The Budget, Super and your Investments
Just like you and I the Government has to work out how much income they are going to earn for the year (taxpayers money) and what they are going to spend it on. Each May they reveal their budget and whether or not they are going to change any of the rules surrounding Super.
This is a quick summary of the key policies that may be of interest to you that were announced last week in the budget.
Downsizing into Super
Retirees aged 65 and over who downsize their family home will be able to contribute up to $300,000 of the proceeds into superannuation as an after tax contribution and will be exempt from the work test. This applies to people who sell their main residence having owned it for at least 10 years. Couples will also be able to use it for the same home, making contributions of up to $300,000 each.
First Home Super Saver Scheme
In a move aimed at helping first home buyers build a housing deposit, the Government proposes to allow voluntary contributions to super funds to be withdrawn from 1 July 2018 onwards for the purposes of buying a first home. Contributions into a super fund will be allowed by salary sacrifice up to a maximum of $15,000 per year to a maximum of $30,000 in total. Employees will still need to pay compulsory super guarantee payments to individuals who make these contributions.
Withdrawals will be taxed at your marginal tax rate less a 30 per cent offset – effectively making withdrawals tax-free for anyone earning up to $87,000.
Financial’s – The bank levy
The most controversial policy announcement on budget night was the proposed bank levy on major Australian banks. The government will apply a 0.006% per annum levy from July 2017 on the major Australian banks (NAB, CBA, WBC, ANZ, MQG) with liabilities greater than A$100bn. The implications are far reaching but how they will eventually play out remains to be seen. The most obvious implications (i.e. response from the banks):
- Higher interest rates on loans (& potentially reduced lending)
- Reduced dividends to shareholders; potential hit to investor confidence (are the dividends sustainable? negative share price reaction/negative sentiment towards the Australian banking sector);
- Cooling off in the housing market (this would be welcomed by the RBA).
According to rating agency, Moody’s, the levy is likely to impact pre-tax profit by approximately 3.8%. We are Neutral on the banks and as it stands today we do not see the levy as catastrophic. It is highly unlikely the banks’ CEOs are going to get much support (or sympathy) from the general public or politicians in a bid to block this legislation.
Housing – no silver bullet on housing
There was no silver bullet on housing affordability, with the government announcing no changes to negative gearing or being able to dip into your superannuation to purchase property other than the First Home Super Saver Scheme. However the proposed 50 per cent cap on foreign ownership in new resident developments could potentially impact Mirvac Group (MGR) and Stockland (SGP).
Media – Free to Air licence abolished
The government will abolish the A$130m annual free-to-air (FTA) licence fee which broadcasters pay and remove the 75% reach rule
and 2-out-of-3 cross media ownership laws.
This is a clear positive for Nine Entertainment (NEC) and Seven West Media (SWM), as it improves earnings and allows consolidation within the industry.
The government will slowly phase out the freeze on reimbursement indexation increases which came into effect in January 2015 and wants to increase the Medicare Levy by 0.5 percentage points for most working Australians.
From FY18 the government will allow increases on standard consultation by General Practitioners (GPs) who bulk-bill. In our view, while this is a positive for Primary Health Care (PRY) and Sonic Healthcare (SHL), the announcement will contribute low single digit improvement to earnings. In FY16, Medical centres made up a much larger component of group earnings for PRY (20% of group revenue) than SHL (8% of group revenue). It is worth noting that SHL has a much larger medical centre footprint and therefore the announcement is likely to be more beneficial to SHL.
Further, whilst the Medicare levy increase may eventually be observed as an increase in taxation (especially for high income earners) and both major political parties will no doubt argue over its merits, if the legislation was to be passed, any increase should be a positive to earnings for medical centre operators but less so and potentially negative for private hospitals (such as Ramsay Healthcare (RHC), Healthscope (HSO).
Infrastructure – A$75bn of it
This is a positive for the Australian economy, however we note infrastructure projects are slow moving (i.e. sticking to their timeline) and will take some time before materialising in earnings for construction materials’ companies. The government has also committed funding for the second Sydney airport in Western Sydney (A$5.3bn). Within our universe, Adelaide Brighton (ABC) and Boral Limited (BLD) are the most exposed to construction materials.
Sydney Airports management (SYD) indicated the project will be long dated and early thoughts are: (1) demand (especially inbound traffic from Asia) should be sufficient to support both airports; (2) SYD’s management team showed strong capital discipline during the process to pass on the project; (3) the second Airport may be more suitable for domestic travel and specific to Western Sydney.
Retail & Other Sectors – Reducing opportunities for multinational tax avoidance
Domestic retailers have long held that foreign retailers especially online retailers have had an unfair competitive advantage in not requiring customers to pay GST or themselves not needing to collect GST. In our view, JB Hi Fi (JBH), Harvey Norman (HVN), Myers Holdings (MYR) and Premier Investments (PMV) stand to benefit.
Overall I am happy with the budget and the upcoming infrastructure spend will not only boost jobs but make our lives better.