Winning gold against the odds

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scott-aem2

Empowered by family support, track cyclist Scott McGrory overcame personal tragedy to win gold against the odds at the 2000 Sydney Olympic Games.

 

“Shortly before the Olympic Games, we had a family tragedy which was incredibly difficult to process and try get through. If it wasn’t for the support of my family and friendship group, I wouldn’t have been able to make it to the race, let alone come home with the gold,” Scott remembers.

For Scott and his wife, Donna, tragedy struck when their 11-week-old son Alexander died of a rare heart condition, 10 weeks before the Olympics.

Adding to this trauma, Scott’s track cycling partner, Brett Aitken, was also coping with extraordinary stress as his two-year-old daughter, Ashli, was seriously ill with Rett Syndrome, a development disorder, during the same crucial lead-up period.

 

The most instrumental person in my success was my wife, Donna, she was the one to motivate me and support me to go to that next stage

 

Not surprisingly, these tragedies impacted so heavily on Scott and Brett’s preparation for their biggest sporting challenge that they both came close to throwing in the towel and giving up.

“The most instrumental person in my success was my wife, Donna, she was the one to motivate me and support me to go to that next stage,” Scott says.

Having his wife’s steadfast support through this extremely testing time was crucial for Scott and ultimately changed the outcome of his career.

“Donna talked me into at least trying to go on. Her reasoning was that we had lost so much already, if we gave up on the Olympics as well, we’d have nothing.”

It was this family support combined with lessons learnt in the 12 years between competing in the Olympics that helped propel Scott, together with his cycling partner Brett Aitken, onto winning the Madison gold medal at Sydney’s Dunc Gray Velodrome in 2000.

“I’m very fortunate to have been to two Olympic Games, however they were separated by 12 years and vastly different approaches,” he says.

“At the 1988 Olympic Games in Seoul, I was only an 18-year-old kid – I didn’t really understand the process needed to be successful and I took a really short-term approach.

“However, heading into the Sydney Olympic Games, I understood that long-term planning was the key to success.

“The long-term approach with the solid support network was the one that yielded the result.”

SOURCE: https://www3.colonialfirststate.com.au/personal/guidance/lifestyle/winning-gold-against-the-odds.html

The US economy – does the flattening yield curve indicate recession is imminent?

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Key points

  • If you are worried about a major bear market, the US economy is the key to watch.
  • While traditional measures of the US yield curve have flattened sending warning signs about future growth, it has given false signals in the past, is still positive and other versions of the yield curve point to rising growth.
  • Moreover, apart from very low unemployment, other US indicators still show little sign of the sort of excesses that precede major economic downturns, profit slumps and major bear markets

Introduction

Ever since the Global Financial Crisis (GFC) there has been an obsession with looking for the next recession. In this regard, over the last year or so there has been increasing concern that a flattening yield curve in the US – ie the gap between long-term bond yields and short-term borrowing rates has been declining – is signalling a downturn and, if it goes negative, a recession in the US. This concern naturally takes on added currency given that the current US bull market and economic expansion are approaching record territory in terms of duration and given the trade war threat.

The increased volatility in shares seen this year, including a 10% or so pull back in global shares earlier this year, adds to these fears. Whether the US is about to enter recession is critical to whether the US (and hence global) bull market in shares is about to end. Looking at all 10% or greater falls in US shares since the 1970s (see the table in Correction time for shares?), US share market falls associated with a US recession are longer lasting and deeper with an average duration of 16 months and an average fall of 36% compared to a duration of 5 months and an average fall of 14% when there is no recession. Similarly, Australian share market falls are more severe when there is a US recession. So, whether a recession is imminent or not in the US is critically important in terms of whether a major bear market is imminent. This note assesses the risks.

The long US economic expansion and bull market

The cyclical bull market in US shares is now over nine years old. This makes it the second longest since WW2 and the second strongest in terms of percentage gain. And according to the US National Bureau of Economic Research the current US economic expansion is now 109 months old and compares to an average expansion of 58 months since 1945. See the next two tables. So, with the bull market and the economic expansion getting long in the tooth it’s natural to ask whether it will all soon come to an end with a major bear market.

The yield curve flattens – but it’s complicated

The yield curve is watched for two reasons. First, it’s a good guide to the stance of monetary policy. When short-term interest rates are low relative to long-term rates it indicates businesses can borrow short and lend (or invest) long & this grows the economy. But it’s not so good when short rates are above long rates – or the curve is inverted. And secondly an inverted US yield curve has preceded US recessions. So, when it’s heading in this direction some start to worry. However, there are several complications.

First, which yield curve? Much focus has been on the gap between 10-year bond yields and 2-year bond yields which has flattened to just 0.3%, but the Fed has concluded that the traditional yield curve based on the gap between 10-year bond yields and the Fed Funds rate is a better predictor of the economy and it has flattened but only to 1%. Moreover, a shorter yield curve based on the gap between 2-year bond yields and the Fed Funds rate predicted past recessions like the longer yield curves but has actually been steepening in recent years which is positive.

OI-20180719-chart1

Second, the yield curve can give false signals – the traditional version flattened or went negative in 1986, 1995 and 1998 before rebounding – and the lags from an inverted curve to a recession can be long at around 15 months. So even if it went negative now recession may not occur until late 2020.

Third, various factors may be flattening the yield curve unrelated to cyclical economic growth expectations including still falling long-term inflation and real rate expectations, low German and Japanese bond yields holding down US yields and higher levels of investor demand for bonds post the GFC as they have proven to be a good diversifier to shares in times of crisis.

Fourth, a flattening yield curve caused by rising short term ratesand falling long term rates is arguably more negative than aflattening when both short and long term rates go up like recently.

Finally, a range of other indicators which we will now look at are not pointing to an imminent US recession.

Watch for exhaustion, not old age

A key lesson of past economic expansions is that “they do not die of old age, but of exhaustion”. The length of economic expansions depends on how quickly recovery proceeds, excess builds up, inflation rises and the central bank tightens. The US economic recovery may be long, but it has been very slow such that average economic and employment growth has been around half that seen in post WW2 expansions. So as a result it has taken longer than normal for excesses to build up. Apart from flattening yield curves one area where the US is flashing warning signs is in relation to the labour market where unemployment and underemployment have fallen about as low as they ever go warning of a wages breakout and inflation pressure.

However, there is still arguably spare capacity in the US labour market (the participation rate has yet to see a normal cyclical rise) and wages growth at 2.7% remains very low. The last three recessions were preceded by wages growth above 4%. Secondly, while US GDP is now back in line with estimates of “potential”, what is “potential” can get revised so it’s a bit dodgy and more fundamentally, industrial capacity utilisation at 78% is still below normal of 80% and well below levels that in the past have shown excess and preceded recessions.

