follows from an announcement in the 2018 Budget that the Government intends to amend the SIS Act to “introduce a retirement covenant that will require superannuation trustees to formulate a retirement income strategy for superannuation fund members”.

The Retirement Income Covenant is part of the Comprehensive Income Product for Retirement (CIPR), which was a recommendation of the Financial System Inquiry (FSI) to require super funds to pre-select a retirement income option for members. The Government has been slowly progressing CIPR since it was recommended by the FSI in 2014.

According to the position paper the only part of the Retirement Income Covenant that would apply to SMSFs is the requirement for a Retirement Income Strategy.

In terms of the broader Retirement Income Framework, the Government plans to prioritise progress of the Retirement Income Covenant, followed by simplified and standardised disclosures for retirement products, then retirement income projections and finally the regulatory framework.

The superannuation industry has criticised CIPR as “neither necessary nor sufficient”, as currently designed, to meet its goals.

 

By |May 22nd, 2018|budget, retirement, Self Managed Super Fund News, Uncategorized|Comments Off on SMSFs to be required to have Retirement Income Strategy

2018 Budget measure proposes annual audit change to once every three years

SMSF Association Media Release – 8 May 2018 – Audits.

The 2018 Budget measure that proposes a reduction in the annual audit requirement to once every three years for self-managed super funds (SMSFs) with a good compliance history has been welcomed by the SMSF Association.

SMSF Association CEO John Maroney says this proposal, which will cut red tape for the SMSF sector, is a fitting reward for trustees who strictly adhere to the regulatory regime.

However, Maroney adds that it’s a strongly held Association position that an independent audit is essential to the integrity of the sector, and as such “we keenly await the implementation details of the proposal”.

This proposed change in auditing procedure for SMSFs, when coupled with the expansion of SMSFs from four to six members and the digital rollover measure announced by the Minister for Revenue and Financial Services, Kelly O’Dwyer, at last month’s inaugural SMSF Expo, help to cut red tape and improve flexibility for SMSFs.

Maroney says these positive measures, in line with a 2018-19 Budget that largely left superannuation alone, will come as an “enormous relief” to SMSFs and their advisers.

“This continued regulatory stability for SMSFs is welcomed by the Association and is sorely needed as trustees still come to grips with the superannuation tax changes that took effect on 1 July 2017.

“We look forward to a much-needed period of stability for superannuation and working through the implementation of the superannuation changes with the Government and regulators.”

He says the Association is pleased that the Government has acted to ensure the efficiency and integrity of the broader superannuation system.

“Capping fees on low balance superannuation accounts and introducing opt-in requirements for insurance in superannuation for certain fund members are positive measures that will ensure younger superannuation fund members do not have their account balances eroded unnecessarily.”

Older Australians were also beneficiaries of the Budget via an expanded Pension Work Bonus program, the enlarging of the Pension Loans Scheme to include people on the full-age pension and self-funded retirees, and granting a one-year superannuation work test exemption for recent retirees with balances under $300,000.

“These measures are welcomed by the SMSF Association for providing more flexibility for older Australians to manage their retirement.”

By |May 12th, 2018|budget, Self Managed Super Fund News, Uncategorized|Comments Off on 2018 Budget measure proposes annual audit change to once every three years

2018-19 Budget Submission

SMSF Association 2018-19 Budget Submission

The SMSF Association welcomes the opportunity to make a pre-budget submission for the 2018-19 Federal Budget. As leaders of the SMSF sector, we believe the SMSF Association are able to offer insights on some key issues from the perspective of an industry that has grown to represent approximately $701 billion in assets and over 1.1 million SMSF members, becoming an integral part of Australia’s superannuation system and economy.

This year SMSF Association submission focuses primarily on improving the efficiency of the superannuation system.

After the introduction of the significant legislative changes which came into effect on 1 July 2017, it is essential that superannuation fund members continue to have a period of stability. The SMSF Association note the Government has stated they have no intent on any further changes to the superannuation rules in the foreseeable future.

In this submission the SMSF Association submit that the Government give ongoing consideration to how policy settings for superannuation and the age pension are integrated to ensure that efficient outcomes are delivered by the broader retirement income system. They believe that further consideration of this policy area is very much needed.

The SMSF Association also seeks action on Superannuation Guarantee (SG) reforms and believe that a recommitment to the increase in the SG rate to 12 per cent should be legislated to ensure retirement savings for individuals are adequate. This should be supplemented by reforms that allow individuals to choose which superannuation fund they want to receive their SG contributions and to prevent unscrupulous employers from using loopholes to avoid paying their full SG entitlements.

The SMSF Association also focus on how SMSFs can be an important source of funding for domestic infrastructure, social impact investment and commercialising innovation. Accessing SMSF capital to fund these important areas would support economic growth and also deliver improved retirement income outcomes for SMSFs.

The SMSF Association also seeks increased transparency regarding the SMSF levy and believe a review of the levy will ensure that SMSF trustee fees are used to regulate the sector in an efficient manner and for purposes which will improve the sector.

Additionally, the SMSF Association submission highlights significant red-tape issues impeding the superannuation system. The current restrictions facing SMSF members who reside outside of Australia and a host of technical amendments resulting from the introduction of the new super reforms on 1 July 2017, problems that could easily be resolved by Government through improved legislation.

