In the wake of the Federal Government’s handing down of Budget 2014, Professional Planner brings you reaction from across the financial planning industry and allied sectors. This page will be updated regularly, so keep an eye on this link as the day unfolds.
From independent consulting business StrategySteps:
The Government delivered a tough budget that was described as the start of a long term repair job. The Government believes that repairing the Budget is necessary to protect living standards and prepare for an ageing population.
The measures announced aim to balance the fine line between repairing the budget and managing the impact of fiscal constraint on economic activity and employment. The budget deficit is forecast to improve substantially starting in the next financial year.
Government debt is forecast to reduce as a result of the reigning in of the deficit. Debt in 2023-24 is projected to be nearly $300 billion lower, even when assuming future tax relief, at $389 billion compared with the $667 billion at the 2013-14 Mid-Year Economic and Fiscal Outlook.
Economic impact
The motivation of the Budget is built on the premise of securing a stronger economy particularly by increasing activity in the non-resources sectors. Economic growth in Australia has been growing below trend for four of the past five years and the unemployment rate has risen as a result.
Click the following link to view the full report: StrategySteps – budget2014 final
From the Financial Planning Association:
The Federal Government held firm on its commitment to avoid adverse changes to superannuation. There are some amendments outlined however that will benefit financial planning clients, and as a result have been welcomed by the Financial Planning Association of Australia (FPA).
Specifically, the FPA welcomes changes to the non-concessional cap, which it views as a fairer and more workable solution. It is also in support of the Government’s stated commitment to increasing Super Guarantee (SG) to 12%, albeit with a slightly changed timeline, and the increase in the pension age.
Dante De Gori, General Manager, Policy and Conduct at the FPA said:
“Obviously one of the key areas of interest and concern for financial planners and their clients is the treatment of superannuation. Understanding the positive impact that adequate superannuation can make to clients, we welcome the pledge the Government has made to increasing SG to 12%. There has been a slight rejig of the timeline however which means we will reach 12% a year later than previously proposed. The increase to 9.5% will proceed from 1 July 2014 but will then pause at 9.5% until 30 June 2018, before increasing by 0.5% each year until it reaches 12% in 2022-23.
Click the following link to view the full FPA statement: FPA Budget2014 response
From the Association of Financial Advisers (AFA):
The Abbott Government’s first Budget will significantly impact many groups of Australians who will need the benefit of financial advice in order to navigate their way through the changes and maximise their personal financial position, according to the Association of Financial Advisers (AFA).
AFA CEO Brad Fox says the impact of the Budget measures, which at a high level are designed to spread the load of reducing the Budget deficit across nearly all adult Australians, will hit welfare recipients and middle income families hardest. “These families will have less disposable income and this may affect their ability to afford vital personal insurance,” he says. “They may also have less capacity to fund financial investments, reduce personal borrowings or make additional contributions to super.”
Mr Fox also says that for Australians born after 1965, who are seeking the freedom to retire before age 70, there is now a compelling reason to build assets outside superannuation. “The age at which people born after 1965 can access the age pension is being lifted to 70, so we may see the preservation age – that is, the age at which people can access their superannuation – also raised to 70 in subsequent budgets,” he says. “This is one of the most compelling reasons yet for Australians to get financial advice on how to build investments outside the superannuation environment.”
Click the following link to view the full AFA statement: AFA Budget 2014
From National Australia Bank chief economist Alan Oster:
“This budget puts a large focus on medium term sustainability.”
“With a large set of outlays coming up in disability services, education and paid parental leave, this budget aims to make room for these projects and also help repair the fiscal situation.
“This has seen a focus on starting straight away – with the government front end loading the adjustment process and attempting to make everyone share in the pain.
“Economically there are risks, because the domestic economy is still fragile. We expect domestic demand growth of only 1% next year.
“Tax and petrol price rises alone should not be enough to stall the economy, however confidence effects are hard to judge – especially when you are reducing government transfers.
“Overall, the adjustment process is firm but not unprecedented. Indeed, in the mid 1990s the adjustment under Howard and Costello was more aggressive.”
From the Financial Services Council (FSC):
The 2014-15 Commonwealth Budget will make a substantial contribution to restoring long term budget sustainability according to the Financial Services Council.
John Brogden, CEO of the Financial Services Council said: “The budget will control spending and secure growth. It’s also the first budget in years where superannuation has not been the target of tinkering.”
“Raising the pension age to 70 years by 2035 is an important, necessary and reasonable reform given the increasing life expectancy of Australians,” Mr Brogden said.
Many Australians starting work today will live for more than one century. It is critical that the increased life expectancy of Australians is the driver for Age Pension and superannuation policy, so future generations of taxpayers are not burdened with the cost of an ageing population.”
“The government needs to match the Age Pension increase with an increase in preservation age to 65.”
