Insights

Unveiling Top Picks for May 2023

This month, we sifted through all of these ideas to select three that we believe are particularly worth highlighting. They are the rail freight operator Aurizon, the biotechnology company CSL, and the data centre business NEXTDC. You can get a sense for the diversity of our analysts’ best ideas from these three alone!

NEXTDC

NEXTDC (NXT) is Australia’s largest independent data centre operator. They have invested billions of dollars and over a decade building 12 live data centre with more on the way. Their business model has, in our view, significant competitive advantage. Most people haven’t heard of NEXTDC but they are probably using its services indirectly. NEXTDC’s status an independent co-location provider means its crucial to Australia Digital economy.

Anyone using Microsoft, Amazon, Google and thousands of other clouds and applications is probably accessing them from a NEXTDC data centre. It’s the go-to place for digital connectivity and this is why thousands of partners and businesses (including Morgans) pay NEXTDC to help host their servers. Its high quality business and crucial infrastructure means NEXTDC is an attractive and relatively high growth digital infrastructure investment.

Growth of the digital economy will continue for decades and NXT is a beneficiary of this growth. The company recently signed their largest ever deal with one of the Global Cloud Service Providers. For confidentiality reasons NXT is not able to name some of its larger contract wins but based on publicly available facts with think it is probably Microsoft. The contract is likely to generate billions of dollars in revenue over its lifetime which could be more than 15 years.

Despite this being a record contract win, we expect there are still more to come over the next 6-12 months. NEXTDC have built significant inventory and management say they do not build inventory speculatively. Refer to our latest note for details but we think they could sign another 3 substantial customer contracts and if this happen the share price could appreciate materially. We have an Add rating on NEXTDC and it’s our preferred telecommunications investment.

Aurizon

Aurizon (AZJ) is Australia’s largest rail freight operator. It operates a regulated coal track infrastructure network in central Queensland, which makes up around half of its earnings. The rest of Aurizon’s earnings come from coal haulage contracts in Queensland and NSW and an expanding Bulk business that moves everything that isn’t coal and owns the Darwin-Adelaide railway. Aurizon bought One Rail last year and the costs of funding the acquisition, as well as the effects of wet weather on its rail operations, meant the first half result was weaker than the market had expected and the share price responded accordingly.

We think the extent of the share price decline was unjustified as the nature of Aurizon’s take-or-pay and regulatory protections means the underlying downgrade to this year’s EBITDA forecast was much less than the headline implied ($10-40m, rather than $50-80m).

So we think Aurizon’s share price fell further than it should have done after the interim results. Looking past this year, earnings look set to rise (unless there’s a repeat of this year’s unfavourable weather). We see a high likelihood of Aurizon receiving a regulated revenue uplift of around $125m in FY24 and most of this drops straight down to EBITDA. Even accounting for higher interest costs, the net positive impact will be material.

On top of this, we expect the revenue yield pressures that have affected the Coal haulage business to cease, with yield now closely linked to the contracted CPI escalation. As if this wasn’t enough, Aurizon will have ploughed about $1.85bn into its Bulk business and we’d expect to see a good return from this investment coming through by FY25.

Investors used to see Aurizon as a solid business with a good dividend and the opportunity for share buybacks. Of course some investors were disappointed when Aurizon reduced its dividend and stopped its buyback to fund its purchase of One Rail, but the likely earnings improvement over the next couple of years should justify your attention. We think the FY25 dividend might deliver a yield of about 7% (which grosses up to about 10%) at the current share price.

CSL Limited

While arguably a leading specialty pharmaceutical company and global vaccine manufacturer, CSL Limited (CSL) was not a ‘COVID beneficiary’, as its core plasma-based products (i.e. those derived and separated from the straw-coloured liquid portion of blood) were constrained on tight supply, a lengthy product cycle (9-12 months) and higher costs.

