The Experts

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Paul Rickard
+ About Paul Rickard

Paul Rickard has more than 25 years’ experience in financial services and banking, including 20 years with the Commonwealth Bank Group in senior leadership roles. Paul was the founding Managing Director and CEO of CommSec, and was named Australian ‘Stockbroker of the Year’ in 2005.

In 2012, Paul teamed up with Peter Switzer to launch the Switzer Super Report, a newsletter and website for the trustees of SMSFs. A regular commentator in the media, investment advisor and company director, he is also a Non-Executive Director of Tyro Payments Ltd and Property Exchange Australia Ltd.

Follow Paul on Twitter @PaulRickard17

June 30 is getting nearer – get your tax act together now!

Thursday, June 20, 2019

The end of the financial year is just 10 days away and because it falls on a Sunday, you really only have a few business days to act. And while you should never do anything for tax reasons alone, you are mad if you don’t try to optimise your position. Here is a run-down of the actions to consider. 

1. Can you bring forward or accelerate expenses, or defer revenue?

If your cash flow is sound and you have a taxable income (that is, you will be paying tax this financial year), you can consider bringing forward expenses and/or deferring revenue. Essentially, a tax deferral strategy where you shift the burden from paying tax this financial year to next year.

Pre-paying interest on loans (for example, a business loan, investor home loan or margin loan) is a classic example. Technically, you can pre-pay interest for up to 13 months in advance and claim the interest expense as a tax deduction in the current tax year.

Taking out an annual subscription to an investment newsletter or professional journal, which will generally be tax deductible, is another example. You can also consider accelerating the payment of other general expenses.

If you are operating a business or are a contractor, you may want to push back invoicing customers so that you defer the receipt of revenue to the 19/20 tax year.

2. Are you a small business that needs some equipment?

In April, the Government announced the expansion of the instant asset write-off scheme which allows businesses to claim a 100% tax deduction upfront on the purchase of equipment. Businesses with an annual turnover of up to $50m are eligible and the equipment threshold has been raised to $30,000.

Some important points to note:

  • The threshold excludes GST, so you can potentially purchase an item that costs up to $33,000 (including GST)
  • Can be new or second-hand equipment
  • It is available on a per item basis and can apply to multiple assets. Potentially, you could spend (say) $150,000 purchasing 5 units of the same item each costing $30,000 (separately invoiced), or 5 different items each costing $30,000.

The main caveat is that you must have sufficient taxable income to apply the tax deduction, and of course, the cash flow.

3. Have you taken any capital gains?

When assets are sold or otherwise disposed, capital gains tax is payable. The main exemption is the family home. The gain (essentially the sale proceeds less the cost base) is counted as part of your assessable income and taxed at your marginal tax rate. If you have owned the asset for more than 12 months, individuals are eligible for a 50% discount (meaning they only pay tax on 50% of the gain), while super funds are eligible for a one-third discount (they pay tax on two-thirds of the gain). There is no discount for companies that own assets.

Capital gains can be offset by capital losses, and if the losses can’t be applied, they can be carried forward from one tax year to the next and then applied to offset a capital gain. If you make a capital loss, don’t forget about it.

If you have taken a gain in 18/19, consider these questions:

  • Do you have any carried forward capital losses from 17/18 that you can apply?
  • Have you taken losses on other assets in 18/19 that you can apply?
  • Do you have assets in a loss situation that you should sell now to crystalize a loss? 

While you should never do anything just for tax reasons, crystalizing a loss on a non-performing asset can often make sense Potentially, you can always re-purchase the asset if you subsequently decide that the sale was a mistake.

Conversely, If you have taken capital losses during the year, you may want to consider the disposal of assets in a gain situation.

One other point to note. If you have multiple parcels of the same asset (for example, shares acquired through a dividend re-investment plan) and you sell part of that asset, you can choose which parcel(s) you sell. There is no set formula (such as FIFO (first in first out) or LIFO (last in first out)) to apply, meaning that you can select the parcels which best optimise your CGT liability. 

4. Can you claim a tax deduction on a personal super contribution?

There are two caps that limit how much you can contribute into super. A cap on concessional (or pre-tax) contributions of $25,000 and a cap on non-concessional (or post tax) contributions of $100,000.

Concessional contributions include your employer’s compulsory super guarantee contribution of 9.5% and any salary sacrifice contributions you make. There is also a third form which is a personal contribution you make and claim a tax deduction for. Previously, this was only available to the self-employed under the ‘10% rule’, but this rule has been scrapped and anyone can now claim this tax deduction.

There are two important caveats. Firstly, you must be eligible to make a super contribution. If you are under 65, or aged between 65 and 74 and pass the work test, you will qualify (there are some particular rules for the under 18s). Secondly, you aren’t allowed to exceed the $25,000 cap on concessional contributions.

Let’s take an example. Tom is 45 and earning a gross salary of $100,000. His employer contributes $9,500 to his super, and he has elected to salary sacrifice a further $5,000. Potentially, prior to 30 June, Tom can contribute a further $10,500 to super and claim this amount as a tax deduction, which he does when he completes his 18/19 tax return. He will also need to need to notify his super fund.

5. Can you boost a partner’s super and get a tax offset?

If your spouse earns less than $37,000 and you make a spouse super contribution of up to $3,000, you can claim a personal tax offset of 18% of the contribution up to a maximum of $540. Potentially, a tax rebate for you of $540 while boosting a partner’s super!

The tax offset phases out when your spouse earns $40,000 or more. Importantly, your spouse’s total super balance must be under $1.6m and they can’t have exceeded their non-concessional super cap of $100,000.

6. Can you get the Government to chip in and boost your partner’s or kid’s super?

There aren’t too many free handouts from Government. The government super co-contribution remains one of the few that is available. If eligible, the Government will contribute up to $500 if a personal (non-concessional) super contribution of $1,000 is made.