Mr Brogden also said that keeping older people in the workforce is imperative if Australians are to self-fund their retirement.
Click the following link to view the full FSC statement: FSC Statement on 2014 Federal Budget
From advocacy and networking group Women In Super:
Women in Super (WIS) Chair, Cate Wood said the Government’s double whammy of increasing the retirement age to 70 whilst withdrawing up to $500 per year in super from the lowest paid would put many women in a very vulnerable position in their old age and was blatantly unfair.
“Increasing the pension age to 70 will hit women hard as many have to leave work early for caring reasons. The responsibility of caring for disabled children, elderly parents and sick partners usually falls to women and is one which has a detrimental impact on their income earning ability and therefore on their retirement savings. Older women also experience discrimination in the employment market.”
Ms Wood stated that women have half the superannuation savings of men and greater life expectancy meaning their savings had to last longer.
“The Government intends to repeal the Low Income Superannuation Contribution (LISC), a vital policy measure that specifically helps 3.6 million workers earning up to $37,000 save for their retirement. ” said Ms Wood.
“When women have half the superannuation savings of men it is incomprehensible that the Government chooses to remove a tax break from 50% of the female workforce whilst leaving untouched the 30% super tax break for the highest paid – predominantly men.”
Click the following link to view the full statement from WIS: 2014 WIS Budget Release
From the SMSF Professionals’ Association of Australia (SPAA):
The Federal Government’s decision to introduce a mechanism to allow taxpayers to withdraw excess non-concessional contributions made after 1 July 2013 is a win for SMSF trustees.
Jordan George, Senior Manager, Technical & Policy, of the SMSF Professionals’ Association of Australia (SPAA), said: “This is good news as it stops punitive tax outcomes where taxpayers can pay up to 93% on excess non-concessional contributions.
“We congratulate the Government on allowing taxpayers to refund excess non-concessional contributions, removing the overly punitive outcomes.
“SPAA has advocated for this treatment of excess non-concessional contributions for many years and is pleased to see the Government has responded to our concerns.
“Although the announcement is welcomed, the Government needs to work though the details of the proposal because the suggestion to allow taxpayers to withdraw earnings associated with the excess non-concessional contributions is likely to result in complex compliance requirements.”
Click the following link to view the full statement from SPAA: SPAA Budget release
From the Actuaries Institute:
The Actuaries Institute supports the Government’s budget decision to increase the pension eligibility age to 70, effective from 2035.
The President of the Actuaries Institute Daniel Smith said: “This decision is an important step in ensuring our pension and health care systems remain sustainable. Without taking action now Australia will be unable to support through fiscal policy the ever increasing number of retirees, particularly as our workforce shrinks over coming years.”
Over the next 30 years the Institute estimates that the number of over 65s will double from 3.5 million (15% of the population) to 7 million (22% of the population) and will outnumber the people under 18. Income support for the elderly which is the largest government expenditure is projected to grow from $40 billion today to $50 billion in four years, highlighting the fiscal problem that the Government needs to deal with.
The Actuaries Institute supports the Government’s budget decision to increase the pension eligibility age to 70, effective from 2035.
The President of the Actuaries Institute Daniel Smith said: “This decision is an important step in ensuring our pension and health care systems remain sustainable. Without taking action now Australia will be unable to support through fiscal policy the ever increasing number of retirees, particularly as our workforce shrinks over coming years.”
Over the next 30 years the Institute estimates that the number of over 65s will double from 3.5 million (15% of the population) to 7 million (22% of the population) and will outnumber the people under 18. Income support for the elderly which is the largest government expenditure is projected to grow from $40 billion today to $50 billion in four years, highlighting the fiscal problem that the Government needs to deal with. The increase to age 70 is one of the measures to bring this cost under control. Another measure that the Government has introduced to reduce costs include the changed indexing of the Age Pension to prices not wages from 2017.
Mr Smith said that without a number of further policy changes future governments will find it difficult to provide similar level of benefits to future retirees.
Click the following link to view the full statement from the Actuaries Institute: Actuaries 2014 Budget
From the Association of Superannuation Funds of Australia (ASFA):
ASFA says this year’s Federal Budget will deliver new investment opportunities for superannuation funds, policy stability and certainty for the community when it comes to planning how they will save for their retirement.
ASFA has identified five key policy areas highlighted in the Budget:
1. Investment environment changes support infrastructure investment and diversification of the Australian Securities Exchange (ASX)
2. Changes to Age Pension eligibility need to be made using a long-term, holistic policy approach
3. Programs for older workers are important for the future, but more debate is needed
4. Pensions test changes mean superannuation savings will be even more important in the future
5. Delaying increase in Super Guarantee not unexpected
Click the following link to view the full statement from ASFA: ASFA Budget media release
From the Institute of Chartered Accountants Australia:
The Institute of Chartered Accountants Australia has welcomed the government’s investments in infrastructure and research in the Federal Budget but warns that piecemeal tax changes could slow growth.
