AuthorMichael Scott

Federal Budget 20-21 Analysis

Building a bridge to recovery

In what has been billed as one of the most important budgets since the Great Depression, and the first since the onset of the COVID-19 pandemic dragged Australia into its first recession in almost 30 years, Treasurer Josh Frydenberg said the next phase of the journey is to secure Australia’s future.

As expected, the focus is on job creation, tax cuts and targeted spending to get the economy over the COVID-19 hump.

The Treasurer said this Budget, which was delayed six months due to the pandemic, is “all about helping those who are out of a job get into a job and helping those who are in work, stay in work”.

The big picture

After coming within a whisker of balancing the budget at the end of 2019, the Treasurer revealed the budget deficit is now projected to blow out to $213.7 billion this financial year, or 11 per cent of GDP, the biggest deficit in 75 years.

With official interest rates at a record low of 0.25 per cent, the Reserve Bank has little firepower left to stimulate the economy. That puts the onus on Government spending to get the economy moving, fortunately at extremely favourable borrowing rates. And that is just as well, because debt and deficit will be with us well into the decade.

The Government forecasts the deficit will fall to $66.9 billion by 2023-24. Net debt is expected to hit $703 billion this financial year, or 36 per cent of GDP, dwarfing the $85.3 billion debt last financial year. Debt is expected to peak at $966 billion, or 44 per cent of GDP, by June 2024.

The figures are eye-watering, but the Government is determined to do what it takes to keep Australians in jobs and grow our way out of recession.

So, what does the Budget mean for you, your family and your community?

It’s all about jobs

With young people bearing the brunt of COVID-related job losses, the Government is pulling out all stops to get young people into jobs. Youth unemployment currently stands at 14.3 per cent, more than twice the overall jobless rate of 6.8 per cent.

As we transition away from the JobKeeper and JobSeeker subsidies, the Government announced more than $6 billion in new spending which it estimates will help create 450,000 jobs for young people.

“Having a job means more than earning an income,” Mr Frydenberg said.

Measures include:

  • A new JobMaker program worth $4 billion by 2022-23, under which employers who fill new jobs with young workers who are unemployed or studying will receive a hiring credit of up to $10,400 over the next year. Employers who hire someone under 29 will receive $200 a week, and $100 a week for those aged 30-35. New employees must work at least 20 hours a week to be eligible.
  • A $1.2 billion program to pay half the salary of up to 100,000 new apprentices and trainees taken on by businesses.

In recognition that the pandemic has had a disproportionate impact on women’s employment, the Budget includes the promised “Women’s economic security statement” but the size of the support package may disappoint some.

Just over $240 million has been allocated to “create more opportunities and choices for women” in science, technology, engineering and mathematics (STEM) as well as male-dominated industries and business.

Housing and infrastructure

As part of its job creation strategy, the government also announced $14 billion in new and accelerated infrastructure projects since the onset of COVID.

The projects will be in all states and territories and include major road and rail projects, smaller shovel-ready road safety projects, as well as new water infrastructure such as dams, weirs and pipelines.

The construction industry will also be supported by the first home loan deposit scheme being extended to an extra 10,000 new or newly built homes in 2020-21. This scheme allows first home owners to buy with a deposit as low as 5 per cent and the Government will guaranteeing up to 15 per cent.

Personal tax cuts

As widely tipped, the government will follow up last year’s tax cut by bringing forward stage two of its planned tax cuts and back date them to July 1 this year to give mostly low and middle-income taxpayers an immediate boost.

As the table below shows, the upper income threshold for the 19 per cent marginal tax rate will increase from $37,000 a year to $45,000 a year. The upper threshold for the 32.5 per cent tax bracket will increase from $90,000 to $120,000.

As a result, more than 11 million Australians will save between $87 and $2,745 this financial year. Couples will save up to $5,490.

Marginal tax rate*Previous taxable income thresholdsNew taxable income thresholds
0%$0-$18,200$0-$18,200
19%$18,201-$37,000$18,201-$45,000
32.5%$37,001-$90,000$45,001-$120,000
37%$90,001-$180,000$120,001-$180,000
45%More than $180,000More than $180,000
Low income tax offset (LITO)Up to $445Up to $700
Low & middle income tax offset (LMITO)Up to $1,080Up to $1,080**

*Does not include Medicare Levy of 2%
**LMITO will only be available until the end of the 2020-21 income year. You don’t need to do anything to receive the tax cuts. The Australian Taxation Office (ATO) will automatically adjust the tax tables it applies to businesses and simply take less. It will also account for three months of taxes already paid from 1 July this year so workers can catch up on missed savings.

Business tax relief

In another move that will help protect jobs in the hard-hit small business sector, business owners will also get tax relief through loss carry back provisions for struggling firms. This will allow them to claim back a rebate on tax they have previously paid until they get back on their feet.

Businesses with turnover of up to $5 billion a year will be able to write off the full value of any depreciable asset they buy before June 2022.

Cash boost for retirees

Around 2.5 million pensioners will get extra help to make up for the traditional September rise in the Age Pension not going ahead this year. However, self-funded retirees may feel they have been left out.

Age pensioners and as well as people on the disability support pension, Veterans pension, Commonwealth Seniors Health Card holders and recipients of Family Tax Benefit will receive two payments of $250 from December and from March.

This is in addition to two previous payments of $750 earlier this year.

Health and aged care

After the terrible toll the pandemic has waged on aged care residents and the elderly, the Government will add 23,000 additional Home Care packages to allow senior Australians to remain in their home for as long as possible.

Funding for mental health and suicide prevention will also be increased by $5.7 billion this year, with a doubling of Medicare-funded places for psychological services.

Super funds on notice

Underperforming super funds are to be named and shamed with a new comparison tool called Your Super. This will allow super members to compare fees and returns.

All funds will be required to undergo an annual performance test from 2021 and underperforming funds will be banned from taking on new members unless they do better.

Looking ahead

As the underlying Budget assumptions are based on finding a coronavirus vaccine sometime next year, Government projections for economic growth, jobs and debt are necessarily best estimates only.

Only time will tell if Budget spending and other incentives will be enough to encourage business to invest and employ, and to prevent the economy dipping further as JobKeeper and JobSeeker temporary support payments are wound back.

Another test will be whether the Budget initiatives help those most affected by the recession, notably young people and women.

The Government has said it is prepared to consider more spending to get the economy out of recession. The Treasurer will have another opportunity to fine tune his economic strategy fairly soon, with the next federal budget due in just seven months, in May 2021.

If you have any questions about any of the Budget measures and how they might impact your finances, don’t hesitate to contact us.

