The year began on an optimistic note, as we finally began to emerge from Covid restrictions. Then Russia threw a curve ball that reverberated around the world and suddenly people who had never given a thought to the Reserve Bank were waiting with bated breath for its monthly interest rate announcements.
2022 was the year of rising interest rates to combat surging inflation, war in Ukraine and recession fears. These factors combined to create cost-of-living pressures for households and a downturn in share and bond markets.
Super funds also suffered their first calendar year loss since 2011. Ratings group Chant West estimates the median growth fund fell about 4 per cent last year.i While this is bad news for members, it’s worth remembering that super is a long-term investment, and that the median growth fund is still 11 per cent above its pre-Covid high of January 2020.ii
Australia key indices December
Share markets (% change) Year to December
2021
2022
2021
2022
Economic growth
4.6%
*5.9%
Australia All Ordinaries
13.6%
-7.2%
RBA cash rate
0.1%
3.1%
US S&P 500
27.0%
-19.3%
Inflation (annual rate)
3.5%
^7.3%
Euro Stoxx 50
20.9%
-11.7%
Unemployment
4.2%
#3.45%
Shanghai Composite
4.8%
-15.1%
Consumer confidence
104.3
82.5
Japan Nikkei 225
4.9%
-10.9%
*Year to September, ^September quarter # November Sources: RBA, ABS, Westpac Melbourne Institute, Trading Economics
The big picture
Even though investors have come to expect unpredictable markets, nobody could have predicted what unfolded in 2022.
Russia’s invasion of Ukraine in February triggered a series of unfortunate events for the global economy and investment markets. It disrupted energy and food supplies, pushing up prices and inflation.
Inflation sits around 7 to 11 per cent in most advanced countries, with Australia and the US at the low end of that range and the Euro area at the higher end.iii
As a result, central banks began aggressively lifting interest rates to dampen demand and prevent a price and wages spiral.
Rising inflation and interest rates
The Reserve Bank of Australia (RBA) lifted rates eight times, taking the target cash rate from 0.1 per cent in May to 3.1 per cent in December.iv This quickly flowed through to mortgage interest rates, putting a dampener on consumer sentiment.
Australia remains in a better position than most, with unemployment below 3.5 per cent and wages growth of 3.1 per cent running well behind inflation.v
Despite the geopolitical challenges, Australia’s economic growth increased to 5.9% in the September quartervi before contracting to an estimated 3 per cent by year’s end, in line with most of our trading partners.vii
Volatile share markets
Share investors endured a nail-biting year, as markets wrestled with rising interest rates, inflation, and the war in Ukraine.
Global shares plunged in October on interest rate and recession anxiety only to snap back late in the year on hopes that interest rates may be near their peak. The US market led the way down, finishing 19 per cent lower, due to its exposure to high-tech stocks and the Federal Reserve’s aggressive interest rate hikes. Chinese shares (down 15 per cent) also had a tough time as strict Covid lockdowns shut down much of its economy.
Australian shares performed well by comparison, down just 7 per cent, thanks to strong commodity prices and the Reserve Bank’s relatively moderate interest rate hikes.
Energy and utilities stocks were strong due to the impact of the war in Ukraine on oil and gas prices. On the flip side, the worst performers were information technology, real estate and consumer discretionary stocks as consumers reacted to cost-of-living pressures.
Property slowdown
After peaking in May, national home values fell sharply as the Reserve Bank began ratcheting up interest rates. The CoreLogic home value index fell 5.3% in 2022, the first calendar year decline since the global financial crisis of 2008.
As always though, price movements were not uniform. Sydney (-12 per cent), Melbourne (-8 per cent) and prestige capital city properties generally led the downturn. Bucking the trend, prices continued to edge higher in Adelaide (up 10 per cent), Perth (3.6 per cent), Darwin (4.3 per cent) and many regional areas.
Rental returns outpaced home prices, as high interest rates, demographic shifts and low vacancy rates pushed rents up 10.2 per cent in 2022. Gross yields recovered to pre-Covid levels, rising to 3.78 per cent in December on a combination of strong rental growth and falling housing values. However, it’s likely net yields fell as mortgage repayments increased.
Despite the downturn, CoreLogic reports housing values generally remain above pre-COVID levels. At the end of December, capital cities combined were still 11.7 per cent above their March 2020 levels, while regional markets were a massive 32.2 per cent higher.
Looking ahead
While the outlook for 2023 remains challenging, there are signs that inflation may have peaked and that central banks are nearing the end of their rate hikes.
Even so, the risk of recession is still high although less so in Australia where the RBA has been less aggressive in applying the interest rate brakes.
Issues for investors to watch out for in the year ahead are:
A protracted conflict in Ukraine
A new COVID wave in China which could further disrupt supply chains across the Australian economy, and
Steeper than expected falls in Australian housing prices which could lead to forced sales and dampen consumer spending.
Welcome to our Spring newsletter. September means it’s football finals season and hopefully the beginning of warmer weather despite the recent late winter chill.
In August, the focus was on US Federal Reserve chair Jerome Powell’s speech at the annual Jackson Hole business gathering on August 26, and he was blunt. To hose down talk of interest rate cuts in 2023, he said the Fed was focused on bringing US inflation down to 2% (from 8.5% now), even at the risk of recession. He said this will “take some time”, will likely require a “sustained period of below trend economic growth”, and households should expect “some pain” in the months ahead. The S&P500 share index promptly fell 3.4% and bond yields rose. Economists expect the US central bank will continue lifting rates each month for the remainder of 2022.
In Australia, economic conditions are less gloomy. Australia’s trade surplus was a record $136.4 billion in 2022-23. Unemployment fell to 3.4% in July while wages growth rose to an annual rate of 2.6% in the year to June, the strongest in 8 years but well below inflation. The ANZ-Roy Morgan consumer confidence index rose slightly in September to a still depressed 85.0 points while the NAB business confidence index jumped to +6.9 points in July, well above the long-term average of +5.4 points. Half-way through the June half-year reporting season, CommSec reports ASX200 company profits increased 56% in aggregate while dividends are 6% lower on a year earlier.
The Aussie dollar fell more than one cent over the month to close around US68.5c. Aussie shares bucked the global trend, finishing steady over the month.
How much super do I need to retire?
Working out how much you need to save for retirement is a question that keeps many pre-retirees awake at night. Recent market volatility and fluctuating superannuation balances have only added to the uncertainty.
So it’s timely that new research shows you may need less than you fear. For most people, it will certainly be less than the figure of $1 million or more that is often bandied around.
For most people, the amount you need to save will depend on how much you wish to spend in retirement to maintain your current standard of living. When Super Consumers Australia (SCA) recently set about designing retirement savings targets they started by looking at what pre-retirees aged 55 to 59 actually spend now.
Retirement savings targets
SCA estimated retirement savings targets for three levels of spending – low, medium and high – for recently retired singles and couples aged 65 to 69.
Significantly, only so-called high spending couples who want to spend at least $75,000 a year would need to save more than $1 million. A couple hoping to spend a medium-level $56,000 a year would need to save $352,000. High spending singles would need $743,000 to cover spending of $51,000 a year, and $258,000 for medium annual spending of $38,000.i
While these savings targets are based on what people actually spend, there is a buffer built in to provide confidence that your savings can weather periods of market volatility and won’t run out before you reach age 90.
They assume you own your home outright and will be eligible for the Age Pension, which is reflected in the relatively low savings targets for all but wealthier retirees.*
Retirement planning rules of thumb
The SCA research is the latest attempt at a retirement planning ‘rule of thumb’. Rules of thumb are popular shortcuts that give a best estimate of what tends to work for most people, based on practical experience and population averages.
These tend to fall into two camps:
A target replacement rate for retirement income. This approach assumes most people want to continue the standard of living they are used to, so it takes pre-retirement income as a starting point. A target replacement range of 65-75 per cent of pre-retirement income is generally deemed appropriate for most Australians.ii
Budget standards. This approach estimates the cost of a basket of goods and services likely to provide a given standard of living in retirement. The best-known example in Australia is the Association of Superannuation Funds of Australia (ASFA) Retirement Standard which provides ‘modest’ and ‘comfortable’ budget estimates.iii
SCA sits somewhere between the two, offering three levels of spending to ASFA’s two, based on pre-retirement spending rather than a basket of goods. Interestingly, the results are similar with ASFAs ‘comfortable’ budget falling between SCA’s medium and high targets.
