Stage 3 tax cut changes + super performance

Happy Australia Day everyone,

I love this day. It’s a day for us to stop and appreciate how good this country is. It’s not perfect, we can always do a lot of things better, but you wouldn’t want to live anywhere else. And it’s all our responsibility to make it better. 

I just wish we could find a day to celebrate which doesn’t cause so much division. Remember, it was only in 1994 that 26 January officially became Australia Day for all states and territories.

In this week’s newsletter: 

• The Government changes stage 3 tax cuts and, more importantly, ditches tax reform.

• Benchmarking how good your superannuation fund should be.

• Why prestige property has been a top performer.

• The cost of education and how to ease the pain.

• A good way to invest in the US’s big technology companies.

Changes to the stage 3 tax cuts won’t ease bracket creep

Yesterday the Federal Government made changes to the stage 3 tax cuts. Look, I don’t have an issue with watering down the benefits to top income earners and shifting them to lower to middle income earners – those who’ve been hit hardest by inflation and the steepest, sharpest rise in interest rates in our history.

But I do have an issue with abandoning the tax reform element which goes with it to ease bracket creep. It is an important differentiation. Economists talk about much needed productivity gains and simplifying our tax system is a key part of that. 

Bracket creep is where you get a pay rise and it pushes you into a higher tax bracket. You pay more tax and lose a bigger chunk of the pay rise because it goes to the government. 

Under the stage 3 tax cuts the 37 per cent rate would be dropped altogether and anyone on an income of $45,000 to $200,000 would be on a flat 30 per cent tax rate. That would eliminate bracket creep for the vast majority of Australians. 

But under the Government’s amendments the 37 per cent tax rate will stay when you get over $135,000 up until $190,000 when you jump up to the 45 per cent tax rate. 

To put all this into perspective, Australia's top marginal tax rate which currently comes in at $180,000 hasn't changed since mid-2008. Back then that $180,000 would be the equivalent of $270,000 today when adjusted for wage rises over that time. 

The big winner out of all this has been the Federal Government. Take a look at where the government’s income comes from.

As you can see, the vast bulk of it comes from you and me and our pay packets. But look at how it has grown. From under 10 per cent of GDP (the value of the economy) to 13.9 per cent now. 

Bracket creep is a major reason for that, combined with low unemployment… the more people in work, earning a wage, the more tax rolls in. 

Tax revenue from business is less than half that from wage earners. And other taxes earn a lot less than that. 

Under the amended stage 3 plan, the cost of living relief for the average wage earner is an extra $15 a week compared with what the Coalition legislated for when they introduced the three stages. 

Those on incomes of more than $200,000 will lose half their promised $9,000 tax cut. Those on incomes of $190,000 will miss out on close to $3,000 in relief, while those earning $180,000 will be about $2,200 worse off.

There’s more to cost-of-living relief than tax changes

There is plenty the prime minister and his caucus can do to ease the cost-of-living crisis apart from just changing the stage 3 tax cuts. 

The overwhelming focus on tax cuts should now be shifted to a more holistic strategy to deliver household budget relief and long-term economic stability. 

Home loan reforms, energy bill relief, and better fuel price reporting should be considered as part of a cost-of-living package from the government. 

Many of these suggestions are quick, easy and cheap to implement… but would have a huge impact on household budgets. 

Here are my top six things the government can do to ease cost of living.

1. Flick the switch on the ‘sun tax’ 

First, the government should turn its attention to the so-called “sun tax”, also known as two-way pricing for solar energy. 

In 2021, the Australian Energy Regulator (AER) confirmed a controversial shake-up to the solar industry that could see households charged for exporting solar at certain times from 2025.

The government should rethink the roll-out timing, which could inflict price pain on 3 million households who installed solar in an effort to escape high energy costs. 

The green transition will come at a cost but that shouldn't mean hitting solar users with more fees. At a time when we should be doing everything we can to incentivise the adoption of solar, two-way pricing could do more harm than good. 

2. Relief from energy bill shock

For many households, solar power isn’t an option. That’s why the state and federal governments should consider extending the energy bill rebates that helped ease price pressure while electricity prices soared last year. 

Energy bill relief was a major shock buffer for households last year – without them, Australians would have felt the full impact of energy prices that were 18.6 per cent higher in the September quarter. 

