Economic & Market Update: Coronavirus – by Chris Lioutas

Economic & Market Update: Coronavirus – by Chris Lioutas

Coronavirus, whilst significant in the short term, will pass in the next few months largely as a result of the significant action taken by the Chinese to contain the virus. Nearly all the deaths have occurred where the virus originated (Hubei), and the deaths have been largely the result of not seeking treatment and complications regarding a pre-existing condition.

Given the actions taken by governments to close down ports, borders, and limit air and sea transfers, this will have a material effect on economic growth and corporate earnings in the short term.

Markets will likely look through the weaker data considering investors have largely taken Coronavirus in their stride, and central banks can and will provide short support if required.

Markets have continued to push higher on a few reasons:

  1. Less political risk with Brexit and phase one trade deal completed
  2. Fourth Quarter corporate reporting season in the US coming through better than expected with upgrades to earnings expected for calendar year 2020
  3. Continued central bank support which will remain in place for this year, keep cash rates and bond yields low, and thus encouraging continued investment into growth assets
  4. US Presidential race looking increasingly likely President Trump gets a second term, which is positive for equity markets versus the alternative.

Absent Coronavirus being a lot worse than we suspect or a Democrat winning the US Presidential election, there’s not a whole lot standing in the way of another equity rally this year. The US economy looks strong enough but not too strong so as to encourage the US central bank to remove stimulus. Europe looks to have found a bottom from an economic perspective, with Germany the weakest link and seriously considering embarking on fiscal spending for the first time in a very long time, which may encourage other European governments to embark on their own fiscal stimulus. Japan looks likely to embark on fiscal stimulus this year as the government needs to counter the effect of GST increases over the last few years.

Other issues to watch out for include a significant slip in Chinese growth (unlikely at this stage given government and central bank support), a re-escalation of US-China trade war (ie. further tariffs), a re-escalation of US-Iran tensions in the Middle East (ie. higher oil price), a significant and permanent spike in inflation (which would cause central banks to remove stimulus).

Closer to home, the Aussie economy is looking for a bottom, but it looks likely there’s further to go, with the bushfires and the Coronavirus significantly impacting tourism. The RBA likely has at least 1 more rate cut in them if not 2 before they get to their lower bound of 0.25%. They’ve recently made comments that they think quantitative easing is off the table, but it’s very premature to be making comments like that, unless they know something we don’t. That could be significant government fiscal pulse in the May budget, which looks unlikely, but is something the economy desperately needs. Outside of that, the only positives in the economy right now are a recovery in the housing market, largely in Sydney and Melbourne, and a falling Aussie dollar which is helping from an export perspective.

Key messages remain as follows:

  1. Diversification is key – across asset classes, regions, sectors, and investment styles
  2. Selectivity – given the wide dispersion that exists in valuations between sectors, styles, and regions, being selective (active management) will be more important this year than it has been for a long time
  3. Rebalancing is important – the best discipline in investment markets goes counter to human behaviour and biases – ie. trimming winners and topping up losers. It has been shown to add 1-2% in additional return per annum
  4. Time in the market – timing the market remains an impossible task, and trying to time the market in the current environment is likely to result in significant opportunity cost considering central banks continue to provide a floor under equity markets.

Market Update – Presented by Shane Oliver AMP Chief Economist

We regularly meet with best of breed fund managers to review, analyse and authenticate their offering with the view to building quality portfolios for our clients. On a quarterly basis we select one of our fund managers to provide a quarterly update for our clients.

Following the end of the quarter we asked Allan Evans from Magellan to provide an economic update on the past quarter.

McQueen Financial Group is a corporate authorised representative of Total Financial Solutions Limited. AFSL No. 224 954, ABN 94 003 771 579

This information is of a general nature only and does not take into account your investment objectives, financial situation or particular needs. You should not act on any information in this report without first consulting a professional investment adviser in order to ascertain whether the information and any investment decision is appropriate. This information is believed to be accurate however no warranty of accuracy or reliability is given in relation to any advice or information contained, and neither TFSA or its Representatives and officers, agents or employees of either of the aforementioned shall not be held liable for any loss or damage whatsoever arising in any way for any representation, act or omission, whether express or implied (including responsibility to any persons by reason of negligence).