The Government matches on a 50% basis. This means that for every dollar of personal contribution made, the Government makes a co-contribution of $0.50, up to an overall maximum contribution by the Government of $500.

To be eligible, there are 3 tests. The person’s taxable income must be under $37,697 (it starts to phase out from this level, cutting out completely at $52,697), they must be under 71 at the end of the year, and critically, at least 10% of their income must be earned from an employment source. Also, they can’t have exceeded the non-concessional cap or have a total super balance over $1.6 million.

While you may not qualify for the co-contribution, this can be a great way to boost a spouse’s super or even an adult child. For example, if your kid is a university student and doing some part time work, you could make a personal contribution of $1,000 on their behalf – and the Government will chip in $500!

 

Was the market right to be wary about AGL’s bid for Vocus?

Thursday, June 13, 2019

AGL’s $3 billion bid for struggling telco Vocus smacks of desperation and the market was right to give it the “thumbs down”. AGL shares closed yesterday at $19.55, down 6.5% since the non-binding indicative proposal was announced.

Pitched at a price of $4.85 per share, AGL has been granted exclusive access by the Vocus Board to conduct due diligence for the next 4 weeks. AGL is the third suitor to review Vocus, the last, Swedish group EQT Infrastructure, walked away less than a week into its due diligence processes. It had indicated a price of $5.25.

The good news is that the market also thinks that AGL will see “reason” and the bid will  wither on the vine. Vocus shares were yesterday changing hands at $4.30, a massive 55c  below the bid price.

So why did AGL bid for Vocus?

AGL is desperate to find new revenue sources as it faces declining wholesale energy prices from generation, and in the medium term, reducing volumes as coal fired power stations are phased out. Part of this is its own fault – the way it mishandled the announcement of the planned closure of the Liddell Power Station means that it has no friends in Canberra, no friends at the ACCC, no friends in the media and no friends in the public. The “big stick” legislation the Coalition government is introducing is about getting square with AGL.

Strategically, AGL had been pinning its hopes on the development of a services business involved in the smart distribution, monitoring and measurement of energy, particularly green energy. Applications include smart meters, optimised roof-top solar, electric charging stations for motor vehicles and the “internet of things”.

But this new business, like many organic businesses, is a slow burn and is developing off a very low base. The market knows that power prices are going to fall and AGL’s profit will be hit.

Acquisition is the next strategic option. The “big stick” legislation means that AGL will be precluded from bidding for a competitor, so it has decided to consider an adjacency – the telecommunications industry.

With customers increasingly connected, there is a convergence of sorts between the energy and data value streams as the traditional energy sector transforms. Further, the capabilities in integrating and managing complex assets and customer portfolios are similar in both industries.

That’s the high level strategic rationale for AGL’s interest in telecommunications. More specifically with Vocus, AGL says:

·       Revenue and operating cost benefits from the integration of the customer platforms and development of a multi-product offering across energy and data;

·       Accelerating “untapped” growth from the integration of Vocus’ high quality broadband fibre infrastructure network with AGL;

·       Improving the offer to AGL’s wholesale and enterprise customers by the provision of an integrated data and energy service; and

·       Vocus’ data centres adding benefit to AGL’s wholesale electricity generation portfolio.

I get that this means that AGL thinks it can sell a “bundled” package of electricity, gas, broadband, mobile and other services to Vocus’ Commander, Dodo and iPrimus customers, and vice-versa to AGL’s existing retail customers, but I don’t really get how this applies in the enterprise or corporate space. Nor can I see where the benefits lie in relation to Vocus’ New Zealand business.

Vocus is a $2bn revenue business, with $900m from its consumer and business division, $300m from its New Zealand operation, and $750m from Vocus Networks which services enterprise, government and wholesale clients. This is by far and away the most profitable division, and includes Australia’s second largest national inter-capital fibre network, the Australia Singapore undersea cable, and the north west cable system connecting the mainland with oil and gas facilities in the Timor Sea.

How these fibre assets and relationships with Government and enterprise clients fit into AGL’s business – that is, deliver additional operating benefits or revenue synergies – remains to be seen and prima facie, AGL’s rationale looks thin at best. Further, it is an acquisition, and the history of acquisitions achieving their financial objectives, particularly those away from an area of core competency, is poor. The reality is that in Australia, more acquisitions fail than succeed.

The market is right to be wary about AGL’s bid for Vocus. It is struggling to understand the impact of any convergence between data and energy and how the acquisition of Vocus will enhance the AGL customer proposition such that the acquisition premium can be recouped. Calling it an act of desperation might be a little tough, but on paper at least, it is not even getting past first base.

 

ANZ CEO’s courageous rate call

Friday, June 07, 2019

Sir Humphrey Appleby of Yes Minister fame would have labelled ANZ boss Shayne Elliott’s call not to pass on the full RBA interest rate cut of 0.25% as “courageous”.

Predictably, the ANZ copped a berating from Treasurer Josh Frydenberg, RBA Governor Dr Phil, and most pundits, economists and commentators. The ANZ’s brand took a hit.

The ANZ wasn’t the only bank that failed to pass on the cut in full, but because it was first out of the blocks and a little more direct in its communication, it took most of the shellacking. Quite cleverly, Westpac bundled a cut of 0.20% to its main rates with a cut of 0.35% to a rate that no one really cares about too much (the interest only rate for property investors) and walked away from the controversy relatively damage free.

But I like “courageous” CEOs and I think Shayne Elliott is right to balance the interests of all stakeholders – borrowers, depositors and shareholders. The fact is that banks “lose” money (i.e. their profits get hit) when interest rates fall.

Let me demonstrate. Suppose that a bank has $100m of home loans earning interest at 4% pa. It is funded by $10m of capital, $50m of deposits that it pays interest at a rate of 1.5%, and $40m of deposits that it pays no interest on (cheque accounts, savings accounts etc). Revenue for the year is $4m, interest costs $0.75m, for a gross profit of $3.25m (this is before expenses and bad debts).

