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Morrison delivers a Costello supersize opportunity

Despite the intention to wind back the generosity of superannuation for large balances, Treasurer Scott Morrison has left open a wide window of opportunity to park money in this tax-advantaged system. Couples have a final chance to place up to $1.15 million into super in the next nine months, even if they are already each over the $1.6 million cap. Such a window might never open again.

The acclaim for the compromise on the super changes announced last week has been widespread. The Australian called it “Turnbull’s super week”, while The Australian Financial Review’s headline went as far as saying, “Morrison wins over everyone”, adding that the change was, “welcome across the industry as a fair and sensible compromise”. Such praise means votes in politics, and veteran journalist Paul Kelly, The Australian’s Editor-At-Large, wrote:

“Finally, on superannuation Morrison and Financial Services Minister Kelly O’Dwyer have achieved an astute, multifaceted compromise. They have won industry backing and party room endorsement, removed the main retrospectivity peg, replaced the $500,000 lifetime cap on after-tax contributions with a $100,000 annual cap, won the budget savings and set up a negotiation with the parliament that will see the super package become law.”

Apparently everyone’s a winner.

What about the lost personal income tax?

Wait a minute. Wasn’t the reason for the proposed change to stop superannuation becoming a store for the wealthy? And to fulfil the objective of providing an income in retirement, not intergenerational wealth transfer? And to stop the drain on revenue from assets being placed in a tax-favoured structure?

The removal of the retrospective elements and limitations of the proposed $500,000 non-concessional contribution (NCC) cap is welcome. However, it’s surprising that a couple under the age of 65 (who have not already triggered the bring-forward) can now put over a million dollars (two lots of $540,000) into super as an NCC by 30 June 2017. Adding a last stab of up to $70,000 in pre-tax concessionals gives $1.15 million, a supersized top up for anyone with access to enough money.

Sure, each person will have a limit of $1.6 million in pension mode where the income remains tax-free, but the balance will be taxed at 15% in an accumulation account. With franking, the average tax rate paid in superannuation outside pensions is about 9%, and higher-earning assets can remain in the pension fund. For those with multimillion-dollar super balances, their likely personal marginal income tax rate is 47% (excluding medical levy of 2%). They can reduce their marginal tax rate by 32%.

(People aged between 65 and 74 who meet the work test can make an annual $180,000 contribution but cannot use the bring-forward rule).

Assuming the $1,080,000 earns only 5%, or $54,000, the tax saving of 32% is $17,280 per couple per annum. Thousands of people will take this last chance - is this fully factored into the budget?

Does this sound familiar? Exactly 10 years ago …

The 2006/2007 Budget was wonderful for high income earners. I remember sitting at the ANZ Budget Dinner in the Westin Hotel ballroom with a thousand other financial market types as Peter Costello delivered the super goodies. The Reasonable Benefits Limits rules were abolished, payments received from a fund as either a lump sum or an income stream would be tax-free after the age of 60, and there was a $1 million top up each. The room was almost silent as executives imagined the dollar signs flipping through their minds. When Costello finished speaking, there was a hubbub as thoughts tumbled out. “Did you hear what I heard?” buzzed the tables as the waiters topped up the wine.

The coincidence in timing and content with the Morrison announcement is extraordinary, as it was almost exactly 10 years ago, on 5 September 2006, when Costello issued this statement:

“People will be able to make up to $1 million of post-tax contributions between 10 May 2006 and 30 June 2007 which will allow people who were planning a large contribution under the existing rules to do so. The $150,000 annual limit on post-tax contributions will commence from 1 July 2007. People aged less than 65 will be able to bring forward two years of contributions, enabling $450,000 to be contributed in one year, with no further contributions in the next two years.”

Wealthy Australians and their advisers set about accumulating as much in super as possible. It was the best tax management programme in town. Post-tax contribution $450,000 brought-forward. Tick. Annual pre-tax contribution $50,000. Tick. And the granddaddy of them all, the one-off $1 million. Big tick.

These were the good old days of mining booms, budget surpluses, reductions in marginal tax rates and even baby bonuses without a means test. And here was superannuation – not some dodgy and doubtful tax-minimisation scheme at the bottom-of-the-harbour – as a centrepiece of government policy, allowing millions to be parked tax-free.

