The Experts

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

5 Budget changes for investors, retirees and SMSFs

Thursday, May 17, 2018


Now that the dust is starting to settle on last week’s Federal Budget, here is a summary of the five immediate financial changes that will impact retirees, investors and SMSF members. All changes will take effect from 1 July 2019. 

1.      Pensioners will be able to earn more before it hurts their pension

If you are one of the 88,000 aged pensioners who works part time, or perhaps a pensioner who wants to work part time, you will be able to earn more before this starts to affect your government pension. The Pension Work Bonus will be increased from $250 per fortnight to $300 per fortnight. When this is added to the $168 income free area, a single pensioner could potentially earn $468 per fortnight ($12,168 pa) and still receive the maximum government aged pension.

Eligibility is also being extended to earnings from self-employment, although a ‘personal exertion’ test will apply. Unused amounts of the work bonus can be carried forward up to a maximum of $7,800.

Because the pensioner income test reduces the fortnightly pension by $0.50 for every $1.00 of income over the income free area (plus work bonus), some pensioners will receive a higher part-rate pension. For example, if Tom earns $600 a fortnight, his part pension will increase by $25 per fortnight.

2.      Government Reverse Mortgage (Pension Loans Scheme available to all retirees)

All Australians of age pension age (67 years or older if born after 1 January 1957) will be able to access the Pension Loans Scheme to boost their retirement income. This is effectively a Government run reverse mortgage scheme. Eligibility is being extended to include self-funded retirees and the payments available are being increased.  

The maximum amount that can be “borrowed” (received as a regular payment from the Government) is for a single person $11,799 pa ($453.81 per fortnight). For a couple, it is $17,787 pa ($684.11 per fortnight). The actual loan size (payment) will depend on the age of the recipient(s) and the value of their home.

As a reverse mortgage, the loan will be secured by a charge over the retiree’s/pensioner’s residential property. Upon death, the home will be sold and the proceeds used to re-pay the outstanding loan balance. Interest is charged on the outstanding loan balance at a rate of 5.25% pa and is capitalised.

Payments are made each fortnight, usually accompanying the regular pension payment. Lump sum withdrawals (loan amounts) are not permitted. On the other side of the ledger, recipients can repay their loan in part or full at any time without penalty.

From a cost point of view, it is relatively attractive with the interest rate about 1% lower than commercial reverse mortgage schemes. There are also no monthly account fees.

Let’s take an example to demonstrate how the Pension Loans Scheme works.

Bob and Sue are a 70 year old maximum rate pensioner couple, with a house valued at $850,000. Their combined Age Pension income is currently $1,368.20 per fortnight ($35,573 per year).

They decide to boost their income and access the Pension Loans Scheme. They choose to receive the maximum amount available of $684.11 which takes their total fortnightly payment (pension plus loan scheme amount) to $2,052 per fortnight ($53,360 per year). This income stream increases over time in line with inflation.

Over the next 20 years, Bob and Sue receive around $500,000 in additional income to support their standard of living in retirement.

After 20 years, Bob and Jane sell their house for $1.6 million. The value of the outstanding loan, which has accrued interest at a rate of 5.25% pa, has grown to around $900,000. Bob and Sue pay out this balance from the sale proceeds and retain $700,000.

3.      An extra year to contribute to super

Currently, if you are over 65 years and under 75 years, you need to pass the ‘work test’ in order to make contributions to super. The test is defined as working a minimum of 40 hours in any 30 day consecutive period in the financial year – so it is like working full time for a week or one day a week for a month. Not that hard, but still a test to pass.

Of course, if you are under age 65 you can make super contributions whether working or not, and if you are 75 or older, you are restricted to just your employer’s mandated 9.5%.

From 1 July 19, people aged 65 to 74 with a total superannuation balance below $300,000 will be able to make voluntary contributions for 12 months from the end of the financial year in which they last met the work test. They will potentially be able to access their non-concessional cap of $100,000 for personal contributions, and their concessional cap of $25,000 for contributions they could claim a tax deduction for. They will also be able to access any unused concessional cap space under the new 5 year ‘carry forward’ rules.

4.      SMFS’s will only need to be audited every three years

The Government will change the annual audit requirement to a three-yearly requirement for self-managed superannuation funds (SMSFs) with a history of good record-keeping and compliance. This measure will reduce red tape for SMSF trustees that have a history of three consecutive years of clear audit reports and that have lodged the fund’s annual returns in a timely manner.

Another positive, particularly for larger families, is that the maximum number of allowable members in new and existing self-managed superannuation funds and small APRA funds will be increased from four to six members from 1 July 19.

5.      No tax deductions on vacant land

And perhaps the only negative is the axing of tax deductions for holding vacant land. From 1 July 19, the Government will deny deductions for expenses associated with holding vacant land such as interest costs or council rates.

Deductions will still be available if the expense has been incurred after a property has been constructed on the land, it has received approval to be occupied and is available for rent or if the land is being used by the owner to carry on a business, including a business of primary production.

The measure is expected to save the Government $25m pa.



5 super actions to take before the end of the financial year

Thursday, May 10, 2018

After the savaging the super system took in last year’s Budget, it was reassuring to note that there were no material changes to super in Tuesday’s Budget. But a wash up from last year’s changes is a couple of positive measures that can still be actioned before 30 June. The biggest of these is allowing anyone to claim a tax deduction for personal super contributions.