But as we transition out of the pandemic, the company is becoming a ‘COVID exit’ trade, standing at an inflection point where plasma collections have turned the corner, posting record 1HFY23 levels (+36% on pcp; 10% above pre-COVID) and are poised to propel plasma-based products and improve margins on growing fixed cost leverage and moderating cost inflation.

We view additional earnings contributions from recently acquired Swiss specialty pharmaceutical company Vifor, which is tracking to plan with integration going well, along with solid performance from Seqirus (seasonal influenza vaccine business), which has seen a significant pandemic impacted boost in demand, all reflected in a solid FY23 outlook (NPAT +13-18%).

Importantly, management is confident in a return to “sustainable growth”, pointing to internal efforts and a Vifor-expanded R&D pipeline in the “best shape it has ever been” (up c70% on pcp), with the majority late-stage programs (Phase 3 to registration/post-registration), well dispersed among core therapeutic areas, and fuelled by modest spend (10-11% of revenues).

Management estimate that at least 10 compounds (c20% of the total R&D pipeline) have the potential to be ‘standard of care’ for the targeted patient group. With c17% annual earnings growth estimated through FY25, undemanding valuation (30.9x vs 33.5x 10 year mean forward PE), this ‘COVID exit’ trade is a clear standout and represents a core portfolio holding.

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• We preview the 1H23 reporting season, with expectations of solid-to-strong 1H23 growth but with a weakening earnings outlook from 2H23 onwards.
• Of the retail-skewed banks, we view WBC as having a greater risk/reward profile than CBA (highest quality and ROE, stretched valuation, lowest yield). Of the business-skewed banks, NAB has higher ROE than ANZ, but ANZ has greater valuation support albeit with greater M&A risk.

Likely 1H23 reporting season thematics

Net interest income generates c.80% of revenue for the sector. APRA has released monthly credit and deposit data (with ANZ having the stand-out growth). Hence, the key uncertainty is the net interest margin (NIM) (+/-5bps NIM = +/-5% cash EPS). The rise in the average RBA cash rate in 1H23 should provide a sugar hit to NIM. However, watch for the trajectory – CBA and BOQ said their NIMs peaked in October – as price competition, deposit switching, higher wholesale funding costs, and weakening terminal cash rate expectations impact the outlook.

The banks will publish first-time Common Equity Tier 1 (CET1) capital ratios under APRA's revised capital adequacy framework. Based on indications from the banks, we expect meaningful CET1 ratio increases that indicate surplus over the targeted minimum of 11% (post-dividends). This provides opportunity for additional capital management and/or further insulation against a weakening economy.

We expect cost inflation will be evident, both through opex (e.g. wage growth and vendor inflation) and upward normalisation of credit impairment expenses (note BOQ indicated business lending asset quality deterioration in its 1H23 result).

Our DPS forecasts are around or below consensus expectations, albeit still targeting solid increases. On our forecasts and at current prices, ANZ is yielding 6.5%, CBA 4.5%, NAB 6.0%, and WBC 6.7% (all fully franked).

Forecast Changes

Earnings and dividends adjusted mostly for moderated NIM outlook (revised RBA cash rate and swap rates) and updated asset/liability growth (re APRA data).

CET1 capital ratios adjusted upwards to reflect potential benefit of APRA's revised capital adequacy framework applicable from Jan-23.

Investment Insights

ANZ (HOLD): Recent loan and deposit market share growth (but at what returns?). Lowest low rate fixed rate loan exposure. Leading institutional banking franchise. Greater diversification into US$ and NZ economy. Valuation support and attractive yield. Cautious re M&A (NOHC implications) and tech transition to a digital bank.

CBA (HOLD): The largest and highest quality bank, with a loyal retail investor and customer base. Highest return on equity (supported by buybacks) and lowest cost of equity. Leading technology. Cautious re: largest fixed rate loan cliff exposure, weakest valuation support, and lowest dividend yield.

