Insights – Summer 2014

insights summer 2014

In 2009, when former Prime Minister Kevin Rudd said he was a supporter of the idea of a ‘Big Australia’, the topic polarised the nation. The logic behind the argument of an increased population, from around 22 million in 2010 to 36 million in 2050, was that it would be good for homeland security, good for business and good for the economy thanks to a larger market and more players.

The arguments against a population boost, apart from the politically unpopular idea of an increase in rates of immigration to Australia, highlighted the fact that our infrastructure – water supply, in particular, but also housing and other necessities – would need massive investment before a larger population would be sustainable.

By 2050, Australia’s population will increase by as much as 14 million. What does this mean for our economy and potential investment opportunities?

After developing a new modelling system, researchers at the Queensland Centre for Population Research (The University of Queensland) announced in 2011 that, by 2050, Australia’s population will increase by as much as 14 million whether our infrastructure is ready or not.1

So what does this mean for our economy as a nation and for our investments as individuals? Is a bigger population really better for business? And what challenges and opportunities does it present?

Future tense

Experts believe that if our population stalls, so will our economy. But at the same time, the challenge involved in housing and feeding an extra 14 million is an extraordinary and expensive one. All of the extra people filling jobs and paying tax though, will certainly make a positive difference in terms of helping to cover the rising health and pension costs caused by that other great population threat – ageing.

Then Prime Minister Rudd argued that our rising population was a good thing, especially when compared with issues being faced by nations with declining populations such as Ukraine, Hungary, Russia and Japan. And declining or stagnant population rates have long been recognised by experts as a serious problem.

In his maiden speech to parliament, Malcolm Turnbull explained the issue concisely when he said, “Societies such as those in Italy, Spain, Greece, Russia and many others in Europe with birth rates of 1.3 or lower are not ageing – they are dying. Unless fertility rates dramatically improve, societies with birth rates substantially below replacement level will either dwindle into an insignificant fraction of their current numbers or be swamped by larger and larger waves of immigration.”

Consider the example of the Republic of Moldova which, in the five-year period leading up to 2011, suffered an average annual population decrease of 1.1%. A TIME magazine report titled ‘Nobody home: The countries where population is on the decline’ said “vicious combinations of low birth rates, high death rates, low immigration and rising emigration” had caused immeasurable damage to the Eastern European nation.2

The biggest problem, the report says, is the number of people that have left the country, including one-third of the economically active population and a whopping 60% of 20 to 39 year olds. They have gone to Russia, the USA and Western Europe seeking greater opportunity. In doing so they created crippling skills shortages in their country, the government of which is now struggling with the added problem of a top-heavy, aged population.

Stagnant or declining populations introduce a series of major problems that are difficult to address. Political intervention, such as Australia’s Baby Bonus, to artificially increase birth rates can be effective when the threat is at its earliest stages. But once the decline gathers pace it can be all but impossible to stop. It’s no wonder many politicians support the idea of constant, but not rampant, growth.

So a lack of population growth has a negative side. But as mentioned, fortunately current studies show Australia is heading in the opposite direction. What challenges and opportunities will this create?

Investment, lifestyle and tax revenue

An area to continue to watch for the purposes of investment is that of infrastructure. Water, gas, electricity, roads and housing, and their related industries, are all likely to experience increasing demand over the coming decades as the population increases. An increased population is also good for the retail industry.

Size does indeed matter. For the growth of the economy, for successful business and for quality of life in Australia, population growth is a vital ingredient.

A report from the Reserve Bank of Australia titled Demography and Growth said “Demographic change can have profound effects on a country’s economy and public finances. These effects generally manifest themselves over multi-decade periods, but the deterioration in many countries’ public finances, and concerns about the underlying growth potential, have recently brought demographic issues to the fore.”3

The growth of an economy’s annual output, the report says, is equal to the sum of growth in labour input and labour productivity growth. In other words, growth results from a combination of more workers and better ways of working. An increase in the number of workers can come from population growth or from growth in the working-age share of the population. With our rapidly ageing population, Australia is not likely to organically achieve growth in the working age share of our current population. In fact, it will be quite the opposite. But population growth is a likely ally for our economy.

