The Carbon Tax - Aussies fear the cost

Flat prices/fear of declining house prices are affecting the political "sell"

The Labor Government is having a hard time convincing ordinary Australians of the need to price carbon now.

Business and the union moverment are vocal in their opposition (van Onselen calls them in "lockstep": http://www.theaustralian.com.au/business/opinion/carbon-tax-is-like-a-bad-smell-that-wont-go-away/story-e6frg9if-1226041792769

Rob Burgess in today's Business Spectator considers this is due to three main factors:

1. Australians are not spending - the retail sales figures show dismal results for the first quarter 2011;
2. Wage rises have been only in a few industry sectors, largely mining and resources, not retail, manufacturing, tourism, education and other struggling sectors; and
3. Household debt: the RBA's aggregate data shows a dramatic and continuing decline in [discretionary income] due namely, [to] the debt we took on via housing finance...over the past decade: http://www.businessspectator.com.au/bs.nsf/Article/house-prices-carbon-price-ACTU-Jeff-Lawrence-pd20110420-G3SEK?OpenDocument&emcontent_Burgess

Burgess reflects:

In the mortgage belt, the voters Julia Gillard needs to win over for the next election are increasingly aware that their houses are no longer appreciating as they used to, and in cities such as Perth and Brisbane they may well be depreciating. Equity withdrawal and the wealth effect that flowed from it are all but over.

In this environment, the immediate effect of upping the cost of everyday goods makes for difficult politics.

"Debt" - the new 4 letter word

Inflation, currency devaluation and low to negative real interest rates: the US Picture

PIMCO's pullout from US Treasury Bonds: a harbinger of inflation, low/negative interest rates & currency devaluation?

Further to our earlier post Bill pops Ben's Bubble, we now read Bill Gross' April Investment Outlook which states http://www.pimco.com/Pages/Skunked.aspx:

• Medicare, Medicaid and Social Security now account for 44% of total federal spending and are steadily rising.
• Previous Congresses (and Administrations) have relied on the assumption that we can grow our way out of this onerous debt burden.
• Unless entitlements are substantially reformed, the U.S. will likely default on its debt; not in conventional ways, but via inflation, currency devaluation and low to negative real interest rates.

This indicates the reason behind PIMCO's February pullout.  It's a significant vote of no confidence in Bernanke's policy of quantitative easing, due to conclude in June 2011.  He's not alone.

 
Famed investor Warren Buffett joined the discussion recently when he said in a speech in New Delhi that investors should stay away from long term fixed-dollar investments because of his forecast for weakness in the U.S. dollar. Apparently Mr. Buffett is also reducing his long exposure to the long bond market and focusing on what he seems to love to do best, which is buying companies around the world. http://www.marketwatch.com/story/what-do-bill-and-warren-know-that-we-dont-2011-04-04?reflink=MW_news_stmp

Bill Gross said Treasuries “have little value” because of the growing U.S. debt burden.

PIMCO “has been selling Treasuries because they have little value within the context of a $75 trillion total debt burden,” Gross wrote in the report published on Newport Beach, California-based company’s website. Congress “must make ‘debt’ a four-letter word.”

PIMCO reckons the Fed has been responsible for 70% of recent Treasury purchases, with foreigners buying the other 30%. “Who will buy Treasuries when the Fed doesn’t?” asks Mr Gross, adding that the danger is of a spike in bond yields as private investors demand a higher return to compensate them for the risks of inflation or dollar depreciation. http://www.economist.com/node/18396156?story_id=18396156&fsrc=rss

Which leads to the question - what will happen when the current round of Quantitative Easing finishes?  In what circumstances would investors be most keen to buy more government bonds? When the economy is struggling. But central banks will be highly unlikely to reverse QE at that stage. In any case, cynics suspect the problem with QE is that there may never be a moment when central banks feel confident enough to unwind it. After all, American GDP grew by a respectable 2.8% last year and growth of more than 3% is forecast for this year. Yet the mid-March Fed policy meeting indicated that the second round of QE would still be completed: as noted in The Economist piece "Stopping quantitative easing may be harder than starting it" referenced above.

The real point to Gross' observations of the domestic budgetary issues in the US is the reality of inflation, currency devaluation and low to negative real interest rates: that is why PIMCO has got out of bonds.

Family trust or SMSF? Which vehicle best provides for your retirement?

HOW DO FAMILY TRUSTS WORK COMPARED WITH SMSFs?

Both family discretionary trusts and SMSFs are established in Australia by deed and controlled by trustee/s according to the rules laid down in the trust deed.  SMSFs are also subject to the rules in superannuation laws.  Why would you choose one over another?

Government policy has successfully spawned the growth of the superannuation industry since Paul Keating was Treasurer.  The philosophy of the system is that we need to create a system to self fund our retirements because Australia has a burgeoning old age population which will otherwise overburden the public purse's ability to pay old age pensions as was previously the experience.  SMSFs have been developed in this country to allow for concessional contributions to be made by individuals up to a certain age and by their employers.  Whilst you are working, the whole fund is "locked up" until you reach a certain age - so as to operate as a source of income in retirement.  Flexibility remains as to the investment decisions of the fund (subject to legislative restrictions) and, once the age thresholds have been met, discretionary allocations may be made to fund members.

Discretionary trusts or family trusts derive from the law of equity and describe a situation where a family member shares wealth with other famliy members of a family group usually including grandparents, parents, children, grandchildren and their children.  Other beneficiaries may also be included in the deed.  Discretionary trusts have great flexibility, no contribution limits and no restrictions on the nature of the trust's investments (unless limited by the deed) and no borrowing limits.  They also are effective as asset protection for an individual and small business - they can be beyond the reach of creditors.  Perhaps their greatest advantage is the ability to "stream" distributions of income and realised capital profits in a tax effective way away from the main income earner of the family to lower-taxed beneficiaries.  The main condition applying to distributions is that all trust income and realised profits for the year must be distributed otherwise the trust faces tax at the top personal rate of 45% plus 1.5% medicare levy.  Assistant Treasurer Bill Shorten has said recently that the Commonwealth Government is going to make an announcement regarding the tax treatment of discretionary trusts arising from the decision of the Federal Court in the Bamford case.  Hopefully this will provide tax advisers with clarity.

If you desire asset protection and think you might need to access your assets before retirement then there are arguments in favour of a discretionary trust structure for your investments.  Similarly, the timing of receipt of your (high) income in relation to your age may be a factor given the contributions caps which apply to SMSFs ie if you receive large amounts of income into your 60s and 70s. 

There may be pitfalls in using trusts and care and professional advice should always be sought.