'Budget Updates'

Australian Cash

As was widely expected by the market, the RBA increased the cash rate by 0.25% to 4.25% in April.

At its most recent meeting on 4 May, the RBA raised the cash rate further 0.25% to 4.50%, citing the better economic environment domestically, strong growth in Asia and a rising terms of trade. They also noted that inflation appears likely to be in the upper half of the 2-3% target zone over the coming year.

The RBA indicated that interest rates are now “around average levels”.  

Australian Fixed Interest

The UBSA Composite Bond All Maturities Index rose 0.6% in April. Market concerns about Greece led to a flight-to quality rally in the long end of the Australian yield curve. Government bond failed to match the rally in US bonds. Yields on 10 year Government bonds fell to 5.7% in April (down from 5.78% in March).

At the shorter end of the yield curve, bank bill yields rose as the RBA lifted the cash rate and markets priced in more risk of further tightening later in the year. Expectations for further RBA tightening were supported by solid business and consumer confidence surveys, and another 19,600 rise in employment in March.

Elsewhere, for most of the month the tension between domestic strength and offshore concerns was resolved by Australian bond markets trading sideways.

Global Fixed Interest

The Barclays Capital Global Aggregate index (hedged $A) rose 0.9%.  Yields in key major markets drifted lower in April as safe-haven buying trumped improved economic data. Investors favoured highly rated major bond markets, particularly the US, in preference to more peripheral European markets where sovereign risk concerns were elevated. As the graph in the next column illustrates, the Euro zone debt crisis widened as Greek sovereign debt was downgraded to “junk” status, Fears of contagion crystallised, with subsequent downgrades of Spain and Portugal. Yields on 10-year US Treasury fell to 3.66%, (down from 3.83% in March).

In the US, consumer spending climbed 0.6% in March – the most in five months, after increasing 0.5% the previous month. The Institute for Supply Management’s index of manufacturing rose to 60.4 in April, the highest level since June 2004, from 59.6 in March. Readings greater than 50 signal expansion.

Corporate credit markets remained resilient during April, as many global issuers were pre-occupied by Q1 earnings season, Euro sovereign concerns, and global corporate bond issuance was muted during April.

Australian Listed Property

The S&P/ASX 300 A-REIT Index was up 3.9% in April, outperforming the broader share market by 5.2%. Investors continued to pursue stocks that they believed could surprise on earnings as the global recovery continued.

For the second month running, the top two sectors over the month were Industrial (6.7%) followed by Retail (6.3%). Diversified (0.2%) was the worst performing sector.

The top performing trusts for the month were Goodman Group (9.2%) Charter Hall Group (8.5%) and Westfield Group (7.1%). Goodman Group benefited from continued confidence that management can deliver on their results. Charter Hall Group enjoyed similar positive sentiment, while Westfield Group saw strong performance with US retail sales exceeding forecasts.

The worst performing trusts for April were ING Industrial Trust (-2.2%) and Mirvac Group (-4.7%). 

Global Listed Property

The UBS Global Property Investors Index (hedged, $A) rose 4.1% in April. The USA/Canada was the top performing region (6.8%) followed by Singapore (5.6%).   . The worst performing regions were Continental Europe (-4.0%) and the UK (-1.6%).

An index of US pending home resales climbed 5% in March following an 8.2% jump a month earlier. The housing market, which triggered the worst recession since the 1930s, has received a boost from a tax incentive, provided buyers signed the contracts by the end of April.

Housing starts increased for the second straight month in March and building permits, a sign of future building, jumped to the highest level in more than a year.

DR Horton Inc, The second largest US homebuilder by revenue, reported its second straight quarterly profit as net orders jumped 55%. US property trusts have surged more than 20% in 2010.

Australian Shares

The S&P/ASX 300 Accumulation Index fell 1.4%in April, with weakness in the resource and related sectors (contractors, steel) dampening the overall market.

Speculation of a new federal tax on resources following the Henry Review (subsequently confirmed) – in addition to negative overseas leads – weighed heavily on resources stocks. Outperforming M&A targets Lihir Gold and MacArthur Coal were the exceptions that outperformed.

