Our research partners, Innova Asset Management, have released their Quarter 2 – 2024 Market Commentary report.

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

– In January, expectations for rate cuts in the US were highly optimistic and unrealistic. Many expected the first rate cut to happen as early as March, with 6-7 cuts of 0.25% each predicted for 2024.

– This optimism helped boost equities, but as the quarter progressed, the expected date for the first rate cut was delayed, and the number of expected cuts significantly reduced.

– Since October/November 2023, consumer sentiment has improved, reflecting a more positive economic outlook. Positive economic data, especially from the US, has led to increased optimism, higher bond yields, and a new “reflation” narrative for 2024.

– While GDP growth revisions have been positive, there are concerns about sustainability. Consumers have shifted from spending excess savings to using credit cards, which isn’t sustainable long-term. However, increased household wealth has made this more manageable, creating a “wealth effect” that benefits consumers.

– Among 55 managers in the HUB24 Balanced SMA universe, three of Innova’s portfolios ranked in the top five for performance in March. Over a three-year period, three of our portfolios remain in the top ten performers.

Watch the full video breakdown below, or read the attached commentary here on the current key issues, a comprehensive review of Quarter 2, and how we are positioning our Innova Active portfolios for clients.

What has happened in markets | Q2 2024

Market outlook & positioning | Q2 2024

On Tuesday evening, the treasurer, Jim Chalmers, handed down his third Labor budget.

A Budget surplus of $9.3 billion is forecasted for 2023-24, which will be short-lived, with an underlying cash deficit of $28.3 billion expected in 2024-25 (and a $42.8 billion deficit for 2025-26). The Budget noted a weak and uncertain global economy where growth is forecast to remain subdued over the next few years.

Inflation is expected to remain elevated at 3.5% in 2023-24 and then fall to 2.75% in 2024-25.

The Government plans to spend billions to cut energy bills and rent, lowering headline inflation and providing relief for voters grumbling about cost of living pressures ahead of an election next year.

In this summary, we highlight some of the Government’s key initiatives.

It is important to note the Budget announcements are still only proposed at this stage and are to be legislated. Changes can also be made prior to these proposals becoming law.

Cost of living and Government Assistance

Energy bill relief fund for all households and eligible small businesses

The Government will provide $3.5 billion over three years from 2023-24 to extend and expand the Energy Bill Relief Fund to provide a $300 rebate to all Australian households and a $325 rebate to eligible small businesses on their 2024-25 electricity bills.

This builds on the $1.5 billion available for energy rebates provided by the Commonwealth in 2023-24 year under the existing scheme. All Australian households, including households in the external and non-self-governing territories, are eligible for the $300 annual rebate that will be applied in quarterly instalments to electricity bills from 1 July 2024.

Small businesses that meet the definition of electricity ‘small customer’, as determined by their annual electricity consumption threshold, are eligible for a $325 annual rebate.

State and territory Governments will administer the rebates and deliver the payments through retailers. In most cases, your electricity providers will automatically apply the bill relief to your electricity account, and you will not be required to take any action.

Pharmaceutical Benefits Scheme (PBS) changes.

Pharmaceutical Benefits Scheme changes: The Government is working to finalise the new Eighth Community Pharmacy Agreement, supported by up to an additional $3 billion in funding. As part of the Agreement, instead of rising with inflation, there will be a one-year freeze on the maximum PBS patient co-payment for everyone with a Medicare card and a five-year freeze for pensioners and other concession cardholders.

Social Security deeming rates freeze for a further 12 months

The government announced that it will extend the freezing of social security deeming rates to their current rate for a further 12 months until 30 June 2025 to help with cost-of-living pressures.

Since 1 July 2023, the threshold amount for financial investments is $60,400 (for single) and $100,200 (for members of a couple).

For the purposes of the social security income and assets tests, the deeming rules provide that any financial investments are earning a certain rate of income, no matter what (if any) income they are actually earning. If the actual income pensioners receive from their investments is more than the deemed income, the extra income is not counted when assessing their rate of pension, benefit or allowance.

This will benefit approximately 876,000 Centrelink payment recipients, including 450,000 aged pensioners.

Strengthening Medicare and the care economy

The Government is investing $2.8 billion to continue its commitment to strengthen Medicare. This includes the package to address pressures facing the health system, which provides:

– Funding to support older Australians to avoid hospital admission, be discharged from hospital earlier and transition to other appropriate care.

– Deliver a further 29 Medicare Urgent Care Clinics and boost support for regional clinics.

– $90 million to address health workforce shortages by making it simpler and quicker for international health practitioners to work in Australia.

Increase in rent assistance

The Government will provide $1.9 billion over five years from 2023-24 (and $0.5 billion per year ongoing from 2028-29) to increase all Commonwealth Rent Assistance maximum rates by 10% from 20 September 2024 to help address rental affordability challenges for recipients. This builds on the 15% increase in September 2023 and will take maximum rates over 40% higher than in May 2022.

