Dixon Advisory

Job market needs another revolution

Max Walsh — Wed, 12 Jun 2013 23:06:00 GMT

13 June 2013, Australian Financial Review (subscription required)

Employment prospects, damaged by the GFC, will remain patchy at best, while economies lack the innovation and impetus for sustained growth.

Jobs, not debt, are positioned to become the key political issue confronting the global economy. Note, I said 'political' issue.

Economists tend to see employment as a function of growth, with the latter being amenable to the macroeconomic instruments of fiscal and monetary policy.

Read the full article: Job market needs another revolution (AFR subscription required)

Read more about the author Max Walsh, Deputy Chairman of Dixon Advisory

Super tax proposals discriminate against single income families

Daryl Dixon — Sat, 08 Jun 2013 23:16:00 GMT

9 June, 2013, The Canberra Times

Last week's public service informant highlighted the extreme complexity of administering the additional 15 per cent surcharge on the superannuation contributions of taxpayers earning above $300,000 annually. While not as complex to administer, the government has also foreshadowed the introduction of a 15 per cent tax on the earnings of individual pension fund accounts above $100,000 a year.

In both cases the proposals focus on the income accruing to an individual taxpayer even though in many parts of the tax and social security system, the combined income of a couple is used for assessment purposes. In the case of superannuation savings, as is currently the situation in the age pension system, there are sound if not overwhelming reasons for using the couple or family unit for determining eligibility for assistance.

For the new superannuation surcharge, for example, it is difficult to justify why a taxpayer earning $400,000 a year with a non-income earning partner is subjected to the additional 15 per cent superannuation contributions tax while a couple both earning $200,000 a year ($400,000 in total)is exempt.

The system already discriminates against the family with a non-working or low income member because the maximum limit for concessional superannuation contributions is currently $25,000 per person.

With both partners working and earning reasonable incomes, the current arrangements allow a total of $50,000 annually to be set aside in concessionally taxed superannuation. Moreover, at the time of retirement, the superannuation account balances will be more equally split within the family than in situations where only one partner is able to contribute to superannuation.

This harsher treatment of single income families was less of a problem when the individual concessional contributions cap was set at $50,000 annually for taxpayers aged 50 or more. This provided greater scope to boost individual retirement savings. Now unless the government takes a more enlightened approach, there will be further discrimination against couples where one partner has a much larger superannuation account balance than the other.

The proposal to tax the annual income earned in a pension fund above $100,000 at the rate of 15 per cent will provide a large advantage to couples where account balances are equally split. It would be much fairer if the new tax were to be assessed on the basis of combined annual pension income

Read more about the author Daryl Dixon, Executive Chairman of Dixon Advisory

It's time to bail from UniSuper

Daryl Dixon — Fri, 07 Jun 2013 22:59:00 GMT

8 June, 2013 The Australian (subscription required)

Where are the superannuation regulators when investors really need them, as the UniSuper defined benefit fund difficulties continue? Recoveries in world equity markets have improved the fund's overall situation and reduced the deficit if the fund were liquidated today.

This situation has allowed trustees to delay a decision on whether benefits need to be reduced on an equitable basis under Clause 34 of the Trust Deed. But it does not remove the uncertainty about whether all members will receive all the benefits promised to them when they leave.

Read the full article: It's time to bail from UniSuper (The Australian subscription required)

Read more about the author Daryl Dixon, Executive Chairman of Dixon Advisory

When the cupboard is bare: Coalition's challenge

Max Walsh — Thu, 06 Jun 2013 00:05:56 GMT

6 June 2013, Australian Financial Review (subscription required)

Economists warn that the lucky country is heading for a rough ride – one that will present some challenges for Coalition government longevity.

The political consensus is that Tony Abbott will not only win the election on September 14, but that he will do so in a landslide that will ensure the Coalition of two or more parliamentary terms.

I wouldn't bet on that longevity.

To read recent speeches by two of our most distinguished economists, Treasury secretary Martin Parkinson and corporate high-flyer and academic Ross Garnaut, is to appreciate that, after a world-breaking run of growth, Australia is at an inflection point.

Read the full article: When the cupboard is bare; Coalition's challenge (AFR subscription required)

Read more about the author Max Walsh, Deputy Chairman of Dixon Advisory

US property an Aussie bonanza

Luke McKenna — Tue, 04 Jun 2013 23:29:00 GMT

United States housing has been a temptation for Australian investors ever since property prices crashed through the floorboards in 2006.