3. Private health GP access

The rising cost of healthcare is enough to make you sick. Allowing the more than 13 million Australians with private health cover to recoup the cost of GP visits through their insurer could make a significant difference to household savings. 

After the Medicare rebate, patients are forking out about $60 for a standard GP consultation. To me, that seems like a prohibitive amount for a health service that is so crucial to our wellbeing. 

With bulk-billing GPs few and far between, now is the time to empower private health insurers to help cover the cost of GP visits. 

4. Make refinancing easier

Australian homeowners have felt the brunt of the relentless rate rises to tame inflation. 

Changes that could help people save money on their mortgages should be prioritised. A number of recommendations were made by the Home Loan Price Inquiry. 

When the difference between advertised home loan rates for new customers and “back-book” rates being paid by existing borrowers is so big it could mean loyal customers are paying thousands of dollars a year more on their home loan. So the government should be making it as easy as possible for people to switch to a better deal. 

The discharge process to switch should not take longer than 10 business days for lenders to turn around. I also want to see a standardised discharge authority form that is easy to access, fill out and submit. 

5. Fuel price reporting for Victorians 

Shopping around is the best way to beat pain at the petrol pump. Currently, Victoria is the only state that cannot access live-to-the-minute reporting on fuel prices. 

Retailers aren’t duty-bound to post live prices in Victoria, which means they often go days without updating their information. 

Without fast, reliable price information, motorists are forced to drive around to find the best prices. Mandating price reporting could be a fast way to deliver major relief, and help motorists make better choices through using the petrol comparison apps. 

6. Financial education in schools

With nearly half of Australians learning money habits from their parents, and a quarter professing to be “self-taught”, improving financial education in schools should be made a top priority. 

Your access to financial education should not depend on your parent’s circumstances or where you are born in this country. I think there’s a lot more we could do to set up children for success in life, and future-proof Australia’s economic stability. 

People without an education in budgeting basics and how to comparison shop are at a huge disadvantage when living costs rise. The government should be looking at what more schools can do to support what’s being taught at home.

After a wild year superannuation funds performed pretty well in 2023

It was a wild year for financial markets with worries about inflation and interest rates. We saw some big swings in share values and sentiment. Remember the doom and gloom of September/October before a strong swing back up in November/December? 

Despite returns swinging between positive and negative throughout the year, super funds delivered strong returns for members over 2023, boosted by that share rally in the final quarter of the calendar year. 

According to superannuation research house SuperRatings, the median Balanced option reported a 2.7 per cent return in December, and an impressive 9.6 per cent for the 2023 calendar year, recovering the 4.8 per cent loss from the previous year. 

These are the benchmarks you should be using to assess your own super fund’s performance. It also shows that choosing the right investment options within your super fund which suit your circumstances is really important.

The median growth option returned 3 per cent in December and 11 per cent over the year, while a smaller allocation to shares resulted in the median capital stable option returning 2 per cent for the month and 6.5 per cent across the year. 

International shares have been the standout performer over the year, led by strong growth in technology shares. Returns were also strongly supported by Australian shares and further bolstered by rising cash rates improving fixed interest and cash returns.

Funds have also delivered for members over the longer term. An investment of $100,000 in the median balanced option 10 years ago would now be worth $189,005 while investing in the median growth option would now be worth $201,539. Members who invested in cash would have $117,637. 

The highest SuperRatings Balanced Index returns over the year was 13.2 per cent for members in the Hostplus – Indexed Balanced option, closely followed by Brighter Super Optimiser Accumulation - Multi-Manager Growth Fund returning 13.1 per cent. ESSSuper – Balanced Growth completes the top three, returning 12.8 per cent.

Superannuation remains a long-term investment for most, with many members having several decades of returns before retirement. So, it’s important to remain focused on longer term returns, with the top performing funds over 10 years listed below. 

The Hostplus – Balanced option remains the top performer over the long-term, with an average annual return of 8.3 per cent, and is the only fund in the index with a higher than 8 per cent annual return over 10 years.

With shares driving most of 2023’s returns, passive investment options, where a fund tracks a specified index, performed well over the year. The table below displays the top 10 passive fund returns over 2023 and over five years, with most of these options having been available within superannuation for a shorter length of time.