NAB (HOLD): Recent slowing of loan growth. Leading SME relationship banking franchise. Increased simplification and improving digitisation in personal banking. Meaningful improvement in ROE that is in excess of cost of equity. Attractive yield and buyback. Cautious re step-up in costs and weaker valuation support.

WBC (ADD): Greatest potential improvement in ROE (vs relatively low risk profile) via cost-out targets, business exits, rates leverage, efficiency lift (including regulatory capital reduction), and lifting loan growth. Valuation support and strong yield. Cautious re ability to deliver transformation and market share improvement.

Catalysts

1H23 results: ANZ (5 May), NAB (4 May), and WBC (8 May). CBA Q1 trading update (9 May). Key economic data releases and RBA policy cash rate changes. Monthly APRA and RBA lending and deposit balance and interest rate data releases. ACCC, Federal Treasurer, and Queensland Government decisions re: Suncorp Bank acquisition by ANZ.

Risks

Interest and inflation rates. Credit risk (key considerations being unemployment and value of collateral). Competition for loans and deposits. Regulatory risk. Liquidity and funding risk. Execution, cost benefit, and scalability risks of digital bank transition. Cybersecurity.

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Our best ideas are those that we think offer the highest risk-adjusted returns over a 12-month timeframe supported by a higher-than-average level of confidence. They are our most preferred sector exposures.

Removals: Megaport Limited (ASX:MP1), with the recent change of CEO and CFO has left some uncertainty in the business. We still see long-term value in MP1 but would prefer to add to positions once the volatility settles.

Large cap best ideas

Commonwealth Bank (ASX:CBA)

The second largest stock on the ASX by market capitalisation. We view CBA as the highest quality bank and a core portfolio holding for the long term, but the trade-off is it is the most expensive on key valuation metrics (including the lowest dividend yield). Amongst the major banks, CBA has the highest return on equity, lowest cost of equity (reflecting asset and funding mix), and strongest technology. It is currently benefitting from the sugar hit of both the rising rate environment and relatively benign credit environment.

Westpac Banking Corp (ASX:WBC)

We view WBC as having the greatest potential for return on equity improvement amongst the major banks if its business transformation initiatives prove successful. The sources of this improvement include improved loan origination and processing capability, cost reductions (including from divestments and cost-out), rapid leverage to higher rates environment, and reduced regulatory credit risk intensity of non-home loan book. Yield including franking is attractive for income-oriented investors, while the ROE improvement should deliver share price growth.

Endeavour Group (ASX:EDV)

We believe concerns around gaming regulatory changes with the potential introduction of cashless gaming cards in NSW have eased following the Labor election victory given the party’s stance on the issue was less onerous than the Liberals. Notwithstanding external factors, EDV’s underlying business remains strong with a broad network of retail liquor stores/hotel venues, well-known brands (eg, Dan Murphy’s and BWS) and dominant market positions.

Wesfarmers (ASX:WES)

WES possesses one of the highest quality retail portfolios in Australia with strong brands including Bunnings, Kmart and Officeworks. The company is run by a highly regarded management team and the balance sheet is healthy. We believe WES’s businesses, which have a strong focus on value, remain well-placed for growth despite softening macro-economic conditions.

CSL Limited (ASX:CSL)

A key portfolio holding and key sector pick, we believe CSL is poised to break-out this year, a COVID exit trade, offering double-digit recovery in earnings growth as plasma collections increase, new products get approved and influenza vaccine uptake increases around ongoing concerns about respiratory viruses, with shares offering good value trading around its long-term forward multiple of ~30x.

Treasury Wine Estates (ASX:TWE)

TWE owns much loved iconic wine brands, the jewel in the crown being Penfolds. We rate its management team highly. The foundations are now in place for TWE to deliver strong earnings growth from 2H22 over the next few years. Trading at a material discount to our valuation and other luxury brand owners, TWE is a key pick for us.

ResMed Inc (ASX:RMD)

While we expect the next few quarters to be volatile as COVID-related demand for ventilators continues to slow and core sleep apnoea volumes gradually lift, nothing changes our medium/longer term view that the company remains well-placed as it builds a unique, patient-centric, connected-care digital platform that addresses the main pinch points across the healthcare value chain.