If interest rates are cut by 0.25%, revenue on the home loans reduces to $3.75m. If deposit rates are also cut by 0.25%, the interest cost reduces to $0.625m (note: there is no change to the $40m deposits earning 0%). Gross profit is now $3.125m, a reduction of $0.125m.

To help offset the impact of lower interest rates, particularly on their capital base, banks run what are called “replicating portfolios”. But even with these, falling interest rates negatively impact profits in the short term. Over the longer term, lower rates will help with “mortgage stress” and should keep bad debts down.

Post the Royal Commission, it is even more fashionable to bash the banks and that’s what made Shayne’s call so courageous. But he is right to consider the interests of shareholders, and will be even more right if ANZ continues to pay competitive rates to its depositors.

For every winner there is a loser, and depositors, particularly self-funded retirees and others living off the interest on their term deposits, are the real losers with this rate cut. And despite what the media likes to make out, there are many more depositors than home loan borrowers who will be impacted by the interest rate cut.

I continue to maintain that the RBA has got this rate cut wrong – it will have limited impact on economic activity and employment, and hurt many more than it will support (see http://www.switzer.com.au/the-experts/paul-rickard/rbas-dr-phil-gets-it-wrong-on-rates/. But if I am wrong and the economy needs the stimulus of a rate cut to boost employment and economic activity (yesterday’s growth reading was 1.8% rather than the RBA’s forecast of 2.75%) , why not go harder and cut rates now by 0.5%? As it stands, it looks like we will get another cut of 0.25% later this year and possibly one next year. This “drip feed” approach makes little sense.

Back to the ANZ, one area it should get a gold medal for is it will be the first bank to pass on the interest rate cut. It will be effective from Friday 14 June, whereas laggard Commonwealth Bank doesn’t pass on the cut until Tuesday 25 June.

New Standard Variable Home Loan Rates

The new standard variable rates start with a ‘5’ or in some cases a ‘6, a big difference to the rate new borrowers are paying which is often starting with a ‘3’.  While many customers pay lower rates than the standard due to package discounts (typically up to 0.75%), the gap is still remarkable. Sure, customer inertia is a factor, but a more pressing issue is that it is really hard to get credit and many borrowers aren’t able to shop around to consider refinancing their loan. It is tough out there to get finance.

The RBA should be at the coalface with the major banks and regulator APRA to free up the market and get credit flowing again. Price is a factor, but availability is far more important.

 

5 super actions you should take before June 30

Thursday, May 30, 2019

Like many things financial, the super system works on a financial year basis. With the end of the financial year (30 June) just around the corner, here are 5 actions you can take to make sure you are getting the most out of the system.

1. Can you claim a tax deduction by making additional contributions to super?

There are two caps that limit how much money you can contribute into super. A cap on concessional (or pre-tax) contributions of $25,000, and a cap on non-concessional (or post tax) contributions of $100,000.

Concessional contributions include your employer’s compulsory super guarantee contribution of 9.5% and any salary sacrifice contributions you elect to make. They are called “concessional” contributions because they are a tax deductible expense for your employer.

There is also a third form of concessional contribution which is a personal contribution you make and claim a tax deduction for. Previously, this was only available to the self-employed under what was known as the  ‘10% rule’ (to qualify, no more than 10% of the person’s income could come in wages or salary from an employer). However, this rule has been scrapped so that anyone can potentially claim this tax deduction.

There are two important caveats. Firstly, you must be eligible to make a super contribution. If you are under 65, or aged between 65 and 74 and pass the work test, you will qualify (there are some particular rules for the under 18s). Secondly, you aren’t allowed to exceed the $25,000 cap on concessional contributions.

Let’s take an example. Tom is 45 and earning a gross salary of $100,000. His employer contributes $9,500 to his super, and he has elected to salary sacrifice a further $5,000. Potentially, prior to 30 June, Tom can contribute a further $10,500 to super and claim this amount as a tax deduction. He will do this when he completes his 18/19 tax return.

Tom will need to notify his super fund that this is a contribution he is claiming a tax deduction for. He does this by using a standard ATO form (https://www.ato.gov.au/uploadedFiles/Content/SPR/downloads/n71121-11-2014_js33406_w.pdf) or online with his super fund. Technically, he will have until the earlier of when he lodges his tax return or 30 June 2020 to do this.

2. Can you make additional post tax contributions to super?

Non-concessional contributions are personal super contributions made from your own after-tax monies. You don’t claim a tax deduction for these contributions and they are capped at $100,000 each year. You must be under 65, or if aged between 65 and 74, meet the work test to qualify. And your total super balance (as at 1 July 2018) must also be less than $1,6000,000.

If you are under age 65 (technically aged 64 or less at 1 July 2018), then you can access the “bring-forward rule” which allows you to make up to three-years’ worth of contributions or $300,000 in one go. A couple could potentially get $600,000 into super. Ability to access this is further limited by your total super balance (under $1.4m full amount; $1.4m to $1.5m $200,000; $1.5m to $1.6m $100,000).

3. Can you or a family member access the Government Co-Contribution?

There aren’t too many free handouts from Government. The government super co-contribution remains one of the few that is available – so it seems silly not to try to access it. If eligible, the Government will contribute up to $500 if a personal (non-concessional) super contribution of $1,000 is made.

The Government matches a personal contribution on a 50% basis. This means that for each dollar of personal contribution made, the Government makes a co-contribution of $0.50, up to an overall maximum contribution by the Government of $500.

To be eligible, there are 3 tests. The person’s taxable income must be under $37,697 (it starts to phase out from this level, cutting out completely at $52,697), they must be under 71 at the end of the year, and critically, at least 10% of their income must be earned from an employment source. Also, they can’t have exceeded the non-concessional cap or have a total super balance over $1.6 million.

