No wallets spared in hunt for savings

It’s hard to find a hip pocket spared by the Abbott government’s first budget.

Every motorist will pay more at the petrol bowser. More than two million families will be affected by a major overhaul of the family tax benefits system. High income earners will pay more tax. New charges will apply to GP visits and the purchase of medicines.

The government will raise an extra $2.2 billion over four years by re-introducing the biannual indexation of fuel excise. That will push up bowser prices by about 1 cent a litre next financial year, adding about $16 to the average annual fuel bill. If inflation rises in line with the official target for the next five years, motoring groups estimate that fuel excise will rise from its current rate of 38.143 cents a litre to 43.684 cents a litre, increasing the average annual fuel bill by about $81.

Expenditure surveys show filling up the car with fuel is the single biggest weekly purchase made by Australian households. Residents of outer suburbs will be hit harder than most because they tend to use much more. Then Prime Minister John Howard dumped fuel excise indexation in a bid to revive his political fortunes prior to the 2001 election.

Tighter eligibility requirements for the $19 billion a year family tax benefits system will hit millions of household budgets and exclude many upper-middle income families from the system altogether.

“Families who can support themselves will receive less assistance from the government,” the budget papers say.

The rates for family support payments will be unchanged until mid-2016 and the thresholds that determine the level of Family Tax Benefit Part A will be frozen until mid-2017. That means many families will receive lower payments as their incomes rise. Families with a single earner with an income over $100,000 will no longer be eligible for Family Tax Benefit Part B and it will no longer apply when the family’s youngest child turns six.

The effect on families from these changes depends on a household’s income and number of children but a Deloitte Access Economics budget specialist, Chris Richardson, said the reforms target middle Australia.

“Most of the heavy lifting is in the middle income range – that is families on about $100,000 to $150,000 a year,” he said.

“They have tried to protect the bottom end.”

The government has made a point of targeting high income earners with a “Temporary Budget Repair Levy”. That will lift the top marginal tax rate by 2 percentage points for the next three financial years. Those with annual earnings of $190,000 will pay an extra $200 a year, those on $250,000 will pay an extra $1400 and those earning $500,000 a year will pay an extra $6400.

Families will also have to find more money to fund their own health care. A new $7 co-payment for GP visits from July next year will cost a typical family of four $140 a year if each member visits the doctor five times.

Patients will also pay an extra $5 towards the cost of each prescription under the Pharmaceuticals Benefits Scheme from January 1 (or 80 cents if they are on a concession card).

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States face huge shortfall in funding


The federal government will rip $80 billion from schools and public hospitals in the next decade, as Commonwealth spending earmarked for the states and territories is slashed due to the rejigging of indexation arrangements and the abandonment of guarantees for public hospital funding.

Likely to enrage state and territory leaders, the massive hit on funding to the second tier of government runs counter to the Coalition’s pre-election promise that health and education would be quarantined from cuts, although the new indexation measures won’t begin to take effect until 2017, after the next federal election.

It also sets the scene for a potentially radical realignment of federal-state financial relations, with the states and territories under immense pressure to make up for the funding shortfall by increasing their own taxes and levies, or introducing new ones.

If they don’t, they may be forced to close schools and hospitals to make up the difference.

Treasurer Joe Hockey said the changes were necessary because the previous Labor government had ”built in massive growth in structural spending” that was simply unsustainable.

Moreover, the government believes that federal spending on schools and hospitals – which it does not manage – is not only unaffordable but ”blurs accountabilities”.

Up until 2024-2025, the cuts will amount to a cumulative $80 billion.

Based on population size, NSW schools and hospitals can expect to suffer a cumulative $25.5 billion reduction in funding over the next decade.

In Victoria, the cut will be $19.9 billion over the same period.

By 2024-25, the federal government will spend $25 billion a year on schools, as opposed to $30 billion if the existing arrangements had remained in place.

For hospitals, the difference is even larger – $25 billion versus $40 billion.

Underpinning the cuts is the change to indexation, which will see funding rise only to reflect the growth in population and inflation, rather than the previous formula which based federal funding on the growth in ”activity” in the health and education systems.

The government promised to maintain health and education funding before the election, although it reserved the right to re-allocate money within the overall funding ”envelope”.

But Treasury officials in the budget lock-up said none of the cuts to schools were being re-allocated elsewhere in the education portfolio.

For hospitals, savings will be redirected to the $20 billion Medical Research Future Fund that will finance investment in new medical technologies and techniques, but only until 2019/2020.

Moreover, the states and territories will lose another $569 million in health funding from the states in the next four years, with the federal government to pull out of national partnership agreements on improving hospital services and preventative health.

In a terse statement, the federal government said: ”The states will be expected to continue contributing to these arrangements at their expense.”

