The sharemarket gained some ground on Tuesday despite a worsening federal budget outlook, as investors focused on an improving global growth outlook.
The benchmark S&P/ASX 200 Index rose 13.6 points to 5103, while the broader All Ordinaries added 13 points to 5106.1.
The market got a strong lead from offshore after equity markets in the US and Europe closed higher.
Global equities were buoyed by the release of better than expected economic data in Europe that was interpreted as proof the global demand outlook is improving.
Goldman Sachs broker Richard Coppleson has predicted the return of $8.39 billion of dividends to local investors over the five trading days between December 12 and December 19 will drive an end-of-year rally as much of this money is reinvested in the sharemarket.
But shares trimmed earlier gains following the release of the government's midyear economic and fiscal outlook, which forecast a combined deficit of $123 billion over the next four years and for gross debt to hit $667 billion in a decade.
Treasurer Joe Hockey said "all options are now on the table", flagging deep cuts in the May budget.
"The market is now treading water ... throw in an imminent US Federal Open Market Committee announcement on Thursday and investors are on the sidelines," said CMC Markets sales trader Betty Lam.
The minutes of the Reserve Bank's December meeting, also released on Tuesday, explicitly left open the possibility the central bank might cut the official interest rate from its record low of 2.5 per cent in 2014 if it judges the domestic economy is worsening. But the RBA also noted the benefit of previous cuts are still flowing through.
At the local close, the dollar was buying US89.41¢, down from US89.54¢ at the previous close.
Coles owner Wesfarmers led the stock exchange higher, rising 2.5 per cent to $42.56. On Monday, Insurance Australia Group agreed to buy Wesfarmers' Australia and New Zealand insurance underwriting business. IAG dropped 5.3 per cent to $5.40.
Australia's biggest insurer, QBE, dropped 1.9 per cent to $10.16.
The metals and mining sector was flat as reforms in China to reduce air pollution caused some concern for the demand outlook in Australia's biggest export market for iron ore and coal. Embattled mining services company Forge Group was the best-performing stock, up 17.8 per cent to 63¢ , after it announced $40 million of new North American contracts.