While you may not qualify for the co-contribution, this can be a great way to boost a spouse’s super or even an adult child. For example, if your kids are university students and doing some part time work, you could potentially make a personal contribution of $1,000 on their behalf – and the Government will chip in $500!

4. Can you claim a tax offset for super contributions on behalf of your spouse?

In the 2017 Budget, the Government raised the income test threshold from $10,800 to $37,000, making this tax offset a lot more accessible. If you have a spouse who earns less than $37,000 and you make a spouse super contribution of up to $3,000, you can claim a personal tax offset of 18% of the contribution, up to a maximum of $540.

The tax offset phases out when your spouse earns $40,000 or more. Effectively, your maximum rebatable contribution of $3,000 is reduced on a $ for $ basis for each $ of income that your spouse earns over $37,000. The offset is then 18% of the lesser of the actual super contribution or the reduced maximum rebatable contribution.

Your spouse’s income includes their assessable income, reportable fringe benefits and any reportable employer super contributions such as salary sacrifice. Similar to the rules for the co-contribution, you cannot claim the offset if your spouse exceeded their non-concessional cap or their total super balance was more than $1.6 million.  

5. Pensions – have you paid enough?

If you are taking an account based pension, then you must take at least the minimum payment. If you don’t, then your fund will potentially be taxed at 15% on its investment earnings, rather than the special rate of 0% that applies to assets that are supporting the payment of a super pension.

The minimum payment is based on your age and calculated on the balance of your super assets at the start of the financial year (1 July). The age based factors are shown below.

Minimum Pension Factors

For example, if you were aged 66 on 1 July 2018 and had a balance of $500,000, your minimum payment is 5% of $500,000 or $25,000. You can take your pension at any time or in any amount(s), but your aggregate drawdown must exceed the minimum amount and be taken by 30 June 2019.

If you commenced a pension mid-year, the minimum amount is pro-rated according to the number of days remaining until the end of the financial year, and calculated on your balance when you commenced the pension.

 

RBA’s “Dr Phil” gets it wrong on rates

Thursday, May 23, 2019

It looks like “group think” has taken over the Reserve Bank. In a prepared address to the Economic Society of Australia on Tuesday, Dr Phil (Governor Phillip Lowe) told us that the RBA is certain to cut the cash rate from 1.5% to a new record low of 1.25% when the Board next meets. “At our meeting in two weeks’ time, we will consider the case for lower interest rates”.

RBA Governors don’t deliver a message any more bluntly than this (see Peter Switzer’s assessment at http://www.switzer.com.au/the-experts/peter-switzer-expert/rate-cuts-are-coming-read-all-about-it/), so blunt that it raises the obvious question that if it is really important to cut the cash rate, why wait the two weeks? Can’t the Board have a telephone hook-up and act now?

At the end of 2018, the RBA was telling the market that the next move in interest rates would be up, rather than down. In February, the Board assessed “that the probabilities of an interest rate increase and a decrease had become more evenly balanced than they were in 2018”. Now in May, they are going to be cut.

So, what has changed?

A few things, but not a lot. The most noteworthy was the change in tack by the US Federal Reserve, which adopted the word “patience” and killed expectations of a further two or three interest rate increases in the USA in 2019. On the domestic front, economic growth in the second half of 2018 was a little soft (although the RBA now maintains the economy will grow by 2.75% in both 2019 and 2020), and the unemployment rate ticked up very marginally to 5.2% in April. Inflation remained low, with the RBA putting the underlying rate at 1.5%.

But do these factors alone justify a cut in the cash rate from the already “emergency low” level that has been in place since August 2016? I don’t think so, but even if they do, who is going to act as a result of the cut? Will business, small or large, be motivated to borrow money to invest in new production or equipment to drive output and employment growth? Unlikely. In the housing market, where the problem is the availability of credit rather than the price of credit, will investors make a bold re-appearance? Unlikely, unless the rules around the availability of credit change.

Sure, there will be some winners, particularly consumers who are feeling mortgage stress. But  typically, when interest rates are cut, loan repayments aren’t automatically reduced (the industry term is “recast”). Rather, most consumers keep paying the same monthly amount and repay their loan a little faster.

Losers include retirees and other savers living off the interest from their term deposits and bank accounts. Their incomes are going to fall. And whereas it is always assumed that people paying  mortgages are those who need the most help, by numbers, there are more savers negatively impacted than borrowers positively impacted from a rate cut.

Dr Phil appears to be responding to the call from bank economists to lower the cash rate, led by Westpac’s Bill Evans and NAB’s Alan Oster. Almost to a man and woman, economists from our trading banks, investment banks and fund managers are singing about the need to cut the cash rate.

It looks remarkably like “group think”, the same “group think” from the political elite that told us that the ALP was going to win the election. Short on insightful analysis, long on the certainty that it is going to (and has to) happen. For the RBA and Dr Phil in particular, there is risk in acting (or not acting) outside the prevailing wisdom of the group.

If I was Dr Phil, I would be focussing on other stimuli that will drive growth. Firstly, pressuring the Government to prioritise the legislation that will deliver low and middle income earners tax relief of $1,080 for a single or $2,160 for a couple when they lodge their 2018/19 tax return. The vast chunk of these rebates will be spent and act as a very powerful stimulus.

Secondly, working with the prudential regulator APRA to make loans easier to get. On Tuesday, APRA announced plans to relax the mortgage servicing regulations. Presently, banks assess the ability of a borrower to pay interest using a rate of 7.25% (the average rate on a new loan is around 3.9%). Under APRA’s plan, this assessment rate won’t be subject to a floor but will be based off a fixed margin of 2.5%. This will see the assessment rate falling to around 6.5%, meaning more potential borrowers will be eligible for a loan and some will be able to get bigger loans.