ASFA estimates a single retiree will need to save $545,000 to live comfortably on annual income of $46,494 a year, while retired couples will need $640,000 to generate annual income of $65,445. This also assumes you are a homeowner and will be eligible for the Age Pension.
Limitations of shortcuts
The big unknown is how long you will live. If you’re healthy and have good genes, you might expect to live well into your 90s which may require a bigger nest egg. Luckily, it’s never too late to give your super a boost. You could:
Salary sacrifice some of your pre-tax income or make a personal super contribution and claim a tax deduction but stay within the annual concessional contributions cap of $27,500.
Make an after-tax super contribution of up to the annual limit of $110,000, or up to $330,000 using the bring-forward rule.
Downsize your home and put up to $300,000 of the proceeds into your super fund. Thanks to new rules that came into force on July 1, you may be able to add to your super up to age 75 even if you’re no longer working.
While retirement planning rules of thumb are a useful starting point, they are no substitute for a personal plan. If you would like to discuss your retirement income strategy, give us a call. *Assumptions also include average annual inflation of 2.5% in future, which is the average rate over the past 20 years, and average annual returns net of fees and taxes of 5.6% in retirement phase and 5% in accumulation phase.
With the tax regulator taking a more aggressive approach to tax debts and reviewing work from home deduction rules, tax issues could become a higher priority in 2022-23.
Here’s a roundup of some of the latest developments in the world of tax.
Consultation on working from home deductions
Taxpayers could face the prospect of new rules when it comes to claiming working from home deductions after the ATO announced it was undertaking a targeted consultation. Now the temporary shortcut method for working from home deductions has ended (available 1 March 2020 to 30 June 2022), the ATO is currently refreshing its approach to the traditional fixed rate method of calculating work from home deductions. The regulator is consulting tax practitioner representatives and expects discussions to be completed in October 2022, with any new rules for the current financial year to be announced after this.
Offsetting of tax debts resumes
After taking a lenient approach during the pandemic, the tax man has begun chasing outstanding tax debts by sending taxpayers letters reminding them about existing debts placed on hold. During the 2022-23 financial year, the ATO will recommence offsetting tax refunds or credits to pay off a taxpayer’s existing tax debts. In some cases, tax credits will also be used to pay off debts owed to other government agencies such as Centrelink.
JobMaker Hiring Credit open
The seventh claim period for JobMaker Hiring Credit payments is now open and will end on 31 October 2022. The scheme allows businesses to claim the credit for up to a year for each eligible employee hired between 7 October 2020 and 6 October 2021. Eligible employers can nominate additional eligible employees through their STP-enabled software and claim using ATO Online Services or their accountant.
ATO app for sole traders
The ATO is encouraging sole traders to download and use the ATO app for a more personalised experience when viewing their tax lodgements and payment due dates. The app also allows sole traders to check the progress of their tax return, view their income tax and activity statement accounts, access transactions and payment plan details and make payments in ATO online. Useful tools and calculators such as my Deductions and the Tax Withheld Calculator are also available, together with a Business Performance Check Tool allowing you to compare your business performance with others in your industry.
Thresholds for 2022-23 car claims
The maximum value for calculating depreciation on the business use of a car first used or leased during 2022–23 has increased to $64,741. The car limit is indexed annually in line with CPI movements and represents the threshold limit on the cost you can use to work out depreciation on a passenger vehicle. If you purchase a vehicle priced over the car limit, your maximum claimable GST credit is $5,885 in 2022-23. From 1 July 2022, the luxury car tax (LCT) threshold has also increased. The new threshold for fuel efficient vehicles is $84,916 (up from $79,659) and for all other vehicles it increases to $71,849 (up from $69,152).
Crypto not taxed as foreign currency
The government has announced crypto currencies will continue to be excluded from foreign currency arrangements for tax purposes. Capital gains tax (CGT) will continue to apply to crypto assets held as investments.
The announcement will be backdated to 1 July 2021 to ensure a consistent tax requirement for crypto asset holders.
New rate for claiming car expenses
Taxpayers electing to use the cents per kilometre method when calculating work related car expenses in their income tax deductions have a new kilometre rate to use. From 1 July 2022, a 78 cents per kilometre rate applies. This rate will remain in place in subsequent income years until varied by legislation.
Director ID reminder
The deadline is approaching for directors to apply for their director ID – a unique 15-digit identifier. From 1 November 2021 directors of all businesses, including directors of self-managed super fund (SMSF) corporate trustees, need a director ID. Anyone who was a director before that date has until 30 November 2022 to apply. Directors appointed between 1 November 2021 and 4 April 2022 had to apply within 28 days of their appointment. From 5 April 2022, intending directors must apply before they are appointed.
Go on… take a break!
One of the things many of us have been missing over the past few years is holidays, but now that the world is opening up again for travel and destinations that have been pretty quiet are now eagerly welcoming back tourists, taking a break has never been more appealing.
Holidays are not just a lovely way to spend time, they are fantastic for us on so many levels. Having a break from the daily grind gets us out of our usual routine, opens us up to new experiences and is good for us mentally and physically. However, the stats tell us that for many Australians it’s been a long time between breaks. In fact, around 8 million Australians have accrued nearly 175 million days of leave over the past 12 months, up from 151 the previous year.i That’s a lot of missed holidays! Whether you are one of those who hasn’t had much of a break lately or even if you’ve just got back from a trip and are planning your next one – there are a host of good reasons to take a holiday.
Holiday to keep the doctor away
Holidays have been proven to lower stress which has a myriad of benefits including addressing the risk of cardiovascular issues like stroke and heart attack. A study following more than 12,000 middle-aged men at high risk for heart disease, found those who took yearly breaks were less likely to die from any cause, including heart attacks and other cardiovascular issues.ii
It’s not just physical health that benefits, taking a break is unsurprisingly pretty good for mental health with even a short break of a few days having a powerful mood enhancing effect.iii
Travel to broaden the mind
Lifelong learning is not only good for our careers but also important for our personal growth. And travel is a learning experience like no other, whether you are heading to a new country or a different part of your city or state you’ll meet new people and experience a different way of life.
Travel is also the ultimate experience in mindfulness – you are living in the moment when you are on holiday. A break in routine takes us off autopilot and puts us in charge.
Having a break makes you more productive
If you are worried about the impact a break can have on your career – don’t be! Research by Boston Consulting Group found that professionals who took planned time off were significantly more productive than those who spent more time working.iv Holidays offer time for introspection, goal setting and a chance to recharge your batteries for a new lease on life.
Planning for a wonderful time
Not all vacations are created equal. Just taking any quickly thrown-together escape may not provide all the health and productivity benefits associated with taking a vacation. A poorly planned break can be a source of tension and stress, rather than the opposite.
So how do you get the best out of a break?
Be flexible – While it’s important to plan before you leave, have enough flexibility for discovery – be open to new experiences and willing to change the schedule to accommodate those spontaneous magical moments.
Don’t sweat the small stuff – Things can and do go awry once you are away but don’t let silly little things spoil the break.
Switch off – Don’t be tempted to check your emails or socials every few minutes – stay in the moment. A decent break from work will also reinforce that the office doesn’t need you 24/7 and that life comes first.
Watch the budget but have some allowances to splurge – Focus on experiences and the memories you’ll take home with you rather than what’s on sale at the gift shop or duty free.
New rules coming into force on July 1 will create opportunities for older Australians to boost their retirement savings and younger Australians to build a home deposit, all within the tax-efficient superannuation system.
Using the existing First Home Super Saver Scheme, people can now release up to $50,000 from their super account for a first home deposit, up from $30,000 previously.
Another change that will help low-income earners and people who work in the gig economy is the scrapping of the Super Guarantee (SG) threshold. Previously, employees only began receiving compulsory SG payments from their employer once they earned $450 a month.