So, with the end of the financial year only 51 sleeps away (who is counting?), here are 5 essential actions to check off before 30 June. Whether it be by making additional contributions and claiming a tax deduction, checking whether you have paid yourself enough pension, getting the Government to cough up a co-contribution or claiming that tax deduction for your fund, these actions will help you get 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. Until this financial year, the ‘10% rule’ meant that only self-employed persons who received less than 10% of their income in wages or salary could claim this deduction. This rule has now been scrapped so that anyone can 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 17/18 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 or online with his super fund. Technically, he will have until the earlier of when he lodges his tax return or 30 June 2019 to do this.

Non concessional contributions, which are personal super contributions made from your own monies and which you don’t claim a tax deduction for, are capped at $100,000 each year. Again, you must be under 65, or if aged between 65 and 74, meet the work test to qualify. Your total super balance (as at 1 July 2017) must also be less than $1,6000,000. 

If you are under age 65 (technically aged 64 or less at 1 July 2017), then you can access the “bring-forward ruler” 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). 

2.      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 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 $36,813 (it starts to phase out from this level, cutting out completely at $51,813), they must be under 71 at the end of the year, and critically, at least 10% of this 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! 

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

While this tax offset (rebate) has been around for years, the Government decided in last year’s budget to make it a whole lot more accessible by raising the income test threshold to $37,000 (it was previously $10,800). So, if you have a spouse who earns less than $37,000 and you make a spouse super contribution of $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.  

4.      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 2017 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 2018. 

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. 

5.      If you have a SMSF, do you know the tax deductions your fund could claim?

There are potentially several tax deductions your SMSF could claim. Of course, your fund does have to be in accumulation phase and paying tax. If your fund is in pension, then you aren’t paying any tax and so there is no assessable income to be offset. Where a fund has one member in pension and one member in accumulation, or a member has both an accumulation and a pension account, then you will pro-rata the deduction according to the respective balances of the accumulation account and the pension account. Your accountant or actuary will advise you of the percentage that can be claimed. 

Some of the expenses that are deductible include:

  • the ATO Supervisory Levy;
  • insurance premiums for death and disability policies;
  • accounting and auditing fees;
  • costs of updating a trust deed to comply with the SIS Act;
  • investment adviser fees;
  • subscriptions to reports such as the Switzer Report;
  • administrative expenses such as bank fees, filing fees etc; and
  • if you have taken out a limited recourse borrowing arrangement to purchase an asset that produces assessable income, the interest cost. 

Finally, contributions must be received and banked by your Fund by 30 June to count. This year, this day falls on a Sunday. Further, some payment systems take a day or more to clear, so if you want your contributions to count, you really need to act by Wednesday 26 June.  


Can cost cutting work for the ANZ?

Thursday, May 03, 2018

It is no surprise that the market gave the thumbs up to ANZ’’s first half profit result on Tuesday. The result was workmanlike, showed ANZ was making solid progress on its key focus areas and comes after a period of relative share market under-performance. ANZ closed yesterday at $27.52, up 2.5% since Tuesday.

But CEO Shayne Elliott was nonetheless quite downbeat when discussing ANZ’s prospects at the investor call. While Shayne is probably a “glass half empty” sort of guy and naturally cautious, he certainly painted a reasonably bearish picture of ANZ’s revenue trajectory. The wash-up from the Royal Commission, including tighter credit standards, a softening property market and high levels of household debt will make it very difficult to grow revenue from ANZ’s core Australian retail and business banking franchise. Add to this some pressure on the net interest margin due to the increase in short term wholesale funding costs, and the ANZ revenue picture looks a bit bleak.

So, with limited prospects for meaningful revenue growth, ANZ remains a business simplification and cost cutting story. The question is – can ANZ continue to cut costs and “shrink to greatness”, and what does this mean for shareholder returns?

Let me attempt to answer these questions by starting with a review of the highlights of their half year report.


Cash profit after tax for the half (H118) from continuing operations of $3,493m was 4.1% higher than the corresponding half in FY17 (H117) and 1.1% higher than the last half (H217). Adjusting for a big fall in credit impairment (bad debt) charges, which fell from $720m in H117 to just $408m in H118, cash profit before credit impairment and tax fell by 1.7%.

A fall in group revenue of 3.8% was caused by a material fall in markets trading income in the Institutional Bank and the impact of the Government’s bank levy, and masked a solid performance from the Australian Retail Bank and New Zealand, where revenues grew by 9.3% and 5.7% respectively.

ANZ largely delivered on its commitment for a fall in operating costs on an absolute basis, which includes restructuring charges. Costs in the first half were 0.2% lower than 2H17 costs and 0.2% higher than 1H17 costs. The Bank shed 914 employees from continuing operations in the first half (mostly in the second quarter), taking its workforce at 31 March to 39,540 staff.

Another highlight was that although investment spending rose, the capitalised software balance fell. ANZ is investing more, capitalising less, and doing this while absolute costs fall.

Notwithstanding the costs of the Royal Commission, ANZ CFO Michelle Jablko suggested that further falls in absolute costs could be expected at least into 1H19.

ANZ’s capital position, as measured by its CET1 ratio, sits at a very healthy 11.0%, well above APRA’s new “unquestionably strong” target of 10.5%. It will rise further to around 11.8% (on a proforma basis) when the divestment of its life insurance and other wealth management business is completed.

A dividend increase?

ANZ is currently undertaking an on-market share buyback, with $1.1bn of shares purchased out of an approved plan of $1.5bn. But with its CET1 ratio set to rise well above what is required, further capital management actions are in prospect.

