Economic update

The recent US Federal Reserve action on monetary policy is intended to limit, rather than mitigate, the current slowdown in the US. At this stage, it is unlikely that the latest move would lead to a strong rebound in the US and trigger growth significantly in the rest of the world. This is because monetary policy is still arguably restrictive in the face of current housing correction, so it is not reflationary. Furthermore, the recent tightening of lending standard has contributed more to declines in both new and existing home sales, and left inventories of unsold homes near their peaks. This, combined with other recent economic data, suggests that the US economy remains at risk of falling into recession.

In Europe, the stress in the banking sector is not the only concern. Recent leading business surveys have moved down in a manner that points to a loss of growth momentum going into this December quarter. Furthermore, the Euro has appreciated noticeably and energy prices remain elevated. These should delay the European Central Bank from raising interest rate any time soon.

Evidence of weakness in Europe suggests that the rest of the world might not completely decouple from the US. While the mixed economic data in Japan is currently difficult to interpret, the scale is leaning towards the downside risk. The rest of Asia has developed a stronger domestic demand base as well as regional trade with China as a centre point. Will Asia be immune to the current global weakness? It is difficult to determine at this stage.

In Australia, the domestic data continue to portray a strong economy and a recent rate increase confirmed that the Reserve Bank retains its tightening bias on the back of growing inflationary pressure.
Source: Navigator

Reducing the cost of your insurance

How most personal insurance premiums are structured
The vast majority of life, critical illness and income protection insurance policies are purchased on what is known as a ‘stepped rate’ premium basis. This simply means that the premium paid in any given year directly reflects the risk level associated with the life insured’s age. Generally speaking, as the life insured gets older, premiums increase yearly to reflect an increase in the occurrences of death and disability. While this premium structure can be economical during younger years, as a person moves towards middle age premiums can escalate so that by the time old age arrives, prices can become prohibitively expensive.

Is there an alternative?
Fortunately an alternative exists – the ‘level rate’ premium option. Level rates aim to regulate premium payment amounts so they are evenly spread over the life of a policy and avoid the often sudden increases common with stepped rate premiums.

Did you Know?
The savings made over a 40 year period for a male non smoker, who started a life policy for $500,000 at age 25, would be enough to provide an extra retirement benefit of $287,723 at age 65.*
A level premium income protection plan worth $3,000 per month for a non-smoking, white collar female aged 30, will initially cost 132% more than the equivalent stepped rate premium, but will be 10% cheaper than stepped premium rates at age 40, 56% cheaper at age 50 and 60% cheaper at age 60.*
If a male non-smoker instigated a level premium life insurance policy worth $160,000 at age 25, and increased the benefit amount to maintain premium parity in each year where stepped premium rates were higher, he would have life cover worth $2,462,211 by the time he reached age 64.*
Speak to your insurance adviser today to find out whether a level premium rate policy structure is suitable for you.
* Excluding Policy Fees
Source: Tower Australia Ltd

What is dividend imputation?
(also known as Franking Credits)

One of the problems that taxation legislation has attempted to remedy over the years is the potential for income to be taxed more than once. With this in mind, the imputation system was introduced in an attempt to overcome the double taxation of dividends paid by Australian companies to their shareholders.

Prior to the introduction of dividend imputation, an Australian company would make a profit from their business operations and would then pay tax on the profit. The after-tax profit was then available to be dealt with in a manner decided upon by the company. In many instances, part of that profit would be paid out to the company’s shareholders in the form of a dividend. As the dividends received by a shareholder now formed part of their income, shareholders were required to include that income in their own personal tax return and pay tax on that income.
The following example illustrates what used to happen.
Company A makes a profit of $100 on which it paid tax of $30. The profit available after tax is $70. Let’s assume Company A pays the $70 to a shareholder whose marginal tax rate also 30%.
The shareholder receives their dividend of $70 and pays $21 tax, leaving a net of $49 in the hands of the shareholder.
In this simple example, $100 profit has been eroded by $51, being the total tax payable by both Company A and the shareholder.
Dividend imputation sought to address this problem.
Whilst companies still pay tax on their profits, shareholders now receive an imputation credit for the tax that has already been paid by the company. The amount of imputation credit that passes on to a shareholder is dictated by the amount of Australian tax that has been paid by the company.
Where a company has paid Australian tax on its entire income, the dividend is referred to as being fully franked. If part of the income is not subject to Australian tax, the dividend may only be partially franked.
A fully franked imputation credit is calculated as follows.
Amount of dividend x company tax rate/100 – tax rate
Let’s turn back to the example of Company A.
The dividend paid by the company is still $70, but the shareholder receives a $30 imputation credit to be offset against their personal tax liability.
Dividend imputation can deliver benefits to shareholders by potentially enhancing the level of return they receive. For example, where a shareholder has a tax rate of less than 30% (the current company tax rate), they will receive a refund of excess franking credits. Certain investment vehicles also pay reduced levels of tax. For example, a superannuation fund is generally taxed on its income at a maximum rate of 15%, but in many cases may pay no tax at all. Where the tax paid by the shareholder (e.g. individual or a super fund) is less than the imputation credit applied, the excess imputation credit is refunded to the shareholder by the Australian Taxation Office, effectively increasing the return they receive on their shareholding.
Access to the imputation system generally applies to investments in Australian shares. These may be held directly or through a managed fund. When considering the tax implications of alternative investments, Australian shares may offer additional tax advantages.
Source: Peter Kelly – Professional Investment Services

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Superannuation contributions limits

Much has been written over the past year on the significant changes to superannuation that have arisen as a result of the Government’s “simpler super” reforms.