The maximum Rent Assistance for a single person is currently $188.20 per fortnight and varies depending on the amount of rent paid and the family situation of the person.

Mental health support

Almost half of Australians will experience a mental health concern in their lifetime. The Government is committed to creating a system where Australians can access quality and affordable care when and where they need it.

The Government is committing $888.1 billion to a mental health package over eight years to help people get the care they need and make it easier to access services.

From 1 January 2026, every Australian will be able to access a free service without a referral.

Carer Payment improve flexibility.

From 20 March 2025, the Government will make amendments to the eligibility criteria for Carer Payment recipients, the existing 25 hour per week participation limit will be amended to 100 hours over four weeks. The participation limit will no longer capture study, volunteering activities and travel time and will only apply to employment.

Carer Payment recipients exceeding the participant limit or their allowable temporary cessation of care days will have their payments suspended for up to six months rather than cancelled. Recipients will also be able to use single temporary cessation of care days where they exceed the participation limit rather than the current seven-day minimum.

Tax and Superannuation

No changes to stage 3 personal income tax cuts

The Government made no further announcements to the legislated revised stage 3 tax cuts which will commence from 1 July 2024. The Treasurer said all 13.6 million taxpayers will receive a tax cut from 1 July 2024. The average annual tax cut is $1,888 (or $36 a week).

Resident tax rates and thresholds from 2024-25 onwards:

Small business instant asset write-off

The Government will improve cash flow and reduce compliance costs for small businesses by extending the current instant asset write-off concession for another 12 months.

Small businesses, with aggregated annual turnover of less than $10 million, will be able to immediately deduct the full cost of eligible assets costing less than $20,000 that are first used or installed ready for use between 1 July 2023 and 30 June 2024. The $20,000 threshold will apply on a per asset basis, so small businesses can instantly write off multiple assets.

Paying superannuation on Government funded Paid Parental Leave Payment (PPL)

The Government will provide $1.1 billion over four years from 2024-25 (and $0.6 billion per year ongoing) to strengthen Australia’s government-funded PPL for births and adoptions on or after 1 July 2025. Eligible parents will receive an additional payment based on the Superannuation Guarantee (12%) of their PPL payments), as a contribution to their superannuation fund. Both partners are entitled to superannuation on their PPL payment.

This measure will help normalise parental leave as a workplace entitlement, like annual and sick leave, and reduce the impact of parental leave on retirement incomes.

Aged care

Regulatory reform and improved support

Additional funding is being provided to:

-Enhancements to critical aged care digital systems so they remain compliant and ready for the introduction of the new Aged Care Act from 1 July 2025.

-$531.4 million in 2024-25 to release 24,100 additional home care packages in 2024-25.

-$174.5 million over two years from 2024-25 to fund the ICT infrastructure needed to implement the new Support at Home Program and Single Assessment system from 1 July 2025.

-Attract and retain aged care workers, collect more reliable data, and improve the outcomes for people receiving aged care services.

-Reduce wait times for the My Aged Care Contact Centre due to increased demand and service complexity.

-Allow states and territories to continue to deliver the Specialist Dementia Care Program.

-Implement the new Aged Care Act, including Government activities, program management and extension of the Aged Care Approval Round.

-Extend the Palliative Aged Care Outcomes program and the program of Experience in the Palliative Approach program.

Housing

Additional funding is being provided to:

The Government is giving more money to build homes for Australians faster, improve housing infrastructure, train more construction workers, and support affordable housing and homelessness services. This includes:

-$423.1 million over five years starting from 2024-25 to help states and territories provide social housing and services for homelessness under a new agreement.

-$1 billion in 2023-24 to help states and territories build infrastructure for new housing through a new program.

-Increasing the government’s guarantee of housing loans by $2.5 billion to $10 billion, which helps the Affordable Housing Bond Aggregator.

-Funding for 20,000 new training spots in construction-related courses at TAFEs and other training providers, including more access to pre-apprenticeship programs.

-Allowing foreign investors to buy established rental properties at a lower fee if they are used for long-term rentals.

-Funding for crisis accommodation for people fleeing domestic violence and for youth, including more grants instead of loans, totalling $700 million.

-$1.9 billion in low-interest loans to help community housing providers build social and affordable housing, using the Housing Australia Future Fund and the National Housing Account.

This Federal Budget summary 2024-25 is courtesy of Fortnum Advice Pty Ltd.

Download the full PDF summary here.

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.

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 

Aaron Steer from Collective Wealth Advisers and Dinyar Irani from Innova Asset Management discuss recent market conditions, how our Actively Managed portfolios are positioned and what we are keeping an eye on over the next few months.