As MySuper offerings have developed in recent years, it is worth noting that lifecycle funds had a strong year. These funds reduce members exposure to growth assets, generally from around age 45-55, and therefore have a higher exposure to growth assets than Balanced options. With growth assets performing well, these options have done well for members in 2023. 

SuperRatings have taken a representative cohort below, showing the returns expected to have been realised for younger members (<45 years old) in these products.

Rents continue to skyrocket

According to property research group CoreLogic, national median rents have just ticked over $600 a week… a record high. That’s a median annual rent of a staggering $31,252 a year. 

In August 2020 median rents were $437 a week – $8000 a year less than today. 

Just to put that in perspective, recent growth in rent values, which averaged 9.1 per cent a year for the past three calendar years, is in stark contrast to the average annual growth rate of 2 per cent in the 2010s. This is driven by a decline in average household size from late 2020, a rapid increase in Australia’s population from late-2022, and a temporary shock to investment housing activity between May 2022 and February 2023, as well as other long-term factors. 

Median rents across the capital city markets ranged from $745 per week in Sydney, to $535 per week in Hobart. Canberra and Hobart were the only markets to see a decline in rent values through 2023, down 1.9 per cent and 3.5 per cent respectively. 

The good news is there has been a recent slowing in rental rises, but the rate is still well above the long-term average. This has been a major contributor to inflation.

Top end of the property market has outperformed median

According to real estate giant Ray White, prestige houses and apartments have outperformed the rest of the residential property market in term of growth over the last 10 years. 

Median priced houses have increased by 78 per cent in this time, while houses priced in the top five per cent have doubled. A luxury house has been a good investment over the past decade so will this strong performance continue?

According to Ray White chief economist, Nerida Conisbee, a big driver of luxury house price growth is simply land value. There are only so many properties you can build in our most expensive suburbs, which tend to be located close to beaches, bays and rivers. Anything with even more unique characteristics that are hard to replicate, such as a view or close proximity to the water, are likely to have increased even further.

Another driver has been renovation activity, which surged during and immediately after the pandemic. Luxury homes have become even more expensive over time as more investment has taken place. And while it is not possible to measure, it is likely a higher proportion of well-located luxury homes have been renovated than the rest of the market and almost certainly true that more has been spent on them.

A greater concentration of wealth has also likely increased prices. A recent report from Oxfam found that the wealth of Australia’s three richest people increased at a rate of $1.5 million per hour since 2020. The total wealth of Australian billionaires increased by 70.5 per cent or $120 billion in that same period. A lot of this wealth has been invested in luxury homes around Australia. 

While luxury homes have outperformed, they have also exhibited a lot more volatility in price growth. During the pandemic, they increased far more than more affordable properties. But they also saw a much greater decline in 2022. Timing the purchase of a luxury home appears far more important than it does for buying one closer to the median. 

Units have also outperformed, showing a switch in the way that wealthy people want to live. Historically, the majority of apartments built in Australia have been aimed at people that could not afford a house. As such, many of them were seen as a stepping stone to buying a house.

Now there is growing demand for luxury apartments and the gap between the median and the most expensive has grown as quality has improved. 

According to Nerida, owning a luxury house or apartment in our most expensive suburbs is set to continue to be a solid investment over the next decade. Providing, of course, you can afford to buy one in the first place.

Stock of the Week: Global X FANG+ ETF

If you want to know what’s driving the US sharemarket, this chart makes it pretty obvious. Frankly the only reason US market is at record highs is because of the big technology companies (the blue line), like Facebook, Apple, Google, Microsoft etc. 

In fact, both Apple and Microsoft have both tipped of $US3 trillion in valuation which is just extraordinary.

Of course, it’s easy for Australians to invest in these big US tech companies directly, but this week on my daily sharemarket program, The Call (on the ausbiz streaming network ausbiz.com.au) the GlobalX FANG+ ETF came up for analysis by the panel of Andrew Wielandt from DP Wealth Advisory and Henry Jennings from Marcus Today. 

The GlobalX FANG+ ETF invests in the top 10 technology companies. The five core stocks are Apple, Facebook (Meta), Amazon, Google (Alphabet) and Netflix, plus five actively traded stocks: Alibaba, Baidu, NVIDIA, Tesla and Twitter. 