Institute Chief Executive Officer Lee White said that he acknowledges the government’s commitment to infrastructure investments through incentive-based funding models with the states and territories. “We can’t cut our way to prosperity, this is where targeted investment and support is needed. With modest growth forecasts, we welcome the government’s nation-building spending commitments.”
Responding to the Treasurer’s confirmation of a ‘temporary Budget repair levy’ Mr White said that long-term fiscal problems could not be solved by short-term solutions. “The debt levy could negatively impact consumer spending, hurt unincorporated small businesses and puts Australia’s top marginal tax rate amongst the highest in the world.
“The amount raised by the debt levy is projected to be only $3.1bn over four years and even this may prove to be optimistic.
“While the government appears to have its house in order on the spending front, this Budget shows we need to look at both sides of the ledger to balance the books in the long run.”
The Institute is disappointed that there isn’t a clearer roadmap for the tax reform process.
“We have been calling for broader tax reform which would need to look at the GST rate and base. We also need to build a community consensus on the need for meaningful tax reform and that dialogue needs to be prioritised now.
“The only significant tax reform on the horizon is the committed 1.5% cut in the company tax rate but while the government is giving with one hand, it is taking with the other by imposing a 1.5% tax increase on our largest companies to fund the Paid Parental Leave scheme,” Mr White said.
From AMP Capital:
On the implications for the property sector, Tim Nation, AMP Capital head of real estate capital: “Higher taxes will negatively impact fragile consumer confidence and retail spending. Our position has been that the large, dominant shopping centres will be best equipped to combat retail headwinds and the changes announced in this year’s budget add further conviction to this view. After a period of low interest rates, we believe that the residential housing market will soften, leading to more sustainable levels of growth. We welcome further commitments to major infrastructure spending as this will benefit all real estate sectors – residential, office, retail and industrial.”
On infrastructure implications, Paul Foster, AMP Capital head of infrastructure for Australia and New Zealand: “The Australian Government’s recently renewed focus on infrastructure procurement and investment – first evident at State and now at Federal levels – is encouraging as it gives private sector investors visibility and confidence on an upcoming pipeline of investment opportunities. This is an important development in addressing the inertia and logjam evident in infrastructure planning and development over much of the last decade. The budgetary measures should translate into more opportunities for investors across all major infrastructure sectors, particularly in transport and social infrastructure. We expect the private sector to play a continuing role in financing the essential assets that support service delivery, enhance growth and productivity, and underpin the operation of Australia’s society.”
On implications for fixed income assets, Simon Warner, AMP Capital head of global fixed income: “While we recognise that there are some systemic issues related to the budget and sustainable expenditures, we don’t expect this to threaten Australia’s strong AAA sovereign rating. Increased levies could damage consumer and business confidence, but data released in the aftermath of the budget will help us assess the extent of the impact. We are looking to the detail of the budget on any measures that help develop the corporate bond market, such as a spur in infrastructure spending and debt issuance.”
On implications for Australian equities, Gian Pandit, AMP Capital co-head Australian fundamental equities: “The headwinds facing the Australian economy highlight the importance of focusing on earnings certainty and capital preservation when deciding which companies to own. The gains we saw in 2013 will be harder to achieve this year, so actively managing capital and closely scrutinising earnings risk is paramount.”
From the Institute of Public Accountants:
The Commission of Audit has looked at the spending side of the ledger and has identified structural changes to rein in costs, but what is missing is the revenue side, according to the Institute of Public Accountants (IPA).
“All of the measures announced in tonight’s Budget by themselves will not be able to address the unsustainable structural deficit that has been created,” said IPA chief executive officer, Andrew Conway.
“The first step to address the revenue shortfalls is to revisit the Henry Review and look at the most efficient ways to collect tax.
“Temporary taxes are no panacea for genuine tax reform.
“Short term initiatives to fill the revenue gap can be damaging to a fragile economy, particularly in terms of small business.
“Piecemeal tax hikes can erode business confidence and may not produce the anticipated revenue levels as it can lead to behavioural changes.
“However, we are very pleased to hear that the Government is apparently going to reduce the company tax rate. Even though only one-third of small businesses are incorporated, this is a great step forward.
“The promised tax reform white paper can’t come quickly enough to restore productivity and growth in the Australian economy,” said Mr Conway.
From Dalton Nicol Reid Portfolio Management:
Following the release of the 2014–15 Budget, we note the following implications for the economy:
Mild drag on growth – the Budget looks for a substantial shrinking of the deficit—from 3.1% of GDP in the current year, to 1.8% in 2014–15 and 1.0% in 2015–16. But this is only a mild ramp-up of policy tightening (0.1% of GDP in 2014–15, 0.3% in 2015–16) compared to what had already been laid out. While there is indeed a range of new savings measures in the Budget, a lot of this is offset by new ‘spending’ (on both the revenue and expenditure sides).