A report from the Australian Bureau of Statistics, called Does size matter? – Population Projections 20 and 50 years from 2013, says the proportion of today’s population over the age of 65 is approximately 14%.4 If we continue our current population growth pattern then that level of over 65s will rise to 19% by 2033 and 23% by 2063. In the same period the amount of population within working age (15 to 64) would drop from 67% to 61% – meaning 65 dependants for every 100 workers as opposed to today’s 50 dependants for every 100 workers – a set-back to the public purse.

But if we grew net overseas migration, which is already the major driver of Australian population growth (in 2013 it contributed 60% of population growth, the report says), then by 2063 there would be 63 dependants for every 100 workers, two less than if we maintain current trends. With zero net overseas migration (the same number of people leaving Australia as arriving) the picture is more severe, with the population beginning to decline in 2041 and, by 2063, 29% of the population being over 65, forcing 79 dependants onto every 100 workers.

Size does indeed matter. For the growth of the economy, for successful business and for quality of life in Australia, population growth is a vital ingredient. Along the way it may provide opportunities for the investor in various related industries.

Key takeaways

  • By 2050, Australia’s population will increase by up to 14 million.
  • Population growth is a vital ingredient of business and economic growth.
  • Increasing the number of people in the working age population will reduce the burden on each taxpayer caused by an ageing population.
  • Potential investment opportunities in infrastructure such as water, gas, electricity, roads, housing and related industries.

1 Bell, M., T. Wilson, and Charles-Edwards, E. (2011). ‘Australia’s population future: probabilistic forecasts incorporating expert judgement’. Geographical Research 49(3): 261–275.

2 ‘Nobody home: The countries where population is on the decline’, TIME magazine, October 2011.

3 ‘Demography and Growth’, Reserve Bank of Australia Bulletin, June Quarter 2010.

4 ‘Does size matter? – Population Projections 20 and 50 years from 2013’, Australian Bureau of Statistics, August 2014.


Few gifts are as valuable as an education. But if your intention is to pay for the schooling of your grandchildren or great‑grandchildren, you should be aware of the pros and cons of the various options.

One of the most enjoyable aspects of retirement is the fact that you have time to be a part of the life of your grandkids and/or great-grandkids. Passing on knowledge, helping them achieve goals and simply being there when they need you is a highly rewarding experience that is difficult to match. But some retirees wish to take their legacy further by investing in a child’s education. How then do you best go about making this investment? There are many choices, each with its benefits and drawbacks.

Gifting and social security

Gifting may impact your eligibility for social security so you need to be across the rules. Right now you can gift up to $10,000 annually, up to a maximum of $30,000 over five consecutive years, without your pension being affected. However, there are plenty of private schools whose fees will not be covered by such an amount.

Of course, you are able to gift a greater sum, but anything over $10,000 per year or $30,000 every five years will still be counted for five years under the assets test, and deemed for five years under the income test when calculating your social security pension.

Tax implications

If the money is held in the child’s name or held by someone else solely to benefit the child then the income and interest from the fund, in whatever form it might take, is then generally taxable to the child (after the first $416, which is tax-free) and can be taxed at up to 68%. This extremely high tax rate is to dissuade parents and others from sheltering income from their own tax rates by holding assets in their children’s names.


A trust is an arrangement where one party (eg a grandparent) holds assets for another party (eg grandchildren). This can include formal arrangements such as a family trust, or informal arrangements where a grandparent legally owns and invests assets solely for the benefit of their grandchildren.

One benefit of a formal trust is that you can create specific instructions as to how it is managed and for what purposes its assets can be used, including specifying the timing of the trust’s outgoings as the grandchildren go through various stages of school and university. The disadvantages include the additional cost to set up and maintain such an arrangement.

An amount saved for education may not justify the formation of a formal trust, but instead you may consider holding funds for the child’s benefit in an informal trust arrangement, where the assets are legally owned in your name or the child’s parents’ names.

The tax treatment of trust income can be complex and will depend on the type of trust and whether the assets are being held solely to benefit the child.

Insurance bonds

Insurance bonds, essentially packaged investment vehicles that are offered by insurance companies, are often invested across a range of managed funds that suit various risk profiles.

Money is usually invested for a 10 year period, meaning some forward planning is required. But after that period any income and capital gain typically does not need to be declared and tax on investment earnings is paid, at a rate of 30%, within the bond by the insurance company.

A lump sum is invested up front and further contributions can be made, but tax penalties can apply where contributions during a year exceed 125% of the previous year’s investment. Depending on your specific situation, you may or may not be able to access the funds tax-free prior to their 10 year maturity.