Both Andrew and Henry like this ETF if you want a simple way to get investment exposure to the big tech stocks which are leading the technology revolution. As they both said, these companies are constantly breaking new boundaries.

Warning, distressing content: the cost of children’s education

I have four children and during their school years I never added up the cost of their education. I wasn’t game to. I just tried to make it work and rationalised the cost as the best investment I’ll ever make. So, I feel your pain if have children in school. 

As the kids go back to school, Futurity Investment Group’s Cost of Education Index has been released. Futurity is a provider of Education Bonds which can help you save to meet educations costs. Remember these figures are the cost of educating a child from kindy to year 12. 

What the index found is: 

• Melbourne is Australia’s most expensive city for a government education ($108,879), an increase of $6,072 compared to last year.

• Canberra is Australia’s most expensive city for a Catholic education ($208,871), an increase of $11,204 compared to 2023. But the most affordable city for a government education ($81,564), an increase of $4,562 compared to last year.

• Sydney is Australia’s most expensive city for an independent education ($377,993), an increase of $20,062 compared to last year. But the most affordable city for a Catholic education ($188,759), an increase of $10,281 compared to 2023.

• Perth is Australia’s most affordable city for an independent education ($225,728), an increase of $11,839 compared to last year.

Average total cost of education nationally

Government

The total cost of a government education will be $92,710 over 13 years for a child starting school this year. School fees make up just 4 per cent of the total cost of a government education for a child starting school this year, with 96 per cent spent on ancillary costs. 

Catholic

The total cost of a Catholic education will be $195,074 over 13 years for a child starting school this year. School fees make up 23 per cent of the total cost of a Catholic education for a child starting school this year, with 77 per cent spent on ancillary costs. 

Independent

 The total cost of an independent education will be $316,944 over 13 years for a child starting school this year. School fees make up 55 per cent of the total cost of an independent education for a child starting school this year, with 45 per cent spent on ancillary costs.

The bills keep coming

The annoying thing is also the timing of the expenses. Just when you’re trying to pay off the Christmas credit card bill the back-to-school costs start. 

School shoes, uniforms, textbooks, stationary, a couple of hundred dollars in “voluntary” school fees and much more for the 30 per cent of Australian kids that go to independent schools. Bills continue to come in through the school year for camps, excursions, music lessons, dance classes and other extra-curricular activities. 

Changes to the higher education system now means the cost of sending your children to university will either send parents broke or students into long-term debt. 

I must admit our family rule is that we pay for the secondary education of our kids but not university. Our view is that uni is their responsibility, so they’re responsible for their HECS debt. 

That may sound harsh, but we believe there is a point where grown-up children need to take responsibility for themselves. But that’s just us. If you do take on the cost of university fees, you’re going to have to think hard about it. 

Either way it’s daunting for parents who don’t know how much hard-earned cash they’ll need to feed, clothe and educate their children. 

Plan ahead to reduce the stress

However, you can take the stress out of education costs by planning ahead and saving now for the big expenses ahead. And rather than saving in traditional bank savings accounts, there are other ways to make your money work harder for you. 

As always, the key is to start early and have a disciplined approach. 

Look at things like having an automatic debit from your transaction account on pay day that transfers a percentage of your salary into an investment account. 

Talk to your adviser about putting money into solid blue chip shares. That way your money hopefully enjoys the capital growth of a rising share price and the fully franked dividends a lot of top companies usually pay.

Similarly, by investing in an Exchange Traded Funds and Listed Investment Companies, your money can be exposed to growth investments like shares, property plus money market interest accounts. As you’re saving over a long time, shares and property should deliver the best returns. 

There are also a number of education and “scholarship” funds on offer which can offer a good option. Education bonds can be a tax effective way of regularly putting away savings to meet costs.

In terms of expenses:

• Try to pay cash for back-to-school expenses and if you have to use a credit card don’t charge more than you can afford to pay off in one billing period.

• Check the school list then work out what you already have. Make a specific shopping list of what the kids need and stick to it.

• Keep all your receipts to claim against the Federal Government’s Family Tax Benefit Part A.

• Also check your state government initiatives which can be very generous.