One option would be for ANZ to increase its dividend, currently running at $1.60 pa fully franked (the interim and final are 80c each). However, this is unlikely for two reasons. Firstly, ANZ’s current policy is to target a full year payout ratio of 60 to 65% of cash profit. This half’s dividend of 80c represents a payout ratio of 66%, and with revenue growth flat, ANZ will be stretched to grow earnings per share. The other reason is that ANZ has no excess franking capacity. A special unfranked dividend is a possibility, but an increase to the ordinary franked dividend is unlikely.

A more likely action will be for ANZ to conduct further on-market buybacks later in 2018 and 2019 and then cancel the shares. This will help to increase earnings per share, potentially allowing the company to marginally increase the ordinary dividend in future years.

What do the Brokers’ say?

According to FN Arena, the major brokers expect revenue growth for ANZ to be very subdued. They like the focus on cost reduction and expect further capital management actions.

Following the result, two of the major brokers reduced their targets, with UBS reducing its target price from $29.00 to $28.00 and Credit Suisse from $31.00 to $28.50. On the other side, Citi raised its target from $30.00 to $31.50 and Morgan Stanley from $28.90 to $29.00.

Of the 8 brokers sampled, there are 4 buy recommendations and 4 neutral recommendations. The consensus target price is $29.59, 7.5% higher than yesterday’s closing price of $27.52.   

                                                                Major Broker Recommendations (source: FN Arena)

My view

I like ANZ because it is arguably the most ‘boring’ of the major banks. With its divestments largely complete, it is now an Australasian business and retail bank. Asia is gone or going, the institutional bank has been peeled back, risk weighted asserts have been cut and divestment of its wealth management businesses is nearing completion. Of the major banks, it has the strongest commitment to cutting costs.

But, ANZ is going to be revenue challenged and will not shoot the lights out. In some ways, it looks set to become “boring but safe” – almost an annuity style of investment.

The two obvious risks to this assessment are the Royal Commission and an increase in bad debts. With interest rates staying low and unemployment at manageable levels, I can’t see the latter blowing out too much in the medium term. And remember, the ANZ has done a lot to de-risk the lending book by jettisoning lower quality assets.

In regard to the Royal Commission, this remains the great imponderable. But you have to buy when others want to sell, and while this may not be the bottom for the ANZ, my sense is that these levels will prove to be good buying.



A no-brainer for first home owners

Thursday, April 19, 2018


If you have kids or grand-kids who will be looking to buy their first home sometime in the next decade, or you are still hoping to achieve that goal yourself, the Government’s new First Home Super Saver Scheme (FHSS) is an absolute no-brainer.

Announced in last year’s budget and only now starting to get some real airplay, this scheme will help people save the deposit on their first home sooner. Because it is tightly capped, it is also no silver bullet in addressing the housing affordability issues many young adults face.

But it will help first home buyers, and as it has virtually no downsides, it is a no-brainer. Let me explain.

First Home Super Saver Scheme

The scheme allows savers to make voluntary contributions to super of up to $15,000 in any one year, and then up to a maximum of $30,000 over the duration of the scheme. This means that a couple can effectively save $60,000.

The voluntary contributions to super can be out of “pre-tax” dollars – just like salary sacrifice contributions, making it particularly tax effective. Inside super, the contributions earn a deemed rate of interest (currently set at 4.78% pa). When withdrawn from super, participants have 12 months to sign a contract to buy their first home or start construction of their home.

Some participants will also pay some tax on the withdrawal (taxed at their marginal rate less a 30% tax offset), but even allowing for this, the Government says that participants will save 30% faster than if just investing the money in a bank account or term deposit.

Take this example. Bob earns $80,000 pa. If he makes $5,000 in voluntary contributions through salary sacrifice each year into the FHSS for the next 6 years, when he comes to withdraw it, he will have $27,189.

If Bob invested the equivalent post tax dollars each year in a term deposit paying interest at 2.0% pa (on $80,000 pa, Bob is paying tax at a marginal rate of 34.5% so the amount he has to invest is $5,000 - $1,725 = $3,275), his investment will be worth $20,330.

$27,189 in super - $20,330 outside super. Bob will be $6,849 or approximately 34% better off by saving in the scheme.


As you would expect, there are rules relating to both eligibility and the contributions.

You are eligible to participate in the scheme if you have never previously owned property. There is no age limit or minimum – but you must be at least 18 to make a withdrawal from the scheme. And you must intend to live in the property as soon as practicable, and for at least 6 months of the first 12 months you own the property.

The main exclusions – if you own or have owned an investment property (and of course, a family home), you are not eligible. And the monies must be used for a home or home and land package – you just can’t use the funds to buy land.

Eligibility is assessed individually, so while your partner might not qualify (because he/she owns an investment property), you can still qualify.

On the contribution side, voluntary contributions through salary sacrifice count against the concessional cap of $25,000, which also includes any other salary sacrifice contributions and your employer’s compulsory 9.5% contribution. Although not as tax efficient, you can make non-concessional contributions (from your own after-tax monies), up to the scheme’s limit of $15,000 in any one year or the $30,000 lifetime limit.


Hard to think of any. If you put money into the scheme and never buy that first property, then the money will be stuck in super until you turn at least 60 years of age. And it may earn a sub-optimal rate of return. Also, if you are a canny investor and can consistently earn a double digit rate of return by investing in higher risk assets such as shares, you may be better saving outside this scheme. The reality, however, is that most cannot.

Bottom Line

A no-brainer for most young adults (or those still wanting to buy their first home). To learn more, visit the government’s website and calculator here or contact your super fund.


Afterpay’s hangover?

Thursday, April 12, 2018

By Paul Rickard

The challenge for high-flying tech companies is that the market doesn’t really know how to value them, and as the hype develops about their “growth”, they become vulnerable to the inevitable hiccup. This looks like what has happened to a current market darling, Afterpay Touch Group (ASX APT).

