budget 2016/17 - pitcher 2016_17... · budget deficit the deficit is expected to fall from $37.1...
TRANSCRIPT
S Y D N E Y W E A L T H M A N A G E M E N T P T Y L T D
BUDGET 2016/17Impact on the Economy & Investment Markets
Economic Forecasts
Measure 2015/16 2016/17 2017/18
Real GDP 2.5% 2.5% 3.0%
Nominal GDP 2.5% 4.25% 5.0%
Household Consumption 3.0% 3.0% 3.0%
Business Investment -11.0% -5.0% 0%
Mining Investment -27.5% -25.5% -14%
Non-mining Investment -2.0% 3.5% 4.5%
Net Exports 1.25% 0.75% 0.75%
Inflation 1.25% 2.0% 2.25%
Unemployment 5.75% 5.5% 5.5%
Budget Deficit -$39.9 billion -$37.1 billion -$26.1 billion
Dwelling Investment 8.0% 2.0% 1.0%
OverviewBased on Treasury projections, the Government expects the economy to grow by 2.5% in both 2015-16 and 2016-17 and to increase to 3.0% in 2017-18. These growth figures continue to be well above the OECD average and higher than all of the major advanced economies. This result is supported by:
• household spending,
• dwelling investment, and
• exports,
while mining investment is expected to continue to detract from growth over the forecast period.
Budget DeficitThe deficit is expected to fall from $37.1 billion (2.2% of GDP) in 2016-17 to $6.0 billion (0.3% of GDP) in 2019-20. Treasury expects the budget to continue to run deficits at least until 2019-20, where the deficit is projected to be $6 billion. The budget is expected to return to surplus in 2020-21.
The continuation of budget deficits for the foreseeable future is disappointing as public debt continues to increase and the prospect of returning to surplus is too far into the future to be credible. This continues a theme of governments making promises beyond their terms of office which they may not be held accountable for. Furthermore, returning to surplus relies upon an improvement in economic growth so that the forecast increase in company profits more than offsets the loss in revenues from a lower company tax rate. This assumption may prove optimistic in the current low growth environment.
Impact on the Economy
Source: Budget Paper Number 1 (figures represent percentage change on previous year)
Source: Budget Paper Number 1
Summary of Government Expenditure
Sector % of Total
Social Security and Welfare 35.2%
Health 15.9%
Public Order and Safety 7.5%
Defence 6.0%
General Public Services 5.0%
Other 30.4%
Total 100%
2
Australian EquitiesThe budget is likely to have the following effect on domestic equities:
• The proposed reduction in licence fees for commercial television and radio broadcasters will result in a marginal increase in earnings for companies exposed to this sector (e.g. Ten Network).
• The Government announced changes to the Wine Equalisation Tax (WET) which will tighten the eligibility criteria. This may improve the supply-demand characteristics of grape production and therefore assist the listed wine producers (e.g. Treasury Wine Estates).
• Aged-care providers are set to lose more than $1 billion in funding for complex health care over four years. This will be a marginal negative for listed aged-care providers (e.g. Estia, Japara, Regis).
• Banks will provide $121 million to help fund the corporate regulator, ASIC. This will have a negligible effect on earnings.
• The second Sydney airport at Badgery’s Creek will receive $115 million. This is a positive for the listed entity Sydney Airport (SYD), assuming they take up their option to proceed.
• The Government has also confirmed funding for several rail and road projects which should provide a benefit for certain listed companies in the non-residential construction sector that obtain contracts.
• Consumer goods retailers such as Harvey Norman (HVN) and JB Hi-Fi (JBH) may benefit from the extension of the GST to low value goods imported by consumers from 1 July 2017.
• The significant changes to the superannuation regime (which will limit future contributions by high net wealth individuals) may be a minor negative for fund managers and wealth managers (as they could expect a net reduction in inflows). However, this may be offset by additional contributions from other individuals who can benefit from some of the more flexible superannuation arrangements.
Conclusion
On balance, the proposed cuts in the corporate tax rate should be a positive for Australian equities over the medium term. In the short term there will be some minor benefactors being stocks in the construction, building materials and consumer goods retailing sectors. However, the main near-term driver of equities will continue to be the performance of the underlying economy. As Treasury forecasts suggest that this will remain slightly below trend over the next 12 months, we would expect equity returns to remain slightly below longer term averages.
Fixed InterestBased on Treasury projections, inflation is likely to revert to the lower end of the RBA’s target band of between 2% and 3% over the medium term. In the short term inflation is likely to continue to remain subdued, possibly allowing the RBA the possibility of lowering the official cash rate even further.
Nevertheless, we believe the RBA has entered potentially dangerous territory with rates at these low levels for the following reasons:
1. Rates are already very low by historical standards and further cuts are arguably like “pushing on a string” and unlikely to reignite demand alone,
2. If the economy slows sharply or falls into recession, then the RBA does not have much ammunition left to restore growth, and
3. Low rates are a negative for individuals living on fixed incomes such as retirees. If individuals think low interest rates are likely to be a long term phenomenon then this can actually encourage greater savings to compensate for the lower return and have the opposite effect of what the RBA intended. Higher savings implies lower consumption, lower growth and higher unemployment.