Thirdly, cyclical spending in the US as a share of GDP remain slow. For example, business and housing investment are around long term average levels as a share of GDP in contrast to the high levels in one or both seen prior to the tech wreck and GFC.

Finally, while the rising Fed Funds rate and flattening traditional yield curve is consistent with tightening US monetary policy, it’s a long way from tight. Past US recessions have been preceded by the Fed Funds rates being well above inflation and nominal economic growth whereas it’s still a long way from either now. See the next chart.

OI-20180719-chart4

US likely to see overheating before recession

Apart from the amber lights flashing from the flattening yield curve and very low unemployment our assessment is that a US recession is still some time away as it will take time for excesses to become extreme and US monetary policy to become tight. Looked at another way, the US is still more likely to overheat before it goes into recession. We have been thinking recession is a 2020 risk. The end of the current fiscal stimulus around then would also be consistent with this. However, given the current slow pace in terms of building excess, that 2020 is a presidential election year – do you really think Trump will allow the US to go off a fiscal cliff then? – and with 2020 being the consensus pick for a downturn, the risk is that it comes later. Of course, an escalating trade war could mess things up earlier, although we still see a negotiated solution. The rising US budget deficit is a concern but it’s more of an issue for when the economy turns down as this is when investors will start to worry about its sustainability. And of course a 1987 style share market crash cannot be ruled out but probably requires a share market blow off before hand. In the meantime, the Fed has more tightening to do and while sharemarket volatility is likely to remain high as US inflation and short rates rise, excesses gradually build and given risks around Trump and trade, with recession still a way off the US and global share bull market likely still has some way to go.

Source: https://www.ampcapital.com/au/en/insights-hub/articles/2018/July/olivers-insights-the-us-economy-does-the-flattening-yield-curve-indicate-recession-is-imminent

2017-18 saw strong returns for diversified investors – but there’s a few storm clouds around

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Key points

  • 2017-18 saw strong returns for diversified investors, but it was a story of two halves with strong December half returns but more volatility in the past 6 months.
  • Key lessons for investors from the last financial year include: turn down the noise around financial markets, maintain a well-diversified portfolio; be cautious of the crowd; and cash continues to provide low returns.
  • Returns are likely to slow and the volatility of the last six months is likely to continue. Global growth is good, this should underpin profit growth and there are minimal signs of economic excess that point to a peak in the global growth cycle. But rising US inflation and rates, Trump and trade war fears and the risks around China and emerging countries are the main threats.

Introduction

The past financial year saw solid returns for investors but it was a story of two halves. While the December half year was strong as global share markets moved to factor in stronger global growth and profits helped by US tax cuts, the last six months have been messier and more constrained – with US inflation and interest rate worries, trade war fears, uncertainty around Italy, renewed China and emerging market worries and falling home prices in Australia. But will returns remain reasonable or is the volatility of the past six months a sign of things to come? After reviewing the returns of the last financial year, this note looks at the investment outlook for 2018-19 financial year.

A good year for diversified investors

The 2017-18 financial year saw yet again pretty solid returns for well diversified investors. Cash and bank deposits continued to provide poor returns and the combination of low yields and a back-up in some bond yields saw low returns from bonds. The latter resulted in mixed returns from yield sensitive investments, but Australian real estate investment trusts performed well helped by the RBA leaving rates on hold.

Reflecting strong gains in the December half as investors moved to factor in stronger global growth and profits assisted in the US by tax cuts global shares returned 11% in local currency terms and 15% in Australian dollar terms. Australian shares also performed well with the ASX 200 rising to a 10-year high and solid dividends resulting in a total return of 13%. Unlisted assets have continued to benefit from “search for yield” investor demand and faster growth in “rents” with unlisted property returning around 12% and unlisted infrastructure returning around 13.5%.

As a result, balanced growth superannuation returns are estimated to have returned around 9% after taxes and fees which is pretty good given inflation of 2%. For the last five years balanced growth super returns have also been around 8.5% pa.

Source: Thomson Reuters, AMP Capital
Australian residential property slowed with average capital city prices down 1.6%, with prices down in Sydney, Perth and Darwin. Average returns after costs were around zero.

Key lessons for investors from the last financial year

These include:

  • Be cautious of the crowd – Bitcoin provided a classic reminder of this with its price peaking at $US19500 just when everyone was getting interested in December only to then plunge 70% in price.
  • Turn down the noise – despite numerous predictions of disaster it turned out okay.
  • Maintain a well-diversified portfolio – while cash, bonds and some yield sensitive listed assets had a tougher time, a well-diversified portfolio performed well.
  • Cash is still not king – while cash and bank deposits provided safe steady returns, they remain very low.

Expect more constrained returns and volatility

We expect returns to slow a bit over the new financial year and just as we have seen over the last six months volatility is likely to remain high. First the positives:

  • While global growth looks to have passed its peak the growth outlook remains solid. Business conditions indicators –  such as surveys of purchasing managers (Purchasing Managers Indexes or PMIs) –  are off their highs and point to some moderation in growth, but they remain strong pointing to solid global growth overall.

Source: Bloomberg, AMP Capital
In Australia, growth is likely to remain between 2.5% and 3% with strong business investment and infrastructure helping but being offset by a housing slowdown and constrained consumer spending.

  • Second, solid economic growth should continue to underpin solid profit growth from around 7% in Australia to above 10% globally.
  • Third, while we are now further through the global economic cycle there is still little sign of the sort of excess that normally brings on an economic downturn – there is still spare capacity globally, growth in private debt remains moderate, investment as a share of GDP is around average or below, wages growth and inflation remain low and we are yet to see a generalised euphoria in asset prices.
  • Fourth, global monetary policy remains very easy with the Fed continuing to raise rates gradually, the ECB a long way from raising rates and tightening in Japan years away.
  • Finally, share valuations are not excessive. While price to earnings ratios are a bit above long-term averages, this is not unusual for a low inflation environment. Valuation measures that allow for low interest rates and bond yields show shares to no longer be as cheap as a year ago but they are still not expensive, particularly outside of the US.