Now, with the market on the mend just as the Australian dollar weakens, the bust is finally becoming a boon for punters who took the plunge.

“The US housing market has reached a critical turning point,” says Alan Dixon, who runs the ASX-listed US Masters Residential Property Fund. “For the first time since 2006, US house prices have begun to increase steadily.”

US Masters, managed by Dixon Advisory, already owns 490 properties and more than 1,500 units throughout New Jersey’s Hudson County and the New York boroughs of Brooklyn and Manhattan. While this so-called New York metropolitan area was the worst performer in the latest Case-Shiller report, rising 2.6% in 12 months, Dixon says independent appraisals show the fund’s property values appreciated an average of “around 10%” over the same period.

Read the full article US property an Aussie bonanza here (subscription required)

Alan Dixon is Managing Direction and CEO of Dixon Advisory USA.

Messy surcharge will encourage retirement

Daryl Dixon — Mon, 03 Jun 2013 23:32:37 GMT

4 June 2013, The Canberra Times

The complexity of assessing the proposed new super tax may, once again, render it unworkable.

Reflecting recently on his time as federal treasurer, Peter Costello said he regretted his 1996 decision to introduce a 15 per cent superannuation surcharge on taxpayers who earned more than $70,000 a year. For a number of reasons, including administrative complexity and successive legal challenges to the legislation, that tax was abolished in 2005.

Eight years later, the Gillard government released draft legislation reintroducing a 15 per cent surcharge on the super contributions of taxpayers who earn more than $300,000.

While far fewer taxpayers will be subject to this tax, and major exemptions apply for the judiciary and senior state public servants in constitutionally protected funds, the new legislation is extremely complex and will again be a nightmare for the Taxation Office to administer.

On equity grounds, there is no justification for exempting the judiciary and senior state public servants. The bulk of the revenue collected will come from federal politicians and public servants who are members of generous defined-benefit funds.

Private-sector workers and public servants in accumulation funds will pay, at most, an extra $3750 a year in tax because of the low $25,000 concessional superannuation cap applying from July 1, 2013. Even when this cap is increased as proposed to $35,000 a year for some taxpayers, the maximum tax take will be $5250 a year per high- income member of an accumulation fund.

Federal employees, other than exempt members of the judiciary, who belong to generous defined-benefit funds (such as CSS and PSS) will face much larger and, in some cases, daunting tax bills.

The draft legislation indicates that the actuarially assessed annual value of employer contributions to these funds will be subject to 15 per cent tax with no upper limits. The actual tax assessments will depend on the actuarial methodology used.

Because of lower-interest rates and increased longevity, these assessments are likely to be much higher than those levied under the Costello surcharge. An accurate assessment of the value of a retirees defined-benefit pension, moreover, would require detailed information about their past salary progression and the age and sex of their partner. If undertaken, these assessments would add significantly to the cost of collecting the new tax.

Previous actuarial assessments of the notional employer contributions required to fund defined-benefit pensions suggests a value of about 60 per cent of superable salary for a federal politician and 30 per cent for a CSS member. In these cases, assuming a superable salary of $300,000 a year, the new surcharge would result in an extra annual tax bill of $27,000 for the politician and $13,500 for the public servant.

Read more about the author Daryl Dixon, Executive Chairman of Dixon Advisory

Quality Aussie shares providing attractive returns

Daryl Dixon — Sun, 02 Jun 2013 23:37:00 GMT

2 June 2013, The Canberra Times

While predicting share market movements is difficult at the best of times, fears of a major downturn now are not warranted. If anything, the recent sharp daily market falls are a necessary result of the rapid increase in prices over the past year.

Even after recent falls, our ASX 200 index is more than 20 per cent higher than a year ago. In Australian-dollar terms, world share markets have increased by the same or much larger percentage terms over the past year.

These sustained increases in share prices are the result of worldwide quantitative easing and low interest rate policies. Australia may reduce rates even further in coming months, especially if the dollar stabilises around current levels.

The problem associated with the falling dollar is that it could bring with it inflationary pressures because of our reliance on imported consumer and industrial items. Also, there are signs the most recent interest rate reduction has boosted middle and higher quality residential property prices.

This could make it more difficult for the Reserve Bank to cut rates further. Even after the 20 per cent rise in average share prices, quality equities are providing higher returns than fixed interest and residential property investments. This is why several leading brokers believe there is still room for further share price rises.

In Australia, as elsewhere around the world, investors are taking higher risks to maintain living standards. While the number of investors owning shares continues to fall in Australia, institutions and personal investors are increasing exposure.

