Economic Update and Outlook for Quarter 1 – 2024

Our research partners, Innova Asset Management, have released their Quarter 1 – 2024 Market Commentary report.

As we reflect on the first quarter of 2024, the stock market has been really interesting, driven by new technology and changes in the economy. Two main things stood out during this time: the significant changes brought by new AI technology in tech companies, and how unsure everyone was about interest rates going up or down. Together, these factors greatly impacted how the stock market moved, how investors felt, and the overall view of the economy.

Here’s a quick look into the dynamics that shaped the financial terrain:

– The stock market in 2023 was mainly driven by breakthroughs in AI technology and changing views on interest rates.

– The largest US tech companies, often called the “Magnificent 7,” were a big reason the market did well.

– NVIDIA stood out due to its focus on AI and big projects by companies like Microsoft.

– The US economy stayed strong, thanks to people spending a lot of money, making it less likely for the economy to shrink.

– Global stock markets, especially those focused on technology like the Nasdaq, did really well in 2023.

– After reaching high levels in 2022, inflation (or the cost of living) in rich countries started to decrease, changing what people thought the Federal Reserve would do about interest rates.

– There’s a growing difference in value between the most prominent US companies and other stocks, with indexes like the S&P 500 and Nasdaq showing higher than usual prices.

Watch the full video breakdown below, or read the attached commentary here on the current key issues, a comprehensive review of Quarter 1, and how we are positioning our Innova Active portfolios for clients.

Economic Update and Outlook for Quarter 3, 2023

Federal Budget Briefing | 10 May 2023

Key Takeaway’s 

– Labor’s second Budget was filled with measures aimed at easing the cost of living over the coming years, addressing the challenges of a slowing economy, and bolstering the healthcare system.
– For super, announcements were focused on aligning employer Superannuation Guarantee payments with pay cycles, and the introduction of the previously announced tax on earnings on balances in excess of $3 million.
– There were no announcements extending the halving of pension minimums for another year or to freeze the Transfer Balance Cap at its current level. There was also no announcement to change legislated ‘stage 3’ tax cuts, although a number of tax strategies were proposed to support small businesses and increase the number of dwellings available on the rental market.

Points of Interest for Financial Planning Clients

No announcement to extend halving of the pension minimums for another year

From 1 July 2023

The government did not announce any extension of the halving of the account-based pension and term allocated pension minimum drawdown requirements, which have been in effect since 2019-20.  

As a result, the minimum drawdown requirements are likely to revert to 100% of the standard minimum from 1 July for the following pensions (and annuities): 

– Account based pensions 
– Transition to retirement pensions
– Term allocated pensions

Although the government could still announce an extension of the current halving of the minimum drawdown requirements for these pensions prior to the end of the year, given this wasn’t announced in the Budget it is considered unlikely.  

For those taking advantage of the reduced minimum pension payments, your pension payments will increase and, in some cases, double, as of 1 July 2023. Options need to be considered in relation to the treatment of this excess cashflow. Please speak to your adviser about strategies that may be applicable.

No announcement to freeze the transfer balance cap at its current level 

In February 2023, it was confirmed that the Transfer Balance Cap (TBC) would increase by $200,000 to $1.9m on 1 July this year due to indexation. However, since February there has been some industry speculation that the government may freeze the TBC at its current level of $1.7m in the Budget – which did not happen.  

While it’s still possible that the government could announce this before the end of the year, the fact it wasn’t announced in the Budget suggests the TBC will increase to $1.9m on 1 July 2023 as expected.  

Given this, clients with large super balances who plan to retire before 1 July 2023 and start their first retirement phase income stream, such as an account-based pension, may wish to consider delaying until 1 July 2023 to get the benefit of the full $200,000 indexation. Please speak to your adviser about strategies that may be applicable.

Requiring employers to pay their employees’ SG at the same time as their salary and wages 

From 1 July 2026

The government has announced that employers will be required to pay their employees’ superannuation entitlements at the same time as their salary and wages. Currently, employers are required to pay their employees’ superannuation guarantee contributions on a quarterly basis.  

