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Monday 15 May 2017
The Big Four banks
A recent media release warned that there are “significant risks” of which ETF investors might not be
aware. In today’s note, I share my take on this and the active manager versus ETF story.
Also in the Switzer Super Report, following last week’s bank levy announcement in the Budget, Paul
Rickard looks at how the Big Four are performing and ranks them in order of preference. Plus, James
Dunn has six non-resource floats to watch.
Sincerely,
Peter Switzer
Inside this Issue
02
Are ETFs really a Big Short problem?
ETFs and managed funds
by Peter Switzer
04
Which bank?
How they perform
by Paul Rickard
07
5 floats to watch
Float pipeline
by James Dunn
Which bank?
10
What to consider
by Graeme Colley
by Paul Rickard
04
Super reforms checklist – are you ready?
14
Buy, Sell, Hold – what the brokers say
Upgrades and downgrades
by Rudi Filapek-Vandyck
Switzer Super Report is published by Switzer Financial Group Pty Ltd AFSL No. 286 531
36-40 Queen Street, Woollahra, 2025
T: 1300 SWITZER (1300 794 8937) F: (02) 9327 4366
Important information: This content has been prepared without taking account
of the objectives, financial situation or needs of any particular individual. It does
not constitute formal advice. For this reason, any individual should, before
acting, consider the appropriateness of the information, having regard to the
individual's objectives, financial situation and needs and, if necessary, seek
appropriate professional advice.
Are ETFs really a Big Short problem?
by Peter Switzer
Fund managers are worried about Exchange Traded
Funds because they are losing business to these
lower-cost alternatives. And they’re also worried
because the media plays up ETFs as being the best
investment option for busy people, who can’t do their
own research or who don’t want to pay for advice.
oblivious to its weaknesses, reminds us of the CDO
market featured in The Big Short,” says Norden.
Last week, an alarming media release alert was sent
out with the warning that “Many ETF investors are
unaware of a range of significant risks to their
investments, according to a group of experienced
traders.”
“Opportunities like these do not come along
regularly. We see this as a once in a decade
opportunity to offer our investors a way to participate
in the crisis that will engulf the ETF market,” says
Norden.
This is what the media release said:
This is alarmist and it’s unfair to compare all ETFs to
Collateralized Debt Obligations, which were a prime
cause of the GFC.
“Gary Norden of Australian-based Organic Financial
Group, Nam Nguyen of Canadian firm Harbourfront
Technologies and Larry Gazette, a US based trader
have between them nearly 80 years of market
experience.
“Both our quantitative analysis and market
experience tell us that the huge growth in ETFs will
end badly for many,” says Norden.
“Many investors wrongly believe that all ETFs are
simple, passive structures with low risk,” says
Gazette.
If your ETF is exotic, it could be linked to derivatives
and these come with relatively more risk. But if the
ETF is based on say the S&P/ASX 200 index, where
the fund manager buys the 200 stocks when you
invest in them, the only risk with these would be a
crash, where everyone runs for the exits at the same
time.
“In reality though, many have a range of weaknesses
that can significantly hurt investors,” according to
Gazette.
However, that always happens with a crash, though
ETFs could result in more and faster selling when the
‘you know what’ hits the fan.
“Even though we have only investigated a small
percentage of ETFs so far, we have identified a
number of vulnerabilities,” said Nguyen.
I’m going to test out this proposition with experts this
week on my TV show.
But what about ETFs versus managed funds?
“Timing when these vulnerabilities will strike is not
easy, however, we are confident that we have a
definable statistical edge in the set up for the trades
we have already identified,” said Nguyen.
“The current market for ETFs, with huge amounts of
capital chasing a relatively new type of structure,
Monday 15 May 2017
Back in 2015 Morningstar data showed that for the
year through to October 31, roughly 58.6% of actively
managed funds had failed to beat their benchmarks.
And over the last 10 years, 73% of actively managed
funds had fallen short.
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So, on those numbers, there is a good argument for
ETFs that copy the index but, simultaneously, there is
argument for looking for the fund managers who
consistently beat the index. Of course, they don’t
have to beat the index every year but they need to do
well over three, five and 10 years.
And they are there, but the smart wealth-builder has
to go looking for them.
Warren Buffett has told retail investors that they are
better off in ETFs but that doesn’t mean that a better
strategy might be a core investment in a passive fund
that mirrors a good market index augmented by a
satellite strategy where you go looking for alpha or
higher returns with a mixture of funds or individual
shares.
Personally, I have relied on an ETF for the S&P/ASX
200 index, which I’ve bought when the index has slid
to very low levels. So when I told you to “buy the
dips,” that’s what I did.
The AFR recently looked at active managers versus
ETFs and the story isn’t as bad as some might think.