But the biggest potential benefits from the recent changes will flow to Australians aged 55 and older. Here’s a rundown of the key changes and potential strategies.
Work test changes
From July 1, anyone under the age of 75 can make and receive personal or salary sacrifice super contributions without having to satisfy a work test. Annual contribution limits still apply and personal contributions for which you claim a tax deduction are still not allowed.
Previously, people aged 67 to 74 were required to work for at least 40 hours in a consecutive 30-day period in a financial year or be eligible for the work test exemption.
This means you can potentially top up your super account until you turn 75 (or no later than 28 days after the end of the month you turn 75). It also opens potential new strategies for a making big last-minute contribution using the bring-forward rule.
Extension of the bring-forward rule
The bring-forward rule allows eligible people to ‘’bring forward” up to two years’ worth of non-concessional (after tax) super contributions. The current annual non-concessional contributions cap is $110,000, which means you can potentially contribute up to $330,000.
When combined with the removal of the work test for people aged 67-75, this opens a 10-year window of opportunity for older Australians to boost their super even as they draw down retirement income.
Some potential strategies you might consider are:
Transferring wealth you hold outside super – such as shares, investment property or an inheritance – into super to take advantage of the tax-free environment of super in retirement phase
Withdrawing a lump sum from your super and recontributing it to your spouse’s super, to make the most of your combined super under the existing limits
Using the bring-forward rule in conjunction with downsizer contributions when you sell your family home.
Downsizer contributions age lowered to 60
From July 1, you can make a downsizer contribution into super from age 60, down from 65 previously. (In the May 2022 election campaign, the previous Morrison government proposed lowering the eligibility age further to 55, a promise matched by Labor. This is yet to be legislated.)
The downsizer rules allow eligible individuals to contribute up to $300,000 from the sale of their home into super. Couples can contribute up to this amount each, up to a combined $600,000. You must have owned the home for at least 10 years.
Downsizer contributions don’t count towards your concessional or non-concessional caps. And as there is no work test or age limit, downsizer contributions provide a lot of flexibility for older Australians to manage their financial resources in retirement.
For instance, you could sell your home and make a downsizer contribution of up to $300,000 combined with bringing forward non-concessional contributions of up to $330,000. This would allow an individual to potentially boost their super by up to $630,000, while couples could contribute up to a combined $1,260,000.
Rules relaxed, not removed
The latest rule changes will make it easier for many Australians to build and manage their retirement savings within the concessional tax environment of super. But those generous tax concessions still have their limits.
Currently, there’s a $1.7 million limit on the amount you can transfer into the pension phase of super, called your transfer balance cap. Just to confuse matters, there’s also a cap on the total amount you can have in super (your total super balance) to be eligible for a range of non-concessional contributions.
As you can see, it’s complicated. So if you would like to discuss how the new super rules might benefit you, please get in touch.
Combining downsizer and bring-forward contributions
Australians aged between 60 and 74 now have greater flexibility to downsize from a large family home and put more of the sale proceeds into super, using a combination of the new downsizer and bring-forward contribution rules.
Take the example of Tony (62) and Lena (60). Tony has a super balance of $450,000 while Lena has a balance of $200,000. They plan to retire within the next 12 months, sell their large family home and buy a townhouse closer to their grandchildren. After doing this, they estimate they will have net sale proceeds of $1 million.
Under the new rules from 1 July 2022:
They can contribute $600,000 of the sale proceeds into their super accounts as downsizer contributions ($300,000 each)
The remaining $400,000 can also be contributed into super using the bring-forward rule, with each of them contributing $200,000.
By using a combination of the downsizer and bring-forward rules, Tony and Lena can contribute the full $1 million into super. Not only will this give their retirement savings a real boost, but they will be able to withdraw the income from their super pension accounts tax-free once they retire.
Trying to time investment markets is difficult if not impossible at the best of times, let alone now. The war in Ukraine, rising inflation and interest rates and an upcoming federal election have all added to market uncertainty and volatility.
At times like these investors may be tempted to retreat to the ‘’safety” of cash, but that can be costly. Not only is it difficult to time your exit, but you are also likely to miss out on any upswing that follows a dip.
Take Australian shares. Despite COVID and the recent wall of worries on global markets, Aussie shares soared 64 per cent in the two years from the pandemic low in March 2020 to the end of March 2022.i Who would have thought?
So what lies ahead for shares? The recent Federal Budget contained some clues.
The economic outlook
The Budget doesn’t only outline the government’s spending priorities, it provides a snapshot of where Treasury thinks the Australian economy is headed. While forecasts can be wide of the mark, they do influence market behaviour.
As you can see in the table below, Australia’s economic growth is expected to peak at 4.25 per cent this financial year, underpinned by strong company profits, employment growth and surging commodity prices. Our economy is growing at a faster rate than the global average of 3.75 per cent, and ahead of the US and Europe, which helps explain why Australian shares have performed so strongly.ii
However, growth is expected to taper off to 2.5 per cent by 2023-24, as key commodity prices fall from their current giddy heights by the end of September this year, turning this year’s 11% rise in our terms of trade to a 21 per cent fall in 2022-23.
Table: Australian economy (% change on previous year)
Actual %
Forecasts %
2020-21
2021-22
2022-23
2023-24
Gross domestic product (GDP)
1.5
4.25
3.5
2.5
Consumer prices index (CPI)
3.8
4.25
3.0
2.75
Wage price index
1.7
2.75
3.25
3.25
Unemployment
5.1
4.0
3.75
3.75
Terms of trade*
10.4
11
-21.25
-8.75
*Key commodity prices assumed to decline from current high levels by end of September quarter 2022 Source: TreasuryCommodity prices have jumped on the back of supply chain disruptions during the pandemic and the war in Ukraine. While much depends on the situation in Ukraine, Treasury estimates that prices for iron ore, oil and coal will all drop sharply later this year.
So, what does all this mean for shares?
Share market winners and losers
Rising commodity prices have been a boon for Australia’s resources sector and demand should continue while interest rates remain low and global economies recover from their pandemic lows.
Government spending commitments in the recent Budget will also put extra cash in the pockets of households and the market sectors that depend on them. This is good news for companies in the retail sector, from supermarkets to specialty stores selling discretionary items.
Elsewhere, building supplies, construction and property development companies should benefit from the pipeline of big infrastructure projects combined with support for first home buyers and a strong property market.
Increased Budget spending on defence, and a major investment to improve regional telecommunications, should also flow through to listed companies that supply those sectors as well as the big telcos and internet providers.
However, while Budget spending is a market driver in the short to medium term there are other influences on the horizon for investors to be aware of.
Rising inflation and interest rates
With inflation on the rise in Australia and the rest of the world, central banks are beginning to lift interest rates from their historic lows. Australia’s Reserve Bank is now expected to start raising rates this year.iii
Global bond markets are already anticipating higher rates, with yields on Australian and US 10-year government bonds jumping to 2.98 per cent and 2.67 per cent respectively. However, the yield on some US shorter-term bonds temporarily rose above 2.7 per cent recently. Historically, this so-called “inverse yield curve” has indicated recession at worst, or an economic slowdown.iv
Rising inflation and interest rates can slow economic growth and put a dampener on shares. At the same time, higher interest rates are a cause for celebration for retirees and anyone who depends on income from fixed interest securities and bank deposits. But it’s not that black and white.
While rising interest rates and volatile markets generally constrain returns from shares, some sectors still tend to outperform the market. This includes the banks, because they can charge borrowers more, suppliers and retailers of staples such as food and drink, and healthcare among others.
Putting it all together
In uncertain times when markets are volatile, it’s natural for investors to be a little nervous. But history shows there are investment winners and losers at every point in the economic cycle. At times like these, the best strategy is to have a well-diversified portfolio with a focus on quality.
For share investors, this means quality businesses with stable demand for their goods or services and those able to pass on increased costs to customers.
If you would like to discuss your overall investment strategy don’t hesitate to get in touch.