Against this though there are a few storm clouds:

  • First, the US economy is more at risk of overheating – unemployment is at its lowest since 1969, wages growth is gradually rising and inflationary pressures appear to be picking up. The Fed is aware of this and will continue its process of raising rates. While other countries are behind the US, its share market invariably sets the direction for global markets
  • Second, global liquidity conditions have tightened compared to a year ago with central bank quantitative easing slowing down and yield curves (ie the gap between long term and short-term bond yields) flattening.
  • Third, the risks of a trade war dragging on global growth have intensified. While the share of US imports subject to recently imposed tariffs is minor so far (at around 3%) they are threatened to increase. Our base case remains that some sort of negotiated solution will be reached but trade war worries could get worse before they get better.
  • Fourth, emerging countries face various risks from several problem countries (Turkey, Brazil and South Africa), slowing growth in China, concerns the rising US dollar will make it harder for emerging countries to service their foreign debts and worries they will be adversely affected by a trade war.
  • Finally, various geopolitical risks remain notably around the Mueller inquiry in the US, the US mid-term elections and Italy heading towards conflict with the EU over fiscal policy.

A problem is that various threats around trade and Trump, Italy and China have come along at a time when the hurdle for central banks to respond may be higher than in the past – with the Fed focussed on inflation and the ECB moving to slow its stimulus and less inclined to support Italy.

What about the return outlook?

Given these conflicting forces it is reasonable to expect some slowing in returns after the very strong returns seen in the last two years. Solid growth, still easy money and okay valuations should keep returns positive, but they are likely to be constrained and more volatile thanks to the drip feed of Fed rate hikes, trade war fears, China and Emerging Market worries and various geopolitical risks. In Australia, falling home prices in Sydney and Melbourne along with tightening bank lending standards will be drags. Looking at the major asset classes:

  • Cash and bank deposit returns are likely to remain poor at around 2% as the RBA is expected to remain on hold out to 2020 at least. Investors still need to think about what they really want: if it’s capital stability then stick with cash but if it’s a decent stable income then consider the alternatives with Australian shares and real assets such as unlisted commercial property continuing to offer attractive yields.


Source: RBA; AMP Capital

  • Still ultra-low sovereign bond yields and the risk of a risking trend in yields, which will result in capital losses, are likely to result in another year of soft returns from bonds.
  • Unlisted commercial property and infrastructure are likely to benefit from the ongoing “search for yield” (although this is waning) and okay economic growth.
  • Residential property returns are likely to be mixed with Sydney and Melbourne prices falling, Perth and Darwin bottoming and other cities providing modest gains.
  • Shares are at risk of a further correction into the seasonally weak September/October period given the storm clouds noted above, but okay valuations, reasonable economic growth and profits and still easy monetary conditions should see the broad trend in shares remain up – just more slowly. We continue to favour global shares over Australian shares.
  • Finally, the $A is likely to fall as the RBA holds and the Fed hikes adding to the case for unhedged global shares.

Things to keep an eye on

The key things to keep an eye are: global business conditions PMIs for any deeper slowing; risks around a trade war; risks around Trump ahead of the US mid-term elections; the drip feed of Fed rate hikes; conflict with Italy over fiscal policy in Europe; risks around China and emerging countries; and the Australian property market – where a sharp slump in home prices (which is not our view) could threaten Australian growth.

Concluding comments

Returns are likely to remain okay over 2018-19 as conditions are not in place for a US/global recession. But expect more constrained returns (say around 6% for a diversified fund) and continued volatility.

SOURCE: https://www.ampcapital.com/au/en/insights-hub/articles/2018/July/olivers-insights-2017-18-saw-strong-returns-for-diversified-investors

Newsletter — 2nd July 2018

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Dear Sir/Madam,

Happy New Financial Year!

Hi there!! It’s been a busy few weeks since the last newsletter.

In office news, Monica and Emma took a recent bus trip through the Scenic Rim which was in aid of the Leukaemia Foundation. We enjoyed lots of little stops, including tasting wine and port at the Bunjurgen Estate Vineyard and smelling the roses at Barton’s Rose Farm.

On another note, we would like to invite our clients to a Trivia Night to raise funds for the girls’ team (Monica, Emma, Narelle and Kerri) for our upcoming OneDay to Conquer Cancer 25km Walk which is coming up in mid August. If trivia is your thing, let us know or even better still, get a table of friends together for a fun night of answering all sorts of questions!  The details are:

Date: Friday 20th July

Time: 7pm

Place: South St Club, South St, Ipswich.

RSVP or for more information: call the TWM office 3281 1226.

And for those who were aware, the boss is home resting up and recovering after his operation. Sadly, he can still use the phone and laptop and has been emailing and phoning us constantly!

Until next month,

Emma (Editor)

Should the RBA raise rates to prepare households for higher global rates?

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Key Points

  • The RBA should avoid calls to raise interest rates prematurely just to prepare households for higher global rates. Such a move would be Iike shooting yourself in the foot in order to practice going to the hospital..
  • Nor should the RBA mess with the inflation target that has served Australia well.
  • We don’t see it doing either and continue to see interest rates on hold out to 2020 at least and can’t rule out the next move in rates being a cut.
  • This will mean term deposit rates will stay low, search for yield activity will still help yield sensitive unlisted investments (albeit it’s waning) and an on-hold RBA with a tightening Fed is likely to mean ongoing downward pressure on the Australian dollar.

Introduction

It’s nearly two years since the Reserve Bank of Australia last changed interest rates – when it cut rates to a record low of 1.5% in August 2016. That’s a record period of inaction – or boredom for those who like to see action on rates whether it’s up or down. Of course, there are lots of views out that the RBA should be doing this or that – often held and expressed extremely – and so it’s natural that such views occasionally get an airing. This is particularly so when the RBA itself is not doing anything on the rate front.

And so it’s been this week with a former RBA Board member arguing that the RBA should raise rates by 0.25% to prepare households for higher global interest rates and that the RBA should consider ditching its inflation target in favour of targeting nominal growth.

Our view – rates on hold at least out to 2020

Our view for some time is that the RBA won’t raise interest rates until 2020 at the earliest. In terms of growth, a brightening outlook for mining investment, strengthening non-mining investment, booming infrastructure spending and strong growth in export volumes are all positive but are likely to be offset by topping dwelling investment and constrained consumer spending. As a result, growth is likely to average around 2.5-3% which is below RBA expectations for growth to move up to 3.25%. This in turn means that spare capacity in the economy will remain high – notably unemployment and underemployment at 13.9% – which will keep wages growth low and inflation down. On top of this house prices likely have more downside in Sydney and Melbourne over the next two years, banks are tightening lending standards which is resulting in a defacto monetary tightening and the risks of a US-driven trade war are posing downside risks to the global growth outlook. As such we remain of the view that a rate hike is unlikely before 2020 at the earliest and can’t rule out the next move being a cut.