After a spectacular run-up to a high of $8.16 in mid-January, which capitalised the company at a staggering $1.3 billion, the shares have come under pressure as concerns have been raised about the robustness of their risk management processes. Yesterday, the shares fell a further 5.7% to $5.60, following the release of a business update and details of the actions Afterpay is taking to address these concerns.

Afterpay (APT) – July 17 to April 18 (source: Commsec)

Afterpay’s business model

If you are not one of the 1.8 million Australians that use Afterpay, let me explain the proposition. It is quite simply the old “lay-buy” done electronically. Customers buy goods online or in store from their favourite retailer, receive those goods immediately, and pay Afterpay in four equal fortnightly instalments by credit or debit card. Afterpay pays the retailer up front, less a service fee of approximately 4%.

Shoppers don’t pay any interest or transaction fees, and buy goods that they may not have otherwise been able to purchase (lay-buy). If they miss a fortnightly payment, they are charged an initial “late fee” of $10, and then a further fee of $7 if it hasn’t been paid after 7 days.

Retailers get incremental sales and new customers, guaranteed up-front payment, zero fraud or credit risk (Afterpay assumes this) and, according to the marketing material, “increased basket size and repeat purchase rates”. There are now 14,000 merchants/retailers on board – up from 6,000 at the start of the financial year.

Turnover using Afterpay has surged, with underlying sales of $530 million in the quarter just completed (March 18), up 360% from $145 million in the corresponding period in FY17. For the 9 months, sales of $1.45 billion compared to $290 million in 2017 – up 500%.

But growth rates anywhere near these magnitudes are hard to sustain, and the inevitable slowing occurs as the base grows. The following table show’s Afterpay’s quarterly sales to March 18 and the growth rate compared to the preceding quarter.

Afterpay quarterly sales

On paper, the decline in the just completed March quarter of 3.8% looks pretty bad and was one of the reasons the market sold the stock down yesterday. Due to the impact of the Christmas peak shopping season, fewer trading days, and the timing of Easter, Afterpay’s performance wasn’t nearly as bad as it looks. Afterpay grew – it just isn’t growing at the same rate.

Afterpay didn’t help its own cause by not attempting to “adjust” for the seasonal factors, nor by describing it as “above system growth”, which conjures up images of single digit growth, rather than growth in the twenties or thirties.

Afterpay Touch also earns revenue from the “pay now” business (the Touch business it acquired in 2017) which services merchants directly. Of the Group’s $60.7 million in revenue for the first 6 months, 21% came from Touch and 79% from the Afterpay (“pay later”) business. Of the latter, 75% comes from the merchant fees and 25% through late fees.

Afterpay reported EBITDA before significant items of $12.1 million for the first half, and a net loss after tax for the first half of $0.7 million.

Risk concerns

As it has grown, Afterpay has come under fire from some consumer groups and industry competitors. Firstly, it hasn’t been verifying the identity of its customers and under age customers can purchase goods using Afterpay that they are not legally allowed to buy (eg. alcohol and other restricted items). Afterpay says that it will now implement an external ID verification service, but as at yesterday when I opened a “fake” account, this clearly wasn’t in place.

Next, Afterpay’s “late fees” have been described by some as exorbitant, which, depending on the transaction size, can represent a very high effective rate of interest. Afterpay says that over 90% of orders don’t attract a late fee, and 78% of customers have never paid a late fee. But, it is a material source of revenue – around 20% of net revenue in the first half.

Afterpay announced yesterday that it would cap late fees at 25% of the purchase order, with a maximum fee of $68 per order.

Finally, there is the question about whether Afterpay promotes responsible customer spending, and how, if at all, it should be regulated. Afterpay argues that customers cannot “revolve” (unlike a credit card), the very short duration of the payment cycle (4 payments every 2 weeks) means that bad debts are detected quickly and usage stopped, that it applies a repayment check for first time customers and that 85% of transactions are via a linked debit card.

Afterpay is not currently a regulated credit product under the National Credit Code and it maintains this hasn’t been challenged by any regulatory authority.

What do the brokers say?

Only two of the major brokers cover the stock. Morgans, who recently initiated cover, have a ‘hold’ recommendation on the stock with a target price of $6.34. Ord Minnett is more positive, with a ‘buy’ recommendation and a target price of $9.50. These were made prior to the yesterday’s trading update (source FN Arena).

In terms of Afterpay’s investment thesis, both see regulatory risks as being high, together with risks from an uptick in the bad debt cycle, competition and maintaining the sales momentum.

On a multiple basis, they have Afterpay earning 5.7c per share in FY 18, rising to 16.5c in FY19, putting it on a multiple of 98.9x FY18 earnings and 33.9x FY19 earnings. At $5.60, this is a PEG (price earnings to growth) ratio of 0.52

My view

Afterpay’s performance in attracting 1.8 million customers, 14,000 merchants and generating $200 million per month in customer turnover has been very impressive. It really has had a remarkable take-up.

While 99 times FY18 earnings looks like a pretty heady multiple, if the analysts are right about the growth in earnings by FY19, $5.60 is not an over the top price and is probably a reasonable entry level.

But it doesn’t look like the regulatory concerns will go away in a hurry, and the new measures, such as external ID verification and capped late fees, will put pressure on earnings. And if the growth rate is really starting to slow, or margins come under pressure due to competition, the gloss will go away from the Afterpay story.

For the brave. For the not so brave, no bargain yet.


Shorten’s naked tax grab could lead to a building boom!