Information in this article has been sourced from the Budget Speech 2020-21 and Federal Budget support documents.

It is important to note that the policies outlined in this publication are yet to be passed as legislation and therefore may be subject to change.

Spring 2020

It’s September and spring is finally here. This is always a wonderful time to get out in the garden or in nature, on foot or on your bike, even if travel restrictions mean we need to stay closer to home this year.

The recent company reporting season for the year or half-year to June 30 provided an insight into the financial impact of COVID-19 – on the economy and for investors. Analysis by CommSec showed only 75% of ASX 200 companies reported a net profit in the year to June 30. Full-year earnings were down 38% on aggregate, while dividends were down 36%. In an extremely difficult trading environment, 53% of companies either cut or didn’t pay a dividend, a move that will affect investors who depend on dividend income from shares.

There were bright spots though. Gold companies profited from rising gold prices, up almost 30% this year due to gold’s status as a ‘safe-haven’ investment. Iron ore miners benefitted from a lift in demand from China and rising iron ore prices, up 46% this year. While homewares and electronics retailers and those with a strong online presence enjoyed increased demand from Australians staying close to home. Retail trade rose 12.2% in the year to July, the strongest annual growth in 19 years. Consumer confidence is also improving, with the weekly ANZ/Roy Morgan consumer confidence rating up 42% since its March lows to 92.7 points in the last week of August. The Australian dollar is fetching around US73.5c, up almost 5% this year.

Challenges remain, however. Unemployment rose to 7.5% in July, the highest level in 22 years. Business investment fell 11.5% in the year to July and residential building activity fell 12.1% in the year to June – the biggest fall in 19 years. The Reserve Bank forecasts the economy will contract 6% this year before rebounding 5% in 2021.

Getting retirement plans back on track

After a year when even the best laid plans have been put on hold due to COVID-19, people who were planning to retire soon may be having second thoughts. You may be concerned about a drop in your super balance, insecure work, or an uncertain investment outlook.

Whatever your circumstances, a financial tune-up may be required to get your retirement plans back on track. You may even find you’re in better financial shape than you feared, but you won’t know until you do your sums.

The best place to start is to think about your future income needs.

What will retirement cost?

Your retirement spending will depend on your lifestyle, if you are married or single, whether you own your home and where you want to live.

Maybe you want to holiday overseas every year while you are still physically active or buy a van and tour Australia. Do you want to eat out regularly, play golf, and lead an active social life; or are you a homebody who enjoys gardening, craftwork or pottering in the shed?

Also think about the cost of creature comforts, such as the ability to upgrade cars, computers and mobiles, buy nice clothes, enjoy good wine and pay for private health insurance.

It’s often suggested you will need around 70 per cent of your pre-retirement income to continue living in the manner to which you have become accustomed. That’s because it’s generally cheaper to live in retirement, with little or no tax to pay and (hopefully) no mortgage or rent.

Draw up a budget

To get you started, the ASFA Retirement Standard may be helpful. It provides sample budgets for different households and living standards.

ASFA suggests singles aged 65 would need around $44,183 a year to live comfortably, while couples would need around $62,435.i Of course, comfort is different for everyone so you may wish to aim higher.

To put these figures in perspective, the full age pension is currently around $24,550 a year for singles and $37,013 for couples. As you can see, this doesn’t stretch to ASFA’s modest budget, let alone a comfortable lifestyle, especially for retirees who are paying rent or still paying off a mortgage.

Then there is the ‘known unknown’ of how long you will live. Today’s 65-year-olds can expect to live to an average age of around 85 years for men and 87 for women. The challenge is to ensure your money lasts the distance.

Can I afford to retire?

Once you have a rough idea what your ideal retirement will cost, you can work out if you have enough super and other savings to fund it.

Using the ASFA benchmark for a comfortable lifestyle, say you hope to retire at age 65 on annual income of $62,000 a year until age 85. Couples would need a lump sum of $640,000 and singles would need $545,000. This assumes you earn 6 per cent a year on your investments, draw down all your capital and receive a part age pension.

Add up your savings and investments inside and outside super. Subtract your debts, including outstanding loans and credit card bills, to arrive at your current net savings. Then work out how much you are likely to have by the time you hope to retire if you continue your current savings strategy.

There are many online calculators to help you estimate your retirement balance, such as the MoneySmart super calculator.

Closing the gap

If there’s a gap between your retirement dream and your financial reality, you still have choices.

If you have the means, you could make additional super contributions up to your concessional cap of $25,000 a year. You may also be able to make after-tax contributions of up to $100,000 a year or, subject to eligibility, $300,000 in any three-year period. 
You might also consider delaying retirement which has the double advantage of allowing you to accumulate more savings and reduce the number of years you need to draw on them.

These are challenging times to be embarking on your retirement journey, but a little planning now could put you back in the driver’s seat. 
Get in touch if you would like to discuss your retirement strategy.

i https://www.superannuation.asn.au/resources/retirement-standard

Tax Alert September 2020

Many small business owners and sole traders will be breathing a sigh of relief following the extension of the JobKeeper scheme until March next year. At the same time, however, the ATO is stepping up its compliance activities.

Here’s a roundup of some of the key developments in the world of tax.

JobKeeper extended to March 2021

The government has announced its JobKeeper scheme, which was originally due to wind up on 27 September 2020, will now continue until 28 March 2021.

The $1,500 per fortnight payment to eligible businesses, not-for-profits and the self-employed will, however, drop to $1,200 per fortnight from 28 September 2020 and to $1,000 per fortnight from 4 January 2021.

From 28 September 2020, if your business claims JobKeeper, you will also be required to demonstrate it has suffered a decline in turnover using your actual GST turnover rather than the prior method, which was based on projected GST turnover.

ATO data matching support payments

The tax man is also starting to put JobKeeper support payments under the microscope using information from a new data matching arrangement with Services Australia (formerly Centrelink).

Information about JobKeeper payments reported to Services Australia for social security payment purposes will also be provided to the ATO. This will help the ATO identify people who are receiving both JobKeeper and social support payments.

JobKeeper still open to businesses

Although most businesses suffered an immediate decline in turnover when the COVID-19 crisis started, some businesses are finding things are tougher now the new financial year has commenced. The renewed lockdown in Victoria has also dealt a new blow to many businesses, so it’s worth remembering it’s still possible to apply for the JobKeeper subsidy.

If your small business has experienced a drop in turnover of more than 30 per cent and you meet the eligibility requirements, you are still able to apply for financial support through JobKeeper.