Raising rates to prepare for higher rates makes no sense…

Against this backdrop, raising rates just to prepare households for higher global rates would be a major policy mistake:

  • It would be like shooting yourself in the foot so you can practice going to hospital. Some might argue that given high household debt you might miss the foot and hit something more serious – but I wouldn’t go that far!
  • What’s more it’s not entirely certain that outside the US higher global rates are on the way any time soon – particularly given the risks around a global trade war, the European Central Bank looks unlikely to be raising rates until 2020 and with Japanese inflation falling again a Bank of Japan rate hike looks years away.
  • The RBA needs to set Australian interest rates for Australian conditions not on the basis of other global economies that are in different stages in the cycle – notably the US which has unemployment and underemployment of just 7.6% in contrast to Australia where it’s 13.9%.


    Source: Bloomberg, AMP Capital

  • Raising rates when there is still high levels of labour market underutilisation, wages growth is weak and inflation is at the low end of the inflation target would just reinforce low inflation expectations – causing businesses and households to question whether the RBA really wants to get inflation and wage growth back up to be more consistent with the inflation target and run the risk of a slide into deflation next time there is an economic slowdown.
  • The RBA has already provided numerous warnings that sooner or later rates will go up, effectively helping to prepare households that such a move may come and in recent times banks have raised some mortgage rates, albeit only slightly. Last year’s bank rate rises were in response to regulatory pressure and recently they have been in response to higher short-term money market funding costs as the gap between bank bill rates and the expected RBA cash rate has blown out by around 0.35% relative to normal levels. This has further reminded households of the risk of higher interest rates.

…nor does changing the inflation target

Suggestions to change the inflation target or move to some other target for the RBA get wheeled out every time we run above or below the target for a while but its served Australia well. When it’s above for a while like prior to the Global Financial Crisis some wanted to raise it, when it’s below for a while some want to cut it. And there are regular calls to move to something else like nominal growth targeting. But the case to change the target is poor:

  • The 2-3% inflation target interpreted as to be achieved over time has served Australia well. It’s low enough to mean low inflation, it’s high enough to allow for the tendency of the measured inflation rate to exceed actual inflation (because the statistician tends to understate quality improvement) and to provide a bit of a buffer before hitting deflation. And the achievement of it over time means the RBA does not have to make knee-jerk moves in response to under or overshoots because it can take time to get back to target.
  • Shifting to a nominal GDP or national income growth target would be very hard for Australia for the simple reason that nominal growth in the economy moves all over the place given swings in the terms of trade which the RBA has no control off. It would have meant much tighter monetary policy into 2011 than was the case and even easier monetary policy a few years ago when the terms of trade fell. In short it would mean extreme volatility in RBA interest rates.
  • And in any case, nominal GDP or income growth is made up of two different things – inflation and real growth – so targeting just the aggregate could lead to crazy results for example if the target is 4.5% the RBA could get 4.5% inflation and say it hit its target! Which would be nuts.
  • Finally, while low rates risk inflating asset price bubbles it’s worth noting that apart from Sydney and Melbourne home prices, the period of low rates has not really led to a generalised asset price bubble problem in Australia. And in any case as we have seen recently in relation to Sydney and Melbourne property prices – which are now falling (despite still ultra-low interest rates!) – the asset price problem where it does arise can be dealt with via macro prudential controls on lenders. Arguably, if we had moved faster on the macro prudential front around 2014-2016 then the east coast housing markets would have been brought under control earlier and rates could have come down faster in Australia and we could now be in a tightening cycle…but that’s all academic!

Bottom line

The bottom line is that the RBA should stick to its inflation target and ignore those arguing for a premature rate hike. Our assessment is that this is just what it will do and that rates will be on hold for a long while yet. In the meantime, the debate about rates will no doubt rage on.

Continuing low interest rates in Australia will mean term deposit rates will stay low, search for yield activity will still help yield-sensitive unlisted investments like commercial property and infrastructure (albeit it’s waning) and an on-hold RBA with a tightening Fed is likely to mean ongoing downward pressure on the Australian dollar as the interest rate differential goes further into negative territory.


Source: Bloomberg, AMP Capital

While a crash in the $A may concern the RBA, we saw in both 2001 when it fell to $US0.48 and 2008 when it fell from $US0.98 to $US0.60 in just a few months that the inflationary consequences of a lower $A are not what they used to be and in any case the RBA would likely welcome a fall to around $US0.65-0.70.

Dr Shane Oliver
Head of Investment Strategy and Chief Economist
AMP Capital

 

SOURCE:  http://www.ampcapital.com.au/article-detail?alias=/olivers-insights/june-2018/should-the-rba-raise-rates-to-prepare-households

All set for the new financial year?

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Maximising-money

Making plans for the new financial year will help set you up for the next 12 months and beyond.

As this financial year draws to a close, now is the perfect time to take stock of your finances before the next one starts. And whether you’re still wrapping things up for FY18 or getting ready to launch into FY19 with a bang, there are plenty of ways to make tax time easier the next time around.

But more importantly, remember that each financial year brings you one step closer to retirement. That’s why it’s essential to make the most of your finances during your final years of employment.

Here’s four simple strategies to get your money working harder for you in the next 12 months.

1. Take care of your tax

The deadline for lodging your tax return each year is 31 October. But, if you get a tax agent or accountant to lodge it for you, a later deadline may apply. Rather than put it off until the last minute, why not get it out of the way earlier? That way, you can take your time to make sure you’re meeting your tax obligations and claiming all the deductions you’re eligible for.

If you usually have trouble tracking down all your paperwork, then why not make a financial new year’s resolution to keep better records throughout the next 12 months. By documenting your income and work-related expenses and storing your receipts and invoices in one easy-to-find-place, you’ll breeze through your next tax return.

2. Make the most of your money

Your super will probably be one of your most valuable income streams when you retire, so it can make sense to use your current earnings to maximise it as much as possible. Even if you can only contribute a little bit extra now, it could make a difference to the retirement lifestyle you’re able to afford.

An option is to contribute some of your before-tax pay directly into your super (known as salary sacrifice). Not only will you boost your super, you’ll potentially save on tax, with before-tax contributions in most cases attracting a tax rate of just 15%, instead of your usual marginal rate. Every financial year, you can deposit up to a maximum of $25,000 in before-tax (concessional) contributions before extra tax applies. This amount includes your employer’s compulsory Super Guarantee payments, any additional amounts you salary sacrificed and your personal tax-deductible contributions.

3. Increase your savings

If you’ve come into some extra cash in the current financial year – such as a work bonus or an inheritance – consider using this money to increase your retirement savings even further.