Santos (ASX:STO)

The resilience of STO's growth profile and diversified earnings base see it well placed to outperform against the backdrop of a broader sector recovery. While pre-FEED, we see Dorado as likely to provide attractive growth for STO, while its recent acquisition increasing its stake in Darwin LNG has increased our confidence in Barossa's development. PNG growth meanwhile remains a riskier proposition, with the government adamant it will keep a larger share of economic rents while operator Exxon has significantly deferred growth plans across its global portfolio.

Macquarie Group (ASX:MQG)

We continue to like MQG’s exposure to long-term structural growth areas such as infrastructure and renewables. The company also stands to benefit from recent market volatility through its trading businesses, while it continues to gain market share in Australian mortgages.

Mineral Resources (ASX:MIN)

MIN is a founder-led business and top tier miner and crusher that has grown consistently despite barely issuing a share over the last decade. Also helping our investment view is that MIN’s diversification leaves it far more capable of tolerating volatility in lithium markets than its peers in the sector. We see MIN’s lithium / iron ore market exposures as an ideal combination to benefit from the China re-opening increase in demand during 1H’CY23. We also see MIN as well placed to grow into its valuation, even if we see unexpected metal price volatility, given the magnitude of organic growth in the pipeline.

QBE Insurance Group (ASX:QBE)

With strong rate increases still flowing through QBE's insurance book, and further cost-out benefits to come, we expect QBE's earnings profile to improve strongly over the next few years. The stock also has a robust balance sheet and remains relatively inexpensive overall trading on 9x FY23F PE.

Transurban (ASX:TCL)

TCL owns a pure play portfolio of toll road concession assets located in Melbourne, Sydney, Brisbane, and North America. This provides exposure to regional population and employment growth and urbanisation. Given very high EBITDA margins, earnings are driven by traffic growth (with recovery from COVID) and toll escalation (roughly 70% by at least CPI and approximately one-quarter at a fixed c.4.25% pa). We think TCL will continue to be attractive to investors given its market cap weighting (important for passive index tracking flows), the high quality of its assets, management team, balance sheet, and growth prospects.

Telstra (ASX:TLS)

After a major turnaround, TLS has emerged in good shape with strong earnings momentum and a strong balance sheet. In late CY22 shareholders vote on Telstra's legal restructure, which opens the door for value to be released. TLS currently trades on ~7x EV/EBITDA. However some of TLS’s high quality long life assets like InfraCo are worth substantially more, in our view. We don’t think this is in the price so see it as value generating for TLS shareholders. This, free option, combined with likely reputational damage to its closest peer, following a major cybersecurity incident, means TLS looks well placed for the year ahead.

Qantas Airways (ASX:QAN)

QAN is now our preferred pick out of our travel stocks under coverage given it has the most near-term earnings momentum. Looking across travel companies globally, airlines are now in the sweet spot given demand is massively exceeding supply. QAN is trading at a material discount compared to pre-COVID multiples, despite having structurally higher earnings, a much stronger balance sheet, a better domestic market position, a higher returning International business and more diversification (stronger Loyalty/Freight earnings). The strong pent-up demand to travel post-COVID should result in a healthy demand environment for some time, underpinning further EBITDA growth over FY24/25. QAN’s balance sheet strength positions it extremely well for its upcoming EBIT-accretive fleet reinvestment and further capital management initiatives (recently announced a A$500m on-market share buyback at its 1H23 result). There is also likely upside to our forecasts and consensus if QAN achieves its FY24 strategic targets.