First Home Super Saver (FHSS) Scheme

To assist first home buyers in entering the property market, the Government announced the First Home Super Saver (FHSS) Scheme in the 2017 Federal Budget. As of 13 December 2017, this scheme was legislated and became law.

Through this scheme, first home buyers are encouraged to use superannuation as another form of maximising their savings to secure the purchase of their first home.

 

What is the FHSS scheme?

From 1 July 2017, first home buyers could begin making voluntary concessional (before tax) and non-concessional (after tax) contributions into super for the purpose of purchasing their first home.

You can contribute up to $15,000 per year, to a maximum of $30,000 under this scheme.

Withdrawals towards a new home are allowed from 1 July 2018 and will be taxed at your marginal tax rate less a 30% tax offset. The maximum amount that can be released from your superannuation fund is the amount you contributed plus associated earnings*.

*The amount of earnings that can be released will be calculated using a deemed rate of return based on the 90-day Bank Bill rate plus three percentage points.

 

Who can qualify?

 You must:

  • be 18 years or older;
  • have not previously owned property in Australia (or the Commissioner of Taxation has determined you have suffered a financial hardship as specified by regulations);
  • have not previously released FHSS funds;
  • either live or intend to live in the premises you are buying as soon as practicable; and
  • intend to live in the property for at least 6 months of the first 12 months you own it, after it is practical to move in.

 

How do I start contributing under this scheme?

You can make voluntary contributions into your superannuation fund with the intention of using that money for a home deposit, as either a concessional contribution (before tax) or a non-concessional contribution (after tax). It is important to note that these contributions must be within the existing superannuation contribution limits.

 

When can I start contributing under this scheme?

The FHSS scheme will apply to voluntary superannuation contributions of up to $15,000 per financial year and $30,000 in total (or $60,000 in total for an eligible couple) made from 1 July 2017 onwards.

 

How much can I withdraw under this scheme?

The maximum amount that can be released from your superannuation fund under this scheme is the amount you contributed plus associated earnings*. This includes:

  • 100% of eligible non-concessional contributions;
  • 85% of eligible concessional contributions; and
  • associated earnings which are calculated using a deemed rate of return based on the 90-day Bank Bill rate plus three percentage points.

You must include the released funds as assessable income in your income tax return. You show this for the year you made your request for release. If you are unsure what amounts to include or which tax year you should include, our specialist accounting team will be able to advise you accordingly.

 

How long would I have to buy a home?

 You have 12 months after your funds are released to sign a contract for your new home or construct a new home. If you fail to do so, you can apply for an extension for a further 12 months.

 

What if I didn’t end up buying a home?

 Under the FHSS scheme, if you don’t end up buying your new home, you must:

  • recontribute the amount into your superannuation fund (this must be at least equal to your assessable FHSS scheme released amount, less any tax withheld by the ATO); or
  • keep the released funds and be subject to a “FHSS scheme tax”.

The FHSS scheme tax is a flat tax equal to 20% of your FHSS released amounts.

It is important to know that you can only apply for a release once under this scheme. Once you have recontributed the amount or paid the FHSS scheme tax you cannot apply for a release again at a later date.

 

What should I do?

 If you are not sure if you are eligible for the FHSS scheme or are interested in more information about this scheme and how it works for your circumstances, please contact us for more details.

 

McQueen Financial Group is a corporate authorised representative of Total Financial Solutions Limited. AFSL No. 224 954, ABN 94 003 771 579.
This information is of a general nature only and does not take into account your investment objectives, financial situation or particular needs. You should not act on any information in this report without first consulting a professional investment adviser in order to ascertain whether the information and any investment decision is appropriate. This information is believed to be accurate however no warranty of accuracy or reliability is given in relation to any advice or information contained, and neither TFSA or its Representatives and officers, agents or employees of either of the aforementioned shall not be held liable for any loss or damage whatsoever arising in any way for any representation, act or omission, whether express or implied (including responsibility to any persons by reason of negligence).