Education funds

Education funds or Education Savings Plans (ESPs) are similar to insurance bonds but with stricter rules. ESPs are designed for saving towards tertiary education, as the earnings on investments can be used to pay education expenses of the nominated child. These funds have been granted special tax status by the Federal Government as they encourage education, but the flipside is that they are more restrictive and offer less options and tighter guidelines for use of the funds.

Earnings used for education expenses are taxed as income for the student (income up to $20,542 is usually tax-free for students over 18). However, high tax rates apply to children under 18 where education expenses, along with certain other assessable income of the student, exceeds $416.

Otherwise they follow similar rules to insurance bonds, including an original lump sum, additions each year of no more than 125% of the previous year and a maturity period. But do be careful with the small print.

There are numerous options when giving the gift of education, just be sure that they match your own specific circumstances. If they do, then it could be the greatest gift you will ever give.

Next steps

  • Go over your options with us – there is no one-sizefits-all approach.
  • Discuss the options with the parent of the child. It is important to ensure your generosity will not create personal or financial (especially tax) issues for them.
  • As with any other investment, re-visit it regularly and discuss its performance with us.


An economic update from the Economic and Market Research team at Colonial First State Global Asset Management

The big three

What have been the major economic events of the past few months?

1 United States

The Federal Open Market Committee of the US Federal Reserve (the Fed) completed the ‘tapering’ of its Quantitative Easing (QE3) bond purchase program at its 28–29 October 2014 meeting. The Fed tapered by a final $US15 billion, completing the tapering which started at $US85 billion in December 2013. As a result, the QE3 program has come to an end.

The Fed noted that since the QE3 program started in September 2012, there has been “substantial improvement in the outlook for the labor market” and that there is “sufficient underlying strength in the broader economy to support ongoing progress toward maximum employment in the context of price stability.” The Fed also highlighted some improved confidence in the US economic recovery with the economy “expanding at a moderate pace”.

The US labour market also continues to improve with 214,000 jobs added in October and the unemployment rate falling to 5.8%, the lowest since July 2008.

2 United Kingdom and Europe

The European Central Bank left its key interest rates unchanged at 0.05% at its 2 October 2014 meeting and the inflation estimate for October was recorded at 0.4% per year, compared to 0.3% per year in September, which was a five-year low.

In the UK, the Bank of England (BoE) left policy unchanged at 0.5% at its 9 October 2014 meeting, as expected. However, it was highlighted that the majority of the Board were concerned over a premature tightening to the Bank Rate given low inflation and wages and possible shocks to the UK economy. As a result, the timing of the first rate hike has been pushed further out by financial markets. It remains a possibility that the BoE could lift the official cash rate in March or April 2015, dependent on the data and ahead of the general election in May.

3 Asia

In China, GDP growth of 7.3% was recorded for the 12 months to 30 September 2014, which was slightly stronger than expected. Meanwhile in Japan, the Bank of Japan’s (BoJ) policy board convened on 31 October 2014 and decided to expand its qualitative and quantitative easing program. The BoJ will now expand its monetary base at an annual rate of Y80 trillion, which is an increase of about Y10–20 trillion on the previous target.


The Reserve Bank of Australia (RBA) again held the cash rate steady at 2.5% at its 7 October 2014 meeting. The RBA has now left interest rates on hold at 2.5% since August 2013 and most commentators are expecting this figure to remain unchanged until the second-half of 2015.

The headline rate of inflation rose by 0.5% per quarter, taking the annual pace from 3.0% for the 12 months to 30 June 2014 to 2.3% for the 12 months to September 2014. Inflation, therefore, remains well within the RBA’s 2% to 3% target range. Also, the unemployment rate rose to 6.2% from 6.1% for October 2014, which is the highest unemployment rate since March 2003.

Australian shares performed well in October, with the S&P/ASX 200 Accumulation Index adding 4.4% during the month. The sharemarket was led higher by financial stocks, while the health care and telecom sectors also performed relatively well. Finally, despite some volatility in October, the Australian dollar rose 0.6% to finish the month at $US0.8798.


We are always available to discuss any questions or concerns you may have.


This document contains general advice. It does not take account of your individual objectives, financial situation or needs. You should consider talking to a financial adviser before making a financial decision.

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