Billed as a Budget for families with a focus on relieving short-term cost of living pressures, Treasurer Josh Frydenberg’s fourth Budget also has one eye firmly on the federal election in May.
At the same time, the government is relying on rising commodity prices and a forecast lift in wages as unemployment heads towards a 50-year low to underpin Australia’s post-pandemic recovery.
While budget deficits and government debt will remain high for the foreseeable future, the Treasurer is confident that economic growth will more than cover the cost of servicing our debt.
The big picture
The Australian economy continues to grow faster and stronger than anticipated, but the fog of war in Ukraine is adding uncertainty to the global economic outlook. After growing by 4.2 per cent in the year to December, Australia’s economic growth is expected to slow to 3.4 per cent in 2022-23.i
Unemployment, currently at 4 per cent, is expected to fall to 3.75 per cent in the September quarter. The government is banking on a tighter labour market pushing up wages which are forecast to grow at a rate of 3.25 per cent in 2023 and 2024. Wage growth has improved over the past year but at 2.3 per cent, it still lags well behind inflation of 3.5 per cent.ii
The Treasurer forecast a budget deficit of $78 billion in 2022-23 (3.4 per cent of GDP), lower than the $88.9 billion estimate as recently as last December, before falling to $43 billion (1.6 per cent of GDP) by the end of the forward estimates in 2025-26.
Net debt is tipped to hit an eye-watering $715 billion (31 per cent of GDP) in 2022-23 before peaking at 33 per cent of GDP in June 2026. This is lower than forecast but unthinkable before the pandemic sent a wrecking ball through the global economy.
Rising commodity prices
The big improvement in the deficit has been underpinned by the stronger than expected economic recovery and soaring commodity prices for some of our major exports.
Iron ore prices have jumped about 75 per cent since last November on strong demand from China, while wheat prices have soared 68 per cent over the year and almost 5 per cent in March alone after the war in Ukraine cut global supply.iii,iv
Offsetting those exports, Australia is a net importer of oil. The price of Brent Crude oil prices have surged 73 per cent over the year, with supply shortages exacerbated by the war in Ukraine.v Australian households are paying over $2 a litre to fill their car with petrol, adding to cost of living pressures and pressure on the government to act.
With the rising cost of fuel and other essentials, this is one of the areas targeted by the Budget. The following rundown summarises the measures most likely to impact Australian households.
Cost of living relief
As expected, the Treasurer announced a temporary halving of the fuel excise for the next six months which will save motorists 22c a litre on petrol. The Treasurer estimates a family with two cars who fill up once a week could save about $30 a week, or $700 in total over six months.
Less expected was the temporary $420 one-off increase in the low-to-middle-income tax offset (LMITO). It had been speculated that LMITO would be extended for another year, but it is now set to end on June 30 as planned.
The extra $420 will boost the offset for people earning less than $126,000 from up to $1,080 previously to $1,500 this year. Couples will receive up to $3,000. The additional offset, which the government says will ease inflationary pressures for 10 million Australians, will be available when people lodge their tax returns from 1 July.
The government will also make one-off cash payments of $250 in April to six million people receiving JobSeeker, age and disability support pensions, parenting payment, youth allowance and those with a seniors’ health card.
Temporarily extending the minimum pension drawdown relief
Self-funded retirees haven’t been forgotten. The temporary halving of the minimum income drawdown requirement for superannuation pensions will be further extended, until 30 June 2023.
This will allow retirees to minimise the need to sell down assets given ongoing market volatility. It applies to account-based, transition to retirement and term allocated superannuation pensions.
More support for home buyers
A further 50,000 places a year will be made available under various government schemes to help more Australians buy a home.
This includes an additional 35,000 places for the First Home Guarantee where the government underwrites loans to first-home buyers with a deposit as low as 5 per cent. And a further 5,000 places for the Family Home Guarantee which helps single parents buy a home with as little as 2 per cent deposit.
There is also a new Regional Home Guarantee, which will provide 10,000 guarantees to allow people who have not owned a home for five years to buy a new property outside a major city with a deposit of as little as 5 per cent.
Support for parents
The government is expanding the paid parental leave scheme to give couples more flexibility to choose how they balance work and childcare.
Dad and partner pay will be rolled into Paid Parental Leave Pay to create a single scheme that gives the 180,000 new parents who access it each year, increased flexibility to choose how they will share it.
In addition, single parents will be able to take up to 20 weeks of leave, the same as couples.
Health and aged care
One of the Budget surprises in the wake of the Aged Care Royal Commission findings, was the absence of spending on additional aged care workers and wages.
Instead, $468 million will be spent on the sector with most of that ($340 million) earmarked to provide on-site pharmacy services.
The Pharmaceutical Benefits Scheme (PBS) is also set for a $2.4 billion shot in the arm over five years, adding new medicines to the list. PBS safety net thresholds will also be reduced, so patients with high demand for prescription medicines won’t have to get as many scripts.
A $547 million mental health and suicide prevention support package includes a $52 million funding boost for Lifeline.
And as winter approaches, the government will spend a further $6 billion on its COVID health response.
Jobs, skills development and small business support
As the economy and demand for skilled workers grow, the government is providing more funding for skills development with a focus on small business. It will provide a funding boost of $3.7 billion to states and territories with the potential to provide 800,000 training places.
In addition, eligible apprentices and trainees in “priority industries” will be able to access $5,000 in retention payments over two years, while their employers will also receive wage subsidies.
Small businesses with annual turnover of less than $50 million will be able to deduct a bonus 20 per cent for the cost of training their employees, so for every $100 they spend, they receive a $120 tax deduction.
Similarly, for every $100 these businesses spend to digitalise their businesses, up to an outlay of $100,000, they will receive a $120 tax deduction. This includes things such as portable payment devices, cyber security systems and subscriptions to cloud-based services.
Looking ahead
With an election less than two months away, the government will be hoping it has done enough to quell voter concerns about the rising cost of living, while safeguarding Australia’s ongoing economic recovery.
The local economy faces strong headwinds from the war in Ukraine, the cost of widespread flooding along much of the east coast and the ongoing pandemic.
Much depends on the hopes for the rise in employment and wages to offset rising inflation, and the timing and extent of interest rate rises by the Reserve Bank.
If you have any questions about any of the Budget measures, don’t hesitate to call us.
It’s March already which marks the beginning of Autumn. While this is traditionally the season when things cool down, the economic and political scene is gearing up with the Federal Budget later this month and a federal election expected by May.
Russia’s invasion of Ukraine in late February increased volatility on global financial markets and uncertainty about the pace of global economic recovery. Notably, crude oil prices surged above $US100 a barrel, breaking the $100 mark for the first time since 2014. Rising oil prices add to inflationary pressures and could set back global economic recovery in the wake of COVID. In Australia, the price of unleaded petrol hit a record 179.1c a litre in February and is expected to go above $2.
In the US, inflation hit a 40-year high of 7.5% in January. Australian inflation is a tamer 3.5% and this, along with unemployment at a 13-year low of 4.2%, is raising expectations of interest rate hikes. The Reserve Bank stated earlier in February that a rate hike in 2022 was ‘’plausible” but that it is ‘’prepared to be patient”. The Reserve is also looking for annual wage growth of 3% before it lifts rates, but with annual wages up just 2.3% in the December quarter Australian workers are going backwards after inflation. The average wage is currently around $90,917 a year.
Before the latest events in Ukraine, consumer and business confidence were improving. The ANZ-Roy Morgan consumer rating rose slightly in February to 101.8 points, while the NAB business confidence index was up 15.5 points in January to +3.5 points.
War in Ukraine has triggered a flight to safety, with bonds, gold and the US dollar rising while global shares plunged initially before rebounding but remain volatile. The Aussie dollar closed at US72.59c.
Avoid the rush: Get ready for June 30
It seems like June 30 rolls around quicker every year, so why wait until the last minute to get your finances in order?
With all the disruption and special support measures of the past two years, it’s possible your finances have changed. So it’s a good idea to ensure you’re on track for the upcoming end-of-financial-year (EOFY).
Starting early is essential to make the most of opportunities on offer when it comes to your super and tax affairs.