The government says requiring employers to pay employees’ SG at the same time as their salary and wages will make it easier for employees to keep track of their payments and increase their overall retirement benefit.  

For example, the government provides an example showing that a 25-year-old median income earner currently receiving their wages fortnightly, but their super quarterly, could be around $6,000 or 1.5 per cent better off at retirement.  

This announcement will apply to employee super guarantee contribution and will most likely not apply to salary sacrifice arrangements.

At this stage the government’s announcement does not provide any carve outs for small businesses. As a result, this proposed change will impact all employers who do not already pay super at the same time as salary and wages. However, these employers will have until 1 July 2026 to prepare for the change, if legislated.

The government also announced it will provide additional funding to the ATO in 2023–24 to improve its ability to identify and act on cases of superannuation underpayment by employers. 

$3m total super balance tax 

From 1 July 2025

The government has announced it will reduce the tax concessions available to individuals with a total super balance exceeding $3 million, from 1 July 2025.  

Individuals with a total super balance of less than $3 million will not be affected.  

This reform is intended to ensure generous super concessions are better targeted and sustainable. It will bring the headline tax rate to 30 per cent, up from 15 per cent, for earnings corresponding to the proportion of an individual’s total super balance that is greater than $3 million. This rate remains lower than the top marginal tax rate of 45 per cent. Earnings relating to assets below the $3 million threshold will continue to be taxed at 15 per cent or zero per cent if held in a retirement pension account.  

Interests in defined benefit schemes will be appropriately valued and will have earnings taxed under this measure in a similar way to other interests.  

The government has been relatively tight-lipped on this announcement with not a lot of detail provided. It will therefore be necessary to wait for the legislation to be introduced before a range of issues will be clarified, such as what amounts will be treated as ‘contributions’ and ‘withdrawals’ for the purposes of the earnings calculation.

Implementation of legislated ‘Stage 3’ tax cuts  

From 1 July 2024

The former government legislated three stages of personal income tax cuts commencing from the 2018-19 financial year, with stage 3 of these tax cuts due to take effect on 1 July 2024.  

While the current government had previously ruled out any changes in this area, there has been ongoing speculation about whether it would be delayed, modified or cancelled given it comes at significant cost to the Budget and particularly benefits higher income earners. With nothing new announced in last night’s Budget regarding the stage 3 tax cuts, they remain legislated to take effect on 1 July 2024.  

However, it’s worth noting that there is more than a year, and a further Federal Budget, between now and commencement. 

As a reminder, the stage 3 tax cuts will change the income tax rates and thresholds (for resident taxpayers) as follows: 

The following graph shows the annual tax saving that the stage 3 tax cuts will provide, based on a client’s taxable income. 

Other Highlights from the 2023 Federal Budget:

– Amendment to the Electric Car Discount
– Small business support – $20,000 instant asset write-off
– Small business energy incentive
– Increased support for Commonwealth Rent Assistance recipients
– Cheaper childcare commences in July
– Aged care regulatory reform
– Funding pay increases for aged care workers 

* Prepared with information from Colonial First State – Federal Budget Briefing paper – 9 May 2023 

Quarterly Market Outlook Report – June ’22

In what continues to be a volatile year for global investment environments, the search for robust and sustainable earnings growth may be difficult to come by as critical economies still remain in limbo due to geopolitical tension and the lingering effects of covid.  Couple this with key questions still continuing in relation to persistently higher inflation and higher interest rates, and it is certainly interesting times for investors.

Our research partners at Innova Asset Management look at the June Quarter and provide some insight into how we are positioning our portfolios.

Quarterly Market Outlook Report – March ’22

While most investment sectors ended 2021 positively, the start of 2022 saw the return of volatility as markets wrestled with higher inflation, Omicron and the escalating Russia V Ukraine crisis.  Our research partners at Innova Asset Management look at the March Quarter and provide some insight into how we are positioning our portfolios.