“Over the past decade, the average annual return
from the S&P ASX 300 Accumulation Index has been
4.1 per cent per cent, says Mercer, while the median
annual return from an active manager was 5.7 per
cent (after fees),” Phil Baker reported.
“The past five years shows that the median
performance from local fund managers was 11.8 per
cent per annum (before fees), compared to 10.4 per
cent from the benchmark index.”
I think the age of the ETF is good for investors but
they have not created an argument that says active
managers should be condemned to the waste bin of
stock market history.
I have also gone long my own fund because that’s
how I always invest — buy dividend-paying stocks in
companies where they grow their dividend.
My super fund this year has shot the lights out and it
was part strategy on my behalf — going long BHP and
Rio at low share prices, as well as investing in an IPO
that beat expectations — but my commitment to ETFs
has also given me a solid foundation. In addition,
Donald Trump and the overall market’s response
have helped deliver a great return for the past year.
Of course, my Switzer Dividend Growth Fund, or
SWTZ, is an ETF but an active one and that’s
because we believe that selecting companies that
can grow their dividends — 30 or 40 — actually takes
a bit of human judgment.
That said, there have been recent years when the
overall return of the fund was only OK because
markets went sideways and my exposure to small
cap fund managers, who beat the index, was too
small.
We hope to beat the dividend-payment from an ETF
based on the index, which has been around 4% plus
franking. We hope to pocket 5-6%, with an extra bit
from franking credits. And because we chase capital
gain as well, we should get another lift when the
market trends higher.
There is a case for ETFs, direct shares and active
fund managers and as Aristotle once advised:
“Nothing in excess, except moderation!”
I think our fund and a market-index ETF gives a pretty
good core strategy and for my own super fund, I’ve
been buying good companies when the market has
unfairly beaten them up.
Important: This content has been prepared without
taking account of the objectives, financial situation or
needs of any particular individual. It does not
constitute formal advice. Consider the
appropriateness of the information in regards to your
circumstances.
Clearly, when CSL dropped to $95 on December 5
was a case in point and those who believe in this
strategy would be very happy with their $134 share
price right now.
Monday 15 May 2017
03
Which bank?
by Paul Rickard
The Treasurer’s announcement that the major banks
and Macquarie will pay a levy on their liabilities was
the catalyst for a material sell off in bank shares last
week. The tax, which is set to raise $1.5bn pa or just
under 5% of total bank profits, will apply from 1 July.
Although the fine details are still being developed,
retail deposits and tier 2 capital will be exempt from
the tax. Hence, it will impact the banks differently,
with Deutsche estimating that it would cause a 5.9%
hit to earnings for ANZ, 4.9% for NAB, 3.4% for
Macquarie and 3.9% for both CBA and Westpac.
This is the worst-case scenario and assumes that the
banks won’t pass the cost on to customers. While
they will be under pressure not to do so in the short
term and their smaller competitors will act as a
competitive break, the likelihood is that over time,
customers will end up sharing some of the pain.
Adding to the negativity last week were
underwhelming half year and quarterly earnings
reports from Westpac and Commonwealth. As a
result, CBA shed 3.23% over the week, Westpac lost
3.81% and ANZ 4.67%. The fall in ANZ included
going ex an 80c dividend, which brought its “real”
loss down to 2.05%, while NAB was the “star” losing
just 0.58%.
5.0% (see table at the end of this article). Earnings
multiples have expanded, with the banks moving from
an average of 12.9 times to 13.8 times forecast
earnings.
In 2017, the Australian sharemarket market has
returned 4.51%. The financials sector (which
comprises the major banks, regional banks and the
insurers) is still up 2.95%, notwithstanding that it has
given up 4.65% so far in May.
Local banks have followed the lead of financial stocks
in the USA and Europe, which have risen strongly as
the prospect of higher interest rates should allow
banks to increase profitability from higher margins.
However, local banks are seeing ongoing margin
pressure as offshore funding becomes a little more
expensive and the RBA keeps interest rates on hold.
Further, APRA is making noise about the banks
having “unquestionably strong” capital ratios, the
Government is imposing a new tax on liabilities,
business credit growth remains tepid and the banks
are under pressure to restrict investor home lending.
Revenue growth is anaemic.
So, with bank reporting season out of the way, and
the banks having to deal with a new tax, do bank
stocks still represent good value? And, let’s pose
that perennial question – which bank?
With the four major banks making up 27.4% of the
S&P/ASX 200 index, it is hard, but not impossible, for
the index to advance through 6000 unless the banks
do their share of the heavy lifting. So, given a positive
disposition on the market, I don’t think it is time to go
materially underweight the banks. However, they
have had a good run and there are enough negatives
to warrant a more cautious approach: indexweight.