Thursday, April 05, 2018


Builders specialising in home renovations could be in for boom times, particularly those that are established in the suburbs of our capital cities frequented by self-funded retirees. If Bill Shorten’s plan to end cash refunds of excess imputation credits (aka franking credits) on share investments becomes law, retirees will be advised to stick their money into the family home and secure access to a government part pension – however small. By doing so, they will continue to get their cash refunds.

This is what could happen because bad policy (Shorten’s naked tax grab) is being met by a bad backdown. I applauded Shorten for having the courage to admit the policy was going to cause considerable pain (read more here). But because the back down is being implemented in an inequitable manner – government pensioners are winners, self-funded retirees are losers - it has the power to create a huge financial incentive for self-funded retirees to access the government aged pension.

And as we know, people will act rationally. To increase their income, a rational action for some self-funded retirees will be to get under the aged pension assets test limit by either buying a more expensive home or investing in their current home.

Let me explain.

Shorten’s back down is to exempt approximately 300,000 recipients of a government aged pensions (part or full) and a handful of Self-Managed Super Funds (SMSFs) where one member is receiving a government pension. Labelling it as the “pensioner guarantee”, this means that they will still be eligible to receive cash refunds of excess imputation credits.

But because eligibility for the government pension is largely determined by application of the assets test limit (currently $837,000 for a homeowning couple), refund eligibility is similarly like a cliff. Assets of $837,000 or less – get cash refunds – assets of $838,00 or more – no cash refunds.

Without cash refunds, the retiree’s income is slashed. The following example shows just how big this impact could be.

Let’s assume that a homeowning couple has assets of $800,000, which is under the assets test limit of $837,000. This comprises $100,000 in non-financial assets (car, home contents etc) and $700,000 in super through their SMSF. Of the super assets, 50% or $350,000 is invested in fully franked shares yielding 5.0%, and $350,000 in cash, term deposits and fixed interest yielding 3%. The SMSF has dividend income of $17,500 plus imputation credits of $7,500 plus interest income of $10,500, which sums to $35,500. The couple is also eligible for a part government pension of $2,886.  If they draw all the investment income in the SMSF (and don’t access any capital), their total income is $38,386.

A second homeowning couple has total assets of $1,000,000. This comprises $100,000 in non-financial assets (car, home contents etc) and $900,000 in super through their SMSF. Of the super assets, 50% or $450,000 is invested in fully franked shares yielding 5.0%, and $450,000 in cash, term deposits and fixed interest yielding 3%. The SMSF has dividend income of $22,500 plus imputation credits of $9,642 plus interest income of $13,500, which sums to $45,642. Under current arrangements, they could draw $45,642 as income and not eat into the capital of their SMSF.  Post Shorten, because the credits will not be refundable, the income drops by $9,642 or 21% to $36,000. They will be worse off than the couple with $800,000 in assets!

Rational action? Get under the pension assets test limit and maintain access to the cash refunds.

How to do it? While they could consider taking a very expensive overseas holiday, the most strategic financial option will be to invest in the family home as it remains exempt from the pensioner assets test. This could be via a renovation or upsizing to a new/better home. Gifting to relatives won’t solve the problem, as CentreLink counts gifts made in the preceding 5 years.

So, take a lump sum from their SMSF of $200,000, invest it in their family home and get their total assets back under $800,000. Access a part government pension, and a higher income! And potentially, improve the value of the family home!

Noel Whittaker, author of Making Money Made Simple and numerous other books on personal finance has pointed out that self-funded retirees who have invested in shares directly could also be impacted. Couples who share income for taxation purposes and are eligible to access the Seniors and Pensioners Tax Offset will face the same fate as couples living off their super.

And please don’t think I have gone hard on Bill Shorten. I have chosen an example where the couple has 50% of their assets invested in Australian shares. There are many couples who have 80% or 90% of their life savings in blue-chip Australian companies paying fully franked dividends. This proposal is really going to hurt.

Time to rethink, Bill.



A backdown – but still a naked tax grab

Thursday, March 29, 2018

Let’s give Bill Shorten a tick for recognizing that his plan to end cash refunds of excess imputation credits was going to cause some pain. His backdown on Tuesday, described as a “pensioner guarantee”, brings relief to 300,000 elderly Australians.

He announced that an estimated 232,000 aged pensioners receiving a part pension, and 45,000 full rate aged pensioners, would continue to receive cash refunds of imputation credits on their direct share investments. A further 13,000 SMSFs with at least one member receiving a government pension would also be exempted (that is, their SMSF would be eligible for a cash refund).

But not the other 585,000 SMSFs and their 1.1 million members, or persons under 67 who don’t get government support but have low incomes (such as non-working spouses or adult children with share investments).

In fact, Bill Shorten’s relief only reduces the saving to Government over 10 years from $59bn to $55.7bn. A million Australians are still impacted, possibly even more if some of the bigger super funds are caught (members will see lower returns). His revised plan remains a naked tax grab (see my earlier story on why this is the case)

Sure, there are a small number of SMSFs (members) who get big cash refunds – some in the millions of dollars – but these are the exception, rather than the rule. The usual 80/20 or 90/10 rules apply to this distribution like most other things.

And the thing that irks the 80% is that the Government keeps shifting the goal-posts. This really grates on self-funded retirees, who feel that they have worked hard, spent frugally and saved to ensure that they have sufficient funds for a comfortable retirement. They have committed to a long-term plan based on one set of rules – and then the Government changes those rules and they are not in a position to do anything about it.

Shorten’s proposed change in the third over the last three years.