Expenses shortcut extended

For employees who have been using the shortcut method to calculate their working from home expenses, the good news is the end date for this scheme has been extended from 30 June to 30 September 2020.

The ATO announced the new three-month extension and said a further extension may be considered.

Employees and businessowners who work from home between 1 March 2020 and 30 September 2020 on income producing activities can use the shortcut method to claim 80 cents per work hour for their home office running expenses. This all inclusive rate means you don’t need to calculate and record your actual running costs.

The shortcut is not a free pass, however, as the ATO recently noted this was one of the top three issues it was seeing in returns lodged for 2019-20. To avoid problems in this area, ensure you don’t double up on your shortcut claim by adding, for example, a depreciation claim for laptops and desktops.

Warning on TPAR requirement

The ATO is warning some small businesses may find they need to lodge a taxable payments annual report (TPAR) this financial year if they have started using contracted service providers due to the pandemic.

TPARs keep the ATO informed about payments made to contractors, with the requirement initially rolled out for the building, cleaning and courier industries.

The tax man is now cautioning restaurants, cafes, grocery stores, pharmacies and retailers who have started paying contractors to deliver goods to customers that they may be required to report.

If total payments received for delivery or courier services are ten per cent or more of your business’s total annual business income, you may need to lodge a TPAR for 2020-21.

No tax on ‘robodebt’ refunds

And some good news for taxpayers who receive a refund amount from Services Australia for a debt raised using averaged ATO income information – also known as a robodebt. You don’t need to include the money in your income tax return.

The ATO is advising no action needs to be taken regarding these refunds and tax returns for prior years should not be amended.

SMSFs on the defensive: Is it time to revisit your strategy?

Self-managed super funds (SMSFs) have had a challenging year, with COVID-19 linked market uncertainty affecting income and returns. But SMSF trustees haven’t been sitting on their hands.

One of the main reasons people give for wanting to establish an SMSF is to have greater control of their investments and taking control of a difficult situation is exactly what they’ve been doing.

Changes to asset allocation

According to the 2020 Vanguard/Investment Trends SMSF investment report, nearly half of SMSFs made substantial changes to their asset allocation this year.

The survey of over 3000 SMSF trustees shows most reacted defensively, with 55 per cent increasing their cash and property holdings, mainly at the expense of equities. Direct shares now represent 31 per cent of SMSF portfolios, their lowest level since 2009 during the GFC.

The report found that one third of SMSF have fixed income exposure. Hybrid securities remain the most popular product, although more trustees are investing in bonds which has become easier with the profusion of bond ETFs (exchange traded funds). In fact, bonds were among the better-performing asset classes in the year to June 2020. International bonds returned 5.4 per cent while Australian bonds returned 4.2 per cent.i

However, the search for a reliable income stream that is better than you can get from bank deposits remains a challenge. The hunt for yield

With interest rates on the decline for several years, and currently at or near zero, investors have turned to shares for their dividend income as well as capital growth. But this source of income is also under threat from the economic impact of COVID-19 on company profits.

The Vanguard/Investment Trends survey also found that SMSFs expect dividend yields to fall from 4.8 per cent pre-COVID-19 to 3.6 per cent this year. While the actual decline in dividend income will depend on the shares you hold, many SMFS will already be feeling the pinch.

In July, the Australian Prudential Regulation Authority (APRA) ordered Australian banks and insurers to restrict dividend payments to 50 per cent of their earnings. Given the banks generally pay out up to 90 per cent of their earnings, this will have a big impact on SMSFs who often rely heavily on bank shares.

In the latest company reporting season, many popular blue-chip companies cut or suspended dividends. According to CommSec, 68 per cent of companies issued dividends in the year to 30 June 2020 but dividend payments were down 32 per cent on aggregate.

Yet despite this setback, SMSF investors are already positioning themselves for the future.

The Vanguard/Investment Trends survey showed SMSFs were poised to buy back into the share market, with 37 per cent willing to increase their allocation to blue-chip Australian shares, and 23 per cent to increase investment in international shares.

Diversification is key

In these uncertain times, having a well-diversified portfolio with multiple sources of income as well as capital growth is more important than ever.

As well as Australian shares, many SMSFs also have a relatively high exposure to property, either through residential real estate or listed property. But property also faces challenges.

Listed property was the worst performing asset class last year, down 13.4 per cent.i Although past performance is not a reliable guide to the future, commercial property faces challenges due to falling demand for retail and office space during the pandemic, as well as falling rents.

While residential property held its value last year, the outlook there is also uncertain given rising unemployment, falling rents and a halt to immigration. It’s also yet to be seen how many investors who temporarily deferred loan repayments will eventually decide to sell their properties.

A time to revise strategy

All in all, SMSF are performing well. However, with reduced dividend income and low interest rates in the medium term, SMSFs in retirement phase may need to make decisions that were not anticipated, such as drawing on their capital to cover their income needs.

At the very least, this is a good time to ensure that your SMSF is well diversified and positioned for continuing market volatility. If you would like to discuss your SMSF investment strategy, retirement planning or tax planning, do give us a call.

i Vanguard: The power of diversification

Winter 2020

Winter is here and we are almost to the end of another financial year. And what a year it’s been! With so many Australians impacted by fires, floods, drought and now COVID-19, let’s hope the new financial year sees a return to something like normality.

As May unfolded, hopes grew of economic re-opening. Reserve Bank Governor Philip Lowe told a Senate Committee on COVID-19 the economic downturn was less severe than feared due to Australia’s better than expected health outcomes and government stimulus and support. However, he stressed: “It’s very important we don’t withdraw fiscal stimulus too early”. Unemployment rose from 5.2% to 6.2% in April, but without JobKeeper support payments it would have been closer to 9.6%. The value of construction work fell 19% in the March quarter, 6.5% over the year, highlighting the need for government stimulus. New business investment in buildings and equipment also fell 6.1% in the year to March, although mining investment bucked the trend, up 4.2% in the March quarter. This was reflected in our record trade surplus of $77.5 billion in the year to April, despite a drop-off in imports and exports in April.

After a wave of panic buying in March, retail trade fell a record 17.9% in April, but consumer confidence is on the mend. The ANZ-Roy Morgan weekly consumer confidence index rose 8 weeks in a row to the end of May, up a total of 42% from recent lows to 92.7 points. As the global economy slowly re-opens and demand improves, iron ore prices rose 15% in May while crude oil was up 77%. Australian shares bounced back by around 5% in May, while the US market rose 3%. The Aussie dollar traded higher on our improved economic outlook, closing the month around US66.4c

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Timing the economic reboot

After successfully navigating our initial response to the COVID-19 (coronavirus) health crisis, backed up with $285 billion in government support to individuals and businesses to keep the economy ticking over, thoughts are turning to how to get the economy back on its feet.