Banks look close to fully valued
Earnings season
Since I reviewed the banking sector last November
(see here), the four major banks have returned on
average just over 10%. NAB leads the way with a
return of 16.3%, while Westpac is the laggard with
Looking at the bank results, they showed:
Monday 15 May 2017
Cash earnings up marginally, but this half
largely flat when compared with the second
04
half of 2016. Earnings were boosted by
trading and markets income their institutional
business;
The “growth challenge” is best illustrated by
the cash profit in their Australian retail banking
operations. Apart from the CBA, each of the
other three majors saw profit decline by
between 1% and 2% in the latest half
compared to the preceding six months;
Bad debt expense remains low by historic
standards. Forward indicators are satisfactory,
although there has been a slight tick up in
housing and personal loans in arrears;
Risk weighted asset growth is negligible, and
in the case of ANZ and NAB, declined in the
half year;
The net interest margin (NIM) remains under
pressure. Most banks saw NIM decline in the
current half compared to the preceding half;
Return on equity has dropped – the new norm
seems to fit in the 13% to 15% range;
All Banks have capital ratios in excess of their
(current) target range. ANZ, NAB and
Westpac each have common equity tier 1
(CET1 ) ratios of 10.0% (prior to the payment
of their dividend);
Expense discipline was strong, with ANZ
reducing operating expenses by 1.5%
compared to the preceding half, while
Westpac kept growth flat; and
Banks maintained their dividends.
Commonwealth Bank increased its dividend
by 1c to 199c.
The Brokers
The table below shows each major broker’s
recommendation and target price for the four major
banks (source: FN Arena).The bank(s) with their
highest recommendation is highlighted in yellow. For
example, Citi has a neutral on ANZ, but a sell on
CBA, NAB and Westpac.
Most banks are trading close to their consensus
target price. For example, the consensus target price
for Commonwealth Bank is $80.85, which was 1.0%
lower than its closing price on Friday of $81.67. On
this metric alone, ANZ represents the best value.
Broker Recommendations and Target Prices as at
12 May 17
Bank results
* Versus 2H16. NIM excludes treasury & markets
** ANZ is with pro-forma adjustments
Australian Retail Profits
Monday 15 May 2017
From this table, it is clear that the major brokers see
little difference in value or price potential for the major
banks. There is no standout.
The table below shows the consensus broker FY 17
and FY18 forecast earnings multiples and forecast
dividend yields. It also shows earnings per share
growth between FY18 and FY17. On pricing
multiples, the gaps are narrow. CBA is the most
expensive, trading at 14.7 times FY17 earnings, while
05
ANZ, having gone ex-dividend, is now the cheapest
at 12.7 times (13.1 times adjusted for the dividend).
I expect CBA to retain a premium, and for this reason,
continue to rate it as my preferred pick.
Forecast Earnings Multiples and Dividend Yields
ANZ seems to have been harshly punished by the
market following its result, possibly because
expectations from some analysts were too high.
While it is hard to “shrink to greatness”, ANZ is doing
the most to cut costs. Its lack of investment in
technology during the “Asian years” might ultimately
be its undoing, but it is now the cheapest bank.
Meanwhile, Westpac is now investing in technology,
but with its multi-branding strategy, the benefits may
still be some years away. It is also likely to face some
challenges with growing its home loan book, as the
proportion of interest only loans at 50% is well above
APRA’s new cap of 30%.
Two other points to note. Earnings per share growth
is very low, with CBA the highest at 3.6% forecast
between FY18 and FY17, while virtually no growth is
forecast for the NAB. Also, most brokers now see
dividends as stable, although a couple of brokers still
forecast a small cut to NAB’s dividend.
My view
Last November, I commented:
“In a very tight race, my order is:
1. Commonwealth Bank
2. National Australia
3. Westpac
4. ANZ”
This is largely as it has turned out (see table below),
although NAB has been the clear outperformer, and
Westpac the laggard.
In a very, very tight race, my order is:
1. Commonwealth
2. ANZ
3. NAB
4. Westpac
Important: This content has been prepared without
taking account of the objectives, financial situation or
needs of any particular individual. It does not
constitute formal advice. Consider the
appropriateness of the information in regards to your
circumstances.
It remains a very tight race, with almost no difference
in strategy between the major banks, only minor
differences in pricing metrics, and as the brokers
observe, very little difference in growth prospects.
Commonwealth Bank, however, does still enjoy a
leadership position in technology, market shares in
key retail markets, funding base and return on equity.
Historically, CBA has traded at a material premium to
the other banks, however the gap from it to the
cheapest bank, the ANZ, is now down to 16%.
Against the NAB, it is into an adjusted 14%.
Monday 15 May 2017
06
5 floats to watch
by James Dunn
The float pipeline at the Australian Securities
Exchange (ASX) continues to swell, presenting
investors with new opportunities all the time.