Healthcare stock CSL, fell particularly hard following poor results from its US rival Baxter, who gave a downbeat assessment of the US plasma market when it released its results. Domestic retailers continued to struggle, not helped by a disappointing Q3 sales result from Harvey Norman. ANZ and Asciano’s profit results were also not well received.

In contrast, earning from the Bank of Queensland and Macquarie were welcomed, while builders (strong leads from US peers), CBA, News Corp (strong US movie and TV releases), Paperlinx (closure of Burnie mill), Telstra (NBN deal speculation) and REITs outperformed. NAB rose despite the ACCC rejecting their takeover of AXA’s Australian and New Zealand businesses.

International Shares

Europe’s sovereign debt crisis stifled the global equity market rally in April, with the MSCI World ex Australia index (hedged, $A) up 0.7%.  The unhedged return was -1.4%. In the US, the S&P 500 climbed in April following strong Q1 earning results (Apple, Caterpillar, Citigroup, Intel and Yahoo!) and encouraging economic data (especially employment and housing). The VIX (volatility) index fell to its lowest level in almost three years.

Consistent with the economic trends, cyclical Consumer, Consumer and IT stocks outperformed defensive Health and Consumer Staple names.

Risk aversion returned late in April as Greek government bond yields soared after being downgraded to ‘junk’, with investors contemplating a real risk of sovereign default. This led to fears of another credit crunch if the contagion spread to other highly indebted Euro members such as Spain and Portugal. Fears of increasing financial regulation also scared the market, fuelled by civil action against Goldman Sachs (-15%) over its behaviour prior to the GFC.

European markets (France -4%, Germany -0.3%, UK -2.2%) were hit hard by the worsening local debt crisis. Asian markets (Japan -0.3%, Korea 2.9%, Taiwan 1.1%) performed much better, helped by the more positive regional and US outlook.

Global Emerging Markets

The MSCI EM index ($A) was down 0.2% in April. China fell on concerns of an overheated property market, and the subsequent clampdown by the government on property speculation. Up to 60% of the country’s gross domestic product relies on construction.

The Government in April banned loans for third homes and raised mortgage rates and down payment requirements for second home purchases. Prices rose 11.7% across 70 cities in March compared to a year earlier; however, the government has stopped short of raising interest rates to contain property prices. The Government said it remained committed to expansionary policies to cement the nation’s recovery.

China’s economy grew 11.9% in the first quarter, the fastest pace in almost three years. The Government projects gross domestic growth for the year at around 8%.

investment markets data

table 1 – investment market performance to 30 April 2010

table 2 – breakdown of Australian & global fixed interest market performance to 30 April 2010

table 3 – performance of major Australia share market indices to 30 April 2010

table 4 – breakdown of Australian share market performance to 30 April 2010*

*Based on S&P/ASX 300 Accum Indices (reclassified in accordance with the Global Industry Classification Standard “GICS”).

top 5 performing Australian shares in April 2010*

bottom 5 performing Australian shares in April 2010*

*Based on the universe S&P/ASX 100 Index.

table 5 – breakdown of international share market performance by country to 30 April 2010

Note: all returns are calculated in local currencies

table 6 – breakdown of international shares market performance by sector to 30 April 2010*

*Based on MSCI world Indices (reclassified in accordance with the Global Industry Classification Standard “GICS”).
 
Note: all returns are calculated in local currencies

*Based on MSCI world Indices (reclassified in accordance with the Global Industry Classification Standard “GICS”).
Note: all returns are calculated in local currencies

economic indicators

economic indicators

Superannuation

Reduction of concessional contribution cap from 1 July 2009

The Government will reduce the concessional contributions (CC) cap to $25,000 per annum (indexed), with effect from the 2009-2010 financial year. The transitional concessional contributions cap (applicable to individuals aged 50 and over for the 2009-2010, 2010-2011 and 2011-2012 financial years) will be reduced to $50,000 per annum. ‘Grandfathering’ arrangements will apply to certain members with defined benefit interests as at 12 May 2009 whose notional taxed contributions would otherwise exceed the reduced cap. Similar arrangements were applied when the concessional contributions cap was first introduced.

