The end of the election uncertainty and the investor-friendly policies of the Coalition produced a relief rally on financial markets. The Australian dollar bounced back above US69c on Monday after falling to three-year lows the day before the election, while local shares surged to an 11-year high on Monday before losing some of their gains the following day.
The Australian dollar more broadly has suffered from a flight to safety as trade tensions between the US and China escalate, pushing the US dollar higher. Global bond yields and share prices have also fallen in May.
In Australia, the Reserve Bank has trimmed its economic growth forecast for 2019 from 3.0 per cent to 2.75 per cent where it is expected to stay until at least June 2021, despite rising iron ore prices. This is against the background of a lift in the unemployment rate from 5.1 per cent to 5.2 per cent in April and a slide in business sentiment. The NAB business conditions index fell from 7.2 points to 3.1 points in April while the business confidence index remains below zero. New vehicle sales, a bellwether for consumer confidence, fell to their weakest level in 9 years in April, down 8.9 per cent over the year.
Now that the federal election is out of the way, all eyes will be on the Reserve Bank and whether it decides to cut the cash rate from its current level of 1.5 per cent to stimulate the economy.
Election 2019: A vote for continuity in an uncertain world
The Liberal/National Party Coalition has been returned to government, as Australians chose continuity over change and cautious economic management over Labor’s ambitious reform agenda.
The Coalition is promising sweeping tax cuts for individuals and continuity for investors with no big changes to existing investment or superannuation policies.
One of the first items of business for Prime Minister Scott Morrison will be to reconvene Parliament to pass legislation on a low and middle-income tax offset.
Individuals to pay less tax
Providing the legislation is passed quickly, from 1 July Australians earning less than $37,000 will receive a tax offset of up to $255 (effectively a cash rebate) with their tax returns. If you earn between $48,000 and $90,000 you will get the maximum amount of $1080. The offset then scales down to zero for those earning $126,000 or more.i
Further planned tax cuts could depend on the Coalition winning the next federal election.
From July 2022, the Coalition plans to raise the top threshold of the 19 per cent income tax bracket to $45,000. Then from July 2024, it plans to reduce the 32.5 per cent tax bracket to 30 per cent and do away with the 37 per cent rate entirely.
If adopted, these proposals will result in a flat 30 per cent tax rate for anyone earning between $45,000 and $200,000.
Support for first home buyers
In a proposal that could also help stimulate the flagging residential property market, the Coalition has promised help for first home buyers trying to get a foot on the property ladder.
From January 2020, the proposed first Home Loan Deposit Scheme would allow eligible first home buyers with income of up to $125,000 (or $200,000 for a couple) to buy a home with a deposit as low as five per cent without incurring lenders mortgage insurance.ii
Help for small business
Small business has not been forgotten. As announced in the recent Budget, the popular instant asset write-off will be increased and extended to businesses with turnover of up to $50 million (previously $10 million).
Eligible businesses will be able to write off assets up to the value of $30,000 (previously $25,000) against their taxable income.
Investment tax concessions to stay
Investors can breathe easy now that controversial changes to dividend franking credits and negative gearing proposed by Labor will not go ahead.
Individuals, including those with a self-managed super fund, will continue to be entitled to a cash refund of franking credits attached to their share dividends if the franking credits exceed their tax liability.
Property investors have also earned a reprieve, with no changes to negative gearing rules.
Super changes at the margins
Australians hoping to boost their super in the run up to retirement will continue to enjoy existing tax concessions.
You will still be able to make catch-up concessional (pre-tax) contributions if you meet certain conditions. From the 2019-20 financial year, individuals who have not used their full $25,000 annual concessional contributions cap will be able to carry forward the shortfall for up to five years and claim a personal tax deduction. To be eligible, your total super balance must be below $500,000 on June 30 the previous financial year.iii
The non-concessional (after tax) contributions cap will remain at $100,000 a year for people with a total super balance below $1.6 million. Those under 65 can still bring forward up to three years’ contributions (or up to $300,000) with a proposal to increase the age limit to 67 from 1 July 2020.iv
The Coalition also plans to allow older Australians to make voluntary contributions until age 67 without meeting the work test. Subject to legislation, this measure would also begin on 1 July 2020.
With the election out of the way, Australians can get back to the business of planning their finances with more certainty.
The initial response from financial markets was positive, with the Aussie dollar and local shares both up on the first day of trading after the election. However, the jury is still out on whether the Government’s tax cuts and spending promises will be enough to boost economic momentum.
If you would like to discuss your overall financial plan in the light of the election result, please give us a call.