While there is an unavoidable level of risk in new
initial public offerings (IPOs), as evidenced by recent
floats such as dried fruit producer Murray River
Organics – which is down 52% on its issue price after
revealing that it will miss its prospectus forecasts –
and auto parts company Automotive Solutions Group,
which has lost 63% of its value in its first five months
on the ASX, having posted a major earnings
downgrade and seen its CEO depart, investors like
the opportunity of getting into potential good
performers at the ground floor.
Here are five interesting non-resources float
opportunities in the market at present.
Oliver’s Real Foods
Oliver’s Real Foods is a fast-food chain with a
difference: it describes itself as the world’s first
certified organic fast food chain. At its 21 stores on
Australia’s major eastern seaboard highways,
Oliver’s Real Food serves fresh, steamed or grilled
food, which is free of additives, preservatives and
artificial ingredients, to more than two million
customers a year.
Founder Jason Gunn was inspired to deliver healthier
roadside fast food choices, along with nutritional
information. The organic range has been extended to
gluten-free, dairy-free and vegan options. Oliver’s
supports its restaurants through has three distribution
centres at Wyong, Brisbane and Melbourne,
dedicated central kitchens, loyal suppliers and its own
proprietary OliVerse technology system. The
company says it has 5% of the $1 billion arterial
highway service centre fast-food market.
Monday 15 May 2017
Oliver’s aims to have 60 company-owned stores
running along the nation’s highways, from Adelaide
to Cairns, over the next four years. Sales have been
growing at an impressive double-digit rate for five
years, with revenue tipped to reach more than $28
million this financial year, yielding normalised
operating earnings of $823,000.
Proceeds from the share offer will be used to fund the
acquisition or development of new stores already
identified along the New South Wales, Victorian,
Queensland and South Australian highways. Oliver’s
is looking for up to $15 million, but says its store
roll-out plan is achievable with the minimum $9 million
subscription. The company is also looking to buy
back its remaining seven franchised stores.
Oliver’s Real Foods is raising up to $15 million
through the issues of shares at 30 cents, and would
be valued at listing at up to $49.7 million. Oliver’s
does not intend to pay dividends immediately, but
says it will pay dividends when its board decides that
the company is sufficiently profitable and cash-flow
positive, after taking into account the capital required
for the continued expansion of the Oliver’s store
network.
Oliver’s Real Foods is expected to list by mid-June.
Veritas Securities is acting as lead manager. The
company looks to have good growth prospects,
standing out in its market segment as the healthiest
alternative, and riding the growing popularity of
healthier eating.
Eagle Health Holdings
Chinese company Eagle Health Holdings makes a
range of health and nutrition products including
protein powder, throat lozenges and vitamins at its
manufacturing base in Xiamen in south-east China,
07
selling into most of the country’s provinces. It wants
to source Australian products to add to its range,
looking to capitalise on the same “clean and green”
perceptions of Australia that helped to drive growth in
China of Australian vitamins brands Blackmores and
Swisse.
CyberGym
Eagle Health, which is chaired by former Federal
Sports and Tourism Minister Andrew Thomson, is
looking to raise up to $30 million in fresh capital and
list on the ASX, where it would be capitalised at $130
million at its maximum raise. The company is offering
up to 75 million shares to new investors at 40 cents.
CyberGym bills itself as the global leader in
cyber-defence solutions and training for financial
organisations, critical and sensitive governmental,
infrastructure and production companies. The
company offers clients comprehensive IT security
services and real-world cyber defence training, on the
basis that an organisation’s personnel are, if not
trained this way, the weakest link in its
cyber-defences: CyberGym places staff in simulated
cyber-attack situations and coaches them on how to
respond.
Eagle Health operates from a 28,000 square-metre
manufacturing and warehousing facility in Xiamen. It
sells its products through pharmacies and trading
companies, and has a large presence on online
platforms such as Tmall, Alibaba and JD.com. The
company has 18 patents and 50 trade marks in
China.
Eagle Health makes 24% of its annual sales from
amino acid liquids, which Chinese people take to
enhance their immune systems, and 23% from its
range of protein powders. Throat lozenges account
for 19% of sales, with vitamins and minerals
supplements representing about 5%. A range of other
products including ginseng, dietary fibre, herbal teas
and edible bird’s nests make up the balance.
According to the prospectus, Eagle Health generated
revenue of $84.2 million in calendar 2016, up from
$72.5 million in 2015. From that it earned net profit
after tax of $15.9 million, up from $14.0 million in
2015. Its net profit margin was 18.8% in 2016, down
from 19.3% a year earlier.
