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What are Investment Bonds

Need advice? Contact Macarthur Wealth Management for expert financial advice in Parramatta and Sydney wide on (02) 9683 2869. www.macarthurwealth.com.au

Investment bonds, or insurance bonds as they are also known, are issued by life insurance companies. They have features similar to a managed fund combined with a life insurance policy. They can be a tax effective way to invest if certain rules about contributions and withdrawals are followed.

Investment bonds are used for a range of purposes including:

  • A medium to long term lump-sum or regular savings plan
  • A tax effective investment for investors on high income earners
  • Investment bonds can be taken out by parents, grandparents and the like on the life of a child. The bond can be structured to automatically be transferred into the child’s name at a pre-determined age. This is referred to as ‘child advancement’.
  • Estate planning. Because an investment bond is in essence a life insurance policy, it is subject to life insurance rules. This includes the ability of the owner of the investment bond to nominate one or more beneficiaries to receive the proceeds of the bond in the event of the death of the bond owner. By nominating beneficiaries under an investment bond, the bond does not form part of the estate of the bond owner and may be administered separately to their estate.
  • Deceased estates that are required to invest bequests that will vest with beneficiaries at a later date.

Parties to an investment bond

There three parties to an investment bond; the owner – who subscribes the investment funds, the life insured – who may be the bond owner, or someone else, and the issuer of the bond – the life insurance company.

Some bonds may include fourth party, being a nominated beneficiary. The bond owner may nominate a beneficiary to receive the bond proceeds in the event of the death of the life insured.

Child Advancement Conditions

Where a bond is issued on the life of a child, and its ownership is to vest in the name of the child at a future date, the bond is subject to Child Advancement Conditions. The owner of the bond may nominate an age, up to 25, at which the ownership of the bond will transfer to the child.

10 year rule

Insurance bonds are tax paid investments. This means earnings on the investment are taxed in the hands of the life insurance company at the corporate tax rate. Insurance companies are generally taxed at a rate of 30% however the actual rate of tax payable may be less than 30% when tax deductions, tax offsets, and tax credits available to the life insurer are taken into account.

Investment bonds can be tax effective for long term investors with a marginal tax rate higher than 30%. An investment bond is designed to be held for at least 10 years. If you hold the bond for at least 10 years, the returns on the investment, including additional contributions that meet the 125% rule, will be tax free. In some circumstances, investing in an investment bond for a shorter period may be an appropriate strategy.

Withdrawals

If you withdraw money before 10 years is up, some or all of the income will be taxable and included in the investor’s assessable income. This amount is taxed at the investor’s marginal tax rate – however a 30% tax offset is allowed to compensate for the tax already paid by the life insurance company. Where an investor’s personal tax rate is less than 30%, any unused portion of the tax offset can be used to reduce tax payable on other income in the same financial year.

If you make a withdrawal within the first 10 years, the rate at which earnings in the investment bond are taxed will depend on when you make the withdraw

125% Rule

While investment bonds are often described as a ‘single premium’ or lump sum investment, many investment bonds accept both regular and irregular additional investments. Provided the amount invested in any one year – based on the anniversary of the bond commencing – does not exceed the previous year’s investment by more than 125%, it will be considered part of the initial investment.

If you exceeds 125% of the previous years’ investment, the 10 year period will reset. If you do not make a contribution in any one year, a contribution in following years will reset the 10 year rule.

Investment Options

The life office issuing the investment bond may offer a range of investment options such as single asset funds i.e. cash, fixed interest, shares, property or a range of diversified options. Each option has different investment goals, timeframes, risk profiles and underlying assets.

Disadvantages and Risks of Investment Bonds

The key risks are largely determined by the nature of the investment chosen. Risks to be aware of include:

  • Market risk: The performance of the investment bond will be affected by the assets and securities that it invests into.
  • Fees: These may vary depending on the investment bond and investment options chosen and include management and administration fees and buy-sell spreads.

Need advice? Contact Macarthur Wealth Management for expert financial advice in Parramatta and Sydney wide on (02) 9683 2869. www.macarthurwealth.com.au

General Advice Warning

The information provided on this website is general in nature only and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information on this website you should consider the appropriateness of the information having regard to your objectives, financial situation and needs. Before making any decision, it is important for you to consider these matters and to seek appropriate legal, tax, and other professional advice.