It’s a huge task, but Australia is better placed than most countries. Pre-pandemic, our Federal Budget was close to balanced and on track to be in surplus this financial year. Economic growth was chugging along at around 2 per cent.

In his Statement on the Economy on May 12, Treasurer Josh Frydenberg gave an insight into the extent of the challenge ahead. He announced that the underlying cash deficit was $22 billion to the end of March, almost $10 billion higher than forecast just six months ago. And that was before the $282 billion in support payments began to flow into the economy.

Global comparison

Economic forecasts are difficult at the best of times, but especially now when so much hinges on how quickly and safely we and the rest of the world can kick start our economies.

The International Monetary Fund (IMF) is forecasting the world economy to shrink by 3 per cent this year. To put this in perspective, even during the GFC the contraction was only 0.1 per cent in 2009.

In Australia, the government forecasts growth will fall by 10 per cent in the June quarter, our biggest fall on record. If we manage a gradual economic reboot, with most activity back to normal by the September quarter, the Reserve Bank forecasts a fall in growth of 6 per cent this year before rebounding by 7 per cent in the year to June 2021.i

Even if we pull off this relatively fast return to growth, it will take much longer to repair the budget.

Budget repair

Economists have recently reduced their forecasts for the budget deficit after the JobKeeper wage subsidy program came in $60 billion under budget. However, they are still predicting our debt and deficits will reach levels not seen since World War II.

For example, Westpac chief economist, Bill Evans forecasts a budget deficit of $80 billion this year and $170 billion next year. AMP’s Dr Shane Oliver also expects the deficit to peak at $170 billion next financial year.ii

While polling shows most Australians approve of the way the federal and state governments have handled the crisis, many are beginning to wonder how we as a nation are going to pay for it.

The key to recovery will be getting Australians back to work; for those who have had their hours cut to return to full-time work, and those who have lost jobs to find work.

It’s all about jobs

The unemployment rate is forecast to double to 10 per cent, or 1.4 million people, in the June quarter with total hours worked falling 20 per cent. After the June 2020 peak, the Reserve Bank expects a gradual fall in the annual unemployment rate to around 6.5 per cent by June 2022.i

With the government announcing the easing of restrictions on movement in three stages by July, Treasury estimates 850,000 people would be able to return to work.

Treasury also estimates that this easing of restrictions will increase economic growth by $9.4 billion a month. However, this outcome depends on us following the health advice. The cost of re-imposing restrictions could come at a loss of more than $4 billion a week to the economy.

The growth strategy

Looking ahead, Treasurer Frydenberg made it clear he expects the private sector to lead job creation, not government. If the past few months are anything to go by, Australians have risen to the challenge.

From working from home and staying connected via Zoom, to restaurants pivoting from dine-in to takeaway and manufacturers switching to production of ventilators and hand sanitiser, individuals and businesses have been quick to adapt and innovate.

This is likely to be one of the positive legacies of the pandemic and should help our economic recovery in the years to come.

If you would like to discuss your finances and how to make the most of the recovery, give us a call.

i https://www.rba.gov.au/publications/smp/2020/may/economic-outlook.html

ii https://www.amp.com.au/insights/grow-my-wealth/the-coming-surge-in-australias-budget-deficit-and-public-debt

Unless otherwise stated, figures have been sourced from Treasurer Josh Frydenberg’s “The economic impact of the crisis” statement https://ministers.treasury.gov.au/ministers/josh-frydenberg-2018/speeches/ministerial-statement-economy-parliament-house-canberra

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Tax Alert June 2020

With COVID-19 dominating everyone’s thoughts, employers are being offered a brief window of opportunity to get their tax affairs in order with the new Superannuation Guarantee (SG) amnesty. There is also a range of virus related assistance on offer to help affected business and individual taxpayers.

Here’s a roundup of some of the latest tax developments and support measures.

New amnesty for unpaid SG contributions

Employers are being offered a one-off opportunity to disclose and pay any unpaid Superannuation Guarantee (SG) amounts stretching back to the beginning of compulsory super, with legislation for the long-awaited SG amnesty finally in place.

The amnesty (which runs until 7 September 2020), allows employers to lodge an SG amnesty form to disclose super contribution shortfalls for their employees for any quarter from 1 July 1992 to 31 March 2018.

To encourage employers to take advantage of the amnesty, it will not incur the normal interest, administration charges and non-payment penalties of up to 200 per cent. Employers can also claim a tax deduction for any SG payments, provided they are made by the September 7 cut-off date.

As legislation for the amnesty doesn’t allow any deadline extensions, the ATO has announced it will offer deferred payment plans to eligible businesses affected by COVID-19.

This brief amnesty also comes with a warning. The regulator has reminded businesses that the new Single Touch Payroll (STP) reporting system gives it more information on payment of employee entitlements and this will increasingly be used to identify non-compliant employers in future.

Assistance for taxpayers affected by COVID-19

In light of the challenging business conditions created by the coronavirus lockdown, the ATO is offering measures to assist taxpayers experiencing financial difficulties.

Unlike the bushfire tax relief, COVID-19 assistance measures will not be automatic. If you are affected, the ATO is encouraging you to get in touch to discuss relief options and a tailored support plan.

Support may include deferring payment of your PAYG instalments, business activity statement (BAS) liabilities and assessment amounts for income tax and excise, by up to four months.

If your business is on a quarterly reporting cycle, you may also opt into monthly GST reporting to get quicker access to your GST refunds. You may also be permitted to vary your PAYG instalment amounts to zero for the March 2020 quarter and claim refunds for instalments you paid for the September and December 2019 quarters.

However, employers still need to meet ongoing SG obligations for their employees.

The ATO will also work with individuals experiencing financial hardship and may offer tax relief if you are in serious and exceptional circumstances, such as being unable to pay for food or accommodation.

Fringe benefits tax deferred

Due to the challenges created by the COVID-19 lockdown, the ATO has also deferred lodgment of all 2019–20 fringe benefits tax (FBT) annual returns.

This means your business is not required to lodge your annual return or pay your FBT liability until 25 June 2020.

Directors liable for unpaid tax

Company directors need to remember that from 1 April 2020 they are personally liable for their company’s unpaid GST, luxury car tax or wine equalisation tax liabilities.

The new Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2019 has extended the existing director penalty notice (DPN) regime, which is designed to protect employee entitlements such as PAYG withholding and SG contributions.