Eagle Health offers investors exposure to the strong
long-term fundamentals of the health supplements
and nutrition sector in China, through a powerful
distribution platform. China’s growing consumer
wealth is being accompanies by a greater awareness
of overall wellness, and this should lead to ongoing
growth for Eagle Health. The company has a long
and solid earnings track record, and expects to pay a
minimum of 10% of its net profit as a dividend. The
offer closes on 31 May and the shares are expected
to list on the ASX on 14 June. The lead manager is
Melbourne corporate finance firm Beer & Company.
Monday 15 May 2017
There has been a rush of Israeli companies on to the
ASX in the last couple of years, and a mini-rush of
cyber security companies to list – and CyberGym is
involved in both.
The company has impressive credentials: its founder
and chief executive, Ofir Hason, was formerly the
head of the Israel Shin Bet security agency’s cyber
unit. CyberGym is a joint venture of Israel Electric
Corporation and CyberControl, Israel’s leading
cyber-security consultancy, established by ex-NISA
(Israel’s National Security Authority) operatives and
security experts.
CyberGym is forecasting gross profit of $10.1 million
for 2017, rising to $14.3 million for 2018. EBITDA
(earnings before interest, tax, depreciation and
amortisation) is estimated at $3.1 million this year,
and $5.8 million next year.
CyberGym is targeting a $30 million raising, and an
initial ASX market capitalisation of $80 million. The
company will also move its global headquarters to
Melbourne. Bell Potter is lead manager on the initial
public offering.
Quick Service Restaurant Holdings
Also in the fast food market – and in fact a competitor
of Oliver’s Real Foods – is Quick Service Restaurant
(QSR), the largest Australian owned quick service
restaurant operator. QSR operates three brands: Red
Rooster (360-plus restaurants), Oporto (160-plus
restaurants) and Chicken Treat (60-plus restaurants).
The company backs this with a central corporate
08
operation handling intellectual property, restaurant
operations, supply chain, franchising, IT, marketing,
store design and construction, food innovation, and
customer satisfaction.
QSR is owned by private equity firm Archer Capital,
which bought it from Quadrant Private Equity for $450
million in 2011. Archer could be floating the company
for $500 million, but is considered likely to keep an
equity stake: investors buying floats from private
equity are very keen to see this, as some private
equity floats – think Dick Smith, Spotless and Myer –
have proven very disappointing for retail investors in
recent memory.
Just under two-thirds of QSR’s sales come from Red
Rooster, which generated $477 million in revenue in
the 2015-16 financial year. The company believes
home delivery – which currently represents 10% of
Red Rooster’s sales – is its major growth area: it
reckons it can boost that proportion to the kind of
levels that Domino’s Pizza has, at about 50%.
Goldman Sachs and Morgan Stanley are handling the
share sale, which is being marketed to institutional
investors at the moment: plans for the retail
component of the sale have not yet been revealed.
Freestyle Technology Limited
Macquarie Group-backed Freestyle Technology
works in specific technology for the Internet of Things
(IoT), the term used to describe the increasing
connectedness of machines and devices, monitoring
each other, swapping and processing information in
real time – and generating ‘big data’ for humans to
analyse. This mega-network of devices and
machines, which can be controlled by apps from
anywhere in the world, is only just getting started, but
is increasingly spoken of as nothing short of the next
industrial revolution.
The company holds 32 patents with another 50
pending. It has already secured major contracts in
Taiwan and China for utility services including data
collection, remote automated meter management,
billing, pressure management and leak detection.
Last month, Freestyle signed a $5.8 million contract
with the South Korean province of Gochang for smart
water meters and a management platform. The
contract will cover 24,000 households by the end of
the year. Freestyle’s machine-to-machine technology
will allow the smart water meters in Gochang
province not only to detect a water leak, but
determine how to fix it based on the external
environment and temperature. The meters will also
alert council workers of any unexpected occurrences
in the system, for example if an elderly person has
not used their water for two days, they will receive an
alert and someone will go and check on them.
The precise timing, valuation and size of Freestyle’s
capital raising is not yet known, but it is likely to be in
the second half of the year, with the funds to be used
to accelerate its growth across Asia-Pacific and in
particular, to launch into the Indian market.
Important: This content has been prepared without
taking account of the objectives, financial situation or
needs of any particular individual. It does not
constitute formal advice. Consider the
appropriateness of the information in regards to your
circumstances.
Even diluting the hype accordingly, it seems fairly
clear that the IoT will start to pervade our lives in the
near future. Freestyle Technology is in the thick of it
already, deploying IoT solutions in the water, gas,
electricity markets, street lighting, waste
management, healthcare, agriculture and markets,
particularly in the Asia-Pacific region.
Monday 15 May 2017
09
Super reforms checklist – are you ready?
by Graeme Colley
Before the sun sets on this financial year and the new
dawn rises, there are a number of things to consider
before the superannuation landscape changes
forever on 1 July. This guide and checklist provide an
overview of things to take into account by 30 June
this year and what needs to be done from 1 July,
even if your superannuation balance may be less
than $1.6 million.