It was a godsend for the wealth management industry. As the chart below shows, there was a massive spike in contributions during 2007. Of the $70 billion in total SMSF contributions, member contributions comprised $57 billion or 80% of total SMSF contributions in that year, and retail and industry funds experienced billions more.

Breakdown of total SMSF fund flows, 2004 to 2008 (with $1 million allowed in 2007)

Largely as a result of these limits, 2.6% of the 550,000 SMSFs now have balances over $5 million, according to the Australian Taxation Office (ATO). That’s 14,300 funds representing about 28,000 members.

Massive inflows in the short term, then a drop off

The removal of the $500,000 NCC and its backdating is not only good news for those who can afford large contributions, but also for the wealth management industry – fund managers, platforms, industry and retail funds, planners, accountants, SMSF administrators and thousands of others – in the short term. The public awareness of superannuation is higher now than it was in 2007, and this window of opportunity is special because the door to NCCs closes for many on 1 July 2017. In 2007, Costello allowed ongoing after-tax contributions of $150,000 a year, so there was not as much need to rush.

Under Morrison, from 1 July next year, anyone with $1.6 million or more in super cannot make further NCCs. Even those with smaller balances have a lower annual cap of $100,000, with a bring-forward. Particular attention will focus on property. The next nine months might be the last time the limits allow a lumpy asset like a property to be placed into super.

There may be some tempering of enthusiasm due to the ongoing tinkering with the superannuation system ensuring there is no certainty of the tax treatment.

In following financial years, the new limits will bite, as the wealthy make no more NCCs and the concessional limit drops to $25,000. With an ageing population drawing pensions approaching $70 billion a year and asset earning rates low, it’s possible that super assets might peak for all time in the June 2017 quarter.

If this plays out, and given the stock market’s usual myopic focus, wealth management businesses will be a good buy into 2017 as strong inflow and funds under management announcements are made to the market, followed by disappointments into 2018 and beyond.

Is the work test really such a stretch?

What about the reintroduction of the work test for people aged between 65 and 74, who cannot make NCCs unless they pass the test of being ‘gainfully employed’, contained in the SIS regulations 7.01 (3):

“A person is gainfully employed on a part-time basis during a financial year if the person was gainfully employed for at least 40 hours in a period of not more than 30 consecutive days in that financial year.”

I have a friend who is over 65 and he took some part-time work (babysitting? gardening? acting?) for a few weeks. Is 40 hours within 30 days or 10 hours a week difficult to organise? A financial adviser told me, “I have a few clients that step in when local businesses need to replace a receptionist or clerical employee for holiday leave.” Arrangements should be checked with the ATO but might be worth it for a last shot at a decent NCC.

What could Morrison have done?

There were two major issues where the politics forced Morrison and Turnbull to negotiate a compromise to the budget proposals: the retrospective treatment of NCCs to 2007, and the $500,000 limit. However, there was widespread (not universal) acceptance that the $1.6 million cap on tax-free income was a decent number.

Given all the ‘budget repair’ arguments, I'm surprised he did not simply remove the $500,000 limit and the 1 July 2017 start date for the new rules, and leave in place the requirement that anyone already over $1.6 million could not contribute more NCCs. It would have achieved most of the desired political outcome without the potential drag on future income tax caused by opening the NCC to everyone.

Not everyone should stick more into super

Of course, the vast majority do not have a cool million lying around. For many, super may not be the best place to lock up their money, especially above the $1.6 million cap where the tax rate becomes 15%. They can take advantage of the tax-free threshold of $18,200 on income earned outside super, and perhaps the Seniors and Pensioners Tax Offset, which allows tax-free earnings of up to $32,200 for singles or $57,800 for couples. If earnings rates are low with franking credits, it’s worth calculating how much is better held outside super in individual circumstances.

These proposals are not yet legislated, although given the political wins for the Government last week, and the previous hammering it took with a public and backbench revolt, they may be reluctant to revisit the rules any time soon. Longer term, governments cannot resist fiddling.