But with all things APRA, the proposal is subject to a 4 week consultation period with submissions not due until 18 June. APRA then needs to consider the submissions, meaning that any change is unlikely to take effect until July at the earliest.

Ignore the group think about interest rates, Dr Phil. There are more direct stimuli to drive growth.

 

Banks will slash thousands of jobs

Thursday, May 16, 2019

My “banker wanker” mates won’t cherish the thought, but the days of being a well-paid  (some would say over-paid) banker are numbered. Banks will be forced to slash thousands of jobs and cut the remuneration of all except award protected tellers and junior staff, in an attempt to strip costs and get profits growing.

That’s the inescapable conclusion after a pretty disappointing set of profit results from the major banks.

Commonwealth’s Bank’s third quarter trading update on Monday brought this message home loud and clear. Third quarter cash profit fell by 28% from $2.45bn to around $1.7bn. While a fair chunk of this fall was due to “one-off” provisions to cover the cost of customer remediation following the Royal Commission, underlying profit still fell by 9% or $250m after tax. Adjusting further for the lower number of days in the quarter and some other factors, the fall was around $125m or about 4%. But it is still a 4% fall in profit.

The problem for banks is that revenue is not growing. Lending volumes are static as the housing market downturn bites, business confidence remains subdued and banks are de-risking their corporate and institutional portfolios. Interest margins are also pressured, which is not going to be helped now that we are back in an environment of lower interest rates. More than a third of bank deposits earn zero interest (cheque accounts where no interest is paid or savings accounts being paid interest at 0.01% pa), which can’t be cut if the RBA reduces the benchmark cash rate. If you are “required” to cut lending rates, but can’t cut deposit rates, your margin gets squeezed and net interest income falls.

Fee income is also being savaged. CBA’s quarterly result showed that non-interest income fell by 10% or approximately $150m. One of the chief drivers was its “better customer outcomes” programme, which is delivering fee removals, fee reductions and pre-emptive fee alerts for the benefit of customers. Examples include the removal of ATM fees, reduced IMT fees, overdrawn account alerts and credit card payment reminders by SMS, removal of ongoing service fees in Commonwealth Financial Planning. For the first nine months of FY19, it has cost CBA $180m in fee revenue. For the full year, this will increase to $275m. And for next year, the hit to non-interest income will be $415m.

Bad debts are also starting to tick a little bit higher as consumers feel the pressure. On the cost side, expenses are flat to marginally higher, with the “automatic” 3% CPI adjustment in wages being offset by trimmings to headcount and a freeze on increases in discretionary costs.

Bottom line – flat to negative interest income, negative non-interest income, increasing bad debt expense and flat operating expenses translating to lower profits.

At the analysts briefing following the announcement on Monday, CBA CEO Matt Comyn was quick to hose down an earlier media report that 10,000 jobs were slated to go. He pointed out that 400 people were involved in the Bank’s “temporary” customer remediation program and that the CBA was divesting several assets including the insurance business (CommInsure) and the funds management business (CFSGAM) which would be accompanied by the transfer of relevant staff.

However, due to the pressure on revenue and with employment costs making up about 60% of operating expenses, the only substantive way to arrest declining profits is to cut the workforce and thousands of jobs will go. In this regard, CBA will be following its peers – with ANZ probably the most progressed and the NAB implementing a program to re-engineer its processes prior to targeting a headcount reduction of 6,000 persons.

Branches and branch staff will be hit hard, as customers vote with their phones and the cashless society takes over. There will be fewer branches with smaller footprints focussed on service and sales. As processes are further digitised and products streamlined, call centres will be impacted and back office teams will shrink.

Head office support teams in marketing, human resources, planning, risk, corporate development and finance will also be under pressure. The days of having “10 bank people at a meeting” will be but a distant memory.

And it won’t just be jobs – it will also be remuneration packages. Some bank directors and CEOs have already taken pay cuts and this is starting to spread to the Executive ranks. It will eventually flow down to middle managers. The reality is that for the level of personal risk and responsibility, Australian bankers are well paid – much better that many of their white collar colleagues. Effectively “guaranteed” performance bonuses means that that there are thousands of “middle managers” and others in each bank earning very comfortable six figure salaries.

Deteriorating profits will drive the inevitable correction. With job cuts, Australian bankers are going to look a little like an endangered species. They still might be “wanker bankers”, but most won’t be “rich wanker bankers”.

 

Worried about franking credits? STOP! Don’t do anything yet!

Thursday, May 09, 2019

The “retiree tax”, which will mean that excess franking credits will no longer be refundable in cash, will hit the incomes of self-funded retirees who draw a pension from their SMSF. Because SMSFs in pension phase don’t pay any tax, or more correctly, are taxed at a rate of 0%, franking credits on share dividends are refunded in full in cash by the Australian Taxation Office. This refund helps preserve the balance of the retiree’s super nest egg and allows a bigger pension to be taken.

The “retiree tax” will require the passing of legislation through both houses of parliament. With the ALP and Greens unlikely to command a majority in the Senate, support from the cross benches will be required. Given the retrospective nature of the ALP proposal (a change to the investing and super rules “after the event”), most cross benchers have said that they will oppose the plan.

Shorten will claim that he has a mandate, so some form of compromise is likely. I expect a cap that allows cash refunds of up to (say) $10,000 per legal entity. The majority of self-funded retirees will be spared the pain of the change, while the handful of super funds getting “millions of dollars” in cash refunds will still be impacted. A victory of sorts for Shorten.

But even if it doesn’t play out this way, don’t fall for one of the other “strategies” doing the rounds.  This strategy says to close your SMSF and roll your super monies into a tax paying super fund, such as a large industry or retail fund, and then access one of their self-directed investment options where  you can select a high proportion of shares paying fully franked dividends. As the super fund is a taxpayer, they can utilise “your” franking credits and they will then pass on the benefits back to you, putting you in roughly the same position as if you were getting a cash refund in your SMSF.