Things to do before 30 June 2017
Contributions
There are no changes to the concessional and
non-concessional contribution limits and rules for this
financial year. However, from 1 July, the caps on
these contributions will be reduced and for anyone
with more than $1.6 million in super on 30 June 2017,
non-concessional contributions cannot be made to
super.
Therefore, review your superannuation contributions
if you wish to maximise the opportunity you have
available until 30 June 2017. Concessional
contributions include salary sacrifice, personal
deductible contributions and superannuation
guarantee contributions. If you are at least 49 at the
beginning of the financial year, the concessional
contribution maximum is $35,000 and for everyone
else it is $30,000.
Pension balance reduction
If you have more than $1.6 million providing your
superannuation pensions it will be necessary to
reduce your pension balances to no more than $1.6
million by 30 June 2017 otherwise a tax penalty may
apply. As you don’t know the exact value of your
pension balance prior to that time any adjustment to
the fund’s accounts that is required can be made at
the time the fund’s accounts are written up sometime
Monday 15 May 2017
after 1 July 2017.
However, you need to take action now to tell the
trustee of the fund that you expect the pension
balance to be greater than $1.6 million but don’t
exactly know how much that will be on 30 June 2017.
Once you know the exact amount the accounts can
be adjusted to reduce the pension balances to the
required amount(s). SuperConcepts has a member
request on its website www.superconcepts.com.au
which you can use free of charge for the purpose of
notifying the fund about the required adjustment.
Things to do from 1 July 2017
Contributions
Reduced concessional cap to $25,000 per annum
From 1 July 2017, if you want to make extra
concessional contributions, ensure that the combined
total of your employer SG superannuation
contributions and any salary-sacrifice payments made
to superannuation, and any contributions claimed as
an income tax deduction do not exceed $25,000 for
the financial year.
Reduced non-concessional cap to $100,000 per
annum, with the three-year bring forward figure to
$300,000
Generally, non-concessional contributions are
contributions made to an SMSF that are not included
in its assessable income; most commonly, personal
contributions for which no income tax deduction is
claimed.
As the contribution cap will be reduced from 1 July
2017, there will be less scope in future income years
to make non-concessional contributions. If you have a
total superannuation balance in excess of $1.6 million
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as at 30 June, you will not be able to make a
non-concessional contribution in the next income
year.
Where you have triggered their three-year bring
forward entitlement in either 2015/16 or 2016/17, and
you don’t fully utilise the bring forward entitlement by
30 June 2017, from 1 July 2017 you may find your
entitlement to the remaining unused amount will be
reduced in line with the reduction in the
non-concessional contributions cap.
incur capital gains tax (CGT), which would not have
otherwise been payable if the Transfer Balance Cap
had not been introduced. To compensate members,
CGT relief measures have been introduced.
This treats certain assets as being sold and
re-acquired on the date of the roll-back to
accumulation and reset the cost base of the asset.
The CGT reset date must be 30 June 2017 unless the
fund has segregated assets, in which case the CGT
reset date can be between 9 November 2016 and 30
June 2017.
The $1.6m Transfer Balance Cap
Resetting the cost base is optional:
From 1 July 2017, a lifetime cap will apply to the
value that can be transferred to the pension phase of
super. This cap is known as the ‘Transfer Balance
Cap’ and will start at $1.6 million. This cap will be
indexed periodically in $100,000 increments in line
with the consumer price index.
The cap applies to:
your combined pension balance so that if you
have multiple pension accounts, either within
the same fund or in multiple funds, it’s the
total combined value of these pensions that is
counted against the cap
pensions commenced both before and from 1
July 2017.
Provided the eligibility criteria are met, resetting the
cost base is optional and is applied on an
asset-by-asset basis.
Elections to claim CGT relief are irrevocable. This
means the deemed sale and repurchase of an asset
cannot be reversed. This is especially relevant for
funds where an asset’s future performance turns out
to be unexpectedly unfavourable or where the fund’s
proportion of exempt pension income in the income
year of disposal is greater than the percentage in
2016/17. It is worthwhile to seek professional tax
advice to determine whether your fund is eligible for
this relief and its pros and cons.
Trustees can choose when to pay
Any amounts in excess of the cap must be
transferred to an accumulation account or withdrawn
from the fund. For pensions commenced prior to 1
July 2017, this must occur on or before 30 June 2017.
Some exceptions apply to pensions, which under the
legislation are not permitted to be commuted
(converted to lump sums).
These new rules limit the amount that can be held in
the tax-free pension environment. Earnings on
pension balances are tax free while earnings on
accumulation balances are taxed at 15%.
The SMSF has the choice of either recognising any
notional capital gain or loss in the 2016/17 income
year, or deferring it until the asset is sold.