Each financial year, you may be able to make after-tax super contributions of up to $100,000 (or up to $300,000 during a three-year period, if you met the requirements of the ‘bring-forward’ rule). So, if you haven’t yet hit these caps and you have some money available, there’s still time to put it towards your super before 30 June.

Keep in mind that a ‘transfer balance cap’ was introduced from 1 July 2017 limiting the amount that could be transferred to a retirement phase income stream, such as an account-based pension, to $1.6 million. The balances of existing retirement phase income streams held at 30 June 2017, and the starting values of any commenced since then, counts towards this.

Any amounts over $1.6 million need to be transferred back to an accumulation phase super account or withdrawn from super. Otherwise a penalty tax will be applied, effectively removing the tax advantage of leaving the funds in the pension phase and in some cases providing further penalty.

Also from 1 July 2017, if you have a total super balance of $1.6m or more just prior to the start of a financial year, your after tax contributions cap will reduce to Nil. The amount you can contribute under the bring forward rule will also be reduced once your total super balance is $1.4 million or more.

4. Consider a TTR strategy

If you’ve reached your preservation age but aren’t yet 65, you might consider a transition-to-retirement (TTR) strategy. This allows you to draw a pension from your super before you retire.
You can use this strategy in three ways:

  • to get extra income before retirement – for example, to help pay off your mortgage
  • to ease back on your work hours, without taking a cut in pay
  • to boost your super, by salary sacrificing more of your income into super at the 15% tax rate (instead of your marginal rate), while drawing enough from your super to live on.

Before you start a TTR strategy, however, there are a few important things to consider. For instance:

  • if cutting back your work hours means you receive a lower income from your employer, this may also mean your employer’s compulsory Super Guarantee payments (valued at 9.5% of your income) are reduced as well
  • if you decide to enter a salary sacrifice arrangement, the combined total from your employee’s compulsory Super Guarantee payments, your salary sacrificed amounts and any other voluntary concessional contributions (eg, personal tax-deductible contributions) you make mustn’t exceed the $25,000 concessional contributions cap in any financial year
  • since July 2017, the earnings on assets that support TTR income streams are now taxed at 15%, instead of being tax-free.

A financial adviser can help you decide what option is right for you. They’ll work closely with you to tailor a financial plan for the coming year that will help put you on track to a comfortable retirement.

Taxation considerations are general and based on present taxation laws and may be subject to change. You should seek independent, professional tax advice before making any decision based on this information. Colonial First State is also not a registered tax (financial) adviser under the Tax Agent Services Act 2009 and you should seek tax advice from a registered tax agent or a registered tax (financial) adviser if you intend to rely on this information to satisfy the liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law.

Using failure to fuel your future success

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Looking out across an Atlantic beach.

To help us grow, sometimes we have to overcome our fear of failing – with this mind, here’s some ways you can use past failures to fuel your future success.

Almost everyone is afraid of failure, even if many of us know it’s an unavoidable feature of eventual success. The list of people who have achieved incredible things despite experiencing disasters is long.

The more famous examples include Steve Jobs (the Apple board once ousted him from his own company), J.K Rowling (multiple publishers rejected her Harry Potter pitch), and Jeff Bezos (he ran a dud online auction site before starting Amazon).

But those are big names – how does failure fit into a less high profile career?

Don’t be afraid of failure

Bri Hayllar, a psychologist and business coach at the Centre for Corporate Health in Sydney, says it’s worthwhile understanding that failure is possible and acceptable “because often the alternative is doing nothing”.

That being said, not every culture treats failure the same way. The United States has a deserved reputation for entrepreneurial success – and for tolerating failure. The theory goes that unless you have failed at least once, you probably have not tried hard enough.

In Australia, by contrast, failure is sometimes seen as a career killer – and this fear of crashing and burning can stifle innovation. So here are some tips to help overcome that fear.

Get in the right frame of mind

Hayllar says when people are in a very negative emotional state, it alters their cognitive processes – in a bad way. They shut down. On the other hand, those with a positive emotional state are more aware and more open to information, which in turn increases their creativity, problem-solving and decision-making skills.

“If we go into a job or a role thinking ‘I must protect myself, I must avoid risk, I mustn’t fail’ then we’re in that threat-negative space which is counterproductive to success.”

 

In Australia, failure is sometimes seen as a career killer – and this fear of crashing and burning can stifle innovation.

 

Learn from your setbacks

Of course, continual failure is not desirable. The key is to process errors and improve. Bill Gates and Paul Allen will forever be known as the creators of Microsoft.

They are less well known for Traf-O-Data, a failed attempt at using computerised data to improve traffic surveys for municipal governments. Their time on the project was not wasted, though; it taught them the skills to simulate how microprocessors work, a key element of Microsoft’s success.

As part of their learning process, Hayllar says people should be conscious of their statements. Avoid the temptation to say “I’m hopeless and I’ve failed”, and instead say “This project didn’t work, but what can I learn from it?”

Try and try again

Legend has it that Thomas Edison discarded thousands of prototypes before perfecting his light bulb.
Such resilience is a common story with successful people. Hayllar is a firm believer that effort, grit and determination trump intelligence. “For instance, we often see that really determined students will achieve more than the intelligent kids who don’t put in the effort.”

Just as artists don’t expect their first painting to be a masterpiece, we all need to appreciate that perseverance is required to achieve true success.

“You’ve got to have that grit to try again and keep doing things,” Hayllar says.

 

SOURCE: https://www3.colonialfirststate.com.au/personal/guidance/lifestyle/using-failure-to-fuel-your-future-success.html

Trade war risks are escalating – but a negotiated solution remains most likely

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Key Points

  • US actions in recent weeks have increased the risk of a full-blown trade war – primarily between the US and China – with a more significant economic impact.
  • So far the bulk of the tariffs are just proposed so there is still room for a negotiated solution (which remains our base case with a 55% probability).
  • But there is now a stronger risk (say around 30% probability) that some of the tariffs go into force before a negotiated solution is reached (which would be a short-lived negative for share markets) or a full-blown US-China trade war is not averted (15% probability) with deeper share market downside.
  • Key to watch for is the re-start of US-China negotiations ahead of July 6.

Introduction

The threat of a full-blown trade war has escalated in the last few weeks with the G7 meeting ending in disarray over US tariffs on imports of steel and aluminium from its allies and more importantly President Trump threatening tariffs on (so far at least) $US450bn of imports from China, and China threatening to retaliate. Our base case remains that a negotiated solution will ultimately be reached, but the pain threshold in the US is clearly higher than initially thought and the risks have increased.