The annual cap on non-concessional contributions (NCC) is $150,000 per annum for the 2008-09 financial year and will remain at that level in 2009-10. In the future, the non-concessional cap will be calculated as six times the level of the (indexed) concessional contributions cap. There has also been no change to the bring-forward rule, which will be capped at $450,000 for 2009-2010.

The transition to retirement (TTR) strategy remains unaffected other than the amount that can be salary sacrificed tax effectively into super. For example a client age 55 on a salary of $150,000 and with a super balance of $800,000 could see the benefits of a TTR plus salary sacrifice strategy reduce by $57,000 over 10 years due to limiting their total concessional contributions so as not to exceed the relevant cap. This example assumes the client draws a pension payment so as to maintain their original net income. Investment returns are assumed at 7% pa after fees but before tax and inflation is assumed to be 3% pa

Temporary reduction of the Government co-contribution from 1 July 2009 to 30 June 2014

The Government will temporarily reduce the matching rate and maximum co-contribution that is payable on an individual’s eligible personal non-concessional superannuation contributions, with effect from 1 July 2009.
Under this measure, the matching rate and corresponding reduction will be:

Co-contribution eligibility

*Based on shade-out thresholds for 2008 – 200

Small and insoluble lost accounts to be transferred to the ATO

From 1 July 2010, superannuation providers will be required to transfer accounts of lost members with balances of less than $200 (small accounts), and those which have been inactive for a period of five years and have insufficient records to identify the owner of the account “insoluble accounts” to unclaimed monies.

Former members of these lost accounts will be able to reclaim their money from the ATO.

Impact

• It will decrease the number of members on the Lost Members Register
• It will increase the importance of members remaining in contact with their superannuation providers.

Extension of capital loss roll over for complying superannuation fun

The Government announced further enhancements to the optional capital gain tax loss roll over for complying superannuation fund mergers where the continuing fund has at least 5 members. The roll over provisions will be extended to 30 June 2011 to ensure funds have sufficient time to utilise the provisions.

Under the proposed measures, merging superannuation entities in a net capital loss position will be able to elect to roll over assets with accrued capital gains as well as accrued capital losses. The measures will also include pooled superannuation trusts and complying superannuation businesses of life insurance companies.

Extension of 50% minimum pension draw down relief from 1 July 200

The Government will halve the minimum payment amounts for account-based pensions for 2009-2010. Reducing the minimum payment amounts for account-based pensions will assist pension account balances to recover from capital losses from the global recession. This measure extends the pension drawdown relief provided by the Government for 2008-2009. The minimum annual income payment for an account-based pension is calculated as a minimum percentage of the account balance as follows:

*Note that where a pensioner has already received in excess of the reduced minimum, the minimum in their case will be the amount they have actually received. No refund will be allowed

New Zealand retirement savings portability scheme

The Government has agreed in principle to the signing of a memorandum of understanding (MOU) with New Zealand to establish a trans-Tasman retirement savings portability scheme. This scheme will permit transfers of superannuation savings between certain Australian superannuation funds and New Zealand KiwiSaver funds. Currently, members of Australian superannuation funds may only transfer their retirement savings within the Australian superannuation system. Any transfers permitted by this scheme may commence from a date to be set as part of the MOU.

Taxation

Reductions in Personal Income Tax

The Government has confirmed that previously legislated tax cuts will go ahead for the 2009/10 and 2010/11 financial years. No additional tax cuts were announced in this budget.

Income tax payable at selected taxable income levels (ignoring Medicare levy and tax offsets)

Low income tax offset (LITO)

The maximum amount of LITO will increase as follows:

• from $1,200 to $1,350 in 2009-10
• to $1,500 in 2010-11

Indicative income tax savings

Tax calculations include LITO, Medicare levy (not surcharge).

Private Health Insurance Rebate

The Government has announced changes to the private health insurance rebate. These changes take affect from 1 July 2010.

Currently, the private health insurance rebate is payable to anyone who took out cover with a complying private health insurance policy and is based on the premium paid.