Watch what happened in 2007

The timing of allowing $1 million into superannuation in 2006/2007 was unfortunate for some, as it was during a major bull run on the stock market, and thousands ploughed the money into shares. The GFC then hit and wiped out far more than the gains from the tax savings. The point to note is not to confuse the investment vehicle (superannuation) with the investment market (such as shares, cash, bonds, property, etc).

Every financial adviser (as soon as the changes are legislated) will be telling their better-off clients to ship as much into super as possible this financial year. Ever since Australians realised the mining boom and the good times were over, many have blamed Howard and Costello for frittering away the large surpluses, and the $1 million super allowance is often cited as an example of generous policy. Is Morrison creating a similar legacy?

(Editor's Note: We have received feedback on a different interpretation of the non-concessional contributions limits. We have checked with superannuation experts who confirm the content above. For example, Liam Shorte says, "Graham your article is correct. As long as they have not triggered the bring forward in the last two years then they can use the full $540,000 before 30 June 2017. The new $1.6m balance limit for contributions does not apply to contributions made before 1 July 2017." )


Graham Hand is Editor of Cuffelinks. This article is based on a current understanding of the proposals but these may change and individuals should seek financial advice based on individual circumstances.


Craig Day
September 30, 2016

Graham your figures in the article are correct. Rather than try and figure out from the the Treasury fact sheets it’s better to go back to the legislation. Under the existing bring forward rules everyone has a NCC cap of $180,000. However, if a taxpayer who was under age 65 at the start of the year contributes more than $180,000, their cap for the year (Year 1) reverts to $540,000. Their cap for Year 2 is then calculated as $540k less contributions made in Year 1. Following on their cap in Year 3 then becomes $540k less contributions made in Year 1 + Year 2.

For the reduced cap to apply this year, the Government would have had to announce that the reduction applies from 1 July 2016 – which they didn’t. All changes apply from 1 July 2017. Therefore under current law an eligible taxpayer can contribute NCCs of up to $540 prior to 1 July 2017 and will remain within their NCC cap for this year.

It’s also important to note that if the changes did impact NCCs made from 1 July 2016, that would absolutely be retrospective as it would impact contributions made between 1 July 2016 and the announcement in September.

Rahul Singh
September 28, 2016

Hi Graham,

Great article.

I read with interest your article. It's disappointing that the work test is being retained, especially when considering Age Pension qualifying age will be 67, and a lingering proposal to increase it to 70.

Just as the upper age limit on SG was removed, the work test doesn't have a great rationale, especially now that NCC limited for those with balance less than $1.6 million.

I have been curious about the use of baby-sitting to satisfy the work test as if one is baby sitting their grandchild, arguably unless they are engaged in child care, they are unlikely to be an employee of their own child nor running a business, if the scope was to do a one-off 40 hours in say a 2 week period). From a definition perspective, if I am dealing with family, what makes me an employee of the payer and is a child who is not carrying on a business capable of employing their parent? If not an employee, then is it the case that I need to be running a business to satisfy gainful employment?

We know the work test is very loosely administered but I feel it would be nice for ATO or APRA to provide more practical guidance on this issue.

I imagine similar principles extend to one-off income producing activities such as lawn-mowing, gardening.

September 26, 2016


The new rules in effect mean that you can still get the funds in to superannuation using the small business concessions but as you have already used up your $1.6m Transfer to Pension cap then the funds will have to remain in Accumulation phase and be subject to 15% tax on earnings. Targeted investing on franking credits in accumulation could reduce this tax to a lower 9% average.

So you don't have to rush to sell your business but I would seek professional tax and planning advice to map out a plan sooner rather than later.

Who is to say the Small Business Concessions won't be targeted soon!

September 26, 2016

HI Graham
Can you clarify what happens if I already have $1.6m in super and I sell my business that I have been running for the past 20 years?
I note that the ATO website says: The government are trying to help small business owners set themselves up for their retirement. Certain proceeds - not just the capital gain - from the sale of your capital assets may also be contributed to a complying super fund. This can be up to approximately 1.35 million dollars in 2014-15 financial year.
Given the changes announced is this amount in addition to the $1.6m cap? In addition to the NCC cap?
Depending on the impact of any changes from July 2017 I may want to complete the sale of my business before then.
Please advise.