Disclaimer

All statements made on this website are made in good faith and we believe they are accurate and reliable. Macarthur Wealth Management does not give any warranty as to the accuracy, reliability or completeness of information that is contained in this website, except in so far as any liability under statute cannot be excluded. Macarthur Wealth Management, its directors, employees and their representatives do not accept any liability for any error or omission on this website or for any resulting loss or damage suffered by the recipient or any other person. Unless otherwise specified, copyright of information provided on this website is owned by Macarthur Wealth Management. You may not alter or modify this information in any way, including the removal of this copyright notice.

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How are Granny Flat Rights Assessed by Centrelink and DVA?

Need advice? Contact Macarthur Wealth Management for expert financial advice in Parramatta and Sydney wide on (02) 9683 2869. www.macarthurwealth.com.au

Sometimes living alone may not be the best option and you may wish to move in with your children or another close relative/friend, or you may wish to reassign ownership of your home. The arrangements can be either formal or informal and you receive the right to accommodation for life.

This might involve you moving into someone else’s home or into a granny flat built on their property. Alternatively you can transfer ownership of your home to that person and continue to live in the home.

This arrangement may involve a gift of money, payment of expenses or transfer of the title of your home.

Normally the transfer of money or assets would come under Centrelink/Veterans’ Affairs (DVA) gifting rules. But the granny flat rules determine how this transfer is assessed and the interaction with gifting rules.

How are Granny Flat Rights Assessed by Centrelink/DVA?

You should discuss your individual circumstances with your local Centrelink/DVA office before taking any action to determine how you will be assessed.

If you pay money that equals the purchase or construction costs or you transfer full ownership of your home, this is deemed to be a ‘reasonable amount’. Gifting rules do not apply.

If transfer additional amounts Centrelink/DVA will determine the ‘reasonable amount’ for the granny flat right using a formula with a conversion factor (shown below) based on your age and the maximum rate of age pension (couple rate). Any amount paid or transferred over this reasonable amount is a gift and is assessed under deprivation rules.

Deprivation applies if the amount deemed to be a gift (single or couple combined) is more than:

  • $10,000 per financial year, or
  • $30,000 over a five year rolling period (includes current financial year and the four previous financial years)

Deprived assets are assessed against the income and assets tests for the next five years and may have a negative impact on your Centrelink/DVA entitlements.

If you move out of the granny flat within five years and the reason that you moved could have been anticipated at the time the right was established, gifting rules may be applied retrospectively.

Some details to be aware of include:

  • For Centrelink/DVA purposes, granny flat rights do not need to be written agreements however Centrelink/DVA may request a statement that the arrangement has begun
  • The amount paid or transferred for the granny flat right is an exempt asset (except deprived asset amounts) and you are assessed as a homeowner if the amount paid is above the extra allowable amount of $224,500 (2022/2023) If you pay $224,500 or less you are treated as a non-homeowner and the amount paid is an assessable asset
  • If you are transferring ownership of your home Centrelink/DVA may use the value accepted for stamp duty or may choose to receive a valuation from the Australian Valuation Office

If you have paid money for construction of the granny flat you need to provide a copy of the building contract to Centrelink/DVA to verify the construction cost

Other Things You Should Know

Granny flat arrangements may not work out. You may wish to formalise the arrangement to protect yourself by having a solicitor draw up an agreement and identify any other details. This agreement may include:

  • The quality and type of the accommodation to be provided
  • Whether the accommodation is in a particular property or in any property
  • How the granny flat right can be dissolved if the arrangement is no longer suitable

You should also ask your solicitor to review and formalise your estate planning arrangements such as your Will and Powers of Attorney.

The value of the granny flat can be a significant proportion of your estate so it is important to prevent potential rifts between family members. You may find it difficult to get your money back if you no longer want to live in the granny flat.

