The 2021 Federal Budget was just handed down against a backdrop of a strong improvement in domestic economic conditions reflected in record Australian and US Equity Markets and Local Residential property valuations. This is quite a turnaround from 12 months ago when much of the country was in lockdown and a significant portion of the working community was relying on Job keeper for temporary income support. A combination of a number of very substantial Government stimulus initiatives supported by record low interest rates from the RBA has made investments more financially attractive and in many cases positively geared and tax effective. This should lead to significant takeover activity and in the last few days this has begun to gain further momentum (Star has bid for Crown, Seven has bid for Boral and Dexus bought APN). Whenever new market highs are achieved the prospect of a 10% pullback becomes increasingly likely as part of an efficient market, and should be seen as a healthy event avoiding excess speculation. All of the major banks reported a significant improvement in market conditions reflected in much better declared dividends which will be most welcome for clients requiring income to fund their retirement. At the same time Iron Ore prices surged above $220 per ton leading to record share prices for BHP, RIO and Fortescue (Interestingly Treasury is till budgeting on $55 in the budget).
Clearly overseas, particularly in India, Coronavirus continues to take its toll and even though Governments have collectively injected $8Trillion into the global economy there is still great uncertainty as to when some economies can get back to a level of normality. While this persists we should expect interest rates to remain at emergency low levels which does leave the prospect of encouraging speculation and potential inflation at a later date. Domestically we appear to be running a good 12 months ahead of our major international peers in the recovery which provides an opportunity to use this to our advantage knowing that we cannot realistically raise interest rates until our counterparties consider similar action. Indeed we are beginning to see staff shortages in our inner city for entry level work due to the absence of foreign students and immigration which presents its own set of problems and may well lead to wage inflation. It is the fear of future inflation and hence higher interest rates that is top of mind of the professional investment community at this time.
Against this economic backdrop the Budget reflected these improved conditions with an improvement in the projected deficit of around $53 Billion but a total of $1Trillion being the peak cumulative debt by June 2025 (another good reason why the Federal Government would want interest rates to stay low as a net borrower). The primary goal of the budget being to get unemployment down to below 5% through a large increase in spending especially in the Aged Care, Education and National Disability areas. There is no expectation of our borders opening until next year so this is very much reliant on domestic growth without the support of tourist, foreign students and new migrants. It may well lead to consumption in travel being redirected into home improvements and general investments.
The full transcript of the budget is at www. budget.gov.au with a full analyses on our website www,virtueandpartners.com.au below are the key bullet points by client type :
- Instant asset write off extended for another year and remains uncapped
- Full expensing and loss carry-back measures retained for another 12 months
- New body to help business deal with the ATO
- Significant improvements in Childcare subsidies
- Additional targeted tax relief of $1,080 per person
- 50% wage subsidies for apprenticeships and traineeships
- Work related super contributions up to $27,500
- SGC rises to 10% and expected to reach 12% by 2025
- Life time cap for retirement phase of super up to $1.7m
- $450 month minimum wage before super is paid is abolished
- Legacy products can be rolled over without CGT
- More flexibility for overseas members of a SMSF
In retirement planning
- The home downsizing rule allowing proceeds of up to $300k per person to be transferred tax free into Superannuation has been amended to age 60 rather than 65 which will be most helpful for some clients although the property must still be owned for at least 10 years
- The work test for clients age 65-74 to meet before transferring after tax funds into super has been abolished which again will help in getting superannuation balances up
- 80,000 additional home care packages and additional medicines listed on the PBS
So very much a stimulus budget with significant national debt and low interest rates to be with us for the foreseeable future. This is probably a free kick for our domestic property market as investors allocate funds that may have been used for consumption and travel to extend mortgages. With minimal expectation of wage growth for the next few years, real wealth is more likely to be achieved by holding quality assets with controllable debt that will appreciate and has capital gains tax benefits as opposed to personal exertion income which is fully taxed and then hoping to make some modest savings in a bank account. As this becomes increasingly apparent in the community this almost becomes self -fulfilling and as such managing an overheating economy without excessive increases in interest rates will be the next major challenge for the Government.
We will be holding a year end client zoom meeting in June and as usual will keep the office open on Thursday evenings and Saturday mornings in June to ensure that all clients have good access to the firm’s advisers prior to financial year end. Full details of the budget are on our website www.virtueandpartners.com.au and we welcome your feedback and referrals at email@example.com
As always I thank you for your support and encouragement