New limits for super contributions
Annual contribution limits for super rose this financial year, so maximising your super contributions to boost your retirement savings is even more attractive.
From 1 July 2021, most people’s annual concessional contributions cap increased to $27,500 (up from $25,000). This allows you to contribute a bit extra into your super on a before-tax basis, potentially reducing your taxable income.
If you have any unused concessional contribution amounts from previous financial years and your super balance is less than $500,000, you may be able to “carry forward” these amounts to further top up.
Another strategy is to make a personal contribution for which you claim a tax deduction. These contributions count towards your $27,500 cap and were previously available only to the self-employed. To qualify, you must notify your super fund in writing of your intention to claim and receive acknowledgement.
Non-concessional super strategies
If you have some spare cash, it may also be worth taking advantage of the higher non-concessional (after-tax) contributions cap. From 1 July 2021, the general non concessional cap increased to $110,000 annually (up from $100,000).
These contributions can help if you’ve reached your concessional contributions cap, received an inheritance, or have additional personal savings you would like to put into super. If you are aged 67 or older, however, you need to meet the requirements of the work test or work test exemption.
For those under age 67 (previously age 65) at any time during 2021-22, you may be able to use a bring-forward arrangement to make a contribution of up to $330,000 (three years x $110,000).
To take advantage of the bring-forward rule, your total super balance (TSB) must be under the relevant limit on 30 June of the previous year. Depending on your TSB, your personal contribution limit may be less than $330,000, so it’s a good idea to talk to us first.
More super things to think about
If you plan to make tax-effective super contributions through a salary sacrifice arrangement, now is a good time to discuss this with your employer, as the ATO requires documentation prior to commencement.
Another option if you’re aged 65 and over and plan to sell your home is a downsizer contribution. You can contribute up to $300,000 ($600,000 for a couple) from the proceeds without meeting the work test.
And don’t forget contributing into your low-income spouse’s super account could score you a tax offset of up to $540.
Get your SMSF shipshape
If you have your own self-managed super fund (SMSF), it’s important to check it’s in good shape for EOFY and your annual audit.
Administrative tasks such as updating minutes, lodging any transfer balance account reports (TBARs), checking the COVID relief measures (residency, rental, loan repayment and in-house assets), and undertaking the annual market valuation of fund assets should all be started now.
It’s also sensible to review your fund’s investment strategy and whether the fund’s assets remain appropriate.
Know your tax deductions
It’s also worth thinking beyond super for tax savings.
If you’ve been working from home due to COVID-19, you can use the shortcut method to claim 80 cents per hour worked for your running expenses. But make sure you can substantiate your claim.
You also need supporting documents to claim work-related expenses such as car, travel, clothing and self-education. Check whether you qualify for other common expense deductions such as tools, equipment, union fees, the cost of managing your tax affairs, charity donations and income protection premiums.
Review your investment portfolio
After a year of strong investment market performance, now is also a good time to review your investments outside super. Benchmark your portfolio’s performance and check whether any assets need to be sold or purchased to rebalance in line with your strategy.
You might also consider realising any investment losses, as these can be offset against capital gains you made during the year.
If you would like to discuss EOFY strategies and super contributions, call our office.
Tax Alert March 2022
New super and tax rules passed in Parliament
Some of the last sitting days before this year’s Federal election saw changes to the tax and super rules finally pass through both houses of Parliament. Here’s a roundup of some of the key developments.
Loss carry back extended and super rules changed
Several reforms to the tax and super rules were legislated during the final marathon full Parliamentary session before this year’s Federal election. They include an extension of the business loss carry-back tax offset for the 2022-23 financial year and an extension to 30 June 2023 for the temporary full expensing regime.
Removal of the current $450-per-month threshold for payment of Superannuation Guarantee (SG) contributions means from 1 July 2022, employers will be required to make contributions for employees earning less than this amount.
Other key changes to the super rules include application of the work test to super contributors aged 67 to 74 who claim a deduction for personal contributions. However, from 1 July 2022 contributors over age 67 will be able to make or receive non-concessional super contributions using a bring-forward arrangement.
The new legislation also includes a reduction in the age limit for downsizer super contributions to 60 and an increase to the maximum allowable amount of contributions under the First Home Super Saver Scheme from $30,000 to $50,000.
Loss carry back tool launched
To help businesses correctly claim the loss carry back (LCB) tax offset in their company tax return, the ATO has launched a new online tool to help prevent errors and ensure correct completion of LCB labels in your return.
The interactive tool helps companies work out their eligibility for the tax offset and calculate the maximum offset they can claim. It also displays labels that must be completed in the company tax return.
FBT deadline approaching
Employers need to remember the annual fringe benefits tax (FBT) deadline is rapidly approaching on 31 March 2022.
The FBT year runs from 1 April to 31 March, and you are required to self-assess your FBT liability for certain benefits you have provided to your employees or their families and other associates.
As an employer, you may be able to claim an income tax deduction for the cost of providing fringe benefits and for the amount of FBT you pay, so it’s important to get your paperwork in order.
New ‘right’ for businesses to request B2B eInvoicing
The government is currently consulting on whether to introduce a Business eInvoicing Right (BER) giving businesses the ‘right’ to ask other businesses to send an eInvoice for transactions.
The BER would be established as part of a new regulatory framework or under the Corporations Act 2001.
Implementation of the BER would be in three phases starting with large entities before moving to medium and finally small businesses.
Add industry codes to your ABN details
Holders of an Australian Business Number (ABN) can now include up to four additional business activities when updating their ABN details.
The extra information will help government agencies better target appropriate business support and stimulus measures.
If you offer business services other than those listed as your main business activity, it may be time to update your ABN details with some additional industry codes.
Focus on small business CGT concessions
The ATO has announced it’s paying closer attention to businesses mistakenly claiming small business capital gains tax (CGT) concessions to which they are not entitled.
Anyone claiming one or more small business CGT concessions in a recent income tax return may receive an ATO letter asking you to check your claim and ensure you meet the basic eligibility conditions.
The taxman is also encouraging taxpayers planning to claim a small business CGT concession to check what attracts its attention in this area.
Trading stock taken for private usage
If you take goods from your business’ trading stock for private use, you will need to check the updated values applying for both adults and children aged four to 16 when preparing your tax return.
The tax man has updated the value of goods it will accept for certain industries during 2021-22.
The new amounts will apply to owners of businesses such as cafes, greengrocers, takeaway food shops, mixed businesses, butcheries and bakeries.
How to calm those market jitters
It’s been a rocky start to the year on world markets but that doesn’t mean you should hit the panic button. Staying the course is generally the best course, but that’s easier said than done when there’s a big market fall.
In January markets plunged some 10 per cent but then staged a recovery. That volatile start may well be an indication of how the year pans out.i
The key reasons for this volatility are fear of inflation, the prospect of rising interest rates and pressure on corporate profits. Add to that ongoing concern surrounding COVID-19 and the conflict between Russia and Ukraine, and it is hardly surprising markets are jittery.
But fear and the inevitable corrections in share prices that come with it are all a normal part of market action.
Downward pressures
Rising interest rates and inflation traditionally lead to downward pressure on shares as the improved returns from fixed interest investments start to make them look more attractive. However, it’s worth noting that inflation in Australia is nowhere near the levels in the US where inflation is at a 40-year high of 7.5 per cent. In fact, the Reserve Bank forecasts underlying inflation to grow to just 3.25 per cent in 2022 before dropping to 2.75 per cent next year.ii
Reserve Bank Governor Philip Lowe concedes interest rates may start to rise this year, with many market analysts looking at August. Even so, he doesn’t believe rates will climb higher than 1.5 to 2 per cent. After all, with the size of mortgages growing in line with rising property prices and high household debt to income levels, rates would not have to rise much to have an impact on household finances and spending.iii
Even with rate hikes on the cards, yields on deposits are likely to remain under 1 per cent for the foreseeable future compared with a grossed-up return (after including franking credits) from share dividends of about 5 per cent.iv
The old adage goes that it’s “time in” the market that counts, not “timing” the market. So if you rush to sell stocks because you fear they may fall further, you risk not only turning a paper loss into a real one, but you also risk missing the rebound in prices later on.