One final hit to state and territory finances came with the termination of the agreement where the federal government financed some of the benefits received by seniors card holders, such as cheaper public transport fares.

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China’s financial reform process will take time, economists warn

China’s latest blueprint for widespread financial market reforms by 2020 has boosted equities and supported commodity prices this week, but fund managers predict the rally is over for now, and economists warn the implementation of the ambitious plan will be a long and difficult process.

Among the proposed reforms is the intention to streamline the approval process for new issues and open Chinese companies to foreign investors. This will help companies sourcing funds in China’s shadow banking sector to refinance their existing debt with equity capital.

The reforms are an important step towards a more innovative and creative private sector in China, Westpac senior economist Huw McKay said.

“Attracting more foreign investors will help Chinese companies dig themselves out of a rapid growth in debt, by exchanging that debt for equity, in a market-based transaction,” Mr McKay said.

Deltec chief investment officer Atul Lele agreed the reforms should reduce the risk of corporate defaults and help China in the long term, but cautioned that they did not address near-term risks.

”Indebtedness within the corporate landscape, the potential impact of contagion across the financial system from trust products, the types of assets that they allow to be used as collateral for financing, such as commodities – there’s a long list of reforms that need to take place,” Mr Lele said.

Commodity markets heavily linked to China’s finance sector, such as iron ore and copper, were mostly higher on Tuesday as traders digested the news that China would develop commodity trading tools and also relax its capital market restrictions. Nickel surged 5.1 per cent to $US20,898 per mega tonne, but analysts said a supply shortage – following an export ban in Indonesia and Vale suspending production in New Caledonia – was the main driver.

China’s Shanghai Composite Index and Hong Kong’s Hang Seng both broke above their 50-day moving average this week after China’s State Council released updated guidelines on Friday for developing open capital markets.

The Shanghai Composite has lost 8.4 per cent over the past one year, and the Hang Seng is down 3.2 per cent amid a slowdown in growth and fears about how the Chinese economy will cope with a raft of ambitious policy reforms. Shanghai shares eased on Tuesday following disappointing industrial production and retail sales numbers. “Typically, Chinese stocks get an immediate boost when the state announces any progress with its program of financial market reforms, but this tends to be very short-lived,” Kevin Bertoli, portfolio manager at PM Capital, said.

Friday’s announcement builds on ideas posited by the state in November and plans unveiled last month to create greater links between the mainland and Hong Kong markets, and has been warmly received by economists.

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Pension whittled away, but super untouched

Many people will be going back to their drawing boards when it comes to planning retirement.

That is because the age pension may not be part of the retirement plans of a larger slice of people younger than their mid-50s.

In his budget speech, Joe Hockey said: “Currently, an individual with a home and almost $800,000 in assets still qualifies for the age pension; a couple with a home and almost $1.1 million in assets also qualify for the age pension.”

The government believes access to the age pension is too generous. Mr Hockey said the age pension needs to be better placed to meet the “challenge of a significant increase in demand”.

The family home is safe, and remains outside of the age pension assets test.

While the government has moved decisively to bring the growth of age pension outlays under control, it is leaving reform of superannuation tax concessions, which are growing more quickly than outlays to the age pension, to another time.

Not only will most of us have to wait beyond our 65th birthdays to qualify for the age pension and pensioner discounts, but access to the pension will be tightened and the rate at which pension payment is indexed will be slowed.

As already signalled, the pension age will rise to 70 from July 1, 2053, from 65 now. That means a pension age of 70 for everyone born after 1965.

But the change will be phased in. Those born between July 1, 1952, and December 31, 1953, will have an age pension age of 65.5. The wait rises progressively until hitting age 70 in 2053.

Rather than tighten the ”taper” rate that the pension falls with each additional dollar of income, from September 2017, the thresholds for deemed income will be lowered. This is where income from investments is deemed to earn a certain amount of interest, regardless of the actual income.

A home-owning pensioner couple, for example, is deemed to have earned 2 per cent on the first $77,400 of assets and 3.5 per cent on the rest. From September 2017, the 2 per cent will apply only on the first $50,000 and 3.5 per cent on the rest.

The government estimates that more than 500,000 age pensioners will be affected by the change, with most losing only a few dollars of the age pension each fortnight.

The government is planning to allow bracket creep to eat away at the numbers of people who can qualify for the age pension.

From July 1, 2017, all pension assets test and income test thresholds will be frozen for three years, instead of adjusted for inflation.

Finally, the way that the age pension is indexed will change. At present, the age pension rises in line with average male earnings, which grow about 1.5 percentage points a year faster than inflation. From September 1, 2017, the age pension will be in indexed to inflation.