There are two major problems with this strategy.

Firstly, not all large super funds are taxpayers. Most are, because they have members in the accumulation phase where earnings are taxed at 15%, and members making concessional contributions which are taxed at 15% when they hit the super fund. These concessional contributions are the employer’s compulsory 9.5% and any salary sacrifice contributions.

The larger super funds publish a ‘tax transparency report’, which shows whether they are a taxpayer or not and how much tax they pay. The latest report from Australian Super, which can be downloaded from its website and covers the tax year ended 30 June 2017, shows that they paid tax of $1.37bn for that year. So, no problem with Aussie Super.

While the chosen super fund may be a taxpayer today, there is no guarantee that it will be a taxpayer in 5 or 10 or 15 years’ time. As the fund “matures” and more members move from the 15% tax rate accumulation phase to the 0% tax rate pension phase, the tax bill drops and the fund is less able to use the franking credits as a tax offset. In the extreme case where thousands of SMSFs move their monies to a particular super fund such as Aussie Super, there could be so much money invested in franked shares and franking credits to go around that the fund won’t have a tax bill. It will cease to be a taxpayer.

However, there is a bigger problem. Fund trustees are required by law to act in the best interests of all their members. If refunds of excess franking credits are canned, that is, they become “illegal”, on what legal basis can a trustee allocate a “refund” to the member in pension phase at the expense of the member in accumulation phase. Who is to say that the member “paying the tax” isn’t entitled to some of the net benefit?

Sure, the fund’s overall tax bill will be reduced, but who gets the benefits and in what proportions is a different ball game. This is a whole new area of super and trustee law.

I am not aware of any super fund, industry or retail, that has stated in writing that it can guarantee that the benefits will flow to the pension phase member. And they are unlikely to do so, because until the law is changed, they are dealing with a hypothetical.

Until you know that the fund is a taxpayer, that there is a very, very high degree of confidence that it will continue to be a taxpayer in the long term, and the trustees confirm in writing that they can “refund” the benefits, this strategy is a non-starter.

Take no action. This has a long way to play out.

 

The ‘ANZ’ slap

Thursday, May 02, 2019

One of the more disappointing aspects of ANZ’s half-year profit result was the decision by the Board to ignore the needs of thousands of self-funded retirees and pay its 80c interim dividend on 1 July.

By doing so, these investors are likely to lose the cash refund of the franking credits that go with the dividend. If the ANZ  had elected to pay the dividend just three days earlier on 28 June, they would have been eligible for a cash refund.

The first day of July is when Bill Shorten’s retiree tax is due to start. Dividends received from this date won’t be eligible for franking credit refunds. And while Bill has to be elected first, and then get his legislation through a hostile Senate, there has never been an argument about the start date.

No doubt some on the ANZ Board were mindful of not upsetting Bill Shorten and his team. But the ALP in Government is never going to be a “friend” of the ANZ or any of the major banks, and the Directors of ANZ only had one duty – to look after the interests of its shareholders. Furthermore, the precedent had already been set by Westpac, which accelerated the payment of its interim dividend from July to June.

Shame on Chairman David Gonski and his fellow directors.

The other disappointing part of the result was the performance of the ANZ bank in home lending. The total book went backwards by $2bn as net new loans written crunched from $31bn to just $21bn. Market share plummeted from 15.8% to 15.1%. And to make matters worse, the share of loans written by the more expensive broker channel went up to 57%.

CEO Shayne Elliott, in “bank speak”, admitted that the home loan performance was a shocker, saying: “we do accept we could have done a better job implementing our new risk settings and are taking steps to improve processes.”

Cash profit from Australian banking fell from $2.07bn to $1.81bn, a fall of 12.1%. Offsetting this was an increase of 33% in the cash profit in the institutional bank to $1.01bn. While volatile markets trading income contributed to the stellar result from the institutional bank, contributions from the more traditional banking areas of trade finance, payments and specialised lending also rose. The other major division, New Zealand, was flat.

Overall, ANZ posted a moderate increase in cash profit (on a continuing basis) of 2.0% to $3.56bn. This was better than the market was expecting of around of $3.4bn.

Apart from the small increase in cash profit, the highlight was ANZ’s progress in reducing expenses. In absolute terms, the Bank reduced costs by $300m as staff numbers fell from 39,700 in March 2018 to 37,400 in March 2019. In an environment where there in next to no revenue growth, and in some areas declining revenue, cutting expenses without impacting customer service is the key to maintaining profitability.

Of the majors, ANZ is leading in this race to digitise processes, improve productivity and reduce costs. That’s why ANZ has been the best performing bank in 2019.

From a balance sheet and capital point of view, the ANZ ticked a number of boxes. Earnings per share rose by 5% on the back of the completion of a $3bn buyback and a 3.7% reduction in the number of shares on issue; return on equity improved by 0.13% to 12.0%; ANZ will “neutralise” the upcoming dividend by buying back on market shares issued through the dividend re-investment plan; and the tier 1 capital ratio rose to 11.5%, 1% higher than APRA’s “unquestionably strong” target of 10.5%. Post some already announced divestments (OnePath, PNG retail etc), the ratio rises to 12.1% on a proforma basis.

Interestingly, the ANZ doesn’t seem too concerned about the Reserve Bank of New Zealand’s proposed increases to risk weighted assets and minimum capital ratios. The most exposed of the major banks to this proposal, it noted that “any changes are expected to be implemented over a 5 year period” and “ANZ is in a better position to manage any change given its transformation and has a number of practical options available if circumstances require”.

The market liked the result and ANZ shares rose by 2.8% to close yesterday at $27.95. A tick from me too, although it has to do better with its retail bank and lift its game in home lending. And Directors, please always put the shareholders first.