Background on trade wars and protectionism

A trade war is a situation where countries raise barriers to trade, with each motivated by a desire to “protect’’ domestic workers, and sometimes dressed up with “national security” motivations. To be a “trade war” the barriers need to be significant in terms of their size and the proportion of imports covered. The best-known global trade war was that of 1930 where average 20% tariff hikes on most US imports under Smoot-Hawley legislation led to retaliation by other countries and contributed to a collapse in world trade.

A basic concept in economics is comparative advantage: that if Country A and B are both equally good at making Product X but Country B is best at making Product Y then they will be best off if A makes X and B makes Y. Put simply free trade leads to higher living standards and lower prices, whereas restrictions on trade lead to lower living standards and higher prices. The trade war of the early 1930s is one factor that helped make The Great Depression “great”. As RBA Governor Philip Lowe has observed “Can anyone think of a country that’s made itself wealthier or more productive by building walls?”

Access for US exports to China and stronger protection of US intellectual property. His comments at the recent G7 meeting where he proposed completely free trade suggest he secretly does support free trade (although it’s a bit hard to know for sure!)

Most of these issues were covered in more detail here.

Where are we now?

Fears of a global trade war were kicked off in early March with Trump announcing a 10% tariff on aluminium imports and a 25% tariff on steel imports. US allies were initially exempted but China was not and the exemptions for Canada, Mexico and the European Union expired on June 1. But tariffs on steel and aluminium imports are minor at around 1.5% of total US imports. There is a risk of escalation though as the affected countries retaliate.

However, the main focus remains China. On March 22, in response to the Section 301 intellectual property review (alleging theft by China), Trump proposed 25% tariffs on $US50bn of US imports from China and restrictions on Chinese investment in the US. At the same time, the US lodged a case against China with the World Trade Organisation. China then announced “plans” for 25% tariffs on $US50bn of imports from the US with a focus on agricultural products. Then Trump threatened tariffs on another $US100bn of imports from China in proposed retaliation to China’s proposed retaliation to which China said it would retaliate.

These tariffs were put on hold after a May 19 agreement between the US and China under which China agreed to import more from the US, reduce tariffs and strengthen laws to protect intellectual property, with negotiations around the details to come. Trump initially cheered the outcome, but after domestic criticism did a backflip and announced that the $US50bn in imports from China to be subject to a 25% tariff would be finalised by June 15, which they were (with a July 6 start date set for $US34bn) and that investment restrictions would be finalised by June 30.

After China said that the May 19 deal was no more and that it would match US tariffs, Trump upped the $US100bn to a 10% tariff on $US200bn of imports and said that if China retaliates to that it will do another $US200bn. This brings the tariffs on US imports from China to $US450bn which covers 90% of America’s total annual imports from China. Along the way Trump has also announced consideration of automobile tariffs – with the outcome yet to be announced.

Rising risk of a full-blown trade war

Clearly the escalating tariff threats have added to the risk of a full-blown trade war between the US and China, and with an escalation possible between the US and its allies. The initial tariffs on steel and aluminium and proposed for $US50bn of imports from China amount to a still small 3% or so of US imports or just 0.5% of US GDP so only a trivial impact and hardly a trade war.

But if there are tariffs on $US450 of imports it’s about 18% of total US imports and will have a bigger impact. On this scale it’s inevitable that consumer goods will be impacted. And with China only importing $US130bn from the US annually, it’s proportional retaliation to US tariffs will have to move into other areas like tougher taxation and regulation of US companies operating in China and selling US Treasury Bonds (although this will only push the Renminbi up which will make things worse for China).

And of course, with US allies preparing retaliation against US tariffs on steel and aluminium (eg EU tariffs on US whiskey and Harley Davidsons) there is a danger that conflict escalates here too as the US counter-retaliates. And then there’s potentially auto tariffs.

There is also the danger that President Trump’s flip flops on policy (particularly after the May 19 agreement with China) and the confusion as to who is handling the US negotiations (whatever happened to Treasury Secretary Mnuchin who declared that the trade war had been put on hold?) has damaged Trump’s and US credibility.

Economic impact

The negative economic impact from a full-blown trade war would come from reduced trade and the disruption to supply chains that this would cause. This is always a bit hard to model reliably. Modelling by Citigroup of a 10% average tariff hike by the US, China and Europe showed a 2% hit to global GDP after one year, with Australia seeing a 0.5% hit to GDP reflecting its lower trade exposure compared to many other countries, particularly in Asia which will face supply chain disruption. At present we are nowhere near an average 10% tariff hike (the average proposed tariff on $450bn of Chinese imports is 12% which across all US imports is around 2%). So this would need much further escalation from here.

It might also be argued that the US is best placed to withstand a trade war because it imports more from everyone else than everyone else imports from it and the negative impact from the proposed tariffs (which is running around $60bn in tax revenue out of the economy) is swamped by the $300bn in fiscal stimulus boosting the US economy. Trump also feels empowered because there is a lot of domestic support in the US for taking a tougher stance on trade (particularly amongst Republicans) and his approval rating has risen to 45% – the highest in his Presidency.

And the current situation mainly just involves the US and China (in terms of significant tariff announcements), so arguably Chinese and US goods flowing to each other could – to the extent that there are substitutes – just be swapped for goods coming from countries not subject to tariffs, thereby reducing the impact.

Some reasons for hope

So far what we have really seen is not a trade war but a trade skirmish. The tit for tat tariffs triggered in relation to US steel and aluminium imports are trivial in size. All the other tariffs are just proposals and the additional tariffs on $US200bn of imports from China plus another $US200bn would take months to implement, much like the initial tariffs on $US50bn. Trump is clearly using his “Maximum Pressure” negotiating approach with US Trade Representative Lighthizer saying on Friday that “we hope that this leads to further negotiations”. If the US didn’t really want to negotiate, the tariffs would no longer be proposals but would have been implemented long ago. And while Trump is riding high now as he stands tough for American workers, a full-blown escalation into a real trade war with China come the November mid-term elections is not in his interest. This would mean higher prices at Walmart and hits to US agricultural and manufacturing exports both of which will hurt his base and drive a much lower US share market which he has regarded as a barometer of his success. US Congressional leaders may also threaten intervention if they feel Trump’s tariff escalation is getting out of hand. So negotiation is still the aim and China, given its May agreement, is presumably still open to negotiation. So our base case is that after a bit more grandstanding for domestic audiences, negotiations recommence by early July allowing the July 6 tariffs to be delayed as negotiations continue, which ultimately lead to a resolution before the tariffs are implemented. Share markets would rebound in response to this.
But given the escalation in tension and distrust of President Trump we would now only attach a 55% probability to this. The other two scenarios involve:

  • A short-lived trade war with say the tariffs starting up on July 6 and maybe some more but with negotiations resulting in their eventual removal (30% probability). This would likely see more share market downside in the short term before an eventual rebound.
  • A full-blown trade war with China with all US imports from China subject to tariffs and China responding in kind, triggering a deeper 10% decline in share markets on deeper global growth worries (15% probability).