If you are a company director on the final day of a tax period or GST instalment quarter, you become personally liable for any GST remaining unpaid by the due date. If your company does not lodge a return, the ATO can estimate the amount of unpaid tax.

Claims for residential rental properties

The ATO has provided landlords with new guidance on tax deductions if they have tenants who are temporarily not paying rent, or paying reduced rent, due to COVID-19.

If landlords are still incurring normal expenses on the property, they can continue to claim these expenses in their tax return.

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How COVID-19 changes tax time

As this financial year draws to a close, it will be viewed as a year like no other. COVID-19 (coronavirus) has impacted everybody’s life, albeit in different ways for different people.

For some, staying at home has meant you have greater savings; for others, the virus has meant lower wages or even the prospect of unemployment for one or more members of the family.

Whichever side of the equation you fall, end of financial year planning has never been more important. Traditionally it marks a time when you can stop and assess your current situation and make plans for the future. That hasn’t changed but your circumstances may well have.

Super options

If you are in the fortunate position of having saved more money, you could consider making extra contributions to your super. This could take the form of voluntary contributions, spouse contributions, co-contributions or carrying forward any unused contributions from last year.

As superannuation is concessionally taxed, it makes sense to make the most of this environment.

Using the unused contributions rule, say you only made $20,000 in concessional contributions in the 2018-19 financial year, then you have $5000 in unused contributions you could make this current year. This means you could contribute a total of $30,000 in this current year ($5000 unused contributions plus the annual contributions limit of $25,000) as long as your super balance is less than $500,000.

Or you might consider making a co-contribution to your fund. If you earned $38,564 or less this financial year, then you could contribute up to $1000 to your super as a non-concessional payment and the government will match it with a contribution of up to $500. That’s a handsome return on your investment of 50 per cent. The government’s co-contribution gradually phases out once your income reaches $53,564.

If on the other hand you have lost some or all of your income and have fallen on financial hard times, you may be eligible to withdraw $10,000 from your superannuation before the end of this financial year and then a further $10,000 in the first quarter of the 2020-21 financial year.

This will have an impact on your final retirement balance, but it may be of considerable help in your current situation. It’s important to weigh up carefully the pros and cons of such a move.

Tax concessions

Of course, reduced income will mean you may well benefit from a tax refund as you may not have worked the full year or not at the rate you began the year.

When you are calculating your expenses for this current financial year, also remember that there are expenses associated with working from home such as mobile and internet costs, electronic device purchases and stationery costs.

The Australian Taxation Office has a quick formula which will allow you to claim 80c for every hour worked at home or else you can choose to calculate the actual amount yourself. This may end up giving a better result but could be more time consuming. The volatile sharemarket may also mean that you have some capital gains or losses that you can offset against your taxable income.

Retiree breaks

For retirees, the coronavirus may also have put a dent in your income due to sharemarket losses or reduced rental income from investment properties.

To ease the pressure, the Government has moved to cut the minimum drawdown requirement on superannuation pensions by 50 per cent for both this current financial year and next year. If you are in a position to take advantage of this drawdown reduction, then it may go some way to maintaining your retirement savings.

Of course, the rule of bringing forward expenses into the current year and deferring receipts into the following year still holds. For instance, if you have insurance premiums to pay and can afford it, consider making them up to 13 months in advance in the current year.

Donating to charity is also something to consider, particularly when there is so much need for financial assistance in the community this year. All donations to registered charities are tax deductible.

If you want to know how to make the most of your end of financial year planning this year, please contact us to discuss.

COVID-19

In a rapidly evolving response to the spread of COVID-19, the Federal Government’s second support package announced over the weekend has flicked the switch to more income support for retirees and workers.

Between the first $17.6 billion package announced on March 12, and this latest $66.1 billion package, the emphasis has shifted from stimulus aimed at keeping businesses up and running, to support for individuals to get them through the crisis.

Importantly, casuals and sole traders along with employees who lose work due to the Coronavirus shutdown will receive help.

Retirees affected by falling superannuation balances and deeming rates out of line with historically low interest rates have also been offered some reprieve.

Minimum pension drawdowns halved

Self-funded retirees will be relieved the Government has moved quickly to temporarily reduce the minimum drawdown rates for superannuation pensions.

Similar to the response in the wake of the Global Financial Crisis, minimum drawdown rates for account-based pensions and similar products will be halved for the 2020 and 2021 financial years.

This means retirees will be under less pressure to sell shares or other pension assets in a falling market to meet the minimum payments they are required to withdraw each financial year. For example, a 75-year-old retiree will now be required to withdraw a minimum of 3% of their super pension balance this financial year and in 2020-21, instead of the usual 6%.

The new rates are in the table below:

Age of member Minimum drawdown rate
(for the 2019-20 and 2020-21 income years)
Under 65 2%
65-74 2.5%
75-79 3%
80-84 3.5%
85-89 4.5%
90-94 5.5%
95+ 7%

Deeming rates cut again

In addition to the cut in pension deeming rates announced in the first stimulus package, the Government has cut deeming rates by a further 0.25 percentage points. This reflects the Reserve Banks latest cut in official interest rates to a new low of 0.25%.

Deeming rates are the amount the Government ‘deems’ pensioners earn on their investments to determine eligibility for the Age Pension and other entitlements, even if that rate is lower than they actually earn.

This move will bring deeming rates closer in line with the interest rates pensioners are receiving on their bank deposits, especially those with lower balances.

From 1 May 2020, deeming rates will fall to 0.25% on investments up to $51,800 for singles and $86,200 for couples. A rate of 2.25% will apply to amounts above these thresholds (see table).

Singles Couples
Investment value Deeming rate Investment value Deeming rate
Up to $51,800 0.25% Up to $86,200 0.25%
Over $51,800 2.25% Over $86,200 2.25%

Early access to super

More controversially, the Government has also announced it will allow anyone made redundant because of the Coronavirus, or had their hours cut by more than 20%, to withdraw up to $10,000 from their super this financial year and a further $10,000 in 2020-21.

Sole traders who lose 20% or more of their revenue due to the Coronavirus will also be eligible.

The Treasurer said the process is designed to be frictionless, with eligible individuals able to apply online through MyGov rather than going to their super fund.

While this provides an additional safety net for individuals and families who face the loss of a job or a significant fall in income, we do urge our clients to consider accessing their super as a last resort.

Taking a chunk out of your retirement savings now, after a big market fall, would not only crystallise your recent losses but it also means you would have less money working for you when markets recover.

So before you do anything, speak to us and look at other income support measures.