Aristocrat Leisure (ASX:ALL)

We have three key reasons for being positive on ALL. They are: (1) long-term organic growth potential. ALL is better capitalised than many of its competitors and has what we regard as a strong platform to continue investment in design and development in both its land-based gaming and digital businesses; (2) strong cash conversion and ROCE. ALL is a capital-light business despite its ongoing investment in Gaming Operations capex and working capital. It has a high level of cash conversion and ROCE; and (3) strong platform for investment. ALL has funding capacity for organic and inorganic investment in online RMG, even after the recent buyback. Its current available liquidity is $3.8bn.

South32 (ASX:S32)

S32 has transformed its portfolio by divesting South African thermal coal and acquiring an interest in Chile copper, substantially boosting group earnings quality, as well as S32's risk and ESG profile. Unlike its peers amongst ASX-listed large-cap miners, S32 is not exposed to iron ore. Instead offering a highly diversified portfolio of base metals and metallurgical coal (with most of these metals enjoying solid price strength). We see attractive long-term value potential in S32 from de-risking of its growth portfolio, the potential for further portfolio changes, and an earnings-linked dividend policy.

Seek (ASX:SEK)

Of the classifieds players, we continue to see SEEK as the one with the most relative upside, a view that’s based on the sustained listings growth we’ve seen over the period. The tailwinds that have driven elevated job ads (~210k currently, broadly flat on the robust pcp) and strong FY22 result appear to still remain in place, i.e. subdued migration, candidate scarcity and the drive for greater employee flexibility. With businesses looking to grow headcount in the coming months and job mobility at historically high levels according to the RBA, we see these favourable operating conditions driving increased reliance on SEEK’s products.

Xero (ASX:XRO)

XRO is a high quality cash generative business with impressive customer advocacy and duration. Over the last 12 months rising interest rates and competition have made things harder for Xero. However, we see the current short-term weakness as a rare opportunity to buy a high quality global growth company at a discount to the life time value of its current customer base.

Morgans clients can download our full list of Best Ideas, including our mid-cap and small-cap key stock picks.

Top Investment Opportunities for April 2023

Amidst global turmoil and economic unpredictability, savvy investors recognise the potential for strategic opportunities. As market volatility persists, there's a shift in focus towards undervalued assets with strong fundamentals. In the upcoming month of April 2023, we unveil three top-tier investment prospects that have weathered recent market fluctuations. Explore the resilience of esteemed global franchises including Macquarie Group, ResMed, and tech giant Microsoft, all presenting compelling value propositions after experiencing double-digit share price declines. Discover why these high-quality businesses stand out amidst the current economic landscape.

Macquarie Group

Macquarie Group (MQG), an Australian success story, showcases its prowess in international expansion, with a significant 72% of its total operating income generated from overseas markets. The company's growth strategy is characterised by several key elements: operating in niche areas where it holds a competitive edge, leveraging its unique expertise to expand into related sectors gradually, and strategically augmenting organic growth through well-timed acquisitions to bolster its scale and presence in the market.

What remains true of Macquarie Group is that management has done what we see as an excellent job positioning the company with broad exposure to long-term structural growth areas like Infrastructure, Green Energy transition, and Private Equity. Macquarie Group’s ability to build and maintain a sustained competitive advantage over time is highlighted by the fact that it has delivered an impressive average 14% return on equity over the last 16 years.

Finally, a key takeaway from Macquarie Group’s recent US investor tour was that even in areas where it has a strong market position, the company still believes it has significant headroom to grow. An example of this is in the US gas market, where despite Macquarie Group being the number one US gas marketer, the company still only has around 10% market share. In our view, Macquarie Group is a quality global business, with a proliferation of avenues for ongoing growth.

Microsoft Corporation

Microsoft Corporation (MSFT) dominates as the provider of critical technology that improves business productivity worldwide. Its Windows operating system granted Microsoft dominance in the personal computer market, and the company has continuously leveraged this into numerous high-quality business-critical earning streams.