The change will also affect the disability support pension (DSP). In several years’ time, after the change starts, the amount of the age pension and the DSP could be expected to be more than $100 a fortnight less than it would have otherwise been under current indexing.

In last year’s budget, the Gillard government doubled the 15 per cent tax on salary sacrificed into super to 30 per cent for those earning more than $300,000 a year.

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The ABC of investing

Laura Henschke, 28, has different aspirations to her father Mark when it comes to buying a home. Photo: Tamara DeanYou didn’t need the budget to tell you that you are on your own, although a reminder every now and then never goes astray.

To get ahead, you must invest, especially while interest rates are low, where they are destined to remain for some time.

An online saving account is not going to hack it. The return is low, it is taxed and it is eroded by inflation.

Where and how should you invest? The cardinal rule is know thyself. If the thought of shares jumping up and down willy-nilly worries you, consider property.

If you don’t want to tie your money up in something that is always requiring attention or repairs, then the sharemarket might be a better fit. If neither appeals, read on. You might surprise yourself.

Oh, and if you want to borrow, the interest component of your repayments is tax deductible whether you buy shares or property.

However, remember, just as using other people’s money can boost your returns because there is more on the line, it will exaggerate any losses.

And don’t negatively gear. Paying out more than you earn in rent is for fools. It is a losing strategy that will bring you undone more quickly than it will the Tax Office.


Registering with a broker – CommSec is the most popular by a country mile – is easier than opening a bank account. It will only take a few minutes and you can buy shares straight away.

However, don’t rush it. The best way for beginners to get used to the sharemarket is to do some pretend or paper trading for a few months.

The ASX also has an online simulated share game that teaches you about the market.

Brokerage is payable on buying and selling and is based on the value of the trade. It costs as little as $11 a trade at CMC Markets, the cheapest broker.

One of the biggest beginners’ mistakes is in thinking a 50-cent stock is better value than a $50 one, says Dale Gillham, chief investment analyst at Wealth Within, which runs the only accredited diploma in share trading.

”They believe they get more shares and, as such, are more likely to get a better return, which is simply untrue,” he says.

Another is not having a selling price in mind when you buy. If nothing else, this concentrates the mind wonderfully, because it will force you to put a value on the stock, which in turn will mean doing some homework.

”Your exit price is more critical than the buying price,” Gillham says.

So where do you start?

Go for any of the stocks in the top 20. They will be blue chip and have stood the test of time.

”Anybody can throw a dart and pick shares, but managing risk is the most important aspect of investing.

”Preserving your capital and your profits from downturns in the market is critical to long-term success. If you don’t lose on a stock, then you don’t have to find a way to make up for it,” Gillham says.

Top blue chips are less volatile and always fare better, which is not to say they are immune from any market bad-hair day.

However, there are other ways to get into the sharemarket without having to pore over annual reports yourself.

One shortcut is a managed fund, usually bought through a financial adviser, where it is all done for you. Since it does not trade on the ASX, you will not know how it is faring day to day unless you specifically ask. This might not be such a bad thing.

You can get the same thing in listed investment companies, or LICs, which also manage a share portfolio. You will know what the LIC is worth every second of the day, like any other share, and they are easy to get into and out of.

Their annual fee is also cheaper than a managed fund’s.

But cheapest of all is an exchange-traded fund (ETF), a sort of cross between the two. LICs and managed funds are actively managed, whereas an ETF follows a predetermined index such as the ASX top 20.

One other thing is that managed funds and ETFs are always valued at what their portfolios are worth, but LICs can stray, and do most of the time, from their real value.

Sometimes that is an advantage – you can buy them for less than their portfolios are worth – but at the moment many are trading at a premium to their underlying value.

Speaking of which, are shares reasonably priced at the moment?

Only just, going by the price-to-earnings (p/e) ratio.

The market’s p/e is about 15, which means shares trade on 15 times companies’ earnings for the financial year. That is right on its long-term average.

Over time, you can expect the market to average a 10 per cent-a-year return including dividends.

Average is the operative word: it is hardly ever that in any particular year.

And here is a sobering thought. A 50 per cent drop in price requires a 100 per cent increase just to get back to where you were.

Fixed interest

Investing in bonds, debentures or anything else that pays interest for a set term is not going to make you wealthy, but it might stop you from becoming poor.

They are the safe ground between shares and cash – not high risk, a better yield, and the chance of a capital gain. As it turns out, some listed companies also issue bonds, although it is hard for ordinary investors to get their hands on them and even then you need to go to a fixed-interest dealer.

Fixed-interest investing also requires a slightly different mindset.

”You’re looking for survivability of a company. With shares, you look at growth,” says Elizabeth Moran, director of education and fixed income research at FIIG Securities, a bond dealer which offers $10,000 parcels of bonds as part of a $50,000 investment.