Although critics are now saying the share prices of the higher-dividend payers, including the banks and Telstra, are overpriced because of price increases of up to 50 per cent, the yields are still attractive. Even if earnings do not increase substantially in coming years, the dividend returns including franking credits are sufficiently high to encourage buying by income seekers.

Real problems for the market are likely to occur only when rates start to rise again or if the economy suffers from falling commodity prices. If, as it seems is happening, the exchange rate moves down with commodity prices, the worst impact on our exporting companies will be cushioned by a falling dollar. If commodity prices were to fall but the dollar stays at or around the current level, the impact on the economy and share prices would be much more severe.

While there’s likely to be more volatility, our market is being underpinned by attractive returns for income seekers.

Read more about the author Daryl Dixon, Executive Chairman of Dixon Advisory

Australia depends on the policies made in Japan

Max Walsh — Wed, 29 May 2013 23:22:06 GMT

30 May 2013, Australian Financial Review (subscription required)

The Australian dollar has a lot riding on Shinzo Abe's unusual and revolutionary strategy to stimulate the Japanese economy.

Since early April, the Australian dollar has been the least-loved currency in the global foreign exchange markets with one exception: Syria. The popular explanation for the Aussie's decline is that the Reserve Bank of Australia's announcement on May 8 that the official short-term interest rate would be cut by 25 basis points was an inflection point.

But before the RBA's decision was announced, the exchange rate, as measured against the US dollar, was down 3.5 per cent from its early April peak. The decline now totals 10 per cent.

Read the full article: Australia depends on the policies made in Japan (AFR subscription required)

Read more about the author Max Walsh, Deputy Chairman of Dixon Advisory

Daryl Dixon shares super and investment insights on Nightlife

Daryl Dixon — Wed, 29 May 2013 01:15:18 GMT

29 May 2013, ABC Nightlife

Daryl Dixon covered everything from the Australian share market and the principles of sound investing to the effect of the federal budget on super in a frank and informative discussion with Tony Delroy on Nightlife on ABC radio on 28 May 2013.

Daryl spoke about the value of Australian shares, especially taking franking credits into account, possible superannuation fund returns this year of between 10 and 15 per cent and his optimism about the strength of the Australian economy.

He also shared some insights from his recent trip to the US and discussed what makes Warren Buffet a good investor.

Among the topics covered in questions from callers were:

• salary sacrificing

• tax on super through an inheritance

• putting money in an industry fund versus a self managed super fund

• inactive super accounts

• retiring and drawing a pension

• the proposed 15% tax on $100,000 income from super.

Listen to the full interview and discussion with callers here. It runs for about 40 minutes

We can’t rely solely on compulsory super to boost retirement savings

Daryl Dixon — Sun, 26 May 2013 23:57:00 GMT

26 May 2013, The Canberra Times

The Coalition’s decision, if elected, to defer for two years the increase of compulsory super contributions from 9 per cent to 12 per cent has received a mixed reaction. This election promise has attracted support from the small business sector for relieving cost pressures on employers, but has been widely criticised by the government and the superannuation industry.

The critics’ objection is that this decision will reduce the pool of superannuation assets by billions of dollars and adversely affect the retirement savings of ordinary Australians. The reality is, the impact of this short delay in increasing compulsory super will be small relative to that of government rule changes and a string of poor investment returns since the advent of the global financial crisis.

For younger people particularly, the attractions of super are greatly diminished by poor investment returns and the money being untouchable until age 60 or later retirement. Speculation that the minimum age should be raised to 62 or even 67, the new age pension eligibility age being phased in, adds to this uncertainty.

Even at older ages, the relative advantages of contributing to super compared with paying off a mortgage are far less compelling than they were when super fund returns were consistently much higher than they are today. Even at today’s much lower interest rates, the after-tax return from paying off a home mortgage is about 5 per cent a year.

While this year’s super fund returns will be more than three times this amount, over the past six years, the returns from paying off a mortgage have been comparable or even better than investing in super. More importantly, the savings achieved from paying off a mortgage cannot fall in value as happened with super funds during the global financial crisis. Given a choice, many Australians would willingly trade in their compulsory super contributions for a wage increase.

The superannuation industry and the government are missing the point that voluntary superannuation contributions are just as important as compulsory super in achieving adequate retirement incomes. The future of super would be very bleak indeed if the government were to rely solely on compulsory payments to boost savings for retirement.