Need advice? Contact Macarthur Wealth Management for expert financial advice in Parramatta and Sydney wide on (02) 9683 2869. www.macarthurwealth.com.au

General Advice Warning

The information provided on this website is general in nature only and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information on this website you should consider the appropriateness of the information having regard to your objectives, financial situation and needs. Before making any decision, it is important for you to consider these matters and to seek appropriate legal, tax, and other professional advice.

Disclaimer

All statements made on this website are made in good faith and we believe they are accurate and reliable. Macarthur Wealth Management does not give any warranty as to the accuracy, reliability or completeness of information that is contained in this website, except in so far as any liability under statute cannot be excluded. Macarthur Wealth Management, its directors, employees and their representatives do not accept any liability for any error or omission on this website or for any resulting loss or damage suffered by the recipient or any other person. Unless otherwise specified, copyright of information provided on this website is owned by Macarthur Wealth Management. You may not alter or modify this information in any way, including the removal of this copyright notice.

Macarthur Wealth Management Links

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Retirement: https://www.macarthurwealth.com.au/account-based-pension/

Gifting and Centrelink

Need advice? Contact Macarthur Wealth Management for expert financial advice in Parramatta and Sydney wide on (02) 9683 2869. www.macarthurwealth.com.au

A person who is eligible for Centrelink or Veterans’ Affairs (DVA) payments is expected to use their own financial resources to support themself so the ability to gift to others without an impact on entitlements may be limited.

Centrelink/DVA entitlements are based on two tests – an income test and an assets test. Gifts can reduce assets (and also the assessed income) and may help to increase the amount of Centrelink/DVA payment.

A single person or couple combined is allowed to gift $10,000 per financial year, with a limit up to $30,000 over a five year rolling period. If more than this amount is gifted the excess amount is called a ‘deprived asset’.

A deprived asset is counted as an assessable asset under the assets test and is subject to deeming under the income test for five years from the date of the gift. This may affect your Centrelink/DVA payment.

When looking at the $30,000 limit, Centrelink will also take into consideration amounts gifted in the previous five years.

Before making the gift it is important for the person to ensure they can afford to do this and that they have enough money to meet their own needs. The amount given away may be more than the additional payment received from Centrelink/DVA. The motivation needs to be to help someone financially, not just increase Centrelink/DVA benefits.

Need advice? Contact Macarthur Wealth Management for expert financial advice in Parramatta and Sydney wide on (02) 9683 2869. www.macarthurwealth.com.au

General Advice Warning

The information provided on this website is general in nature only and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information on this website you should consider the appropriateness of the information having regard to your objectives, financial situation and needs. Before making any decision, it is important for you to consider these matters and to seek appropriate legal, tax, and other professional advice.

Disclaimer

All statements made on this website are made in good faith and we believe they are accurate and reliable. Macarthur Wealth Management does not give any warranty as to the accuracy, reliability or completeness of information that is contained in this website, except in so far as any liability under statute cannot be excluded. Macarthur Wealth Management, its directors, employees and their representatives do not accept any liability for any error or omission on this website or for any resulting loss or damage suffered by the recipient or any other person. Unless otherwise specified, copyright of information provided on this website is owned by Macarthur Wealth Management. You may not alter or modify this information in any way, including the removal of this copyright notice.

Macarthur Wealth Management Links

Blog  https://www.macarthurwealth.com.au/insights/

Facebook  https://www.facebook.com/macarthurwealthmanagement

Youtube   https://www.youtube.com/channel/UCHde08SRVuDPchprbz0CE_g

Twitter  https://twitter.com/MacarthurWealth

Pinterest   https://www.pinterest.com.au/MacarthurWealth/

Linkedin   https://www.linkedin.com/company/macarthur-wealth-management

Instagram  https://www.instagram.com/macarthur_wealth/

Retirement: https://www.macarthurwealth.com.au/account-based-pension/

Interest rates –accentuating the negative

Need advice? Contact Macarthur Wealth Management for expert financial advice in Parramatta and Sydney wide on (02) 9683 2869. www.macarthurwealth.com.au

So, it’s just a normal day.

You walk into the bank, deposit some money. And the teller asks you to pay them interest.

Keeping your cool, you ask why.

And the teller apologetically explains: “Oh we’ve got negative interest rates.”