*If the oldest person moves into the next age group during the year, the rebate is based on the number of days that person was in each group

From 1 July 2010 the Government will introduce a 3 tiered approach to determine the amount of private health insurance rebate payable to individuals. Once income is above the upper threshold ($120,000 for singles and $240,000 for couples) no private health insurance rebate will be payable. The amount of the rebate will also be dependant on the age of the individual as the tables below illustrate.

Medicare Levy Surcharge increase

To ensure that middle and high income earners do not abandon their private health insurance the Government has introduce variable rates of Medicare Levy surcharge, if appropriate private heath insurance cover is not held and certain income thresholds are exceeded (as illustrated in the table above).

Previously legislated changes to the definition of ‘income’ will also apply to the Medicare levy surcharge from 1 July 2009, which includes:

• taxable income;
• reportable fringe benefits;
• reportable employer superannuation contributions;
• personal deductible superannuation contributions;
• total net investment loss

Note: amounts withdrawn from superannuation to which the low rate cap amount ($150,000 for 2009/10) has been applied are not included in ‘income”.

Increased Medicare levy low income threshold from 1 July 2008

The Government will increase the Medicare levy low income threshold to $17,794 for individuals and $30,025 for individuals in families. The additional amount of threshold for each dependent child or student will also increase to $2,757. The Medicare levy threshold for pensioners below age pension age will also be increased to $25,299. This is to ensure that pensioners below age pension age will not have a Medicare liability where they don’t have an income tax liability.

Additional small business and general business tax break from 13 December 2008

The Government will expand the small business and general business tax break announced in February. Small businesses will now be entitled to a bonus deduction of 50% where they acquire an eligible asset between 13 December 2008 and 31 December 2009 and install it ready for use by 31 December 2010. The previously announced 30% and 10% bonuses will continue to apply for all other businesses.

Changes to income tax exemption for income earned by Australians working overseas from 1 July 2009

From 1 July 2009 foreign employment income derived by certain Australians working overseas for a continuous period of 91 days or more will become taxable in Australia. To avoid double taxation, taxpayers will be entitled to a foreign income tax credit for any foreign tax paid. Currently, foreign employment income derived by Australians working overseas for a continuous period of 91 days or more is exempt from tax in Australia. Importantly, this exemption will continue to apply to income earned as an aid worker, a charitable worker, under certain types of government employment or on projects that are in the national interest

Small business CGT concessions

The Government will make several changes to the small business capital gains tax (CGT) concessions provisions so that they operate flexibly and as intended. A transitional rule will extend the time for taxpayers to choose to access the concessions where the choice arises from changes to the concessions announced in the 2008-09 Budget and the 2008-09 Mid-Year Economic and Fiscal Outlook. This extension of time will apply from Royal Assent of the amending legislation. Access to the concessions for assets acquired on the death of an individual will be extended to cover assets that have passed to a testamentary trust where the individual would have been able to access the concessions at the time of their death. This extension will apply to CGT events happening in the 2006-07 income year and later income years. The provisions which treat certain distributions to entities connected with a private company as dividends will be excluded from applying to the small business CGT retirement exemption. This exclusion will apply from Royal Assent of the amending legislation. This measure was introduced into Parliament together with the previously announced changes to the concessions on 19 March 2009

Social Securit

Age pension age to increase to age 67 from 1 July 2017

The qualifying age for the Age Pension and the Commonwealth Seniors Health Card for men and women will increase to 67 years of age from July 2023. The Henry Tax Review report on the retirement income system also recommends aligning the superannuation preservation age with this higher Age Pension age. The qualifying age will begin to increase from July 2017, by six months every two years.

Age Pension increases

The Government has announced the following changes from 20 September 2009:

• an increase to the base rate for single age pensioners of $30 per week;
• a combining of the four separate allowances (GST, Utilities, Telephone/Internet and Pharmaceuticals) into one ‘pension supplement’ that will be paid fortnightly; and
• an increase to the pensioner supplement of $2.49 per week for singles and $10.14 per week (combined) for couples.