There would not be sufficient voluntary contributions by the self-employed and workers with inadequate past compulsory contributions who need to make additional salary sacrifice contributions to achieve an adequate retirement income over the next 30-plus years.

Read more about the author Daryl Dixon, Executive Chairman of Dixon Advisory

Asset check with Daryl Dixon

Daryl Dixon — Sun, 19 May 2013 00:28:00 GMT

Daryl Dixon 19 May 2013, The Canberra Times

As widely expected, this year's budget was a non-event aimed at avoiding controversial changes in an election year. But for the reasons outlined below, major changes will be required to both our tax and expenditure arrangements even if the mining boom continues unabated.

The projected deficits of about $18 billion for this year and the next are not the problem. But if the federal government cannot generate a surplus when the economy has been growing at close to 3 per cent in real terms, real problems will arise because of the ageing of the population.

Further, if the end to the boom lowers the value of the dollar, this will increase inflationary problems and add to the costs caused by an ageing population and foreshadowed boost in education and disability outlays. The biggest challenge is that personal income tax now provides the bulk of federal government revenue.

Now with the population ageing rapidly, relying primarily on income tax collections is a high-risk strategy which will upset the working-age population. While Labor is highlighting the benefits of its increase in the tax-free area threefold to $18,200 annually, this has resulted in higher marginal tax rates on those working.

The tax-free area is even higher at $20,452 annually because of the low-income tax offset. This means a couple with income equally split do not pay tax until they earn $40,904. If their combined income is $74,000, tax is only $6785, or 9 per cent of family income.

Such high thresholds will force future governments to lift marginal tax rates to maintain revenue. This is what was done this year by not indexing the thresholds for inflation over the next two years and by a 0.5 per cent discretionary increase in the Medicare levy from July 1, 2014.

By reducing the assistance provided to superannuation savings and lifting the age pension, the government is encouraging retirees to access the pension in retirement. Just how large the increased demand will be depends very much upon future superannuation earnings rates.

If these are reduced by lower interest rates, this will encourage using up capital to increase age pension entitlements in retirement. While it might have appeared attractive at the time to earmark revenue from the GST to the states, this could prove to be a costly decision.

Funding an ageing population without access to the most important source of indirect tax revenue will cause headaches for all future governments. Hopefully the economy will continue to perform well to allow sufficient time to address these problems.

Read more about the author Daryl Dixon, Executive Chairman of Dixon Advisory

Bureaucracy lacking in reform approach

Daryl Dixon — Sat, 18 May 2013 00:09:00 GMT

Daryl Dixon 18 May, 2013 The Australian (subscription required)

Treasury officials, not politicians, must take the blame for short-sighted policies on super.

A PERFECT example of the pot calling the kettle black was former Treasury secretary Ken Henry's criticism of Australia's politicians for their short-term perspective that hindered bold policy initiatives. Treasury's past record of advice on superannuation and other tax shelters provides an excellent case study of short-sightedness and obstinate obstruction of longer-term reforms.

Even in the 1980's when significant reform was possible before the burden of an ageing population had become a real issue, Treasury representatives on the occupational superannuation taskforce obstructed meaningful reforms to boost national savings. Occupational and national insurance reforms were opposed on spurious grounds including what would we do with the additional national savings.

Without the intervention of far-sighted politicians and outsiders, including Paul Keating and Bill Kelty, Australia would not have introduced our compulsory superannuation arrangements and assistance for voluntary superannuation, particularly for the self-employed.

Read the full article: Bureaucracy lacking in reform approach (The Australian subscription required)

Read more about the author Daryl Dixon, Executive Chairman of Dixon Advisory

What you need to know about SMSF related party transactions

Daryl Dixon — Fri, 17 May 2013 05:16:48 GMT

Daryl Dixon 17 May, 2013 AFR Smart Investor (subscription required)

The proposed rule changes to asset transfers between DIY funds and related parties are complex and inflexible, so it's crucial to get your head around them.

Responding to the Cooper review into superannuation, the government released draft legislation earlier this year containing stricter guidelines on acquisitions and disposals of certain assets between DIY funds and related parties. The changes introduce further restrictions aimed at ensuring the integrity of these transactions by DIY fund trustees.

Read more about the author Daryl Dixon, Executive Chairman of Dixon Advisory

Read the full article: What you need to know about SMSF related party transactions

(AFR Smart Investor subscription required)

Tougher regime but saving has appeal

Daryl Dixon — Wed, 15 May 2013 05:11:00 GMT

15 May 2013, The Canberra Times

Tuesday's budget, as would only be expected in an election year, contained no nasty surprises to upset ordinary taxpayers.