Right now, we’re living in a world where some countries have ‘negative interest rates.’ That means, that instead of rewarding customers for depositing money, a bank (or a central bank) will charge them interest. In financial terms, that’s the world turned upside down.

So how did we get here?

The GFC hangover and COVID-19

Broadly speaking, negative interest rates are engineered by governments and central banks as a way of getting life into a chronically spluttering economy. If it costs you money to put your money in the banks (or it costs banks money to park their funds with the Government) there’s more incentive for individuals to spend it on housing, at the shops, or on holidays. And for banks to invest it in areas that also foster more economic activity and employment – like lending to business.

There’s no coincidence we’re talking about negative interest rates in 2021. They were part of a suite of measures used by some countries to try and get out of the economic slump caused by the Global Financial Crisis back in 2008/09. The economic shock administered by COVID-19 has brought them back into fashion – countries as advanced as Japan, Switzerland and Sweden have jumped on the negative interest rate train.

Australia stays positive

So, what do negative rates mean for you? The good news is that they’re not really happening in Australia. At least not yet. And they probably won’t.

Back in November 2020, the Reserve Bank of Australia (RBA) Governor Dr Philip Lowe said: “There has been no change to the Board’s view that there is little to be gained from lowering the policy rate into negative territory.”

Given that the Australian economy has picked up sharply since then – house prices and employment numbers are on the upswing – there seems less need for negative interest rates in Australia than most other countries.

Different folks

But, while not negative, interest rates in Australia are still at historic lows – and could stay that way till around 2024 according to Dr Lowe and his team at the RBA. This has implications for everyone – but different implications depending on whether you’re a saver or a borrower.

  • If you’re a saver or retired, low interest rates make it harder to earn the income you used to from products like Cash Management Trusts and Term Deposits. You might find you are considering investing in riskier assets, like shares, to try to make up that income.
  • If you have large debts – like a mortgage – your interest payments are likely significantly lower. And if you’re looking to borrow, it’s possible you can borrow more money, because your repayments will likely to be much lower.

What goes down must come up

As mentioned earlier, these low interest rates are a symptom of a global economy trying to get itself going again. They’re not normal (though they might feel like the new normal). That means it could make sense to get good advice about how to handle this economic trend – to look out a bit longer than the next three years.

Here’s how good advice could help:

  • Savers: A financial planner can help you find sources of extra income without taking on too much risk to do it.
  • Borrowers: Some expert advice could help you ensure you don’t overcommit when it comes to borrowing. As the popular US financial planning radio star Dave Ramsey puts it, “A lower interest rate doesn’t make a debt go away.”

Low and negative rates are likely to be with us for some time. But for Australian savers, borrowers and investors, it’s important to look beyond the obvious, front page economic headlines.

After all, the COVID crisis is just a year old – and already people are talking about a potential post-COVID boom. Things go down – and up again – and down again. Just like interest rates.

Need advice? Contact Macarthur Wealth Management for expert financial advice in Parramatta and Sydney wide on (02) 9683 2869. www.macarthurwealth.com.au

General Advice Warning

The information provided on this website is general in nature only and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information on this website you should consider the appropriateness of the information having regard to your objectives, financial situation and needs. Before making any decision, it is important for you to consider these matters and to seek appropriate legal, tax, and other professional advice.

Disclaimer

All statements made on this website are made in good faith and we believe they are accurate and reliable. Macarthur Wealth Management does not give any warranty as to the accuracy, reliability or completeness of information that is contained in this website, except in so far as any liability under statute cannot be excluded. Macarthur Wealth Management, its directors, employees and their representatives do not accept any liability for any error or omission on this website or for any resulting loss or damage suffered by the recipient or any other person. Unless otherwise specified, copyright of information provided on this website is owned by Macarthur Wealth Management. You may not alter or modify this information in any way, including the removal of this copyright notice.

Opportunities for last minute tax planning

Need help? Contact us Macarthur Wealth Management for expert financial advice in Parramatta and Sydney wide. (02) 9683 2869. https://www.macarthurwealth.com.au

June provides some opportunities for some last-minute tax planning. Some of the opportunities worth considering are:

Maximise superannuation contributions
This year the maximum deductible contribution to superannuation is $25,000. This figure includes any SG amount plus salary sacrifice. If you are below this figure, you can make a contribution to super and claim it as a tax
deduction. This is available for people up to age 74 (must meet “work test” if over 65). Note, this figure moves to $27,500 next financial year.