 

Shorten’s super slugs to hit more than 1,000,000 Australians

Thursday, April 18, 2019

Bill Shorten hasn’t been caught out after all about his super slugs. He didn’t “mis-speak”, he just “misheard”. Maybe? Let’s give him the benefit of the doubt on this occasion.

What he can’t hide from, however, is that these slugs are another attack on the superannuation system and the attractiveness of it relative to the Government providing for your retirement. The $34 billion it will raise over the next decade through higher taxes and reduced tax concessions will come from more than a million Australians.

Take the change to the non-concessional contribution cap to just $75,000. Twelve years after it was established at $150,000, Shorten will slash it to half  its original amount. Adjusting for inflation, it’s less than one quarter.

Super was designed to reduce people’s dependence on the government aged pension. Rather than the taxpayer, get the individual to prepare, plan and save for their retirement. But almost every change made to super recently is making it less attractive as a savings vehicle. Now Shorten is planning to add to this by introducing five further changes. Each change makes super less attractive in its own right, and will cause many savers to question why they should tie their money up in the super system for the next decade, or two or three.

Here’s a simpler “no super” strategy for savers: spend the money on your family and have some fun yourselves, invest in the tax-free family home, “gift” surplus assets to your kids five years before you retire,  go on the government aged pension, and, if needed in your old age, seek some “reverse gifts” from your family to supplement your government pension.

Here’s a run-down on Shorten’s super slugs and who’s impacted:

1. Non-concessional contribution cap slashed to $75,000

Originally set at $150,000 12 years’ ago for the 2007/08 financial year, increased to $180,000 for 2014/15, reduced back to $100,000 for 2017/18 and 2018/19, the annual cap on non-concessional contributions will be cut back to just $75,000.

Non-concessional contributions are, of course, personal contributions to super from your own resources and are made from your “after tax” monies.

The cut in the cap will reduce the ability to make a large “one-off” contribution to super, which may come from the proceeds of selling an asset, an inheritance, a termination payment or some other means. By using the ‘bring-forward’ rule, a person under 65 can make 3 years’ worth of non-concessional contributions in one year. This means that under current policy, a person can get $300,000 into super in one hit while a couple can potentially contribute up to $600,000. Under the ALP, this will fall to $225,000 or $450,000 for a couple.

While only impacting 20,000 superannuants in its first year, the change potentially impacts all superannuants because this will set the standard for decades to come. It reduces the utility of super as a savings vehicle

2. Abolish catch-up concessional contributions

Probably the dumbest of Shorten’s super slugs, he plans to abolish ‘catch-up’ concessional contributions. According to Treasurer Josh Frydenberg, this will impact about 230,000 workers.

An initiative of the current Government, the ability to make ‘catch-up’ contributions only came into effect last July. It is designed to allow people with interrupted work patterns, such as a mother who goes on maternity leave, to make additional super contributions when they return to work and still receive the same tax concessions.

The unused portion of the annual concessional cap of $25,000 can be carried forward for up to 5 years. Concessional contributions are primarily your employer’s compulsory 9.5% plus salary sacrifice contributions. If you don’t make any concessional contributions for four years, you could potentially make a concessional contribution of up to $125,000 in the fifth year. Or if you made a concessional contribution of $5,000 in the first year, you could make a concessional contribution of $45,000 in the second year. 

Eligibility is restricted to those with a total superannuation balance under $500,000 (as at 30 June of the previous year).

Shorten says that he will announce policies that deal with some of the perceived inequities of the super system (such as the materially lower balances women have when they retire), but for some reason, ‘catch-up’ contributions doesn’t appear to pass the test. Hard not to think that this isn’t a case of the “not invented here” syndrome at work.

3. End deductibility of personal contributions within the concessional cap

Concessional contributions include your employer’s compulsory super guarantee contribution of 9.5%, salary sacrifice contributions and personal  contributions you make and claim a tax deduction for. They are capped at $25,000 in total.

Until recently, the third category was only available to “self-employed” persons who satisfied the “10% rule”, that is, they received less than 10% of their income in wages or salary (ie genuinely self-employed). Last year, the Government scrapped the 10% rule so that anyone who was eligible to contribute to super could claim a tax deduction for personal super contributions (within the overall concessional cap of $25,000). This was designed to assist, amongst others, employees whose employer didn’t offer salary sacrifice facilities.

Shorten says that an ALP Government will reverse the change and scrap the widespread deductibility of personal super contributions.(It is not clear whether this means the re-instatement of the 10% rule.) According to Frydenberg, this could impact up to 800,000 workers who are working part-time at the same time as running a small business. Many are using the salary from their part-time job as the cash flow to make their business grow. He says that “the concession (tax deduction) specifically encourages the dual objective of entrepreneurship and savings for retirement, and helps strengthen the small business sector – the backbone of the economy”.

4. Higher income super tax lowered to $200,000

Persons on incomes from $200,000 to $250,000 will have their concessional super contributions taxed at 30% (rather than 15%). Known as Division 293 tax, a higher tax rate (effectively 30%) applies to concessional super contributions made by higher income earners. Originally introduced to apply to persons on incomes of $300,000 or more, the threshold was reduced last year to $250,000. Now, Shorten proposes to lower it to $200,000.

130,000 additional people will pay 30% tax on their super contributions. And if you are wondering why the threshold is $200,000 rather than the $180,000 threshold for the 47% marginal tax rate , the income definition for Division 293 tax includes super contributions (which is approximately $180,000 plus the 9.5%).

5. SMSFs won’t be allowed to borrow  

David Murray’s Financial System Inquiry recommended that SMSFs be prohibited from borrowing to purchase investment assets such as property. The current Government chose not to adopt this recommendation.