Mortgages: Lock In Certainty, Or Roll The Dice On Savings?

Mortgages: Lock In Certainty, Or Roll The Dice On Savings?

Over the last few years, interest rates have dropped dramatically. They’re now around a quarter of what they were a decade ago, and half of what they were just a few years ago. The Reserve Bank’s decision to leave rates on hold has got some economists and commentators talking; could it be time for a rate rise soon?

Nobody knows exactly when (or even if) the Reserve Bank will raise interest rates again. The good news, however, is that you’ve got a choice that allows you to hedge your bets. Whether you’re establishing a new mortgage or switching from an old provider, you’ve got an opportunity to choose between stability and predictability, and the potential for savings.

 

Australia’s economy improving

The Aussie economy has been growing slowly but steadily over the last few months. Though some experts are still cautious, others have pointed out that Australia has fared much better than other countries in terms of economic recovery.

Other countries similar to Australia have raised rates. Over the last few years the US has raised rates from historic lows of 0.07 per cent to 0.39. But on the other hand, the European Central Bank has rates hovering around zero. Our Reserve Bank bosses say we’ve got a bit further to go in terms of economic growth before it makes sense to put rates up. But if history tells us anything, they won’t stay this low in the longer term.

 

Fixed rates = security

One of the main benefits of choosing a fixed rate mortgage is that you’ll have predictability over your repayments for at least the term that the rate is fixed for – usually three years. A fixed rate might be a good choice if you don’t have a lot of wiggle room in your household budget.

The only downsides are that fixed rates are usually locked in at a rate slightly above the current standard variable rate. This helps banks cover themselves in case of an upswing in the interest rate cycle. And depending on the product you choose, you may also be prevented from making extra early repayments without attracting a penalty.

Despite these downsides, fixed mortgages are still popular. Especially amongst the budget conscious, including first home owners and conservative investors. According to the ABS’s housing finance stats, the percentage of dwellings financed by fixed rate loans has grown slowly over the last yeari.

 

Variable rates = the potential for savings

Variable rates have the potential to help you save in two ways. First, if official interest rates go down, your provider’s variable rate may go down too. This means lower regular mortgage payments. Second, if you have a windfall or even just a generous salary bump, you’ll be able to make extra repayments to save on total interest, without incurring any penalties. Lower initial payments may also help make those first few years of mortgage repayments a little easier. Alternatively, home buyers may be able to afford to borrow more with a variable rate loan.

However, especially if your mortgage balance is quite high, a sudden jump in your variable rate could mean extra repayments that are tricky to fit in to your budget. Your repayments could vary by several hundred dollars if your interest rate changed by just a few basis points.

 

Comparing your options

Perhaps you’ve weighed up the pros and cons of fixed and variable rates, and you’re still wondering what you should choose. That’s fair enough – after all, saving money and having a predictable plan are both attractive options. Your decision could depend on a variety of factors, from your household budget to (if you’re investing) the other assets in your portfolio. We’re here to help you get it sorted, so make an appointment today to get on the right mortgage track.

 

McQueen Financial Group is a corporate authorised representative of Total Financial Solutions Limited. AFSL No. 224 954, ABN 94 003 771 579. This information is of a general nature only and does not consider your investment objectives, financial situation or particular needs. You should not act on any information in this report without first consulting a professional investment adviser in order to ascertain whether the information and any investment decision is appropriate. This information is believed to be accurate however no warranty of accuracy or reliability is given in relation to any advice or information contained, and neither TFSA or its Representatives and officers, agents or employees of either of the aforementioned shall not be held liable for any loss or damage whatsoever arising in any way for any representation, act or omission, whether express or implied (including responsibility to any persons by reason of negligence).