There are also catch-up facilities to make contributions in excess of $25,000 per annum. If you have not maxed out $25,000 in the last 3 years and your super balance is less than $500,000, you may be able to put a maximum of
$75,000 into super and claim a deduction. This is a really good opportunity to try and catch up on the years you could not maximise contributions.

Bring forward deductions
If you are paying income protection premiums on a monthly basis, you may want to consider paying 12 months in advance this month. This effectively brings forward your deduction, it may also save you money, as annual
premiums usually save around 10%.

The same theory works if you have an investment property loan. You may be able to prepay the interest for 12 months in advance to bring forward the deduction.

General Advice Warning

The information provided on this website is general in nature only and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information on this website you should consider the appropriateness of the information having regard to your objectives, financial situation and needs. Before making any decision, it is important for you to consider these matters and to seek appropriate legal, tax, and other professional advice.

Disclaimer

All statements made on this website are made in good faith and we believe they are accurate and reliable. Macarthur Wealth Management does not give any warranty as to the accuracy, reliability or completeness of information that is contained in this website, except in so far as any liability under statute cannot be excluded. Macarthur Wealth Management, its directors, employees and their representatives do not accept any liability for any error or omission on this website or for any resulting loss or damage suffered by the recipient or any other person. Unless otherwise specified, copyright of information provided on this website is owned by Macarthur Wealth Management. You may not alter or modify this information in any way, including the removal of this copyright notice.

The magic of franking credits in your portfolio

 A franking credit is a tax credit allocated to the shareholder. The tax credit can offset the tax that is due on the dividend.

It’s obvious that investors select investments based on the rate of return they can earn on their funds. For share investments, the rate of return has two components:

1.  Sell the share for gain – assume you purchase 100 shares at $20 each. If you later sold the shares for $40 each you have made a gain of $20 per share. The total gain is $2,000 ($20 for each share) on the original 100 shares;

2.  Earn a return through a dividend. A dividend is a share of company earnings paid to the shareholder. If your share pays a $1.50 on each of your 100 shares, you’ll earn $150.

Keep in mind that your rate of return should be based on the dollars you keep after taxes have been paid. One way to reduce the tax you pay on dividends is by using franking credits.

How do they work?

Franking credits are a tool used by investors to reduce or eliminate the taxation of dividends. Australian companies that pay dividends to shareholders can be subject to double taxation. The earnings are taxed to the corporation at 30%. If earnings are then paid to shareholders in the form of dividends, they are taxed again at the individual’s personal tax rate.

A franking credit is a tax credit allocated to the shareholder. The tax credit can offset the tax that is due on the dividend.

Assume you receive a $100 dividend and your tax rate is 34.5%. The company has already paid 30% tax on its profit. A franking credit of $30 ($100 x 30%) would reduce your tax liability leaving only 4.5% of the dividend income taxable.

That example applies if the dividend is fully taxed or “fully franked”.

A partially franked dividend means that the tax credit covers only a portion of the taxable dividend payment. However, even a partially franked dividend increases your rate of return.

Assume that the franking credit only covers $20 of the $30 in tax. You’re still ahead because you’ve earned $100 – $10 in taxes, or $90.

Reinvesting + Compounding

If you are able to earn more dividend income after tax and reinvest that income, you can also benefit from compounding. Compounding is defined as earning “interest on interest”.

Assume that you’re able to invest the full $100 dividend, rather than just $90. With compounding, that extra $10 in dividends will earn a return. Over time, reinvesting more dividends can greatly increase your total earnings.

Speak to us about how franking credits can benefit your portfolio. If you would like more information about your options, contact Macarthur Wealth Management on (02) 9683 2869 or info@macarthurwealth.com.au to talk you through your options.