What to watch?

Key to watch for is a return to negotiation between the US and China by the end of June. The renegotiation of NAFTA and proposed retaliation from the EU against US steel and aluminium imports are also worth watching.

Why are Australian shares so relaxed?

Despite the trade war threat Australian shares have pushed to a 10 year high over the last few days helped by a rebound in financial shares, a boost to consumer stocks from the likely passage of the Government’s tax cuts (even though these are trivial in the short term) and strong gains in defensives. Given that China takes one third of our exports the local market would be vulnerable should the trade war escalate significantly. But if our base case (or even a short-lived trade war) plays out the ASX 200 looks on track for our year-end target of 6300.
Dr Shane Oliver
Head of Investment Strategy and Chief Economist
AMP Capital

 

SOURCE: http://www.ampcapital.com.au/article-detail?alias=/olivers-insights/june-2018/trade-war-risks-are-escalating-negotiations-likely

Putting the global “debt bomb” in perspective – seven reasons to be alert but not alarmed

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Key Points

  • Global debt levels have reached new records.
  • Countries with very high gross debt to GDP include Japan, Belgium, Canada, Portugal and Greece. The main areas of rising debt since the Global Financial Crisis (GFC) have been public debt in developed countries (with more to come in the US) and private debt in emerging countries (and of course household debt in Australia).
  • Global debt is not as a big a concern as headline numbers suggest & debt to income ratios will tend to rise through time simply because of saving & investing.
  • Key signs to watch though are a broad-based surge in debt along with signs of excess such as overinvestment, rapid broad-based gains in asset prices and surging inflation and interest rates.

Introduction

Here’s my forecast: “The global economy is going to have a significant downturn and record levels of debt are going to make it worse.” Sound scary enough? Put it in the headline and I can be assured of lots of clicks! I might even be called a deep thinker! The problem is that there is nothing new or profound in this. A significant economic downturn is inevitable at some point (it’s just the economic cycle), debt problems are involved in most economic downturns and such calls are a dime a dozen.

A standard scare now is that memories of the role of excessive debt in contributing to the GFC have worn thin and total global debt has pushed up to a new record high of over $US200 trillion – thanks largely to public debt in developed countries (with more to come in the US as Trump’s fiscal stimulus rolls out), Chinese debt and corporate debt (and household debt in Australia of course). Also, that its implosion is imminent and inevitable as interest rates normalise and that any attempt to prevent or soften the coming day of reckoning will just delay it or simply won’t work. However, in reality it’s a lot more complicated than this. This note looks at the main issues.

Global debt – how big is it and who has it?

Total gross world public and private debt is around $US171 trillion. Adding in financial sector debt pushes this over $US200 trillion but that results in double counting. Either way it’s a big and scary number. But it needs to be compared to something to have any meaning or context. A first point of comparison is income or GDP at an economy wide level. And even here new records have been reached with gross world public and private non-financial debt rising to a record of 233% of global GDP in 2016, although its fallen fractionally to 231% since. See the next chart.

Source: IMF, Haver Analytics, BIS, Ned Davis Research, AMP Capital

The next table compares total debt for various countries.

Source: IMF, Haver Analytics, BIS, Ned Davis Research, AMP Capital
The next chart shows a comparison of developed world (DM) and emerging world (EM) debt – both public and private.


Source: Haver Analytics, BIS, Ned Davis Research, AMP Capital

It can be seen that the rise in debt relative to GDP since the GFC owes to rising public debt in the developed world and rising private debt in the emerging world. Within developed countries a rise in corporate debt relative to GDP has been offset by a fall in household debt, so private debt to GDP has actually gone down slightly. And a rapid rise Chinese debt (particularly corporate) has played a role in the emerging world.

Of course, it needs to be mentioned that measures of gross debt exaggerate the total level of debt. For example, because of government holdings of debt instruments via sovereign wealth funds, central bank reserves, etc, net public debt is usually well below gross debt. In Norway net public debt is -91% of GDP and in Japan it’s 153% of GDP. But as an overview:

  • Japan, Belgium, Canada, Portugal and Greece have relatively high total debt levels;
  • Germany, Brazil, India and Russia have relatively low debt;
  • Australia does not rank highly in total debt – it has world-beating household debt but low public & corporate debt;
  • Emerging countries tend to have relatively lower debt, but rising private debt needs to be allowed for particularly in China, where corporate debt is high relative to GDP.

The bottom line is that global debt is at record levels even relative to GDP so it’s understandable there is angst about it.

Seven reasons not to be too alarmed about record debt

However, there are seven reasons not to be too alarmed by the rise in debt to record levels.

First, the level of debt has been trending up ever since debt was invented. This partly reflects greater ease of access to debt over time. So that it has reached record levels does not necessarily mean it’s a debt bomb about to explode.

Second, comparing debt and income is a bit like comparing apples and oranges because debt is a stock while income is a flow. Suppose an economy starts with $100 of debt and $100 in assets and in year 1 produces $100 of income and each year it grows 5%, consumes 80% of its income and saves 20% which is recycled as debt and invested in assets. How debt, debt to income & debt to assets evolves can be seen in the next table.


Source: AMP Capital

At the end of year 1 its debt to income ratio will be 120%, but by the end of year 5 it will be 173%. But assuming its assets rise in line with debt its debt to asset ratio will remain flat at 100%. So the very act of saving and investing creates debt and {% rising debt to income ratios. 1 China is a classic example of this where it borrows from itself. It saves 46% of GDP and this saving is largely recycled through banks and results in strong debt growth. But this is largely matched by an expansion in productive assets. The solution is to spend more, save less and recycle more of its savings via investments like equity.
Third, the rapid rise in private debt in the emerging world is not as concerning as they have a higher growth potential than developed countries. Of course, the main problem emerging countries face is that they borrow a lot in US dollars and either a sharp rise in the $US or a loss of confidence by foreign investors causes a problem. This has started to be a concern lately as the $US is up 7% from its low earlier this year.