The current environment of global uncertainty, lack of stability in government policy and high household debt has not been conducive to stimulate investment and deliver sustainable growth. Ultimately what is required is stable government policy, lower household debt and an improvement in business confidence.
Commercial and Residential PropertyThe budget was a net positive for commercial and residential property developers as no changes were made to negative gearing.
Impact on Investment Markets
3
Impact of Key Measures
Superannuation changesThe Government has proposed significant changes to superannuation. In summary the most significant changes are as follows:
• From 1 July 2017, the Government will introduce a $1.6 million transfer balance cap on the total amount of accumulated superannuation an individual can transfer into the retirement phase.
• Where an individual accumulates amounts in excess of $1.6 million, they will be able to maintain this excess amount in an accumulation phase account (where earnings will be taxed at the concessional rate of 15%).
• Members already in the retirement phase with balances above $1.6 million will be required to reduce their retirement balance to $1.6 million by 1 July 2017. Excess balances for these members may be converted to superannuation accumulation phase accounts.
• The Government will introduce a $500,000 lifetime non-concessional contributions cap. The lifetime cap will take into account all non-concessional contributions made on or after 1 July 2007, and will commence at 7.30pm (AEST) on 3 May 2016.
• From 1 July 2017 the Government will also reduce the annual cap on concessional superannuation contributions to $25,000 (currently $30,000 under age 50; $35,000 for ages 50 and over).
• The Government will remove the tax exemption on earnings of assets supporting Transition to Retirement Income Streams from 1 July 2017 (income streams of individuals over preservation age but not retired).
• From 1 July 2017, the Government will remove the current restrictions on people aged 65 to 74 from making superannuation contributions for their retirement. People under the age of 75 will no longer have to satisfy a work test and will be able to receive contributions from their spouse.
Potential impacts
• These changes will significantly limit the extent to which the tax-free benefits of retirement phase accounts can be used by high net wealth individuals and cause a raft of new planning challenges.
• Some commentators have suggested that this may lead to an increase in the use of negative gearing in property in an attempt to minimise income tax and add further fuel to the already expensive housing markets in Sydney and Melbourne.
• The changes are unlikely to have significant impacts on existing superannuants with large balances as the 15% tax on earnings on balances above $1.6 million is still far lower than the top personal marginal tax rate of 49%.
• Subject to clarification of the rules, it may be desirable for superannuation funds with large balances in pension phase to crystallise capital gains within the fund before switching balances above $1.6 million into accumulation phase.
• It may also be suitable for self-managed superannuation fund investors with large balances to consider running segregated pension and accumulation accounts so they can better manage capital gains in future.
• The changes will have large impacts on wealthy individuals with low superannuation balances who were hoping to take advantage of the generous non-concessional contribution caps in the years before their retirement. Other structures such as family trusts with corporate beneficiaries may now need to be considered.
• The changes will benefit income earners who haven’t taken advantage of their concessional contribution caps as well as non-working individuals with large taxable incomes in their own names, aged between 65 and 74.
Company Tax changesThe Government will reduce the company tax rate to 25% over 10 years.
Potential impacts
• It is hoped that these changes will improve the global competitiveness of Australian companies.
• Due to the long-dated nature of these policy commitments it remains to be seen whether they will be implemented.
Tax AvoidanceA Diverted Profits Tax (DPT) will be effective from 1 July 2017. Dubbed a “Google tax”, it will target large multinational companies (defined as those with global revenue of at least $1 billion and Australian revenue of at least $25 million) by imposing tax penalties on such companies who attempt to minimise their Australian taxation obligations by attempting to shift domestic profits offshore.
Potential impacts
• It may encourage multinationals to restructure their affairs prior to 1 July 2017, possibly reducing Australian operations and jobs.
• It remains to be seen how the legislation will be implemented and how it effectively deals with currently legitimate transfer pricing arrangements that assist profit shifting.
4
Change to Personal Tax RatesThe changes to personal tax rates will have a nominal impact on household incomes who are subject to tax in the $80,001 to $87,000 tax bracket.
Marginal Tax Rate * Income FY16 Income FY17
0% $0- $18,200 $0- $18,200
19.0% $18,201 - $37,000 $18,201 - $37,000
32.5% $37,001 -$80,000 $37,001 -$87,000
37.0% $80,001 - $180,000 $87,001 - $180,000
45.0% $180,000+ $180,000+
Negative GearingThere are no changes in the budget with regards to negative gearing.
Capital Gain Tax (CGT)There are no changes in the budget with regards to CGT.
Goods and Services Tax (GST)The GST will be extended to include low value goods imported into Australia from 1 July 2017. The intent of this measure is that low value goods imported by consumers will face an identical tax regime as goods that are sourced domestically. The tax will be collected at the point of sale.