Microsoft, renowned for its flagship product Microsoft Office, embraced by approximately 90% of businesses globally, alongside the ubiquitous Microsoft Outlook, often employed for email communication. The company operates across distinct business segments, comprising Productivity and Business Processes, encompassing Office, Teams, and LinkedIn; the Intelligent Cloud, synonymous with Cloud Computing, the Internet of Things, and Microsoft Azure; and Personal Computing, offering diverse services ranging from internet search facilitated by ChatGPT, to the provision of laptops, Virtual Reality devices, and Xbox electronic gaming consoles.

Microsoft also operates arguably the largest cybersecurity business in the world, which seems unlikely to be anything other than a major growth area. The bulk of Microsoft's revenue is recurring and sold through channel partners.

Microsoft has defensive earning streams, numerous growth projects, and is a cash-generating machine. Its return on equity over the last 15 years has averaged 15%. Microsoft's dividend has grown every year over the last decade, and its free cashflow is largely returned to shareholders via dividends and on-market share buybacks.

Despite expectations of a global economic slowdown, the market forecasts Microsoft's earnings and dividends to grow in the coming years. Microsoft's CEO Satya Nadella said it best when he suggested that Microsoft is set to "participate in the secular trend where digital spend as a percentage of GDP is only going to increase."

He also indicated that Microsoft aspires "to lead in the AI (artificial intelligence) era, knowing that maximum enterprise value gets created during platform shifts."

ResMed

ResMed (RMD) holds a dominant position in the global market for Sleep and Respiratory Care, which makes up around 90% of its net revenue. It is developing innovative products designed to enable clinicians to better manage patients and improve patients’ long-term adherence to therapy, with sales in more than 140 countries worldwide.

This market remains globally underpenetrated and poised for continued growth, fuelled by geographic expansion and increasing awareness of respiratory disorders.

Uniquely, the company has complemented this segment with cloud-based software health applications and devices targeting the fragmented and underserved out-of-hospital care market.

These products and health technology solutions are designed to provide ‘connected care’, a key value proposition where we see significant opportunity to address sector ‘pinch-points’ (in other words, improving patient outcomes, helping physicians and providers better manage chronic disease, and reducing overall healthcare system costs).

In addition, a combination of continued product development, product and technology acquisitions, and innovation further strengthens ResMed’s competitive advantage and should provide a strong platform for sustainable growth.

While global supply chain disruptions have seen shares pull back around 20% from their COVID-inflated highs, we view easing logistic concerns and a benign competitive environment as lending further support to this structural growth story. With a strong track record of high returns, strong cash generation, and one of the best balance sheets in the market, ResMed is a quality global franchise and a key portfolio holding.

Morgans clients receive exclusive insights such as access to the latest stock and sector coverage featured in the Month Ahead. Contact us today to begin your journey with Morgans.

• Market risks have escalated and serve as a reminder that ‘accidents’ do happen when central banks hike interest rates aggressively. Portfolios need a new investment playbook and be agile to change in this new market regime of stubborn inflation and elevated volatility.
• This quarter we take a cautious tilt: overweight cash, underweight developed market (DM) stocks and neutral fixed interest/Australian equities. But we are ready to seize opportunities as macro damage gets priced in.

The consequences of rising interest rates

Cracks in the financial system appear as the lagged effects from a rapid succession of interest rates expose some vulnerabilities. However, unlike previous episodes of financial distress, this time, regulators appear to be on the front foot responding decisively with emergency liquidity to prevent broader contagion.

These measures give the troubled global banking system some breathing space, but it’s too early to say if there won’t be more casualties.

There are reasons for cautious optimism and a major banking crisis on par with the Global Financial Crisis (GFC) can be avoided. Unlike in 2007, there does not appear to be large credit losses hidden in opaque instruments on bank balance sheets. Post-GFC reforms mean that large global banks have more robust capital and liquidity buffers.

Risk presents opportunity, and we see a path for investors to succeed in the new regime. Investing in the energy transition, Australian/Emerging Market equities with a value/quality bias and investment grade credit offer the best risk/return profile for a market fretting about what is to come.