These increases will apply to recipients of the Age Pension, Service Pension, Disability Support Pension, Carer Payment, Bereavement Allowance, Widow B Pension, Wife Pension, Income Support Supplement and to War Widows.

Total increase in Age Pension entitlements

Income test – changes to taper rate

From 20 September, 2009, payments to pensioners will be reduced by 50 cents for each extra dollar of private income above the income test “free area”. Currently, once a pensioner earns over the tax free amount a 40 cent per $1 reduction applies.

Paid Parental Leave

The Government announced it will introduce a paid parental leave scheme. The scheme will be funded by the Government and is intended to commence on 1 January 2011. Parents will be able to lodge claims from 1 October 2010.

Payments under the scheme will be paid to the primary carer at the adult federal minimum wage (currently $543.78 per week) for a period of up to 18 weeks. Payments made under the paid parental leave scheme will be treated as taxable income and will affect entitlement to family assistance payments, but will not be counted as income for income support payments.

Primary carers (such as stay at home mums) who do not qualify for the scheme or those people who elect not receive paid parental leave can still access the baby bonus or Family Tax Benefit Part B where they meet the eligibility requirements for those benefits.

Primary carers will be eligible for the scheme if they:

• Earned less than $150,000 in the full financial year prior to the birth or adoption of a child;
• Have worked at least 330 hours over the 10 months (equivalent to around one full day of work each week) preceding the birth or adoption of a child; and
• Have also worked continuously with one or more employers for at least 10 of the 13 months before the expected date of birth or adoption.

Paid parental leave also will be available to contractors, casual workers and the self employed.

Employer funded leave

Parents who are eligible for the scheme will be able to continue to access employer funded leave around the time of the birth or adoption of the child. This includes employer provided maternity and recreation leave. Government funded paid parental leave can be taken in conjunction with, or in addition to, employer provided paid leave.

Effect on baby bonus and other family benefits

Parents who choose to receive paid parental leave will not be eligible to receive the baby bonus, except in the cases of multiple births where parents will not receive the baby bonus for the first child only.

Parents who choose to receive paid parental leave will not be entitled to the following benefits for the 18 weeks whilst in receipt of paid parental leave:

• Family Tax Benefit Part B
• Dependent spouse
• Child-housekeeper
• Housekeeper tax offset

Operation of the scheme

Employers will make the paid parental leave payments for most employees. The Government will provide employers with funds in advance of the payments they make to employees.

Reform of family payments from 1 July 2009

From 1 July 2009, as a cost reduction measure, the FTB–A payment rates will be indexed by the Consumer Price Index (CPI) consistent with other family payment such as FTB-B and the Baby Bonus. Currently the maximum rates of FTB-A for children under the age of 16 are benchmarked to the higher of a proportion of the combined couple rate of pension payments, or CPI. The upper income threshold for FTB-A, FTB-B, dependency tax offsets and the Baby Bonus will remain at its current level until July 2012. These thresholds would ordinarily be indexed by CPI. The following upper thresholds will remain:

Extension to the First Home Owners Boost

The government will extend the First Home Owners boost for another six months. The following table summarises the extension of the First Home Owner grant:

What it means for the economy

This Budget has been framed against the backdrop of a sharp contraction in the world economy in late 2008 and early 2009. Virtually all developed economies are now in recession with the deleveraging of corporate and household balance sheets and a collapse in global trade undermining global growth. The flow-on affect to Australia has been swift and profound.

Against this backdrop, the Government’s Budget strategy has two contrasting objectives:

• provide further fiscal stimulus in the short-term, building on the emergency measures announced in the December 2008 and February 2009 mini budgets and;
• set the wheels in motion to balance the Budget over the long-term.

While All Financial Services Pty Ltd ABN 56 055 133 018, AFSL No 239183 believes that the information contained in this document is correct, no warranty of accuracy, reliability or completeness is given and , except for liability under the statute which cannot be excluded, no liability for errors or omissions is accepted

The information provided in this document is general information only.  In preparing this information, we did not take into account the investment objectives, financial situation or particular needs of any particular person. Before making an investment decision you need to consider whether this information is appropriate to your needs, objectives and circumstances, and we recommend you seek independent financial advice.

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