Over time, short-term losses tend to iron out. Growth assets such as shares offer higher returns in the long run with higher risk of volatility along the way. The important thing is to have an investment strategy that allows you to sleep at night and stay the course.
Chance to review
A downturn in the market can also present an opportunity to review your portfolio and make sure that it truly reflects your risk profile. Years of bullish performances on sharemarkets may have encouraged some people to take more risks than their profile would normally dictate.
After many years of strong market returns, it’s possible that your portfolio mix is no longer aligned with your investment strategy. You may also want to make sure you are sufficiently diversified across the asset classes to put yourself in the best position for current and future market conditions.
A recent study found that retirees generally have a low tolerance for losses in their retirement savings. Retirees often favour conservative investments to avoid experiencing downturns, but this means they may lose out on strong returns and capital growth when the market rebounds.
Think long term
Over the long term, shares tend to outperform all other asset classes. And even when share prices fall, you are still earning dividends from those shares. Indeed, the lower the price, the higher the yield on your share investments. And it is also worth noting that with Australia’s dividend imputation system, there are also tax advantages with share investments.
For long-term investors, rather than sell your shares in a kneejerk reaction, it might be worthwhile considering buying stocks at lower prices. This allows you to take advantage of dollar cost averaging, by lowering the average price you pay for a particular company’s shares.
Investments are generally for the long term, especially when it comes to your super. Chopping and changing investments in response to short-term market movements is unlikely to deliver the end results you initially planned.
If the current turbulence in world markets has unsettled you, call us to discuss your investment strategy and whether it still reflects your risk profile and long-term objectives.
As the nation drifts back to work and study after the summer break, it’s often a time to start putting your New Year’s resolutions into practice. For some, an extended holiday may have convinced you that you are ready for more of the good life and that it’s time to retire.
In the past, that would have meant leaving work for good. These days, retirement is far more fluid.
You might simply want to wind back your working hours to give your mind and body room to breathe. Or you may want to leave your full-time job but keep your career ticking over with part-time or consulting work. Others may dream of leaving the nine to five to run a B&B or buy a hobby farm.
Changing retirement patterns
There are already signs that people’s retirement plans are changing.
In 2019, the average retirement age for current retirees was 55 (59 for men and 52 for womeni), but the age that people currently aged 45 intend to retire has increased to 64 for women and 65 for men.ii
There are many reasons for this gap between intentions and reality. Only 46 per cent of recent retirees said they left their last job because they reached retirement age or were eligible to access their super. Substantial numbers retired due to illness, injury or disability (21 per cent) while others were retrenched or unable to find work (11 per cent).iii
Retired women were also more likely than men to retire to care for others. But for people who can choose the timing of their retirement, there can be good reasons for delay.
Reasons for delaying retirement
As the Age Pension age increases gradually from 65 to 67, anyone who expects to rely on a full or part pension needs to work a little longer than previous generations.
We’re also living longer. A man aged 65 today can expect to live another 20 years on average while a woman can expect to live another 22 years.iv So the longer we can keep working and building a nest egg the further our retirement savings will stretch.
And then there’s COVID. If you lost your job or your hours were reduced during the pandemic, you may need to work a little longer to rebuild your savings. Even if you kept your job, you couldn’t go anywhere so you may have postponed your retirement plans. But now the COVID fog is lifting, and borders are reopening, retirement may be back on the agenda.
Whatever shape your dream retirement takes, you will need to work out how much it will cost and if you have sufficient savings to make it happen.
Sourcing your retirement income
The more you have in super and other investments the more flexibility you have when it comes to timing your retirement. If you plan to retire this year, you will need to be 66 and six months and pass assets and income tests to apply for the Age Pension. But you don’t have to wait that long to access your super.
Generally, you can tap into your super once you reach your preservation age (between age 55 and 60 depending on the year you were born) and meet a condition of release such as retirement. From age 65 you can withdraw your super even if you continue working full time.
But super can also help you transition into retirement, without giving up work entirely.
Preservation age
Date of birth
Preservation age
Before 1 July 1960
55
1 July 1960 – 30 June 1961
56
1 July 1961 – 30 June 1962
57
1 July 1962 – 30 June 1963
58
1 July 1963 – 30 June 1964
59
From 1 July 1964
60
Source: ATO
Transition to retirement
If you’re unsure whether you will enjoy retirement or find enough to do to fill your days, it can make sense to ease into it by cutting back your working hours. One way of making this work financially is to start a transition to retirement (TTR) pension with some of your super.
Case study
Ellie, a teacher, has just turned 60. She wants to reduce her workload to three days a week so she can explore other interests and gradually ease into retirement. Her salary will drop but if she starts a TTR pension she can top up her income with regular monthly withdrawals.
Most super funds offer TTR pensions, or you can start one from your self-managed super fund (SMSF). You decide how much to transfer into a TTR pension account, but there are some rules:
You must have reached your preservation age
Money can only be withdrawn as an income stream, not a lump sum
There is a minimum annual withdrawal amount, for example, 4 per cent of your TTR account balance (2 per cent until June 2022) if you are aged 55-64
The maximum annual withdrawal is 10 per cent of your TTR account balance
Income is tax-free if you are aged 60 or older; if you’re 55-59 you may pay tax on the TTR income, but you receive a tax offset of 15 per cent.
One of the benefits of this strategy is that while you continue working you will receive compulsory Super Guarantee payments from your employer. A downside is that you will potentially have less super in total when you finally retire.
Retirement is no longer a fixed date in time, with far more flexibility to mix work and play as you make the transition. If you would like to discuss your retirement options and how to finance them, give us a call.
It’s September and spring is here, providing a welcome lift in spirits. After some spectacular performances by our athletes at the recent Tokyo Olympics and Paralympics, hopefully you are inspired to achieve some personal goals of your own.
August provided mixed economic news, with central banks, business and consumers remaining cautious. In a widely-reported speech, US Federal Reserve chair, Jerome Powell said there remained “much ground to cover” before he would consider lifting interest rates, sending stocks higher and bond yields lower.
In Australia, shares and shareholders were boosted by a positive company reporting season. According to CommSec, of the ASX200 companies that have reported so far, 84% reported a profit in the year to June, 73% lifted profits and dividends were up 70% to $34 billion. One of the COVID “winners” is the construction sector. While the value of construction rose 0.4% overall in the year to June, the value of residential building was up 8.9% and renovations rose 24.5%, the strongest in 21 years. One of the COVID “losers”, retail trade was down 3.1% in the year to June.
While unemployment fell from 4.9% to 4.6% in July, full-time jobs and hours worked were lower due to the impact of lockdowns. The Westpac-Melbourne Institute index of consumer sentiment fell 4.4% in August while the NAB business confidence index fell 18.5 points in July, the second biggest monthly decline since the GFC. Wages grew 1.7% in the year to June, well below the 3% the Reserve Bank wants before it considers lifting interest rates.
Iron ore prices fell 18% in August, while the Aussie dollar finished the month weaker at US73.2c.
Aged care payment options
When it comes time to investigate residential aged care for yourself, your partner, parent or relative, the search for a facility and how to pay for it can seem daunting. The system is complex, and decisions are often made in the midst of a health crisis.
Factors such as location to family and friends, reputation for care or general appeal are just as important as the sometimes-high price of a room and other fees in residential aged care.
Even so, costs can’t be ignored.i
Accommodation charges
The first thing to be aware of when researching your residential aged care options is that there are separate costs for the accommodation and the care provided by the facility.
The accommodation payment essentially covers your right to occupy a room. You can pay this accommodation fee as a lump sum called the Refundable Accommodation Deposit (RAD), or a daily rate similar to rent, or combination of both.
The daily rate is known as the Daily Accommodation Payment or DAP and is effectively a daily interest rate set by the government. The current daily rate is 4.04 per cent. If the RAD is $550,000 then the equivalent DAP is $60.87 a day ($550,000 x 4.04%, divided by 365 days).