A big change was the superannuation reforms last year, which reduced the caps on contributions into super, taxed the earnings on investments supporting transition to retirement pensions, and introduced a limit of $1.6m on how much money could be transferred into the pension phase of super and enjoy access to the 0% tax rate.

However, the change that has caused the biggest impact is the reduction in the assets test for the aged pension. An initiative of the final Abbott/Hockey budget in 2015, this came into effect on 1 January 2017. About 90,000 elderly Australians lost their aged pension, and a further 235,000 pensioners had it reduced as the limit on assets got crunched.

The essence was to lower the limit on assets that a couple could own (excluding the family home) from approx. $1.2m to approx. $800,000 (today, CPI adjustments have taken this up to $837,000). If a couple has more than $837,000 in assets, they aren’t eligible for a government pension.

The assets of most retirees are their superannuation balances. While $838,000 sounds like a reasonable sum to have invested in super, if it is earning 5% pa, this generates an income of only $41,900 pa. Sure, it is tax free, and is also higher than the full rate Government aged pension of $35,573 pa.

But an income of $41,900 doesn’t make a couple “rich”, and without some careful management of outgoings, barely “comfortable” either.

And yes, they can draw down on their capital (which the system wants them to do), but many retirees are worried about outliving their savings and are scared to take more than the regulated minimum drawing

Mr Shorten’s proposed imputation credit change will make it even harder. Let’s take the same couple. Suppose that 50% of their super is invested in Australian shares paying a dividend yield of 5%. On the dividend income of $20,950, their super fund will have imputation credits of $8,978, which are currently refunded in cash. This boosts the potential income the fund is earning (and can pay them) by 21% to $50,878.

Still not “rich”, but more likely to be comfortable. However, if Shorten gets elected and introduces his policy, our couples are staring down quite a big cut to their income.

Fairer Options

I have argued that the system of dividend imputation, which includes the refunding of excess imputation credits, means that every taxpayer gets the same benefit. Further, company profits are effectively taxed at the marginal tax rate of the recipient, which is entirely in keeping with a progressive tax system. (see my article I wrote here).

The fairest option is therefore not to change the system.

However, a bit like the superannuation “honeypot”, this looks like a “honeypot” to Shorten and his ALP team, and they want the money to build a war-chest that can fund spending promises and/or personal tax cuts. So, a full retreat is very unlikely.

If they feel they need to change the system, a fairer option (and massively easier to administer) is to implement a cash refund cap. I don’t have the resources of the Treasury or Parliamentary Budget Office to crunch the numbers, but a cap in the range of $10,000 would pass the “pub test” and exempt those on low to medium incomes, including many self-funded retirees.




Coles demerger is no silver bullet

Thursday, March 22, 2018

It always pays to be wary when the price of a stock jumps suddenly following 'news'. Particularly when that news has absolutely nothing to do with value creation. This is exactly what happened to Wesfarmers last Friday.

On the back of an announcement that Wesfarmers is set to demerge the Coles business (supermarkets, liquor stores and convenience stores), its shares jumped by 6.3% from $41.20 to $43.80. In market capitalisation terms, it added (“wiped on”) a staggering $3bn.

But no new value has been created. Not a single dollar of earnings has been made. All that has happened is the development of a plan for Wesfarmers shareholders to exchange a share in the current business for a share in Coles and a share in a new Wesfarmers (ex Coles). Purely a paper transaction.

And because there will be costs to implement this plan (stamp duty, legal fees, advisers fees etc), Wesfarmers shareholders in aggregate will be poorer initially.

That doesn’t mean that the plan isn’t without merit, and that it won’t ultimately be a positive in the long run for shareholders. Recent demergers, such as S32 and CYBG, have done reasonably well once the initial overhang of stock has been cleared (typically, this takes about 6 months). However, the proof will ultimately be in the delivery, rather than the expectation. This is one of the reasons that Wesfarmers shares have eased this week, pulling back to $43.05 yesterday as saner heads prevailed.

Rationale for the demerger

Wesfarmers rationale for the demerger is pretty straightforward. It reckons that Coles is impacting its return on capital. Coles contributes 34% of the conglomerate’s EBIT, but employs 61% of the capital. By getting rid of Coles, the return on capital employed for the new Wesfarmers will be a lot higher.

Wesfarmers will also be in a position to focus on organic growth opportunities with the remainder of its portfolio (Bunnings, Kmart, Target, Office Works and Industrials), and acquire new businesses.

Further, a newly established company comprising supermarkets, liquor and convenience stores will prove attractive to investors who want predictable and resilient earnings. Investors will pay for the defensive characteristics of the Coles business.

The sum of the parts will be greater than the whole.

As one of Australia’s last real conglomerates, Wesfarmers has a multi-decade history of active portfolio management – acquiring and disposing of businesses – and so a rationale based on improving its return on capital employed is credible. This is also borne out by the history of demergers in Australia, which in the main, have been largely successful. In addition to CYBG and S32, names such Treasury Wine Estates, Bluescope, Dulux, Orora and BT Investment Management come to mind. Maybe it is a result of “freed up/refreshed” management making the difference – big isn’t always better.

But the surviving company doesn’t always fare so well, and the Wesfarmers mergers and acquisitions team will need to take a cold shower and be careful about blowing money on new acquisitions.  Their recent track record on this front is pretty poor. The disaster of the Homebase stores acquisition in the UK, which within two years of announcement has been written down to zero, comes to mind. And if you care to go back a little further, a case can be made that the acquisition of the whole Coles group in 2007 has delivered less than stellar results for shareholders.

What do the brokers say

According to FN Arena, the major brokers are largely positive on the proposal. That said, only one of the brokers upped their target price, with Morgans arguing that “a greater focus on existing businesses should lead to improved growth prospects” and raising their target from $41.18 to $44.65.