September 24, 2016

I'm glad you've pointed out the tax free threshold and the SAPTO provisions.I always thought it was ridiculous that people did not at least try to the reach the $18200 threshold by keeping money outside of super.

Even part time work to reach that threshold and tax free super can produce a good income.This will (may)change next year but if it does and the super returns are taxed @15% it would still seem worthwhile.

Most people will not pay $18200 tax on the earnings from super.Even if they pay say $2-3K tax on earnings rather than tax free they are still better off.

Graham Hand
September 23, 2016

Removing some of this uncertainty, I was sent this from the TapIn team at AMP (although they cannot be held responsible for it). It supports the numbers in my article:

"If the NCC bring-forward is (or was) triggered under the existing $180,000 / $540,000 rules, the full $540,000 can (cash flow /resources permitting) be contributed by 30 June 2017 even if the person already has a superannuation balance of more than $1.6m.
Where a $540,000 bring-forward amount under the existing rules is fully contributed/utilised by 30 June 2017, no further NCCs can be made until the relevant bring-forward period has expired. After that time, the proposed annual
$100,000 NCC cap (or $300,000 using the bring-forward) will apply as long as the person’s total superannuation balance at the start of the financial (contribution) year is under the $1.6m superannuation balance restriction."

Dean Tipping
September 25, 2016

Graham...SPOT ON!!

It can't be detailed any simpler than that. People need to seek out professional advice if they can't grasp those mechanics.

Off the NCC topic, one of the really positive proposals that Phil from Super Concepts highlighted at a recent ASX seminar that hasn't been discussed anywhere is the ability to roll forward and aggregate any unused concessional contributions over a 5 year period, then contribute the aggregated total in the 5th year and claim a tax deduction for them in that 5th year.

For example, if you have $10K unused concessional contributions (as a side note, assuming the $15K concessional cont's are all SGC that equates to a base salary of circa $157K which I would have thought is ok for most out there) over a 5 year period then you will have in the 5th year aggregated unused concessional contributions totalling $50K which you can then contribute into super and claim a tax deduction for in that 5th year.

When Phil mentioned this straight away it occurred you could offset any realised capital gains with any unused concessional contributions to avoid paying tax on those realised capital gains.

Extrapolated out in the example above this means you could realise a capital gain of $100K (with discounting knock 50% off for assessment purposes), pump $50K of the gain into super to utilise the unused concessional contributions over the last 5 years, claim a tax deduction for it thereby offsetting the discounted capital gain, pay no CGT and have $50K left in the kicker...

It's absolutely crucial people seek out sound professional advice as there is more to it than what has been discussed which has mainly centred around the NCC rules. As you highlighted so well in your article, you don't have to have everything inside super.

Go the Western Bulldogs!!

September 23, 2016

They have also added some tables in the later version of the flyer which make the transitional arrangements a bit clearer.

So for anyone who downloaded the first flyer, download the current one as it has now been updated.

September 23, 2016

I don't think this sentence is right ...

"can now put over a million dollars (two lots of $540,000) into super as an NCC by 30 June 2017"

The $540 looks to only be available if used in its entirety by 30/6/16 (not 30/6/17 as your article implies)

Flyer called "Annual Non-concessional cap" shows if you only part-use the cap in 16/17 or wait till 17/18 then it won't be $540k.

Eg if $200,000 put in 16/17 , then actually the maximum over 3 years is $180+$100+$100 = $380.

Refer to Molly scenario on the flyer

Graham Hand
September 23, 2016

Hi Lisa, I agree it's confusing, but I believe $540K is available this FY if used in full this FY. My interpretation of the Molly example (shown below) is that the reason she does not have access to the full $540K in 2016/2017 is that she does not put in the full amount in that year. She only puts in $250K. She triggers her bring-forward, but is then subject to the rules from 1 July 2017 for subsequent contribution. I believe the full $540K is available in 2016/2017 by USING the full amount, not simply TRIGGERING it. My article is about what is possible by 1 July 2017, not after that.

But I have noticed something strange. I quoted previously from this Molly example, and it is different from the latest version. Look at the two below ... they have taken out the "which is $540,000".