A resident can pay as much or as little towards the RAD as they choose, but any outstanding amount is charged as a DAP.
The RAD is fully refundable to the estate, unless it is used to pay any of the aged care costs such as the DAP.
Daily fees
As well as an accommodation cost there are daily resident fees that cover living and care costs. There is a basic daily fee which everyone pays and is set at 85 per cent of the basic single Age Pension. The current rate is $52.71 a day and covers the essentials such as food, laundry, utilities and basic care.
Then there is a means tested care fee which is determined by Services Australia or Veteran’s Affairs. This figure can range from $0 to about $256 a day depending on a person’s income and assets. The figure has an indexed annual and a lifetime cap – currently set at $28,339 a year or $68,013 over a lifetime.
Some facilities offer extra services, where a compulsory extra services fee is paid. It has nothing to do with care but may include extras like special outings, a choice of meals, wine with meals and daily newspaper delivery. It can range from $20-$100 a day.
A means assessment determines if you need to pay the means-tested care fee and if the government will contribute to your accommodation costs. Everyone who moves into an aged care home is quoted a room price before moving in. The means assessment then determines if you will have to pay the agreed room price, or RAD, or contribute towards it.
How means testing works
A means-tested amount above a certain threshold is used to determine whether you pay the quoted RAD and how much the government will contribute towards the means-tested care fee.
A person on the full Age Pension and with property and assets below about $37,155 would have all their costs met by the government, except the $52.71 a day basic daily fee.
A person on the full Age Pension with a home and a protected person, such as their spouse, living in it and assets between $37,155 and $173,075 may be asked to contribute towards their accommodation and care.
To be classified a low means resident there would be assessable assets below $173,075.20 (indexed). It is also subject to an income test.
A low means resident may pay a Daily Accommodation Contribution (DAC) instead of a DAP which can then be converted to a Refundable Accommodation Contribution (RAC). They may also pay a small means-tested care fee.
Payment strategies
The fees you may pay for residential care and how you pay them requires careful consideration. For example, selling assets such as the former home to pay for your residential care can affect your aged care fees and Age Pension entitlements.
If you would like to discuss aged care payment options and how to ensure you find the right residential care at a cost you or your loved one can afford, give us a call.
Although smaller businesses are now enjoying a lower corporate tax rate, their quarterly super bills have gone up, following the latest indexed rise in the Super Guarantee rate.
Here’s a roundup of some of the other key developments when it comes to the world of tax.
SME tax rate drops
With business conditions remaining tough, small and medium companies will welcome the lower corporate tax rate applying from 1 July 2021. Businesses with a turnover under $50 million are now only up for tax of 25 per cent.
This reduction was part of legislation passed back in 2018 to gradually reduce the corporate tax rate from 27.5 per cent to 25 per cent.
More small companies are eligible for this lower rate as the turnover threshold to access a range of tax concessions has been lifted from $10 million to $50 million.
Reminder on SG increase
If you are an employer, don’t forget the Superannuation Guarantee (SG) rate increased by 0.5 per cent on 1 July 2021, making the annual rate 10 per cent.
When paying SG contributions for the July to September quarter for your employees, check your calculations are based on the new, higher rate to ensure you don’t run into problems with the ATO.
The higher SG rate may also increase your Workcover premiums and payroll tax liability.
Tax status of COVID-19 grants
If your business is taking advantage of the financial support provided by state and territory governments during pandemic lockdowns, it’s essential to check the strict tax rules covering these grants.
Most of these financial supports have been given a concessional tax status and are classed as non-assessable non-exempt (NANE) income, but only grants paid in the 2020-21 and 2021-22 financial years currently qualify.
For the grant to qualify for NANE income tax status, your business’s aggregated turnover for the current year must be under $50 million. You are also required to be carrying on a business in the current financial year and the grant program must be declared an eligible grant through a legislative instrument.
Continuation of full expensing and loss carry-back
In more good news, eligible business taxpayers who took advantage of the government’s full expensing and loss carry-back measures in the past financial year will be able to use them again this financial year.
The temporary full expensing regime was introduced to help businesses with an aggregate annual turnover of under $5 billion to cope with the financial challenges of the pandemic. Eligible businesses can deduct the full cost of any eligible depreciable assets purchased after 6 October 2020.
Similarly, eligible companies will also be able to carry-back tax losses from the current income year (2021-22) to offset previously taxed profits going as far back as 2018-19 when they lodge their business tax return.
FBT exemption for retraining and reskilling
The ATO is reminding employers that if they provide training or education to employees who are made redundant, or soon to be redundant, the cost is exempt from fringe benefits tax (FBT).
Eligible employers using the exemption are not required to include the retraining in their FBT returns, or in the reportable fringe benefits listed in the employee’s Single Touch Payroll reporting or payment summary.
You are, however, required to keep a detailed record of all the training and education provided if you intend claiming this exemption.
Changes to SuperStream
And finally, a reminder that from 1 October 2021, self-managed super funds (SMSFs) will only be able to roll member benefits into and out of their fund using SuperStream. Some electronic release authorities will also need to be processed using SuperStream.
SMSF trustees need to ensure their fund will be ready to meet the new requirements by checking the details recorded with the ATO are up-to-date for both the fund and its members.
Trustees should also check they have provided the ATO with details of the fund’s ABN and unique bank account for super payments.
Future proofing your career with professional development
“The only thing that is constant is change” – so said the ancient Greek philosopher Heraclitus and it continues to ring true today.
Industries are changing, continuing to evolve in response to challenges (such as the COVID-19 pandemic), technological disruptors and customer expectations. As a result, there is a greater need for the workforce to continue to adapt and develop. We need to be agile to stay on top of these changes, continue developing and learning, which will work towards future proofing our careers.
While some industries have formal professional development programs, there are many ways to foster your own development for those who don’t have formal pathways. Here is how you can take the lead to future proof your career.
Enrol in a course
Some workplaces offer both in-person and online courses, for example LinkedIn Learning, so take advantage of what’s on offer. You can also seek out professional courses relevant to your industry to upskill, keeping you abreast of the changing environment – not to mention that further education is a great additional to your CV as it showcases your engagement within the industry and your proactive approach to your career.
Attend webinars or seminars
While COVID restrictions have halted many in-person seminars, there are plenty of online webinars you can attend, some which are specifically on the topic of future proofing your career. While there are a number of free webinars you can attend, others may be offered by organisations to their members. Paid membership to these organisations be they industry groups, or groups centred around a common goal, can be a worthwhile investment assisting with not only educational sessions but networking opportunities.
Not only are webinars accessible from your office or living room, they tend to be more budget-friendly than seminars. However, seminars offer face-to-face learning and networking opportunities, so they are great to utilise where possible.
Pick up a book or listen to podcasts
It doesn’t get easier than picking up a book to arm yourself with new knowledge. There is a wealth of information out there, some which will be general advice discussing trends and management styles, others that will be tailored to your industry.
If you don’t have much time to read, opt for an audio book to listen to in the car or during exercise. Podcasts are also excellent ways of getting helpful information in a format that is convenient and can be tapped in and out of. As they are regularly created, you’re likely to get more up-to-date information this way.
Enlist the help of a mentor
It’s clear that a mentor can help you stay on top of your industry or explore new opportunities by providing support and guidance. A 2019 survey showed that while 76% of people thought mentors are important, only 37% actually have one.i
The study also found that 61% of mentor-mentee relationships developed naturally, with 25% happening after someone offered to mentor, and 14% when someone asked for a mentor. This means that there’s likely to already be someone in your life who could be your mentor. Think about who is dynamic in facing industry changes and don’t be shy to ask if they’re open to mentoring you.
Join peer groups
An extension of having a mentor, peer groups provide you with the support of others who are also dedicated to professional and personal growth. If you are someone who thrives on peer support, it will be invaluable to be part of a group of people rather than going it alone.
You can give each other feedback, check in on each other’s goals and share helpful experiences and resources such as great books or webinars. This is also a fantastic way to make real-life connections – you might even meet someone who helps you land a new job or open doors to a new industry. Online tools such as Meetup can help you find a group near you and keep an eye on industry meetups as well.