Self-Managed Superannuation Funds (SMSFs) and Limited Resourse Borrowing Arrangements

Self-Managed Superannuation Funds (SMSFs) and Limited Resourse Borrowing Arrangements

 

Since late 2007, a Self-Managed Superannuation Fund (“SMSF” or “Fund”) has been allowed to borrow money for investment purposes following the introduction of an additional exception to the general borrowing prohibition – one that continues to exist under superannuation law.

This additional exception to the borrowing prohibition is provided in the form of a limited recourse type of borrowing.

In essence, the relevant asset is held on trust to provide limited security for the outstanding loan, but the benefits of the ownership (such as rent or dividends) flow directly to the Fund. If the Fund defaults on the loan, then the rights of the lender are limited to the asset which is the subject of the borrowing, and the Fund’s loss is limited to the loss of the beneficial interest in the asset and any payments made prior to the default.

Arrangements entered into on or after 24 September 2007 and before 7 July 2010, allowed a Fund to invest in certain borrowing arrangements involving borrowing money to acquire a permitted asset. Those arrangements must meet the conditions stipulated by the law in former subsection 67(4A) of the superannuation law – referred to as Instalment Warrants.

Those conditions continue to apply to limited recourse borrowing arrangements that were entered into before 7 July 2010, however new rules apply to new arrangements entered into on or after 7 July 2010 – referred to as Limited Recourse Borrowing Arrangements (“LRBAs”).

 

How The Arrangement Works

  1. An SMSF arranges to borrow money on a limited recourse basis, which it then transfers to a Holding Trust, along with its contribution to the purchase price.
  2. The Holding Trust would then arrange to purchase and hold the asset on trust for the SMSF.
  3. In this case, the SMSF would receive the beneficial interest in the asset and would be able to instruct the Trustee in relation to the asset.
  4. Once the SMSF repays the loan it can then arrange for the legal ownership of the asset to be transferred from the Holding Trust to the Fund.

 

 

What Can The Holding Trust Invest In?
Any investment that the superfund could hold itself can be purchased by the Holding Trust i.e. residential property, business real property, shares, managed funds.


What Can The Holding Trust Invest In?

The usual rules apply:

  • Must be purchased on arm’s length basis
  • Restrictions apply for assets purchased from a related party in the normal way (e.g. can’t buy residential property from the member or a related party).

Who Can The Lender Be?

  • A Bank
  • A Margin Lender
  • The member or a Related Party (i.e. the member can be their own lender either as an individual or a trust)
  • If the lender is a related party lender the loan should have a commercial interest rate. You should seek some advice about what is applicable in your situation.

 

Arrangements entered into on or after 24 September 2007 and before 7 July 2010

An SMSF is not prohibited from borrowing money, or maintaining a borrowing of money, providing the arrangement entered into satisfies each of the following conditions:

  • The borrowed monies are used to acquire an asset which the Fund is not otherwise prohibited from acquiring.
  • The asset acquired (or a replacement asset) is held on trust (the holding trust) so that the Fund receives a beneficial interest in the asset.
  • The SMSF has the right to acquire legal ownership of the asset (or, if applicable, the replacement asset) by making one or more payments after acquiring the beneficial interest.
  • Any recourse that the lender has under the arrangement against the SMSF Trustee is limited to rights relating to the asset acquired (or, if applicable, the replacement asset). For example, the lender can have the right to recover outstanding amounts where there is a default on the borrowing by repossessing or disposing of the asset being acquired under the arrangement, but cannot have the right to recover such amounts through recourse to the Fund’s other assets.

 

Arrangements entered into on or after 7 July 2010

An SMSF is not prohibited from borrowing money, or maintaining a borrowing of money, providing the arrangement entered into satisfies each of the following conditions:

  • The borrowed monies are used to acquire a single asset, or a collection of identical assets that have the same market value (that are together treated as a single asset), which the Fund is not otherwise prohibited from acquiring (called the ‘acquirable asset’). The new law makes it explicit that borrowed money applied to expenses incurred in connection with the borrowing or acquisition (such as loan establishment costs or stamp duty), or expenses incurred in maintaining or repairing the acquirable asset, is allowed.
  • The borrowed monies are not applied to improving an acquirable asset.
  • The acquirable asset is held on trust (the holding trust) so that the SMSF Trustee receives a beneficial interest in the asset.
  • The SMSF Trustee has the right to acquire legal ownership of the acquirable asset by making one or more payments after acquiring the beneficial interest.
  • Any recourse that the lender or any other person has under the arrangement against the SMSF Trustee is limited to rights relating to the acquirable asset. This limitation applies to rights directly or indirectly relating to a default on the borrowing and related charges or directly or indirectly relating to the SMSF Trustee’s rights in respect of the acquirable asset (for example, rights to income from the asset).
  • The acquirable asset is not subject to a charge other than as provided in relation to the borrowing by the SMSF Trustee.
  • The acquirable asset can be replaced by another acquirable asset that the SMSF is not otherwise prohibited from acquiring, but only in very limited circumstances as listed in the super law.

 

Self-Managed Superannuation Funds Ruling SMSFR 2012/1

The Australian Taxation Office released on 23 March 2012 its views on the limited recourse borrowing arrangement provisions. The Final Ruling explains the key concepts of what is a ‘single acquirable asset’, maintaining or repairing the acquirable asset (as distinguished from improving it); and when a single acquirable asset is changed to such an extent that it is a different (replacement) asset.

While the borrowings under the limited recourse borrowing arrangements cannot be used to improve an acquirable asset, the ATO says money from other sources could be used to improve (or repair or maintain) that asset. However, any improvements must not result in the acquirable asset becoming a different asset.

 

Single acquirable asset

Factors relevant in determining that what is being acquired is a single object of property, include:

  • the existence of a unifying physical object, such as a permanent fixture attached to land, which is significant in value relative to the overall asset value; or
  • whether a State or Territory law requires the two assets to be dealt together.

The following do not meet the ‘single acquirable asset’ provisions:

  • two or more adjacent blocks of land wanting to be sold together;
  • farmland with multiple titles; or
  • apartment with separate car park (unless titles cannot be assigned or transferred separately).

 

Repairs maintenance and improvements

Money other than borrowings can be used to fund improvements (or for repairs or maintenance).

An SMSF can use the cash within the fund to undertake improvements. Any improvements must not result in the acquirable asset becoming a different asset (replacement asset).

It will be important to consider the asset’s qualities and characteristics at the time the SMSF entered into limited recourse borrowing arrangement. The ATO has clearly indicated that restoration or replacement using modern materials will not amount to an improvement.

 

Replacement asset

Any alterations or additions that fundamentally change the character of the asset will result in a different asset being held on trust.

An asset becomes a different asset for example through subdivision, a residential house built on land, and change of zoning (residential to commercial).

There are various examples outlined in the Ruling that demonstrate where such improvements don’t create a different asset, including:

  • one bedroom of house converted to home office
  • house burnt down in a fire and rebuilt (regardless of size) using insurance proceeds and SMSF
  • funds
  • compulsory acquisition by government on part of property; and granny flat added to back of property

 

As borrowing is not treated as a contribution, there is no age restriction on who can use the strategy. However, borrowing is not for everyone and each member should seek advice on the appropriateness of a gearing strategy for their risk profile.  It is important to remember that if you borrow money you have to pay it back.

At McQueen Group, we have a specialist team that can provide you with legal and taxation advice on the structures involved and help you to understand both current and future tax implications if your Fund is considering to borrow money on a limited recourse basis.

 

 

McQueen Financial Group is a corporate authorised representative of Total Financial Solutions Limited. AFSL No. 224 954, ABN 94 003 771 579. This information is of a general nature only and does not consider your investment objectives, financial situation or particular needs. You should not act on any information in this report without first consulting a professional investment adviser in order to ascertain whether the information and any investment decision is appropriate. This information is believed to be accurate however no warranty of accuracy or reliability is given in relation to any advice or information contained, and neither TFSA or its Representatives and officers, agents or employees of either of the aforementioned shall not be held liable for any loss or damage whatsoever arising in any way for any representation, act or omission, whether express or implied (including responsibility to any persons by reason of negligence).