By Dr. Riccardo Biondini and Martin Fowler
*Note: Marginal Tax Rates are Exclusive of the Medicare Levy
5
About Pitcher Partners
Pitcher Partners is an accounting, auditing and business advisory firm providing personal service and quality advice to high wealth individuals, small to medium public companies, large proprietary companies, local government and privately owned businesses.An association of firms located in Melbourne, Sydney, Perth, Adelaide, Brisbane and Newcastle, Pitcher Partners is purpose-built for the middle market. We have a strong reputation for providing personal service and quality commercial advice to our clients across a broad range of industries.
On 1 November 2015 Moore Stephens Sydney and Pitcher Partners Sydney merge to become a new Pitcher Partners Sydney practice. The combined expertise and resources means that clients will benefit from greater infrastructure support both locally and nationally through the Pitcher Partners association.
Our commercial services to dynamic businesses
Financial essentials• Accounting and Business
Advisory Services• Audit, Risk Management
and Assurance• Internal Audit• Recovery, Turnarounds
and Insolvency• Tax advice and Compliance
Planning and growth• Business Consulting
and Commercial Advice• Business Performance
Improvement• Business Structuring• Corporate Finance• Corporate Governance• International Business Advisory• Investment Advisory Services• Succession Planning• Superannuation Services• Tax Consulting• Technology and IT Consulting• Valuations
Our private wealth services• Estate Planning• Family Office Management• Investment Advisory Services• Philanthropy Services• Succession Planning• Superannuation Strategies• Tax Advice and Compliance
Industry specialisations• Retail• Professional services• Health and aged care• Manufacturing• Not for profit• Property and construction• Government and the public sector• Agriculture• Food and beverage• Hospitality
Pitcher Partners refers to the Victorian partnership and its associated entities including Pitcher Partners Advisors Limited, Pitcher Partners Consulting Pty Ltd, Pitcher Partners Corporate Pty Ltd, Pitcher Partners Transaction Services and Pitcher Partners Investment Services Pty Ltd.
$3.8bnWorldwide revenue 2015 (USD)
141Countries
28,000+Partners and staff globally
100+Partners nationwide
1,200+People nationally
Pitcher Partners is a national association of independent firms.Liability limited by a scheme approved under Professional Standards Legislation.
Sydney
240+Total Sydney staff
26Sydney partners
6
Firm locations
MELBOURNE
John Brazzale | Managing Partner +61 3 8610 5000 [email protected]
ADELAIDE
Tom Verco | Principal +61 8 8179 2800 [email protected]
SYDNEY
Rob Southwell | Managing Partner +61 2 9221 2099 [email protected]
BRISBANE
Ross Walker | Managing Partner +61 7 3222 8444 [email protected]
PERTH
Bryan Hughes | Managing Partner +61 8 9322 2022 [email protected]
NEWCASTLE
Michael Minter | Managing Partner +61 2 4911 2000 [email protected]
Pitcher Partners has the resources and depth of expertise of a major firm, but with a smaller firm feel. We give our clients the highest level of personal service and attention. That’s the difference.
Pitcher Partners is a national association of independent firms. Liability limited by a scheme approved under Professional Standards Legislation.
7
Budget 2016_17 Impact on EconInvestMarkets
MELBOURNE
John Brazzale | Managing Partner +61 3 8610 5000 [email protected]
ADELAIDE
Tom Verco | Principal +61 8 8179 2800 [email protected]
SYDNEY
Rob Southwell | Managing Partner +61 2 9221 2099 [email protected]
BRISBANE
Ross Walker | Managing Partner +61 7 3222 8444 [email protected]
PERTH
Bryan Hughes | Managing Partner +61 8 9322 2022 [email protected]
PITCHER.COM.AU
NEWCASTLE
Michael Minter | Managing Partner +61 2 4911 2000 [email protected]
Pitcher Partners is an association of independent firms. Liability limited by a scheme approved under Professional Standards Legislation.
Get in touch...
Martin Fowler Partner, Wealth Management
+61 2 8236 [email protected]
Haris Argeetes Manager, Wealth Management
+61 2 8236 [email protected]
Charlie ViolaPartner, Wealth Management
+61 2 8236 [email protected]
Jordan Kennedy Client Director, Wealth Management
+61 2 9228 [email protected]
The information provided is not personal advice. It does not take into account the investment objectives, financial situations or needs of any particular investor and should not be relied upon as advice. While the information is provided in good faith and believed to be accurate and reliable at the date of preparation, we will not be held liable for any losses arising from reliance thereon. We recommend investors consult their personal financial adviser to discuss suitability and application to their individual circumstances. Advisors at Pitcher Partners Sydney Wealth Management are authorised representatives of Pitcher Partners Sydney Wealth Management Pty Ltd, AFS & Credit Licence number 336950.
Dr. Riccardo Biondini Investment Analyst, Wealth Management
+61 2 8236 [email protected]
Lino Abruzzese Financial Specialist | Wealth Management
+61 2 8236 [email protected]