"Molly is 40 and has a superannuation balance of $200,000. In September 2016, she receives an inheritance of $250,000, which she puts into her superannuation. This triggers her three year bring forward. From 1 July 2017, as the cap has been lowered, Molly would be able to make further non-concessional contributions of up to $130,000, taking her to the new bring forward amount of $380,000. Molly makes a nonconcessional contribution of $110,000 in 2017-18 and $20,000 in 2018-19. She can then access the new bring forward from 2019-20 and contribute up to $300,000 in non-concessional contributions."

It used to say:

"Molly is 40 and has a superannuation balance of $200,000. In September 2016, she receives an inheritance of $250,000, which she puts into her superannuation. This triggers her three year bring forward, <strong>which is $540,000</strong>. From 1 July 2017, as the cap has been lowered, Molly can make a non-concessional contribution of $110,000 in 2017-18 and $20,000 in 2018-19. She can then access the new bring forward from 2019-20 and contribute up to $300,000 in non-concessional contributions."

I ran this difference past Liam Shorte and he says: "Yes that fits in with the clarification that if you have not used the full $540,000 by 30 June 2017 then the transitional rules apply i.e. $180K, 100K , 100K = $380,000."

September 23, 2016

I wish to disagree with SMSF Trustee's statement, "Taking advantage of legal, clear tax laws is not avoidance".

The text book definition:-
Tax avoidance - "The arrangement of one's financial affairs to minimize tax liability within the law."
Perhaps you are confusing avoidance with tax evasion - "The illegal non-payment or underpayment of tax."

I guess it really comes down to what is legally acceptable versus what is morally acceptable. Either way, I would suggest that asserting that someone who does not share your opinion ".... is probably just a troll" also does not belong ".... on a website intended for intelligent debate!".

SMSF Trustee
September 24, 2016

I take the troll retort on the chin. You are right.

But as for my reaction to the accusation of tax avoidance, I don't care what a dictionary says. The ATO regards tax avoidance as wrong:

So for ordinary folk, simply arranging their affairs the way the law intends, to be called tax avoiders is to me an insult and simply wrong. And I strongly suspect that this was the intention of the person who wrote the original comment, hence my reaction.

September 22, 2016

sorry I meant $380,000

September 22, 2016

I must be missing something. My interpretation is that the maximum anyone can put in is $460,000 and that is only if they have triggered the bring forward rule (ie contributed over $180,000 in 2015/6). If they haven't triggered the bring forward rule, the maximum is $360,000.

geoffery arthur godden
September 22, 2016

it is nice to see Morrison has seen some common sense re contributions, now he must apply the rules to himself and the other public servants , for him and others to be paid their pensions, the Govt. would have to have more than $1.6 mill. invested at current rates for him to receive his pension, perhaps he and the rest of them could start paying tax above the $1.6 mill cap like he is proposing for us !!, " what's good for the goose is good for the gander "

September 22, 2016

Thanks Graham, that makes perfect sense.

September 22, 2016

You are correct Graham, as the Fact Sheet 4 clearly states that "Where an individual has made a non-concessional contribution in 2015-16 or 2016-17 and that triggers the bring forward, but has not fully used their bring forward before 1 July 2017, transitional arrangements will apply so that the amount of bring forward available will reflect the reduced annual contribution caps."

So the transitional rules only apply where the full $540,000 has not been utilised by 30 June 2017.

The new $1.6m balance limit only comes in to effect for contributions after 1 July 2017.

September 22, 2016

In 2006 Costello did not act out of generosity. It was actually a cave-in. Prior to 2007 there was no limit on non-concessional contributions. Many people would tip the proceeds of the sale of an investment property into super just before retirement so as to enjoy the pension with tax concessions in retirement.
In his changes Costello proposed to limit non-concessional contributions to $150,000 per year - with the bring forward rule. There was loud screaming about this perceived injustice. In response, Costello caved in and allowed $1m in non-concessional contributions, but only for the first year - as a transitional arrangement.
More to the point the concessional (pre-tax contributions such as salary sacrifice) in 2007 was set at $100,000 for people over 50, down from $105,000 before. Morrison is making that $25,000 from 2017.
But there are people who had unlimited non-concessional contributions before 2007 and then their pension became tax-free after 2007. That is why we still have super funds with $80m in them.
Now the $1.6m pension cap starts to make sense.