Need help? Contact Macarthur Wealth Management for expert financial advice in Parramatta and Sydney wide. https://www.macarthurwealth.com.au

General Advice Warning

The information provided is general in nature only and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information on this website you should consider the appropriateness of the information having regard to your objectives, financial situation and needs. Before making any decision, it is important for you to consider these matters and to seek appropriate legal, tax, and other professional advice.

Disclaimer

All statements made on this website are made in good faith and we believe they are accurate and reliable. Macarthur Wealth Management does not give any warranty as to the accuracy, reliability or completeness of information that is contained in this website, except in so far as any liability under statute cannot be excluded. Macarthur Wealth Management, its directors, employees and their representatives do not accept any liability for any error or omission on this website or for any resulting loss or damage suffered by the recipient or any other person. Unless otherwise specified, copyright of information provided on this website is owned by Macarthur Wealth Management. You may not alter or modify this information in any way, including the removal of this copyright notice.

Strategies to rebuild super after early access

3 STRATEGIES TO REBUILD YOUR SUPER

If you’ve accessed your super early due to COVID, there are a number of strategies that can help you get your super back on track when the time is right. There are three key strategies that could help you boost your retirement savings between now and retirement.

1. Allocate some of your pre-tax salary to super

WHO COULD THIS WORK FOR?

This may be appropriate for those who have sufficient cash flow to divert some of their pre-tax salary to super (before it hits your wallet for spending). It doesn’t need to be a large amount to start and you can further increase the amount that you contribute in the future once things are back on track.

STRATEGY AT A GLANCE

If, and when, the time is right, you may be able to arrange for your employer to contribute some of your future pre-tax salary, wages or bonus directly into your super fund— this is called a salary sacrifice contribution. By making regular additional contributions to super, you’re helping build up your account balance again. Don’t be afraid to start small if it is all you can commit—even small incremental amounts add up over time. The sooner you can start making even small contributions, the better. Salary sacrifice contributions are made from your pre-tax salary which can be a great, disciplined way to save for retirement. Super is also a long term investment, so, the younger you are when you start saving for your retirement, the more time you’ll have to benefit.

INFORMATION TO CONSIDER

Salary sacrifice contributions count towards the concessional contributions cap. Concessional contributions include employer contributions (also known as super guarantee) and personal contributions claimed as a tax deduction. Breaching the cap may lead to additional tax penalties. Also, salary sacrifice contributions are generally taxed at the concessional rate of up to 15% rather than your marginal rate, which could be up to 47% . Depending on your circumstances, this strategy could therefore reduce the tax you pay on your salary and wages by up to 32%. Get started with boosting your super.

2. Make a spouse contribution and receive a tax-offset

WHO COULD THIS WORK FOR?

Members who are in a couple, where one spouse earns less than $40,000 a year and there is capacity to make a super contribution on behalf of a spouse.

STRATEGY AT A GLANCE

If you make an after-tax contribution into your spouse’s super account and they earn less than $40,000 a year, you may be eligible for a tax offset of up to $540. To qualify for the full offset of $540 in a financial year, you need to contribute $3,000 or more into your spouse’s super account and your spouse must earn $37,000 a year or less. A lower tax offset may be available if you contribute less than $3,000 or your spouse earns more than $37,000 a year but less than $40,000. Spouse contributions can be a great way to grow your super as a couple and to be rewarded via a tax offset for saving for retirement.

INFORMATION TO CONSIDER

A spouse contribution counts towards your spouse’s non-concessional contribution cap and must be within this cap to entitle you to the tax offset.

3. Make personal contributions and claim a tax deduction

WHO COULD THIS WORK FOR?

Unlike salary sacrifice contributions, personal contributions can be made with your take home pay or savings. You can do this regularly or wait until the end of financial year which could provide greater flexibility and planning options if you have irregular income or expenses.

STRATEGY AT A GLANCE

You could make a personal contribution and claim a tax deduction for the amount (turning it into a personal deductible contribution). This could help to reduce your assessable income and manage your tax liability. The contribution will generally be taxed in the fund at the concessional rate of up to 15%, instead of your marginal tax rate which could be up to 47%.

Depending on your circumstances, this strategy could result in a tax saving of up to 32% and enable you to increase your super. You could put some or all of these savings towards making even more super contributions in the following year.