Shorten’s Treasury Spokesman Chris Bowen has stated that an incoming ALP Government would adopt this recommendation and change the law to prohibit SMSFs from borrowing.  Presumably, this will apply prospectively, with some form of grandfathering or transitional “wind-down” period applying to SMSFs with existing loans.

 

More super changes but will they ever see the light of day?

Thursday, April 11, 2019

The recent budget contained two more changes to super.

The first will get rid of the ‘work test’ for people aged 65 and 66 wishing to make super contributions. To align with an eventual increase in the pension age to 67, from 1/7/20, people aged 65 and 66 will be able to make personal after-tax (non-concessional) super contributions, salary-sacrifice contributions and have spouse contributions made on their behalf without needing to satisfy the ‘work test’ (defined as working 40 hours over any 30 day consecutive period). They can be fully retired and still make super contributions.

They will also be able to access the ‘bring-forward’ rule, which allows a person to make up to three years’ worth of non-concessional contributions in one hit. Potentially, a way to get $300,000 into super, or for a couple, up to $600,000. Currently, you need to be under age 65 during the financial year to trigger this. It will  be extended to under age 67 from 1/7/20.

The second change will make it easier for spouse contributions to be made, by extending the age of the receiving spouse from under age 70 to under age 75. The receiving spouse will no longer need to meet the ‘work test’ if aged 65 or 66 (but will need to meet the work test if aged from 67 to 74 years). Potentially, this means that more spouses can claim the tax offset for making a spouse contribution(up to $540), and extends the opportunity by another 5 years to equalise superannuation balances between spouses.

Both changes are sensible and arguably overdue, and on paper, should be supported when they finally make there way through the legislative processes.

However, the day after the Budget was delivered, the Government quietly dumped one of its headline super changes from the 2018 Budget – a plan to increase the maximum number of members in a Self-Managed Super Fund (SMSF) from 4 to 6. Originally the centrepiece of an omnibus bill covering changes to superannuation, craft brewing and global infrastructure and imaginatively entitled Treasury Laws Amendment (2019 Measures No. 1) Bill 2019, all references to the SMSF change had gone when the Senate finally gave it the nod. Presumably, some pesky cross-bench Senators had concerns (or were lobbied by other interest groups), and in the wrap up of Parliament, the Government took what was on offer. Craft-brewers were celebrating the excise relief, while SMSF members were left stranded.

This is a reminder that changes to superannuation requires changes to the law, which means running the gauntlet of the Senate cross-bench. If there is a change of Government at the May election, there is no guarantee that the super changes announced by Josh Frydenberg in the Budget will make their way back into Parliament.

This is because all bills lapse when the Parliament is dissolved (as happens at a General Election). Moreover, the ALP has its own set of priorities for the super systems and has already announced 5 changes. The “not invented here” syndrome possibly also comes into play. Here is a re-cap on the ALP’s proposed changes.

1. Non-concessional contribution cap slashed to $75,000

Originally set at $150,000 12 years’ ago for the 2007/08 financial year, increased to $180,000 for 2014/15, reduced back to $100,000 for 2017/18 and 2018/19, the annual cap on non-concessional contributions is set to be cut back to just $75,000.

Non-concessional contributions are of course personal contributions to super from your own resources and are made from your “after tax” monies.

The cut in the cap will reduce the ability to make a large “one-off” contribution to super  which may come from the proceeds of selling an asset, an inheritance, a termination payment or some other means. Under the ALP’s plan, if you access the ‘bring forward rule’, the maximum contribution will fall from $300,000 to $225,000, or for a couple, from $600,000 to $450,000.

2. Catch-up concessional contributions abolished

An initiative of the current Government, the ability to make ‘catch-up’ contributions came into effect last July. It is designed to allow people with interrupted work patterns, such as a mother who goes on maternity leave, to make additional super contributions when they return to work and still receive the same tax concessions.

The unused portion of the annual concessional cap of $25,000 can be carried forward for up to 5 years. Concessional contributions are primarily your employer’s compulsory 9.5% plus salary sacrifice contributions. If you don’t make any concessional contributions for four years, you could potentially make a concessional contribution of up to $125,000 in the fifth year. Or if you made a concessional contribution of $5,000 in the first year, you could make a concessional contribution of $45,000 in the second year. 

Eligibility is restricted to those with a total superannuation balance under $500,000 (as at 30 June of the previous year).

3. End deductibility of personal contributions within the concessional cap

Concessional contributions include your employer’s compulsory super contribution of 9.5%, salary sacrifice contributions and personal  contributions you make and claim a tax deduction for. They are capped at $25,000 in total.

Until recently, the third category was only available to “self-employed” persons who satisfied the “10% rule”, that is, they received less than 10% of their income in wages or salary (i.e. genuinely self-employed). Last year, the Government scrapped the 10% rule so that anyone who was eligible to contribute to super could claim a tax deduction for personal super contributions (within the overall concessional cap of $25,000). This was designed to assist, amongst others, employees whose employer didn’t offer salary sacrifice facilities.

4. Higher income super tax lowered to $200,000

Persons on incomes from $200,000 to $250,000 will have their concessional super contributions taxed at 30% (rather than 15%). Known as Division 293 tax, a higher tax rate (effectively 30%) applies to concessional super contributions made by higher income earners. Originally introduced to apply to persons on incomes of $300,000 or more, the threshold was reduced last year to $250,000. Now, the ALP proposes to lower it to $200,000.

5. SMSFs won’t be allowed to borrow

David Murray’s Financial System Inquiry recommended that SMSFs be prohibited from borrowing to purchase investment assets such as property. The current Government chose not to adopt this recommendation.

Shadow Treasurer Chris Bowen says that an incoming ALP Government would adopt this recommendation and change the law. Presumably, this will apply prospectively, with some form of grandfathering or transitional “wind-down” period applying to SMSFs with existing loans. If it doesn’t, then we will all be screaming.

 

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