Tax changes to Transition to Retirement (TTR)
pensions
TTR pension no longer exempt from fund tax
exemption
Capital Gains Tax (CGT) Relief
From 1 July, investment earnings within a TTR
pension will no longer be tax exempt and will instead
be taxed at the concessional rate of 15%.
As a result of the introduction of the $1.6 million
Transfer Balance Cap and the new requirements
applying to Transition to Retirement (TTR) Pensions,
some funds that sell assets after 1 July 2017 may
Members transitioning to retirement will still able to
commence a TTR pension upon reaching
preservation age and access their preserved
superannuation balances prior to retirement. The
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earnings of the pension account won’t be exempt
from tax until a full condition of release has been
satisfied.
The value of the TTR pension will not count towards
the Transfer Balance Cap until such time that a full
condition of release has been satisfied.
Checklist
Here’s our checklist to help you stay on top of the
super changes coming into effect from 1 July 2017.
1. $1.6m Transfer Balance Cap
Members with pension balances in excess
of $1.6 million – If you have more than $1.6
million in the pension phase of super, any
pension balance in excess of $1.6 will need to
be removed from super or transferred to
accumulation phase on or before 30 June
2017. Some exceptions apply to pensions,
which under the legislation are not permitted
to be commuted. The ATO has released
guidelines which explain how an SMSF
member can request a pension commutation
prior to 1 July 2017 to comply with the
Transfer Balance Cap, even though the
amount of the member’s excess pension
balance may not be known at the time of the
request.
Members with multiple pensions – If you
have multiple pensions you will need to
choose which pension to commute, if the total
of value of the pensions exceeds $1.6 million
Strategies for spouses – Spouses with
uneven super balances may consider
implementing contribution-splitting strategies
in 2016/17 and beyond. This may not apply in
all cases subject to the contribution rules.
for CGT relief to apply for a CGT asset in the
approved form. The choice is irrevocable, and
must be made on or before the day a trustee
is required to lodge their fund’s 2016/17
income tax return. This decision should also
be documented through a trustee resolution.
Defer or not to defer – Where there is a
notional capital gain, trustees will need to
decide whether to treat the proportion of
notional capital gain as assessable in the
2016/17 year or defer until the asset is
actually sold.
Keep records – Trustees need to keep
appropriate records for the assets subject to
CGT relief, and the exempt portion of any
deferred capital gain. Records need to be
maintained to ensure that capital gains or
losses on the subsequent realisation of these
assets can be accurately determined.
You may need an actuary certificate –
Where applicable an actuary certificate would
need to be obtained to determine the portion
of the fund’s assets in pension phase for the
2016/17 financial year. This will be needed in
order to determine the portion of the notional
capital gain that will be taxable on assets for
which the CGT cost base has been reset.
3. Tax Changes to transition to retirement (TTR)
Pensions
You may be need to make adjustments to
remain within the cap – Once a full condition
of release is met, such as retirement, the
value of a TTR pension will count towards the
Transfer Balance Cap at that point. Members
may be required to make adjustments to
remain within the cap once the pension
converts to an account-based pension.
4. Limits to non-concessional contributions
2. Capital Gains Tax (CGT) relief
Which assets to reset to market value – If
there are members in the fund affected by the
introduction of the $1.6 million Transfer
Balance Cap or the changes to TTR pensions,
trustees will need to decide which assets, if
any, to claim CGT relief for.
Make a valid choice – Trustees must choose
Monday 15 May 2017
Consider maximising contributions during
2016/17 – Remember to consider maximising
your non-concessional contributions during
the 2016/17 financial year.
Close out any unused bring-forward
entitlements – If your client has triggered the
bring-forward rule in either 2015/16 or
2016/17, ensure they have fully utilised their
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bring-forward entitlement by 30 June 2017.
Strategies for spouses – Spouses with
uneven super balances may consider
implementing contribution-splitting strategies
in 2016/17 and beyond.
Remain within the applicable cap – Ensure
that your client’s non-concessional
contributions are not higher than the
applicable cap post 1 July 2017.
5. Limits to concessional contributions
Consider maximising contributions during
2017 – Remember to consider maximising
concessional contributions during the 2016/17
financial year.
Remain within the applicable cap – Ensure
that your concessional contributions are not
higher than the applicable cap for post 1 July
2017.
Important: This content has been prepared without
taking account of the objectives, financial situation or
needs of any particular individual. It does not
constitute formal advice. Consider the
appropriateness of the information in regards to your
circumstances.
Monday 15 May 2017
13
Buy, Sell, Hold – what the brokers say
by Rudi Filapek-Vandyck
In the good books
AVEO GROUP (AOG) Upgrade to Accumulate
from Hold by Ord Minnett B/H/S: 4/0/0
Ord Minnett is more positive about the
company’s prospects after an investor briefing.