Click here to download and read the full submission.

 

By |April 9th, 2018|Uncategorized|Comments Off on 2018-19 Budget Submission

Event-based reporting webinar Nov 2017

Watch a video from a ATO webinar for SMSF's about Event-based reporting, November 2017.

Topics

  • Consultation with industry and frequency of SMSF reporting from 1 July 2018
  • What is event based reporting?
  • Why do we need event based reporting?
  • What are the impacts for SMSFs?
  • The reporting framework
  • Transitional concession for event based reporting
  • What events should be reported?
  • Frequency of SMSF reporting – case studies
  • Consequences of exceeding the transfer balance cap
  • Understanding some possible impacts of deferred reporting
  • Case studies

You may find some of the slides are a little difficult to read so here is a link to the ATO webinar slides.

By |January 9th, 2018|Self Managed Super Fund News, Uncategorized|Comments Off on Event-based reporting webinar Nov 2017

CGT relief not for all assets

CGT relief provisions do not apply to all assets that the SMSF owns.

20 Dec 2017 from www.smsmagazine.com.au by Darin Tyson-Chan

SMSF advisers and trustees must be aware the capital gains tax (CGT) relief provisions contained in the super reforms do not apply to all assets the fund owns, a technical expert has said.

Speaking at the Institute of Public Accountants 2017 National Congress on the Gold Coast last month, SuperConcepts technical services executive manager Mark Ellem told delegates cash and fixed income products are not eligible for CGT relief and nor are traditional securities.

“The best example of a traditional security is debenture notes, floating notes where your return is based on interest rates and they go up and down in value depending on what interest rates are doing, unsecured loans, they’re traditional securities,” Ellem said.

“A gain or loss on a traditional security is not assessed under the CGT provisions – it’s on revenue account.

“So it’s not a capital gain or loss and you can’t reset the cost base because they don’t have a cost base. So have a look if you’ve got funds that invest in these interest-type securities.”

He noted in certain circumstances it was not as easy to determine if an asset is a traditional security just on the surface alone.

“We saw an asset that looked like a traditional security, but a lot of these items have class rulings. In this case we found a class ruling and it specifically said the asset was not a traditional security, therefore it came under the CGT provisions, therefore we could reset the cost base,” he said.

In addition to class rulings, advisers and their clients can also refer to product disclosure statements to help determine if an asset is a traditional security.

“Normally, but not always, the product disclosure statement will have a tax opinion in it about how a traditional security is assessed from an income perspective and also when it is sold,” Ellem noted.

“Even if it has that tax opinion, you should still see if there is a class ruling for the asset as well that is going to specifically say if it’s on revenue account or on capital account.”

 

By |January 8th, 2018|Self Managed Super Fund News, Uncategorized|Comments Off on CGT relief not for all assets

Super Changes Reshape Succession Planning

From 1 July 2017, the need for specialist advice is as important as ever, with the introduction of the transfer balance cap (TBC) impacting on the amount of death benefits that a beneficiary can receive as an income stream. Clients who have already put plans in place to direct their superannuation where they want it to go on their death will have to redesign those plans. Advisers talking to clients about putting such plans in place will need to refresh their thinking around the relevant considerations to be addressed in the advice they provide.

Where the recipient of a death benefit pension exceeds their own TBC, they will need to take any excess as a lump sum death benefit. Different rules apply to modify the TBC rules for a child beneficiary and for a reversionary beneficiary. The amount of money that can now be retained within the superannuation environment upon the death of a member as either a pension account or an accumulation account of the recipient member has been materially curtailed.

This is a significant shift in relation to superannuation death benefits and estate planning, making it paramount to review all succession plans involving superannuation benefits.

Join Peter Hogan, the Head of Technical and Education in our November Masterclass.

The Masterclass workshop will provide you with specialised knowledge and skills to analyse your client’s information and provide solutions to their complex situations.

Get hands-on practice at determining the best course of action and subsequent outcomes for particular clients through the interactive discussion, activities and examples.

To ensure that you get the most out of the Masterclass, we will be providing

• A pre-course quiz to help us develop the Masterclass to suit your needs
• A webinar which will acquaint you and fellow participants with the course format and content as well as introducing content to be covered that we will later build on.
• A pre-course assignment which embeds the themes introduced in the webinar. It includes pre-reading material and a case study to analyse.
• A 3-hour intensive face-to-face course where you will explore and discuss all aspects. For most of the course we will look at some strategies you can use to get the best outcomes for your clients, and tackle some tricky real-life situations which will get you thinking outside the box.

Take advantage of an exclusive membership + Masterclass bundle by following this link for further instructions:
https://www.smsfassociation.com/masterclass-membership-bundle/
This event will be held at Cooper Grace Ward

Details

Date: 14 Nov 2017
9:30 am AEST – 12:30 pm AEST

Knowledge Area:

Managing Investment, SMSF Administration, Taxation

CPD Points: 6

Venue:

Cooper Grace Ward
Level 21 / 400 George Street
Brisbane, QLD 4000

$440

Price for Members Self Managed Super Fund Association

$575

Price for Non-Members

To book : https://www.smsfassociation.com/product/super-changes-reshape-succession-planning-bris/

By |October 16th, 2017|Uncategorized|Comments Off on Super Changes Reshape Succession Planning

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