Thanks to the intervention of former minister Simon Crean, who warned against retrospective changes to the superannuation rules, all the adverse changes to the super rules had already been announced. And even these only affected a relatively few higher income taxpayers.

Resource company investors have also escaped the threatened claw-back of generous depreciation and investment allowances. The company tax changes have been directed mainly at overseas companies paying little or greatly reduced company tax bills in Australia through internal company transactions.

It may still not be safe to plan ahead for the new financial year because of the election in September and the resulting uncertainty whether the new government will proceed with the two positive superannuation measures contained in the budget.

The first is a rise in the annual concessional (tax-deductible) contributions cap from $25,000 to $35,000 for taxpayers aged 60 or more from July 1.

The second proposal, if enacted into legislation, will remove the worst abuses of the penalty tax regime on annual contributions in excess of the concessional caps. This reform is long overdue and will, from July 1, allow people to withdraw from their super fund all excess contributions and pay only their marginal income tax rate plus an interest charge. They now can face penalty tax bills as high as 93 per cent in certain situations.

Despite this improvement, overall the superannuation tax rules are now much tougher than they were when Labor was elected to office. Compared with previous years, older taxpayers now have much less scope to make catch-up contributions when they can afford them.

Despite this, for taxpayers willing to take the risk that future governments will not adversely alter the rules, superannuation remains an attractive savings option because of the higher marginal tax rates introduced this year. As part of the changes that raised the tax-free area almost threefold to $18,200 a year, the government increased all marginal tax rates. Above $37,000 a year, the marginal rate is now 34 per cent (including the Medicare levy) rising to 38.5 per cent at an annual income of $80,000.

After paying the 15 per cent contributions tax, the saving for putting money away for retirement is thus either 19 per cent or 23.5 per cent. The tax advantages of negative gearing were not changed. For investors prepared to risk borrowing, the tax savings are even higher because there is no 15 per cent contributions tax levied on the tax deduction.

Negative gearing is now for this reason even much more attractive to taxpayers earning more than $300,000 a year who are subject to a 30 per cent contributions tax rate in measures announced in the last budget. The reduced borrowing costs resulting from recent interest rate cuts also boost the attractions of negative gearing relative to super.

Read more about Daryl Dixon, Executive Chairman of Dixon Advisory.

Historically low mortgage rates could trigger housing price bubble

Daryl Dixon — Mon, 13 May 2013 01:20:00 GMT

13 May 2013, The Canberra Times

Financial markets got it right during the week by predicting that there was a better than even chance of a reduction in the official cash interest rate. The Reserve Bank obliged with a 0.25 per cent per annum rate reduction to 2.75 per cent, taking the cash rate down to historically low levels.

The bank justified its decision by reference to a benign level of inflation and a modest softening in the growth rate of the Australian economy. Nevertheless, coming as it has one week before the federal budget, it creates the risk of a housing price bubble and future problems of management of the Australian economy.

The real estate industry has welcomed the rate reduction which may well prove to be correct in the short term. But with the federal government not able to control its spending and balance its budget, there are serious risks that historically low mortgage rates will lead to a housing price asset bubble.

Canada’s recent experience highlights the extent to which low interest rates encourage borrowing for property investments at the same time as it discourages saving. Gearing property investments provides a means of increasing returns when interest rates are at or even below the yields of assets.

Both investors and owner occupiers receive larger tax incentives to invest in geared property assets because of the unlimited tax deductions for negative gearing and the tax-free capital gains on owner occupied housing. The rate reduction provides a bonus for high income earners now being restricted and even penalised when their income exceeds $300,000 per annum from investing in super.

Younger investors especially have very sound reasons for looking elsewhere than superannuation for their investments with the constant speculation about rule changes. Despite the huge cost to the budget of negative gearing and the exemption of capital gains on the family home, the chance of a change in the relevant tax rules is minimal.

If the federal government were to surprise us next week with a tax on capital gains on houses worth say more than $2 million and limits to the negative gearing deductions, Australia would be able to avoid the Canadian rush into property. The more likely situation is the government will continue to discourage super for high income earners and continue to provide unlimited assistance to property investments.

It is worth noting that during the global financial crisis, over investment in property brought down several economies including Spain and Ireland.

Read more about Daryl Dixon, Executive Chairman of Dixon Advisory.

Daryl Dixon