Morgan Stanley, which has an underweight call on the stock, maintained its target price of $40.00. It said that “it does not believe a separate Coles will drive accountability or performance, and incremental costs of $10-$20m should be expected as Coles operates as a separate entity”.

The consensus target price is currently $43.06, fractionally above yesterday’s closing price of $43.05. There are 2 buy, 5 neutral and 1 sell recommendation as shown in the following table.


My view

Wesfarmers has traded in an incredibly narrow trading range over the last five years (see chart below). Essentially, it has been a buy around $37 and a sell around $44. Time spent below or above these levels has been fleeting.


While I think the demerger should be good for the company, Wesfarmers has blotted its copy book over the last few years. It allowed Woolworths to crawl back and take the lead in the super-market wars, and its foray into the UK hardware/homewares market through Homebase has been a disaster. Although Rob Scott has recently come on board as CEO and is a “cleanskin”, I get nervous when he starts talking about “value accretive transactions”.

I have been a supporter of Wesfarmers on grounds that it is better value than Woolworths (it is g on a multiple of 18.5 times forecast earnings compared to Woolworths 21.5 times), it has the powerhouse of Bunnings Australia and I think there is value in the conglomerate moderate. However, the market looks to me that it has been a little premature in subscribing value to the proposed transaction. Wesfarmers is more of a sell than a buy at these levels.


Shorten’s naked tax grab may lead to more buybacks

Thursday, March 15, 2018

Bill Shorten’s proposed changes to the dividend imputation system are a naked tax grab. They are not about making the system more equitable, and they are not closing a “tax loophole”.

The changes, which would see an end to the Australian Taxation Office paying cash refunds to taxpayers who have excess imputation credits, is set to raise $59bn over 10 years.  To start from 1 July 2019, it will raise more than $5bn in its first year.

Self-funded retires and pensioners will be particularly hard hit, as will non-working spouses and part time workers who have share investments. In fact, anyone whose marginal tax rate is less than 30%, which includes all superannuation funds and persons with incomes under $37,000, could be impacted. At least 1.12m taxpayers will be worse off – and potentially a lot more if some public offer super schemes are also caught.

And because Bill and his team have a realistic chance at winning the next election, companies will act by bringing forward the payment of special dividends and off-market buybacks.

More on this later. First, let me explain why Shorten is not “closing a tax loophole” and why this is a naked tax grab.


Dividend imputation exists to eliminate the double taxation of company profits. If a company makes a profit, it pays tax on that profit at 30%. If the company then pays a dividend out of its after-tax profit, that dividend is taxed in the hands of the shareholders at their marginal tax rate, which could be as high as 47%. The original profit has been taxed twice – once in the hands of the company, and once in the hands of the shareholders.

Paul Keating recognized that company profits were, through double taxation, effectively being taxed at punitive rates and introduced the system of dividend imputation in 1987. The system effectively rebates through imputation credits (also called franking credits) the tax that the company has already paid, so the profit is only taxed in the hands of the shareholder.

Critically, the system only recognizes company tax that has been paid to the Australian Taxation Office, so if companies aren’t paying tax in Australia, they can’t frank their dividends. This is why companies such as CSL, which earns more than 90% of its revenue outside Australia and pays tax to foreign governments, can’t frank its dividends. It simply doesn’t pay enough company tax to the ATO.

In 2000, an enhancement to the scheme was made by Peter Costello to refund excess imputation credits in cash. The purpose was simple – to make sure that every shareholder (taxpayer) gets the same benefit. This is what Shorten now proposes to axe.

Let’s take an example to demonstrate the point. Suppose that a company makes a profit of $100, pays tax of $30, and then distributes a dividend of $70 to its shareholders. Because it has paid the full amount of company tax, it can fully frank the dividend. Consider five shareholders – with respective marginal tax rates of 47% (the highest), 30% (potentially another company), 19%, 15% (a super fund in accumulation phase) and 0% (a super fund in pension phase or an individual earning less than $18,200).

Dividend Imputation by Shareholder Tax Rate

For a shareholder paying tax at rate of 47%, both the dividend of $70 and the imputation credits of $30 are included in their taxable income. Tax of $47 is assessed, and then the imputation credits act like a tax rebate, meaning that the net tax payable is $17. On the profit of $100, the company has paid $30 in tax, and the shareholder $17 (total $47).

In the case of a shareholder paying tax at 30%, such as another company, the gross tax payable on the taxable income of $100 is $30. After deducting the imputation credits, the net tax paid is $0.

For shareholders paying tax at 19% or 15%, the imputation credits more than offset the gross tax payable. The excess imputation credits are then refunded in cash, meaning that the shareholder has in addition to the dividend, received a cash payment from the ATO.  Finally, for a shareholder with the best marginal tax rate of 0%, they pay no tax and get the imputation credits refunded in full.

This table highlights two important points. Firstly, the total amount of tax paid to the ATO on company profits depends on the tax rate of the shareholder. If the shareholder is a low rate or 0% rate taxpayer, the Government’s take is small. Conversely, if the shareholder is paying tax at the top rate, company profits are effectively taxed at 47%.  Whether this is right or wrong is arguable, but it is totally consistent with a progressive taxation system.

Secondly, it is utter nonsense by Shorten and his cronies to say that denying the refundability of excess imputation credits is closing a “tax loophole”. There is no loophole, but rather a system where every taxpayer gets the same benefit – their tax is reduced by the same $30 (reflecting the tax the company has paid). What could be more equitable than this?