Relief for those out of work

All workers, including casuals and sole traders, who lose their job or are stood down due to the Coronavirus shutdown, will be eligible for a temporary expansion of Newstart (now called JobSeeker) payments to new and existing recipients.

Individuals who meet the income test will receive a Coronavirus supplement of $550 a fortnight on top of their existing payment for the next six months. This means anyone eligible for JobSeeker payments will receive approximately $1100 a fortnight, effectively doubling the allowance.

This measure includes people on Youth Allowance, Parenting Payment, Farm Household Allowance and Special Benefit.

Importantly, the extra $550 will go to all recipients, including those who get much less than current maximum fortnightly payment because they have assets or have found a few hours of part-time work.

Support for pensioners

Pensioners have also received additional support. On top of the $750 payment announced on March 12, an additional $750 will be paid to any eligible recipients, as at 10 July 2020, receiving the Age Pension, Veterans Pension or eligible concession card holders.

This payment will be made automatically from 13 July 2020.

More support to come

This latest support package is unlikely to be the last as the Government responds to a rapidly evolving health crisis and progressive shutdown of all but essential economic activity.

If you have any questions about your investment strategy or entitlements to government payments, please don’t hesitate to call.

Information in this article has been sourced from https://treasury.gov.au/coronavirus/households

Autumn 2020

After an unprecedented summer of bushfires, we hope that Autumn brings cooler temperatures and soaking rain for all those who have been affected.

Data released in February give an early indication of how the Australian economy has been impacted by the bushfires and coronavirus, on top of the US-China trade war. The Reserve Bank of Australia lowered its near-term growth forecast for the year to June 2020 from 2.5% to 2.0%. New business investment fell 2.8% in the December quarter and 5.8% over 2019. Retail sales rose 0.5% in the normally super busy December quarter but were up just 0.3% over 2019, the slowest year on record. New vehicle sales were also sluggish, down 8.2% last year while the value of construction work done fell 7.4%. Consumers have perked up a bit since then, with the Westpac/Melbourne Institute consumer sentiment index up 2.3% in February.

Australian, US and European share markets all fell by more than 8% in February. Commodity prices also fell, although gold was up more than 5% due to its safe haven status. And the Aussie dollar dipped below US$66c, its lowest level since 2009.

Despite the economic challenges, the Australian corporate sector remains in good health. As the interim profit reporting season comes to an end, more than 90% of companies reported a first half profit (although a bare majority lifted profits), while record numbers issued dividends.

The low dollar, a rise in unemployment to 5.2% in January, annual wage growth stuck at 2.2% in the December quarter and sluggish economic growth make another cut in official interest rates more likely.

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Hold on… bumpy markets ahead

After period of optimism, global investment markets have hit the panic button on fears about the possible economic impact of the coronavirus (COVID-19).

At times like these, it’s good to get some perspective.

Australian shares rose 24 per cent last year, touching record highs, and 10 per cent a year over the past seven years. Global shares rose 28 per cent last year and 17 per cent over the past seven years.i After such a good run, many observers have been saying shares were looking fully valued and that a correction was likely.

The thing with market corrections is that it is impossible to predict what will trigger them or how long and severe they will be.

Avoid knee-jerk reactions

At this point, markets are responding to uncertainty. Nobody knows what the extent of the economic fallout will be, so the temptation is to bail out of shares and put your cash in the bank. Or jump ship and switch to a ‘safer’, more conservative option in your superannuation fund.

While the urge to act and protect your savings is understandable, knee-jerk reactions can be a mistake.

It’s near impossible to time the markets. Not only do you risk selling when prices are near rock-bottom, but you also risk sitting on the sidelines during as the market recovers. As history tells us it always does.

In an ever-changing world, the basics of investing stay the same. By sticking to some timeless rules it’s much easier to avoid emotionally driven reactions and focus on your investment horizon.

Have a plan

Investing is a lifelong journey and like all journeys you are more likely to reach your destination if you plan your route. Without a plan, it’s easy to be distracted by the latest market worries and short-term price fluctuations.

Think about your personal and financial goals and what you want to achieve in 1,5,10, 20 years’ time. Be specific, put a dollar figure on your goals and plan how to reach them.

Low risk comes with lower returns

Many people are wary of investing in shares because of the perceived risks. Growth assets such as shares and property do entail higher risk than cash in the bank, but they also deliver higher returns in the long run.

Perhaps the biggest risk of all is not earning the returns you need to achieve your goals. While domestic and international shares produced stellar returns last year, cash returned just 1.5 per cent which was below the level inflation. Cash returns were not much better over the past seven years, averaging 2.2 per cent a year.

Spread your risk

Shares, property, bonds and cash all have good years and bad. While shares and property tend to provide the highest growth over time, there will be years when prices fall or go sideways. In some years, bonds and even cash produce the best returns.

A good way to reduce volatility and enjoy smoother returns over time is to diversify your investments across and within asset classes. That way, one bad investment or difficult year won’t sink your ship.

The most appropriate mix will depend on your age, the timing of your goals and your risk tolerance. You will need cash for emergencies and short-term goals, with enough money in growth assets to last you through your retirement.

Let your savings grow

The effect of compound interest is often referred to as magic, but there’s no trickery involved. Better still, it requires no work on your part, just the willpower to reinvest the income you earn on your investments, so you earn interest on your interest.

Rather than sell shares in quality companies in a panic, you could continue to collect your share dividends and reinvest them in more shares or other quality assets. This way, you avoid crystallising short-term paper losses and benefit from the inevitable market recovery.

That’s the simple but powerful concept behind superannuation which locks away your savings and all investment earnings until you retire.

When fear is driving markets, it’s important to get back to basics and think long term. If you would like to discuss your overall investment strategy, don’t hesitate to get in touch.

i https://www.chantwest.com.au/resources/2019-a-standout-year-for-super-funds

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Tax Alert March 2020

The ATO is providing taxpayers in bushfire areas with more time to get their tax affairs in order, but at the same time it’s getting tough on employee car parking benefits and investigating lifestyle assets owned by wealthy taxpayers.

Here’s a roundup of some of the latest developments when it comes to tax:

Deferrals for taxpayers affected by bushfires

In the wake of this summer’s devastating bushfires, the ATO has announced it will be automatically deferring any lodgments or payments that taxpayers in bushfire-impacted postcodes are due to make.

Deferral will apply to income tax, activity statement, fringe benefits tax (FBT) and excise return lodgments and any associated payments, with the new deadline being 28 May 2020. Refund payments will be prioritised.