In this article we will revisit the limits that apply to superannuation contributions.
Whilst there is technically no limit on the amounts that may be contributed as “concessional” contributions to super, contributions that exceed specified “caps” may be taxed at a rate of 46.5%. Concessional contributions are those contributions that are being claimed by the contributor as a tax deduction.
For the 2007/08 financial year, the concessional contribution cap is $50,000 however, for people aged 50 and over, the limit is $100,000. These limits are applied “per person, per financial year” so contributions from multiple sources are aggregated.
Concessional contributions are treated as taxable income to the superannuation fund that receives the contribution. As such, they are taxed inside the superannuation fund at a rate of 15%.
Contributions that are not subject to a tax deduction are referred to as non-concessional contributions. Non-concessional contributions are limited to a maximum of $150,000 per person per year, however a person aged under 65 may bring forward up to three years contributions and effectively contribute up to $450,000. Non-concessional contributions are not taxed as income to the receiving superannuation fund and are therefore not subject to the 15% contributions tax.
However, where non-concessional contributions exceed the relevant cap, the excess will be taxed at a rate of 46.5%.
If a superannuation fund receives a non-concessional contribution that exceeds the relevant non-concessional contribution cap of $150,000 (or $450,000 under the 3 year averaging arrangement), the fund is required to refund the contributions that exceed the cap. This requirement should help to eliminate the risk of making excessive non-concessional contributions however, if non-concessional contributions are made to a number of unrelated superannuation funds, the excessive contributions will not be picked up, resulting a potential 46.5% tax impost.
With the increased attractiveness of superannuation, many people are looking to access the superannuation system as a structure for holding their investments. It is important to look at who can make contributions to a superannuation fund.
Generally, anyone under the age of 65 is able to make a contribution to a superannuation fund. There is no requirement that the contributor be working, in fact they may never have worked. There may however be restrictions on their ability to claim a tax deduction for personal contributions.
Between ages 65 and 74, concessional and non-concessional contributions may still be made provided a “work test” is met in each year of contribution. To meet the work test, the contributor must be employed, or self-employed, for gain or reward for a period of at least 40 hours worked over not more than 30 consecutive days, in the year in which the contribution is made. Contributions can not be made once a person turns 75.

Source: Peter Kelly – Professional Investment Services

Australia is Asia’s biggest investment market

As Australia re-launches its financial services export drive, it’s worth reminding ourselves where we sit in the world’s pecking order.

With this in mind, the latest Benchmark Report from InvestAustralia makes for very encouraging reading notwithstanding the big challenge for us as a country is what to do about it.
According to the report we hold Asia’s biggest pool of investment funds and the fourth biggest on the planet. Our economy is the fifteenth biggest in the world and our economic growth is the tenth fastest.
Our stock market is the second biggest in the region after Japan’s and we have the highest proportion of floating stock compared to any of our neighbours. We also have the fourth biggest debt securities market in the region.
In short, Australia is a power hitter very used to playing way above its weight. Indeed if you add in our global political influence as evidenced by our developing relationship with China and our very close ties with the US, we are a big league player often outflanking much bigger countries which is probably why some of them get their noses out of joint when we move into their playgrounds.
The next step being deepening our relationship with India through a mooted Free Trade Agreement and leveraging this as they prepare to host the 2010 Commonwealth Games can only improve our positioning as we progress through the century.
Now overlay our world leadership in securitisation, property management and pension fund reform (hardly a country around the world is not mimicking us at least in some way), and you can see why so many of our neighbours are putting us on their trade delegation schedules.
For a country which InvestAustralia says has only 0.5 per cent of the world’s population, all these are quite amazing achievements and may explain why 70 per cent of our economy is now in service related industries.
To keep developing however we have to get back to growing productivity, boosting national income, building up our national institutions and integrating them into the region like never before.
Source: www.financialstandard.com.au

Seasonal trivia

The common abbreviation for Christmas to Xmas is derived from the Greek alphabet. X is letter Chi, which is the first letter of Christ’s name in the Greek alphabet.
Some priests in Australia advise you to say “Happy Christmas”, not “Merry Christmas”, because Merry has connotations of getting drunk - which brings its own problems. One should say “Happy” instead.
Oliver Cromwell, in England banned Christmas Carols between 1649 and 1660. Cromwell thought that Christmas should be a very solemn day so he banned carols and parties. The only celebration was by a sermon and a prayer service.
Silent Night was written in 1818, by an Austrian priest Joseph Mohr. He was told the day before Christmas that the church organ was broken and would not be prepared in time for Christmas Eve. He was saddened by this and could not think of Christmas without music, so he wanted to write a carol that could be sung by choir to guitar music. He sat down and wrote three stanzas. Later that night the people in the little Austrian Church sang “Stille Nacht” for the first time.
St Francis of Assisi introduced Christmas Carols to formal church services.
26 December was traditionally known as St Stephen’s Day, but is more commonly known as Boxing Day. This expression came about because money was collected in alms-boxes placed in churches during the festive season. This money was then distributed during to the poor and needy after Christmas.
Christmas trees are edible. Many parts of pines, spruces, and firs can be eaten. The needles are a good source of vitamin C. Pine nuts, or pine cones, are also a good source of nutrition.