Life is full of change, but rather than feeling overwhelmed, embrace it. By furthering your education, you’ll future proof your career and feel more empowered tackling the changes you face.
When the coronavirus pandemic hit financial markets in March 2020, almost 40 per cent was wiped off the value of shares in less than a month.i Understandably, many investors hit the panic button and switched to cash or withdrew savings from superannuation.
With the benefit of hindsight, some people may be regretting acting in haste. Although for others, accessing their super under the early release due to COVID measures was a difficult but necessary decision at the time.
As it happened, shares rebounded faster than anyone dared predict. Australian shares rose 28 per cent in the year to June 2020 while global shares rose 37 per cent. Balanced growth super funds returned 18 per cent for the year, their best performance in 24 years.ii
While every financial crisis is different, some investment rules are timeless. So, what are the lessons of the last 18 months?
Lesson #1 Ignore the noise
When markets suffer a major fall as they did last year, the sound can be deafening. From headlines screaming bloodbath, to friends comparing the fall in their super account balance and their dashed retirement hopes.
Yet as we have seen, markets and market sentiment can swing quickly. That’s because on any given day markets don’t just reflect economic fundamentals but the collective mood swings of all the buyers and sellers. In the long run though, the underlying value of investments generally outweighs short-term price fluctuations.
One of the key lessons of the past 18 months is that ignoring the noisy doomsayers and focussing on long-term investing is better for your wealth.
Lesson #2 Stay diversified
Another lesson is the importance of diversification. By spreading your money across and within asset classes you can minimise the risk of one bad investment or short-term fall in one asset class wiping out your savings.
Diversification also helps smooth out your returns in the long run. For example, in the year to June 2020, Australian shares and listed property fell sharply, but positive returns from bonds and cash acted as a buffer reducing the overall loss of balanced growth super funds to 0.5%.
The following 12 months to June 2021 shares and property bounced back strongly, taking returns of balanced growth super funds to 18 per cent. But investors who switched to cash at the depths of the market despair in March last year would have gone backwards after fees and tax.
More importantly, over the past 10 years balanced growth funds have returned 8.6 per cent per year on average after tax and investment fees. High growth funds returned 10.3 per cent per year and the most conservative funds returned 5.5 per cent per year.ii
The mix of investments you choose will depend on your age and tolerance for risk. The younger you are, the more you can afford to have in more aggressive assets that carry a higher level of risk, such as shares and property to grow your wealth over the long term. But even retirees can benefit from having some of their savings in growth assets to help replenish their nest egg even as they withdraw income.
Lesson #3 Stay the course
The Holy Grail of investing is to buy at the bottom of the market and sell when it peaks. If only it were that easy. Even the most experienced fund managers acknowledge that investors with a balanced portfolio should expect a negative return one year in every five or so.
Unfortunately, we can only ever be sure when a market has peaked or troughed after the event, by which time it’s usually too late. By switching out of shares and into cash after the market crashed in March last year, investors would have turned short-term paper losses into a real loss with the potential to put a big dent in their long-term savings.
Even if you had seen the writing on the wall in February 2020 and switched to cash, it’s unlikely you would have switched back into shares in time to catch the full benefit of the upswing that followed.
Timing the market on the way in and the way out is extremely difficult, if not impossible.
Looking ahead
Every new generation of investors has a pivotal experience where lessons are learned. For older investors, it may have been the crash of ’87, the tech wreck of the early 2000s or the global financial crisis. For younger investors and many older ones too, the coronavirus pandemic will be a defining moment in their investing journey.
Now that shares and residential property prices have rebounded strongly, investors face new challenges. That is, how to make the most of the prevailing market conditions while ignoring the FOMO (fear of missing out) crowd.
By choosing an asset allocation that aligns with your age and risk tolerance then staying the course, you can sail through the market highs and lows with your sights firmly set on your investment horizon. Of course, that doesn’t mean you shouldn’t make adjustments or take advantage of opportunities along the way.
We’re here to guide you through the highs and lows of investing, so give us a call if you would like to discuss your investment strategy.
As the new financial year gets underway, there are some big changes to superannuation that could add up to a welcome lift in your retirement savings.
Some, like the rise in the Superannuation Guarantee (SG), will happen automatically so you won’t need to lift a finger. Others, like higher contribution caps, may require some planning to get the full benefit.
Whether you are just starting your super journey or close to retirement, a member of a big super fund or your own self-managed super fund (SMSF), it pays to know what’s on offer.
Here’s a summary of the changes starting from 1 July 2021.
If you are an employee, the amount your employer contributes to your super fund has just increased to 10 per cent of your pre-tax ordinary time earnings, up from 9.5 per cent. For higher income earners, employers are not required to pay the SG on amounts you earn above $58,920 per quarter (up from $57,090 in 2020-21).
Say you earn $100,000 a year before tax. In the 2021-22 financial year your employer is required to contribute $10,000 into your super account, up from $9,500 last financial year. For younger members especially, that could add up to a substantial increase in your retirement savings once time and compound earnings weave their magic.
The SG rate is scheduled to rise again to 10.5 per cent on 1 July 2022 and gradually increase until it reaches 12% on 1 July 2025.
The annual limits on the amount you can contribute to super have also been lifted, for the first time in four years.
The concessional (before tax) contributions cap has increased from $25,000 a year to $27,500. These contributions include SG payments from your employer as well as any salary sacrifice arrangements you have in place and personal contributions you claim a tax deduction for.
At the same time, the cap on non-concessional (after tax) contributions has gone up from $100,000 to $110,000. This means the amount you can contribute under a bring-forward arrangement has also increased, provided you are eligible.
Under the bring-forward rule, you can put up to three years’ non-concessional contributions into your super in a single financial year. So this year, if eligible, you could potentially contribute up to $330,000 this way (3 x $110,000), up from $300,000 previously. This is a useful strategy if you receive a windfall and want to use some of it to boost your retirement savings.
More generous Total Super Balance and Transfer Balance Cap
Super remains the most tax-efficient savings vehicle in the land, but there are limits to how much you can squirrel away in super for your retirement. These limits, however, have just become a little more generous.
The Total Super Balance (TSB) threshold which determines whether you can make non-concessional (after-tax) contributions in a financial year is assessed at 30 June of the previous financial year. The TSB at which no non-concessional contributions can be made this financial year will increase to $1.7 million from $1.6 million.
Just to confuse matters, the same limit applies to the amount you can transfer from your accumulation account into a retirement phase super pension. This is known as the Transfer Balance Cap (TBC), and it has also just increased to $1.7 million from $1.6 million.
If you retired and started a super pension before July 1 this year, your TBC may be less than $1.7 million and you may not be able to take full advantage of the increased TBC. The rules are complex, so get in touch if you would like to discuss your situation.
Reduction in minimum pension drawdowns extended
In response to record low interest rates and volatile investment markets, the government has extended the temporary 50 per cent reduction in minimum pension drawdowns until 30 June 2022.
Retirees with certain super pensions and annuities are required to withdraw a minimum percentage of their account balance each year. Due to the impact of the pandemic on retiree finances, the minimum withdrawal amounts were also halved for the 2019-20 and 2020-21 financial years.
Next financial year is also shaping up as a big one for super, with most of the changes announced in the May Federal Budget expected to start on 1 July 2022.
The Budget included proposals to:
repeal the work test for people aged 67 to 74 who want to contribute to super
reduce the minimum age for making a downsizer contribution (using sale proceeds from your family home) from 65 to 60
abolish the $450 per month income limit for receiving the Super Guarantee
expand the First Home Super Saver Scheme
provide a two-year window to commute legacy income streams
allow lump sum withdrawals from the Pension Loans Scheme
relax SMSF residency requirements.
All these measures still need to be passed by parliament and legislated.
Time to prepare
There’s a lot for super fund members to digest. SMSF trustees in particular will need to ensure they document changes that affect any of the members in their fund. But these latest changes also present retirement planning opportunities.
Whatever your situation, if you would like to discuss how to make the most of the new rules, please get in touch.