Qantas is a classic example. You wouldn’t want to buy its shares, but there is no question of it meeting its financial commitments. Its bonds with a face value of $100 mature in 2020 and have an interest yield of 6.5 per cent a year.

A bond yield is the fixed-interest version of dividend yields: in this case the interest divided by the price you paid. So the more the bond costs, the lower the yield.

If you think rates are going to drop you would want a bond, because its price will rise.

A rate rise would lower the price but all is not lost. Some bonds have a floating rate tied to the money market and are usually adjusted quarterly. When rates rise, so does your return, without hurting the bond’s price. It might even rise, because the bond will be paying more.

Bendigo and Adelaide Bank’s floating bond is yielding about 5.6 per cent, Moran says.


With rates so low, property has never had it so good. Perhaps too good, because by any stretch it’s expensive. The average rental yield is 4.7 per cent, the equivalent of the sharemarket’s p/e or payback period of 21 years.

Even for owner occupiers, mortgage repayments are approaching the highest proportion of income ever, according to the Reserve Bank. Then again, the unique thing about property is that every home is its own separate market.

But there are some things a good investment property needs. It should match the demographic of the area. In the inner city or close to a university, for example, a unit will be more in demand from tenants than a house.

And you want to buy in an area with a rapidly rising population.

The more sought-after units are close to transport, shops and parks or beaches. For houses, you could add proximity to a high-rating NAPLAN (National Assessment Program – Literacy and Numeracy) school.

Look beyond your own backyard. The ideal investment property might not be in your street, city or even state.

It will be where there is ”a population growing faster than the national average, a median household income growing faster than inflation, strong infrastructure plans designed to provide extended and appropriate services to the growing population [such as transport, schools, roads and shopping precincts] and a local government with progressive town plans and money to commit to the area,” property expert and author Margaret Lomas says.

”There is still a little bit of life left in Western Sydney. After that, I really like Brisbane suburbs. Nundah, Albion, Runcorn, Upper Mount Gravatt and the Logan shire, to name a few. In Melbourne: Narre Warren, Epping and Meadow Heights.”


The best investment you can make is salary sacrificing into superannuation. Not that super is an investment as such. It is a tax dodge for things you would invest in anyway.

Most super funds have more in shares than anything else, and for good reason. Your super has to provide a nest egg for you at the end of your working life and then, hopefully, many years of retirement. Earning interest alone is just not going to cut it.

Also, blue-chip shares come with franked dividends and, because super earnings are taxed at 15 per cent, whereas franking has a 30 per cent credit, it means more money flowing in courtesy of the Tax Office.

By the same token, you need diversity, because the sharemarket may not be there when you need it. Just ask all those baby boomers who had to postpone retirement because they were hit by the global financial crisis.

The typical balanced fund, which is what you are in unless you told your boss otherwise, has shares, fixed interest, some cash, international investments and probably some property.

It is like a one-stop shop for an investment portfolio, but with tax breaks. These include 15 per cent taxes on salary-sacrificed contributions and the fund’s earnings – in both cases instead of your marginal rate.

Even so, it doesn’t suit everybody. If you are under 40, you are probably better off in a growth option which will stick more in shares, but if you are over 50, something more conservative might be better.

Or you can always run your own fund along with more than half a million others, but you need to have at least $200,000 in it for it to be worth the accounting, auditing and government levy fees.

There are also strict limits to how much you can salary sacrifice a year, which is not helped by the fact that your boss’s 9.25 per cent contribution counts towards the ceiling as well.The generation gap

Most baby boomers think the younger generation will do it tougher financially than them – but the Henschke family suggests perhaps not.

The two generations have quite different aspirations about buying a home. According to a survey of ”affluent investors” by asset management firm Legg Mason, 70 per cent feel ”investment prospects would be worse for future generations”. And fewer than half of them are convinced they’re saving enough for retirement.

Legg Mason’s Matt Schiffman’s advice is to ”invest early in life and make sure you understand what you’re investing in”.

At 28, Laura Henschke, says: ”Time is getting on. I’ve worked hard to pay off my debts and am now able to consider investing.”

Although she and her partner, Michael, will invest in property, they aren’t keen to buy a place to live in. Yet, at her age, baby boomers were typically already buying their dream home.

Her retired dad, Mark, who runs his own super fund, says: ”For my generation it was ‘buy a home’, and that was it.”

But Laura, a laywer, says the couple prefers ”to invest at this stage. I don’t have a desire for a big house. We’d rather invest wisely. Eventually in our late 30s or early 40s we might get a house.”

Mark says if he had his time over again he’s not sure he would have bought a home first. ”Maybe there would be different choices,” he says.

Read David Potts in Weekend Money, in the paper each Sunday.


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