If you are affected by the bushfires but don’t live in a postcode on the ATO’s list, phone its Emergency Support Infoline on 1800 806 218. The service can also assist with re-issuing tax returns and activity statements, re-constructing your tax records and setting up payment plans.

 

Super obligations also delayed

SMSFs in bushfire zones have also been given extra time to meet their lodgement and compliance obligations.

The deferral applies to SMSF members and trustees living in an affected postcode, even if your SMSF’s address is not in these areas.

Employers in bushfire zones are still required to meet employee super guarantee (SG) obligations by the due date. SG charges for late SG payments will not be waived.

 

More employers up for FBT on car parking

The ATO has released a new draft interpretation of the FBT legislation that could see more businesses paying FBT if they provide employees with car parking benefits.

Draft Taxation Ruling TR 2019/D5 is due to commence on 1 April 2020 and replaces the former ruling, which was in place for over 20 years.

Under the ATO’s new interpretation, if your staff car parking facilities are both in the vicinity of your business and within 1 kilometre of a car park that offers all-day parking as a ‘commercial’ car park for FBT purposes, you may have to pay FBT on the value of your employees’ car spaces – even if they were tax-free before. A car park can be commercial for FBT purposes even if its fee structure discourages all-day parking by charging a higher fee.

If your business is near a shopping centre, hospital or airport for example, you should review your obligations prior to the new FBT year.
ATO collecting details on lifestyle assets

Taxpayers with ‘lifestyle assets’ like yachts, thoroughbred horses, expensive cars and fine art are likely to find themselves under the tax man’s microscope after the ATO requested five years of policy details from insurers.

Over 30 insurers have been asked to provide details of assets over certain value thresholds for use in the ATO’s data matching program.

Valuations of assets owned by around 350,000 taxpayers will be added to the ATO’s database, providing it with a more complete picture of a taxpayer’s actual financial situation. Although the information will not be used to start automated compliance activities, it will be used for risk profiling purposes.
Early release of super on ATO radar

The tax man is once again warning taxpayers that withdrawing your super savings before a condition of release is met is illegal.

If you are approached by someone promoting a scheme offering early release of your super benefits, the ATO is asking you to contact it on 13 10 20.
CGT blow for non-resident property owners

Property owners who are non-residents for tax purposes are no longer eligible for the main residence exemption (MRE) for capital gains tax (CGT) when they sell their home.

Under new legislation, the MRE is now denied to non-resident taxpayers if they dispose of a property purchased after 9 May 2017, unless certain life events occur within six years of becoming a foreign resident for tax purposes.

For homes purchased prior to 9 May 2017, non-resident taxpayers only have until 30 June 2020 to sell their former home if they do not want to pay full CGT on the capital gain made since the original property purchase.

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Hatching your nest egg early

The summer bushfires have touched the lives of all Australians. For individuals who lost homes, businesses or livelihoods, the financial hardship lingers, prompting many to ask whether they can dip into their super to tide them over.

The short answer is generally no. According to the Australian Taxation Office (ATO), there are very limited circumstances where you can access your super early, mostly related to specific medical conditions or severe financial hardship.

Before we discuss these special circumstances, let’s look at when you can legally access your super under normal conditions.
Accessing super before age 60

Under superannuation law, there are strict rules around when you can start withdrawing your super.

The first hurdle is reaching what is referred to as your preservation age. Once you reach your preservation age – between age 55 and 60 depending on the year you were born – and retire, you can access your super in a lump sum or as a pension. But as a disincentive to early retirement, there may be tax to pay.

Even if you keep working, once you reach preservation age you can access a portion of your super by starting a transition to retirement pension. This can be an effective way to scale back your working hours while supplementing your reduced wages with income from super.

However, you can only access 10 per cent of your pension account each year. You pay tax on the taxable portion of pension income at your marginal rate less a 15 per cent offset. Earnings on assets supporting your pension are taxed at the normal super rate of 15 per cent.
Accessing super from age 60

From age 60, you can access your super tax free provided you are no longer working. And once you turn 65 you can access your super tax free even if you haven’t retired.

Anyone who has suffered financial hardship as a result of the bushfires and has already reached their preservation age could dip into their super under the normal rules, provided they retire or start a transition to retirement pension.

But what about people who don’t qualify under the normal rules? That’s where the early access rules governing severe financial hardship or compassionate grounds come in.
Severe financial hardship

There’s no question the recent bushfires have caused severe financial hardship for many people in the community. But for superannuation purposes, the definition of hardship will mean few people can use it to gain early access to their super.

You can gain access to at least part of your super as a lump sum if:

  • You have been receiving certain government income support payments continuously for at least 26 weeks, and
  • You are unable to meet your reasonable and immediate family living expenses.

Even then, you can only receive a maximum payment of $10,000 a year before tax.

If you have reached your preservation age plus 39 weeks, you may be able to access your entire super balance as a lump sum or pension (as opposed to 10 per cent of your balance each year with a transition to retirement pension) if:

  • You are employed for less than 10 hours a week, and
  • You have received government income support payments for at least 39 weeks since reaching preservation age.

Access on compassionate grounds

You may be able to take some money out of super early on compassionate grounds but, once again, strict rules apply. The money can only be taken as a lump sum and used to cover unpaid expenses including:

  • Medical treatment or transport for you or one of your dependents, but only for a chronic or life-threatening illness not available through the public health system,
  • Modifications to your home or vehicle to accommodate a severe disability,
  • To prevent foreclosure on your mortgage if your lender threatens to repossess or sell your home.

Unfortunately, the rules governing early access make it extremely difficult to qualify. That’s because super is meant to be used for the sole purpose of providing retirement income.

If you would like to discuss when and how you can access your super, under the normal rules or due to special circumstances, please give us a call.

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The Hunt For Dividend Income

With interest rates at historic lows and likely to stay that way for some time, retirees and other investors who depend on income from their investments are on the lookout for a decent yield.

Income from all the usual sources, such as term deposits and other fixed interest investments, have slowed to trickle. Which is why many investors are turning to Australian shares for their reliable dividend income and relatively high dividend yields.

The average dividend yield on Australian shares was 5 per cent in 2019 and more than that for many popular stocks.

By comparison, returns from traditional income investments are failing to keep pace with Australia’s low inflation rate of 1.7 per cent. Interest rates on term deposit from the big four banks are generally below 1.4 per centi, while the yield on Australian Government 10-year bonds is around 1.2 per cent.ii

Investment Interest rate/income return
Cash rate 0.75%
Average 12-month term deposit (major banks) 1.2-1.4%
10-year government bonds 1.2%
All Ords dividend yield 5.0%
Average rental yield (Australian residential property) 4.0%

Sources: RBA, Canstar, CoreLogic Home Value Index

But with shares entailing more risk than term deposits or bonds, is a dividend income strategy safe?