Inflation battle likely to take a lower priority for now

With central banks committed to restoring financial stability, the battle to contain inflation is likely to take a back seat in the short term. However, the focus could return just as quickly if regulators and central banks manage to restore confidence.

This has implications for long-duration assets which have seen some valuation relief since the onset of the banking troubles in March. Strategically speaking, we think the market could prove to be short-sighted in ignoring the persistence of inflation.

Nonetheless, in a slowing economic backdrop that sees growth fall and central banks turn less hawkish, a quality oriented fixed income portfolio could play an important role for returns and diversification. This will be especially true if stock/bond correlations turn negative again.

Seeking shelter in emerging economies

Markets have focused on the mayhem in the developed world. Under the radar has been confirmation that the economic restart in China from Covid restrictions is encouraging.

In addition, China’s monetary policy is supportive as the country has low inflation compared with DM. This should benefit Emerging Market (EM) assets. As a result, we keep our relative preference for EM over DM stocks (US/Europe).

Key changes to our asset allocation settings

This quarter we take a cautious tilt: overweight cash, underweight developed market (DM) equities and neutral Australian equities. This is because we don’t believe the market has fully discounted the risk to earnings from a global slowdown.

We take a more constructive view on Australian equities supported by higher commodity prices and strong employment conditions which should see the Australian equity market outperform global peers.

Figure 1: Morgans recommended asset allocation settings

Morgans clients receive access to detailed market analysis and insights, provided by our award-winning research team. Begin your journey with Morgans today to view the exclusive coverage.

How much superannuation is enough? It’s a common question and one many Australians ask when thinking about the type of retirement they want to plan for.

Labor’s proposed “Better Targeted Superannuation Concessions”

The Federal Government recently posed this question to the Australian public, throwing out a figure of $3 million. The Government is concerned there are a number of individuals who have superannuation balances well over this threshold who are receiving attractive tax concessions. Hence their proposal to introduce a tax on earnings where fund balances exceed $3 million.

Treasury has released a fact sheet on how the tax on earnings may apply, however, we are still yet to see the consultation paper which will then lead to legislation being drafted.

Here’s what we know so far

1. Legislation is due to take effect from 1 July 2025.
2. If a person’s Total Superannuation Balance is over the $3 million threshold at the end of the financial year, tax on the excess earnings will apply for that financial year.
3. Tax will be calculated based on the difference between the person’s Total Superannuation Balance (TSB) at the end of the financial year and the start of that financial year.
4. Tax will then apply to the proportion of earnings corresponding to fund balances above $3 million.
5. Amounts drawn down/withdrawals will be added back to the formula. This includes pension payments where the person has a pension account.
6. Concessional contributions less 15% contributions tax will be subtracted from the formula.
7. Negative earnings for the financial year can be carried forward into future years to offset positive earnings, if the fund is still operating.
8. A person who has multiple super funds will be able to elect the fund or funds from which the tax is paid.
9. A person will have the choice of paying the tax from personal funds or from their super fund.
10. It is the intent of the Government to ensure commensurate treatment for defined benefit interests. Further consultation in this regard is still being conducted.

What are our concerns?

There appears to be no allowance for regulated pension payments if a person has a retirement pension. Based on the examples provided in the fact sheet, pension draw downs and lump sum withdrawals are treated the same and added back to total super balance. The law requires pension payments to meet minimum pension requirements so we feel adding pension payments back is unfair and should be addressed.

Unrealised capital gains are also included in the total super balance calculations. This has been a very contentious issue since the fact sheet was released. Whether the government listens to feedback remains to be seen.

The $3 million cap will not be indexed so this law will capture far more people in the future than stated. Interestingly, if you consider the effective date is in 2 years’ time, the actual present value of the cap in today’s dollars is around $2.6 million depending on the discount rate you use.

It really is important for individuals to not make any rash decisions at this stage whilst detail is scant. The consultation period may bring some changes or different rules within the proposed policy so let’s wait and see how this goes before contemplating any action.

Watch the Video