INFORMATION TO CONSIDER

These contributions are treated as concessional contributions and count towards your concessional contributions cap. Exceeding your cap may result in additional taxes and penalties.

Need help? Contact us Macarthur Wealth Management for expert financial advice. https://www.macarthurwealth.com.au

We are a Parramatta based financial planning practice, specialising in retirement planning, superannuation and investment advice.

Whether you want to start preparing for retirement or have already done so we can help you implement a personalised financial roadmap.

General Advice Warning

The information provided on this website is general in nature only and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information on this website you should consider the appropriateness of the information having regard to your objectives, financial situation and needs. Before making any decision, it is important for you to consider these matters and to seek appropriate legal, tax, and other professional advice.

Disclaimer

All statements made on this website are made in good faith and we believe they are accurate and reliable. Macarthur Wealth Management does not give any warranty as to the accuracy, reliability or completeness of information that is contained in this website, except in so far as any liability under statute cannot be excluded. Macarthur Wealth Management, its directors, employees and their representatives do not accept any liability for any error or omission on this website or for any resulting loss or damage suffered by the recipient or any other person. Unless otherwise specified, copyright of information provided on this website is owned by Macarthur Wealth Management. You may not alter or modify this information in any way, including the removal of this copyright notice.

US ELECTION UPDATE

There’s never a dull moment when it comes to us politics and particularly during a presidential race. Regardless of your political persuasion or whether you think us politics doesn’t affect you, The US remains the world’s superpower and US politics and policy can have a significant impact on investment markets.

Right now, less than 10 days out from the election, it’s important to understand how markets may be impacted or react to the result. Much of the share market rally over the last 3-4 weeks can largely be explained by the market’s acceptance that a Democrat / Biden clean sweep (ie. House, Senate, President), as indicated by the polls and betting odds, would usher in a huge stimulus package, lead to less adversarial foreign policy, and give the elected government sufficient power to “get things done”.

However, the polls and betting odds look eerily like they did leading into the 2016 US election with Clinton leading Trump. The difference this time is that we have Covid-19 and President Trump as the 1st term incumbent. Long term history shows that 1st term Presidents generally get a 2nd term and recent history shows that election polls can be well and truly off. As 2016 showed, President Trump didn’t win the popular vote, but he did win the Electoral College which means key swing states are likely to come into play this time around too.

Putting that aside, this is what we know:

• US equity markets generally go up after a Presidential election.
• Republican policy is generally more Wall Street (ie. share market) friendly.
• President Trump, if re-elected, will continue to operate on the same platform he has for the last 4 years – ie. smaller government, lower taxes, pro-US policies.
• Joe Biden, if elected, will increase taxes, support a very large stimulus package, and support pro-environmental policies.
• Both the Democrats and the Republicans are anti-China, but Democrats support continued globalisation whilst Republicans under Trump prefer less globalisation.
• Republicans prefer a faster re-opening of the US economy whilst Democrats prefer a slower re-opening.
• A President Trump re-election will likely result in both a US equity market and US dollar rise, with a faster short-term recovery in the economy.
• A Biden win could see the US equity market rise (under a huge stimulus package) or fall (under the burden of rising taxes) and likely continued to downward pressure on the US dollar, with a slower short term recovery in the economy.

There are a lot of variables and a lot of unknowns for the market to digest. The following is key to note:

• Markets won’t like a delayed result – ie. the result could take some time to obtain given the number of postal votes. In addition, if the result is tight, it’s likely either side will request a recount.
• Markets won’t like a messy result – ie. a result whereby Trump or Biden win with very small majority or no majority in the Senate. Believe it or not, a Democrat House and Senate with Trump retaining the Presidency is actually possible!
• Markets will like a decisive result – ie. a clear election win for either side will see market volatility subside.
• Markets will like a clean result – ie. a Biden or Trump victory with either clean sweep of the House and Senate, or at the very least, a clear majority in the Senate.

The election is 4th November Australia time (3rd November US time). It will make for an interesting week with a Melbourne cup with no spectators and a Reserve Bank of Australia meeting which is likely to see the bank cut the cash rate to 0.1% and launch a large bond buying program (Quantitative easing).

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