Fourth, debt interest burdens are low and in many cases falling as more expensive, long maturity, older debt rolls off. And given the long maturity of much debt in advanced countries it will take time for higher bond yields to feed through to interest payments. In Australia, interest payments as a share of household disposable income are at their lowest since 2003, and are down by a third from their 2008 high. There is no sign of significant debt servicing problems globally or in Australia.

Fifth, most of the post GFC debt increase in developed countries has come from public debt & governments can tax and print money. Japan is most at risk here given its high level of public debt, but borrows from itself. And even if Japanese interest rates rise sharply (which is unlikely with the BoJ keeping zero 10-year bond yields with little sign of a rise) 40% of Japanese Government bonds are held by the BoJ so higher interest payments will simply go back to the Government.

Sixth, while global interest rates may have bottomed, the move higher is very gradual as seen with the Fed and the ECB, Bank of Japan and RBA are all a long way from raising rates. What’s more, central banks know that with higher debt to income ratios they don’t need to raise rates as much to have an impact on inflation or growth as in the past.

Finally, debt alone is rarely the source of a shock to economies. Broader signs of excess such as overinvestment, rapid broad-based gains in asset prices and surging inflation and interest rates are usually required and these aren’t evident on a generalised basis. But these are the things to watch for.

Concluding comment

History tells us that the next major crisis will involve debt problems of some sort. But just because global debt is at record levels and that global interest rates and bond yields have bottomed does not mean a crisis is imminent. For investors, debt levels are something to remain alert too – but in the absence of excess in the form of booming investment levels, surging inflation and much higher interest rates, for example, there is no need to be alarmed just yet.

SOURCE: http://www.ampcapital.com.au/article-detail?alias=/olivers-insights/june-2018/putting-the-global-debt-bomb-in-perspective

Your 7-point guide to the First Home Super Saver scheme

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The First Home Super Saver (FHSS) scheme may allow you to save more money to put towards buying your first home by using the tax advantages around super – here’s a guide to help you decide if it’s right for you.

1. What is the FHSS scheme?

From 1 July 2018, under the FHSS scheme, you can access your super to withdraw an amount of voluntary concessional (before-tax) and non-concessional (after-tax) superannuation contributions made since 1 July 2017, along with any associated earnings, to put towards buying your first home.

If you’re eligible under the FHSS rules, you can contribute a maximum for future withdrawal of $30,0001, plus associated earnings, with your contributions capped at $15,000 per year. Couples can combine forces and access a total of $60,000 of their eligible contributions, plus associated earnings.

By putting your money in super and not in a savings account, you can make the most of the 15% superannuation tax rate which in many cases may be less than your personal income tax rate, and could leave you with more money to put towards buying your first home.

2. What are associated earnings?

Associated earnings represent the interest or ‘deemed rate of return’ on your concessional and non-concessional FHSS contributions, calculated based on the 90-day bank bill rate plus three percentage points (shortfall interest charge rate).

You should also note that concessional contributions and associated earnings withdrawn will be included in your assessable income at tax time and taxed at your marginal tax rate minus a 30% non-refundable tax offset.

3. Are you eligible?

According to the Australian Taxation Office (ATO), you can start making super contributions from any age, but you can only request a release of amounts under the FHSS scheme once you are 18 years old, and if you:

  • have never owned property in Australia – this includes an investment property, vacant land, commercial property, a lease of land in Australia, or a company title interest in land in Australia (unless the ATO determines that you have suffered a financial hardship)
  • have not previously requested the ATO to issue a FHSS release authority in relation to the scheme.

Eligibility is assessed on an individual basis which means couples, siblings or friends can each access their own eligible FHSS contributions to purchase the same property. If any of you have previously owned a home, it will not stop anyone else who is eligible from applying.

4. Getting started by saving in your super

To get started, you can begin saving in super by choosing to make your own voluntary personal super contributions or by entering into a salary sacrifice arrangement with your employer.*
Please be aware that some employers may not offer salary sacrifice arrangements to their employees. Also, be mindful that there’s no change to the amount of money you can contribute to your super – the existing superannuation contribution caps still apply. Under the FHSS scheme, your contributions still count towards your contribution caps for the year in which they were originally made.

5. Accessing your money to buy your first home

It is important to note that you must apply for, and receive, your withdrawal under the FHSS scheme prior to entering into a contract to purchase or construct your first home – if you enter into a contract first you will be ineligible to make a withdrawal under the scheme.

When you are ready to receive your FHSS amounts, you need to apply to the Commissioner of Taxation for a FHSS determination and a release of your savings. You will be able to apply online from 1 July 2018 using your myGov account linked to the ATO.

Remember, the ATO – not your super fund – will decide what counts towards the FHSS scheme. As such, the ATO will tell you the total of eligible FHSS contributions you can take out, the associated earnings and how much tax will need to be withheld.

Once you have submitted your release of savings application, the ATO will issue a release authority to your super fund/s and your fund/s will send the requested release amounts to the ATO.

The ATO will then withhold the appropriate amount of tax, send the balance of the released amount to you and send a payment summary to you. This will show your assessable FHSS released amount, which is comprised of your voluntary FHSS contributions and any associated earnings on these contributions.

You need to include this amount as assessable income when completing your tax return for the financial year you request the release. The tax payable on this assessable amount will receive a 30% tax offset (any tax payable is also reduce by the estimate of tax withheld by the ATO).

6. Don’t forget, the ATO is watching

The ATO is in charge of ensuring any money withdrawn from your super fund under the FHSS scheme is used to buy your first home. It must have released an FHSS amount to you before you sign a contract to purchase or construct residential premises, otherwise you will be ineligible to make a withdrawal under the scheme.

Once the funds are released you have 12 months to enter into a contract to buy a residential premises. As it may take some time to release the money from the ATO to the super fund, it’s worth planning ahead.

If you release the money and do not buy a home within 12 months you either have to recontribute it back into your super or pay a FHSS tax penalty of 20% of the assessable amount released from super. If required you can apply to the ATO for an extension of time.

Additionally, you must notify the ATO if you either sign a contract to purchase or construct a home, or recontribute the amount into your super fund or you will be subject to the FHSS tax. You can make this notification from 1 July 2018. To find out more, visit the ATO’s website.

7. Consider the pros and cons before you take the plunge

Is the FHSS scheme right for you? While it may help you save more money to put towards buying your first home, it is a less flexible way to save than many options outside super. The FHSS scheme could also impact your future retirement savings. To better understand the potential pros and cons before taking the plunge, visit the ATO’s website for more information or speak to a financial adviser.

SOURCE: https://www3.colonialfirststate.com.au/personal/guidance/intelligent-investing/your-seven-point-guide-to-first-home-super-saver.html