September 23, 2016

Quite right Jack. I amazed how short people's memories are. Costello's $1m limit was putting in a limit where previously there wasn't one. I well remember several clients suddenly wanting to tip large sums into super who had shown no interest previously and had not expressed any interest in doing so previously. Sure the tax free pay outs to the over 60s made putting more in more attractive, but the $1m limit was not an example of Costello era largesse.

September 22, 2016

I assume that the comments in relation to the bring forward in the article were made prior to Treasury clarification yesterday

Graham Hand
September 22, 2016

Hi Rory

I can understand the confusion as there are transition arrangements where the bring forward has not been used fully.

I am double-checking all this, but super experts I have discussed this with say there is a difference between 'triggering' and 'fully using' the bring-forward.

Where an individual has triggered the bring forward in 2016/2017 but has not used it fully by 30 June 2017, transition rules apply.

But in my article, I discuss using the available $540,000 in full this FY. I believe it can be used fully and the transition arrangements do not apply.

At least, that's how I understand it.

September 22, 2016

Great for the already pampered greedy wealthy who are the Lieberals target audience but useless for the rest of us. While they are busy avoiding tax which should pay for community services like schools and hospitals the 'man/woman in the street' gets slugged again. We lose our meagre pensions after paying tax for 40 years and pay for the bludgers.

SMSF Trustee
September 22, 2016

I have to respond to this, even though Huw is probably just a troll.

Taking advantage of legal, clear tax laws is NOT avoidance. Avoidance is where you try to get around the law illegally, but this is not what is happening here. Ordinary people doing things that are intended by the law is not wrong-doing and the implication that it is should not be allowed to pass uncritically.

Huw, get your facts straight. Schools and hospitals are mostly paid for by State Governments, who rely largely on GST revenue, not income tax. These same 'super rich' that you decry will actually go out and spend their lowly taxed pension earnings, paying full freight GST along the way, therefore funding schools and hospitals, etc.

Sorry, while I recognise that the super tax regime is generous towards the well off, arguments like this belong elsewhere, not on a website intended for intelligent debate!

September 24, 2016

I think you are confusing tax evasion which is illegal and tax avoidance which is legal.

SMSF Trustee
September 24, 2016

John, no I'm not. I understand why people think otherwise, because US based newsletters and dictionaries think that avoidance is legal. I've never understood avoidance to be legal. It's not as overt as evasion, where you don't declare income for example, but it involves schemes that rort the tax system unfairly and against the intention of the tax law. I've said this in response to another comment, but have a look at the Tax Office website and you'll see that they regard avoidance as wrong, something they seek to stamp out.

September 23, 2016

I just can't understand why so many people get confused about why we pay tax over our working lives - it is certainly not so that we can get a state funded pension when we retire - it is solely so that we pay our share for government services provided during our working lives, and allocating a share of our income to those dependent on government support at that time.
It has nothing to do with "paying forward" for a pension.

September 22, 2016

Retention of the so-called work test makes no sense whatsoever. I believe this is bad policy for two reasons, as follows:

Firstly, this test is an anachronism that has no clear policy purpose, especially as the retirement age is increasing into the same age band.

Secondly, the test will inhibit some people from starting or increasing an allocated pension via superannuation when they have a lump sum available to do so. This may arise, for example, from downsizing the main residence, selling a business, receiving a bequest, a redundancy payment or selling other assets.

Any disincentive for older people to downsize to a smaller home is surely a bad thing on many levels.

For these reasons, I believe retention of the work test is likely to increase the demand for the age pension beyond any saving that the work test might generate, even before considering the cost of administering the work test.

September 22, 2016

Still waiting to see any actual legislation but looks like super is still a tax lurk (ie welfare) for the rich – so not much has changed?

September 22, 2016

You are correct. Just another tax lurk and mis-use of the superannuation system which was never intended to be a tax avoidance scheme. What else would we expect from the Lieberals?


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