Lower household income – a budget repair levy, changes to Family Tax Benefits, fewer benefits to job-seekers, the reintroduction of fuel excise indexation, a range of other initiatives spanning medical and senior citizens and an increase in higher education costs will all play a part in reducing household income. While these changes are more a 2015–16 story than 2014–15, the sum of the above changes is roughly 1% of household consumption in 2013, a sizeable figure. Thus, it is expected to have an impact on consumer sentiment and spending.
RBA required to support economy – the pressure on the RBA to increase interest rates will ease with this budget as it provides support for housing.
Repeal the resources tax and the carbon tax – if this is achieved, it would deliver a mild boost for miners, and for carbon-emitting companies (e.g. steel, building materials, transport). It should be noted that all of the above measures will need Senate approval, which may not be straight-forward.
Paid parental leave and a tax cut from small companies – the paid parental leave scheme will put some money back in consumers’ pockets. It is to be funded by a 1.5% levy on the profits on large companies. At the same time, the Government will lower the corporate tax rate by 1.5%, leaving the overall tax rate unchanged for large companies. Smaller companies thus enjoy a tax break.
Lifting infrastructure spend – a combination of new funding and an asset recycling initiative (to encourage states to sell assets and reinvest) is expected to lift infrastructure spend by over $600m in 2014–15, and ~$1.5bn in subsequent years. This could provide support for contractors and building material companies.
Impact on the market
The tough budget was well flagged so it is likely that is has been absorbed by the market at this point and market action would suggest this is the case. From our portfolio perspective we see the infrastructure spend as having a positive impact on Lend Lease and Macquarie Bank, the likely impact on interest rates as being favourable for Stocklands and Dulux and the changes to the Medicare co-payments having a negative impact on Sonic Healthcare (albeit we do not think the impact will be substantial).
From Colonial First State:
Colonial First State (CFS) has responded to last night’s budget by identifying the five budget proposals most likely to impact advisers and members.
The CFS list includes:
- Temporary Budget Repair Levy on income over $180,000;
- Option to withdraw excess non-concessional contributions from superannuation;
- Age pension to increase to 70 by 2035;
- Changes to the Commonwealth Seniors Health Card (CSHC); and
- Superannuation guarantee rate to increase to 9.5%, with a change in the schedule for an increase to 12%.
Craig Day, Executive Manager of FirstTech at CFS said among the most contentious discussions from the budget was the Levy for high income earners.
“The proposed Levy will apply to taxable income, therefore we know that strategies which reduce taxable income will result in a reduction in the amount of levy payable,” explained Mr Day. “This can be achieved by either reducing assessable income or increasing deductible expenditure.”
Mr Day added that taxpayers who sell assets or take superannuation lump sums between 1 July 2014 and 30 June 2017 may therefore need to take into account any additional levy they may incur if it pushes their taxable income past $180,000.
The budget has also proposed that individuals will have the option to withdraw contributions made from July 1 2013 that exceed their non-concessional contributions cap. According to Mr Day, this is good news for clients.
“This proposal means that clients who inadvertently exceed their non-concessional cap will have the ability to withdraw the excess amount rather than have it taxed at the top marginal rate,” he explained. “It also ensures the treatment of excess non-concessional contributions will be broadly consistent with the rules that apply to excess concessional contributions.”
Also well publicised from the budget was the increase in age pension age to 70 by 2035.
“While the policy intention is to encourage people to continue working until the age of 70, the reality is many people will be unable to do so. This means there may be a gap between when someone retires and when they qualify for the age pension.”
Mr Day estimates that a person born 1 January 1966 (aged 48), who wishes to retire at age 65, will require approximately $96,432 to generate the equivalent of the maximum age pension to fund the five year gap. For a couple funding the five year gap, it is approximately $72,689 each.
Treasurer Joe Hockey also announced a number of changes to CSHC. From 1 January 2015 the deemed income from account based pensions will be included in the CSHC income test. However, grandfathering applies to holders of a CSHC on 1 January 2015 with an account based pension commenced prior to that date.
As currently legislated, the Government confirmed that the superannuation guarantee (SG) rate will increase from 9.25% to 9.5% from 1 July 2014. However, this rate will now be frozen until 30 June 2018, postponing further increases.
“This announcement gives employers and employees certainty into next financial year, allowing time for salary sacrifice arrangements to be amended to ensure they remain within their concessional contributions cap.
“However, freezing the SG rate at 9.5% until 30 June 2018 represents a further delay from the government’s previous proposal. The new proposal will further reduce the SG entitlements of all employees until the rate reaches 12% from 1 July 2022,” Mr Day added.