Clearly, some of the strong dividend paying stocks will look less attractive to investors. Telstra, which pays a fully franked dividend of 22c per share, is probably the best example. For a shareholder with a tax rate of 0% (such as a SMSF in pension phase or retiree with limited income investing outside super), on a purchase price of $3.40 per share, this translates to a yield of 9.2%. Take away the refunding of the franking credits, the yield is crunched to 6.5%. Still interesting, but a lot less exciting. Impact – the share price will fall.

The banks and other high paying dividend stocks could also be impacted.

But there will also be offsetting actions that some companies will take. Because the change won’t come into effect until the start of the 2019 tax year, some Boards will “read the tea leaves” and accelerate the payment of special dividends. Companies with strong capital positions and healthy franking account balances will undertake off-market buybacks. These allow companies to buy their shares back at a discount to the then market price, and are particularly attractive to zero rate taxpayers who can get their excess imputation credits refunded in cash. Take way this aspect, as Shorten proposes, and off-market buybacks as we know them could well be a thing of the past.

One thing we can be certain of is that Shorten’s proposal will become a hot political issue. And in due course, will be seen for what it is - a naked tax grab.


Ramsay feels some pain

Thursday, March 01, 2018

It’s hard work being a “market darling”, particularly when you have a track record of surpassing market expectations. When you then miss – even if it is only a small miss – the market can be pretty punishing.

That’s what happened yesterday to Australia’s largest private hospital operator, Ramsay Health Care, when it reported that its core earnings for the first half had grown by 7.5% to $288.0m and core EPS (earnings per share) by 7.8%. This was below Ramsay’s guidance range for the full year of an increase of 8.0% to 10.0%, and its shares were sold off, losing 5.75% on the day or $3.90 to close at $63.90.

Analysts had been expecting Ramsay to do better, with consensus forecasts for the full year dividend to grow by 14.3% (Ramsay lifted its interim dividend by 8.5% to 57.5 cents per share), and top line revenue growth of almost 7% for the Australian hospital division (Ramsay achieved top line growth of 4.3%).

But it did reaffirm full year guidance of cores EPS growth of 8.0% to 10.0%.

So, how should you play Ramsay? Firstly, let’s take a closer look at the results.


For Ramsay, the result is a tale of two continents. A strong performance in Australia due to cost efficiency programmes, and a weak performance from France and the UK where revenue fell.

Overall, Group revenue grew by 3.0% to $4.4bn, EBIT by 1.5% to $470.4m and Core NPAT by 7.5% to $288.0m.

Australian hospitals, which contribute 55% of Group EBITDAR, lifted earnings by 9.1%. Although revenue only grew by 4.3%, Ramsay was able to improve its EBIT margin from 14.6% to 15.3%, mainly due to operational efficiencies and a cost restructuring programme implemented over the last 2 years. By way of comparison, Ramsay’s main competitor, Healthscope, saw its margin get crunched from14.3% to 11.6% in the December half.

Looking ahead, Ramsay expects continued volume growth, and says that the recent focus on improving the value and affordability of private health insurance will be a positive for the sector. It says that the reimbursement environment with the private health funds is stable, with most arrangements negotiated in FY17 with multi-year terms. It is also sees opportunities with non-hospital earnings – pharmacy being an example, where it now has 54 pharmacies.

Brownfield developments to hospitals and clinics (beds, theatres, suites) remain a key part of the growth strategy, with $57m of work completed in the first half, $147m set to open in the second half, and $156m in the first half of FY19. The company is currently considering expansion business cases worth over $500m, including a major expansion of the Joondalup Health Campus in Perth.

The French hospitals’ business, which accounts for 35% of Group EBITDAR, saw revenue decline by 1.1% to 1,066m. EBITDAR fell by 5.8% from 206.1m to 194.1m. According to Ramsay, overall admission growth and strong cost management mitigated the negative tariff setting.

In a slightly more upbeat assessment, Ramsay says that the tariff decrease slated for March 2018 is a little lower than anticipated. They are progressing a centralisation programme in France, which will see functions such as finance, admin and HR removed from hospitals and located in a separate shared service centre. When implemented, this is expected to save £5m pa.

UK hospitals were impacted by NHS (National Health Service) demand management strategies, with revenue falling by 4.8% to £206.2m. EBITDAR fell by 4.6% to £49.4m – about 10% of the Group. A positive tariff adjustment will take affect from 1 April. On the volume front, Ramsay expects normal volume growth to return in the short to medium term.


Going into the results, the Brokers saw upside in Ramsay. According to FN Arena, there were 2 buy recommendations and 5 neutral recommendations, and a consensus target price of $73.26 (see table below – data sourced from FN Arena).

Broker Recommendations (prior to result)

Brokers were also forecasting earnings per share growth of 9.8% in FY18, and a further 9.5% in FY19.

With the December half result a little less than anticipated, and ongoing challenges in Ramsay’s European business, the coming days will probably see brokers make some minor downgrades to earnings forecasts and target prices.


With attractive demographic sector fundamentals, combined with their very strong record of execution, I have long argued that Ramsay Health Care should be a core stock in your portfolio. While the December result was a little disappointing, Ramsay’s reaffirmation of full year guidance is important, and I can’t see cause to change my view.

On last night’s close at $63.90, Ramsay is trading on a multiple of 22.2 times FY18 earnings and 20.4 times forecast FY19 earnings. It is not that cheap, and with earnings growth slowing (from the low teens to high single digit over the next few years), the risk is that there may be a further PE de-rating.

I think that this is unlikely, with fund managers looking at any price weakness as an opportunity to top up. A hold for me at these levels – buy in market weakness. 



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