On Alert for Unpleasant Budget Surprises

Our radar needs to extend to bank deposits and potential nasties on the budget horizon.

If you are like me, when interest rates went to token levels it was hardly worth managing your money to maximise returns when those returns were so low. It was a wonderful time for banks because they were effectively getting free money from their depositors and no one was interested in swapping banks for very little reward.

But that game is now changing and changing rapidly. If you have shares in a bank check to see whether their call rates are competitive because, if they are not, they will be experiencing a money outflow, particularly if they are a smaller bank. Most of the banks have special deals for valued depositors but some do not and they will be losing money in large lumps. (In the past CBA customers accepted lower rates.)

Higher At-Call Rates

Macquarie has set the pace and their normal account now yields around 1.5 per cent and they have an accelerated account that can only be open with an adviser that yields 2.8 per cent for amounts under $2 million. My bank turned out to be one of the laggards, so I have had to restore an almost dormant Macquarie account to gain a high at-call return.

I am not alone in withdrawing deposits. Investors in bank shares will need to watch depositor balances carefully because they are the heart of any bank in these times of higher interest rates and uncertainty.

Now, to the budget. Treasurer Jim Chalmers was in the US when he saw markets force the removal of the UK treasurer and threaten the prime minister. The UK prime minister must now do what the markets are demanding. Chalmers knows that while, currently, he is in control, if he takes too many wrong steps, markets will take control, UK style.

Accordingly, many promises in the last election campaign will need to be either dropped or funded by spending cuts or extra taxes. No one knows where Chalmers will strike but I highlight two areas of concern: self-managed funds and dividend franking.

SMSFs & Franking Credits

If you are fortunate enough to have large sums in a self-managed fund it looks “London to a brick” you are going to be forced to extract savings above $5 million and put them into your personal account. The industry funds are behind a body that is telling the government to adopt this policy rather than increase the tax rate on superannuation. This body, the Association of Superannuation Funds of Australia, knows that an increase in tax rates above the tax-free cut off level would not be good for their funds.

But a limit of $5 million attacks their main rival — self-managed superannuation funds. Given the key role industry funds play in union and government money raising it is highly likely that the government will follow their advice. Accordingly, those with more than $5 million in their fund will need to start thinking about how to organise their affairs in a more tax efficient way.

Obviously, spouses can be very useful if they are low income and others will be looking at trusts and corporations. But don’t forget that there can now be six people in a self-managed fund and so, longer term, consider tax paid contributions from your children so that your self-managed fund becomes a family affair.

Property Investment

The industry body says the government will raise $1.5 billion if they make the move, but I very much doubt that figure as people will use other tax-efficient means. A great many Australians chose negatively gearing a house as a better way to save superannuation, so they limited their superannuation contributions and used the money to buy houses. It has been an incredibly successful means of saving and with house prices falling it will need be considered again.

The second area where I am fearful is franking credits. 

In the 2019 election campaign, the ALP conducted a clumsy and badly conceived campaign against some recipients of franking credits. Chalmers is smarter and may return to the fray by reducing the proportion of tax credits in profits. Any such action at a time of rising interest rates would hit share prices. I hope my fears are ill founded.

The interim reporting season coming up will be important because a large number of both large and small enterprises have done very well in the three months to September. A great many have been impacted by higher costs but have simply passed them on and consumers are paying the higher prices.

Prelude to Downturn 

Many have very optimistic projections for the future based on the first three months of trading. The Commonwealth Bank has been almost alone warning about the downturn that comes next year when mortgage holders get hit with the full force of the recent interest rate rises.

But KPMG have now come to the same conclusion. That means that the first three months trading for those involved in discretionary services and goods may be merely a prelude to tighter times in the final months of calendar 2022 or, more likely, early in 2003. Hopefully, in February, directors will reveal whether their companies are being impacted or whether it is business as usual.

We saw with Optus that telecommunication companies need to have the very best security systems. Optus was originally a wonderful company but when the Singaporeans took it over it began to decline. And I suspect they did not invest sufficiently in their systems.

Legacy Issues

But Telstra also has unresolved legacy issues. Last week my Telstra email system fell over. I gave the job of trying to fix it to a person I use for my computer problems and technology issues. He explained to me there was a basic flaw in the Telstra legacy system and Telstra told him it could only be fixed by going to a Telstra shop. It took two days to gain an appointment and meanwhile I used an emergency email system. At the store everybody was extremely helpful. They phoned people both in Australia and overseas and at one stage there were three people around the desk and a remote Telstra person on the phone all trying to work out what to do. Eventually one person arrived who actually understood how the system worked and in combination with my man the problem was solved.

There is still a lot of work to be done at Telstra.