Earnings forecasts are lifted because of higher
assumed development completions. The broker now
has greater confidence in delivery and increased
margins.
Ord Minnett assumes 10.7% growth in earnings per
share in FY17 and 8.4% for FY18. Rating is raised to
Accumulate from Hold. Target rises to $3.70 from
$3.40.
Upgrade to Outperform from Neutral by
Macquarie B/H/S: 2/0/0
Macquarie reviews production forecasts in the light of
recent exploration successes. The broker now
expects production to exceed 300,000 ounces per
annum over the next five years.
The broker believes mid-grade, high-tonnage, shallow
underground mines can be highly profitable to run.
The success at Karari underpins this mode of
operation for the company.
Rating is upgraded to Outperform from Neutral.
Target is raised to $1.30 from $1.00.
In the not-so-good books
BT INVESTMENT MANAGEMENT LIMITED (BTT)
Downgrade to Neutral from Outperform by
Macquarie B/H/S: 1/5/0
OCEANAGOLD CORPORATION (OGC) Upgrade to
Neutral from Sell by UBS B/H/S: 4/2/0
UBS believes the appointment of a new mining
minister in the Philippines has materially reduced the
risk of the suspension order on Didipio from being
enforced.
This should allow the market to re-focus on growth
opportunities at Haile and at NZ operations.
The broker upgrades to Neutral from Sell. Target is
raised to $4.35 from $3.41.
First half results beat Macquarie’s forecasts but
were in line with expectations after adjusting for
one-off items. The company’s key operating metrics
are meeting the broker’s fund manager investment
criteria.
Rating is downgraded to Neutral from Outperform
following recent share price performance. The stock
is trading at more than 20x FY17 and FY18 earnings
forecasts and is the highest-rated fund
manager under the broker’s coverage.
The downgrade comes despite the broker’s
acknowledgement of the company’s capacity and
demonstrated ability to deliver net inflows. Target is
reduced to $11.70 from $11.92.
SARACEN MINERAL HOLDINGS LIMITED (SAR)
Monday 15 May 2017
14
Target is reduced to $2.45 from $2.70. The broker
believes investment risk has risen and reduces its
rating to Hold from Accumulate.
VITA GROUP LIMITED (VTG) Downgrade to Hold
from Add by Morgans B/H/S: 0/1/0
Vita has suspended its plan to expand its store count
until negotiations with Telstra (TLS) on remuneration
are finalised, at a time as yet unknown. The company
has issued revised FY17 guidance -6% below
Morgan’s prior forecast, representing a -16% fall in
the second half from the first.
As the terms of Vita’s future agreement with Telstra
are uncertain, FY18 earnings uncertainty is very high,
Morgans notes. Downgrade to Hold for now. Target
falls to $1.67 from $3.49.
GRAINCORP LIMITED (GNC) Downgrade to
Neutral from Outperform by Macquarie B/H/S:
0/5/0
XERO LIMITED (XRO) Downgrade to Neutral from
Outperform by Credit Suisse B/H/S: 2/4/0
First half results beat Macquarie’s expectations with
a strong performance from the upstream businesses.
Credit Suisse observes Australasia remains strong,
with no sign subscriber additions have peaked.
Meanwhile, UK growth has stepped up and gross
margins rebounded.
The company has flagged higher gas and electricity
costs in FY18 and beyond, relevant for its oil
processing & malt businesses. Macquarie factors in a
-$7-9m impact to EBIT in FY18 and beyond.
The broker suspects further margin expansion is
likely thanks to the AWS platform, while the challenge
to build scale in North America remains the key
uncertainty.
The broker downgrades to Neutral from Outperform
and reduces the target to $10.00 from $10.50.
With the stock having gained 33% in six months,
Credit Suisse downgrades to Neutral from
Outperform. Target rises to NZ$23.50 from
NZ$21.00.
HEALTHSCOPE LIMITED (HSO) Downgrade to
Hold from Accumulate by Ord Minnett B/H/S: 2/5/0
Ord Minnett raises concerns about the NSW decision
to reduce the number of public beds along with a
requirement that Healthscope meet private
conversion targets from patients entering the new
Northern Beaches Hospital.
This may prove challenging, in the broker’s opinion,
especially in light of the downgrading of private health
cover and increased consumer sensitivity to
out-of-pocket health costs. The broker reduces FY17
forecast by -1.5% to reflect the likely impact of the
Easter/Anzac Day holidays on volumes.
Monday 15 May 2017
15
Earnings forecast
Important: This content has been prepared without
taking account of the objectives, financial situation or
needs of any particular individual. It does not
constitute formal advice. Consider the
appropriateness of the information in regards to your
circumstances.
Monday 15 May 2017
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