Dividends provide stability

When comparing investments, it’s important to look at total returns. The total return from shares comes from a combination of capital gains (from share price growth) and dividend income. While market commentary tends to focus on short-term price fluctuations driven largely by investor sentiment, dividend income is remarkably stable.

Over the past 20 years, dividend income has added around 4 per cent on average to the total return from Australian shares.

For example, in 2019 the All Ords Index (which measures the share price gains or losses of Australia’s top 500 listed companies) rose 19.1 per cent. When dividends were added, the total return was 24.1 per cent. While that outstanding performance is unlikely to be repeated in 2020, it shows how dividends are the icing on the cake in good times and a buffer against short-term losses in difficult times.

So how are dividend yields calculated?

Calculating dividend yields

To work out the dividend yield on a company’s shares you divide the latest annual dividend payments by the current share price.

Take the example of BHP Billiton. Its shares were trading at $37.41 in December after paying annual dividends of $1.9178, providing a dividend yield of 5.13 per cent ($1.9178 divided by $37.41). When you add franking credits, the ‘grossed up’ dividend yield is 7.32 per cent.iii

Franking credits are a type of tax credit compensating shareholders for tax the company has already paid. Companies such as BHP with fully franked shares will have franking credits equal to 30 per cent of the gross dividend value. This is not a recommendation for BHP, simply an illustration of how dividend yields are calculated.

Australia’s major banks have a long history of strong profit growth and reliable dividend income, making them popular with income investors, along with household names such as Wesfarmers, Woolworths and BHP Billiton.

But a big dividend yield is not always better. So how can you spot a quality dividend?

Quality counts

When companies earn a profit, directors must decide how much to pay out to shareholders in the form of dividends and how much to reinvest in the company to grow the business.

Because of the way they are calculated, a high dividend yield may signal a company with limited growth prospects, a falling share price, or both. Sometimes it’s the result of a one-off special dividend.

Investors looking for a reliable income stream need to focus on companies with quality assets and strong management teams, good growth prospects and sustainable earnings. This is what will determine the future growth in dividends and/or the share price.

In the current low interest rate, low economic growth and low inflation environment, many companies have taken a cautious approach and rewarded shareholders with higher dividends. As growth picks up, companies may allocate a greater share of profits to growing their business. Australia’s economic growth is forecast to pick up to 2.25 per cent in 2019/20 from 1.7 per cent last year.iv Relying too heavily on dividends from Australian shares could also expose you to risk or mean missing out on opportunities elsewhere.

Consider the big picture

When hunting for a good dividend yield, it’s important to follow fundamental investment principles such as diversification. That means holding shares from a variety of market sectors, with good prospects for growth and income. If your share portfolio consists entirely of bank stocks, for example, you risk losing money if the sector falls out of favour.

Diversification is also important across asset classes. The total return from Australian residential investment property was 6.3 per cent in 2019 (from a combination of price movements and rental yields), but in other years the performance of shares and property could be reversed.v

And despite their lowly returns, holding term deposits with different maturity dates allows you to manage your cash flow. It also helps avoid having to sell your shares and crystallise losses in a market downturn.

If you would like to discuss your income needs within the context of your overall investment portfolio, give us a call.

i https://www.canstar.com.au/term-deposits/highest-term-deposit-rates/

ii https://tradingeconomics.com/bonds

iii https://www.marketindex.com.au/analysis/dividend-yield-scan-6-december-2019

iv https://budget.gov.au/2019-20/content/myefo/index.htm

v https://www.corelogic.com.au/news/corelogic-december-2019-home-value-index-strong-finish-housing-values-2019-corelogic-national

2019 Year in Review:

It was a year of extremes, with shares hitting record highs and interest rates at historic lows. Yet all in all, 2019 delivered far better returns than Australian investors dared hope for at the start of the year.

The total return from Australian shares (prices and dividend income) was 24 per cent in the year to December.i When you add in positive returns from bonds and a rebound in residential property, Australians with a diversified investment portfolio had plenty to smile about.

Humming along in the background, Australia entered a record-breaking 29th year of economic expansion although growth tapered off as global pressures mounted.

Global economy slowing

The US-China trade war, the Brexit impasse and geopolitical tensions weighed on the global economy in 2019. Yet late in the year optimism grew that US President Donald Trump would sign the first phase of a trade deal with Beijing. The re-election of Boris Johnson’s Conservatives in the UK also raised hopes that the Brexit saga may finally be resolved.

The US economy is in good shape, growing at an annual rate of 2.1 per cent in line with inflation and a jobless rate of just 3.5 per cent. China has fared worse from the trade tensions, with annual growth of 6 per cent its weakest since 1992.

In Australia, growth slipped to an annual rate of 1.7 per cent in the September quarter. Inflation, at 1.7 per cent, is well below the RBA’s target and unemployment is stuck around 5.2 per cent.ii

Despite the global slowdown, higher commodity prices were a major contributor to Australia’s healthy trade surplus in 2019.iii

Australian Key Indices as at 31 Dec 2019 Share Markets (% change) Jan – Dec 2019
GDP annual growth rate* 1.7% Australia ASX 200 18.4%
RBA cash rate 0.75% US S&P 500 28.6%
Inflation 1.7% Euro Stoxx 50 24.5%
Unemployment 5.2% Shanghai Composite 22.3%
Consumer confidence index 95.1 Japan Nikkei 225 17.8%

* Year to September 30,2019 Sources: RBA, Westpac Melbourne Institute, Trading Economics

Commodities prices mixed

Iron ore prices rose 28.7 per cent in 2019 following a mine disaster in Brazil which reduced global supply. Other major Australian exports to receive a boost were gold, up 18.5 per cent, and beef, up 32 per cent.iv

At the other end of the scale, thermal coal prices fell 34 per cent and liquefied natural gas (LNG) was down 44 per cent.v

Middle East tensions and tighter supply led to a surge in crude oil prices, with Brent crude up almost 21 per cent.vi As Australia is a net importer of oil, a jump in oil prices coupled with a fall in the Aussie dollar filtered through to higher petrol prices for motorists.

Interest rates at new lows

In an effort to stimulate the economy, the Reserve Bank cut the cash rate three times in 2019 to an historic low of 0.75 per cent. The US Federal Reserve also cut rates to a target range of 1.50-1.75 per cent. This was the main reason the Australian dollar lifted from its decade low of US67c in October to finish the year where it started, around US70c.vii

Rate cuts flowed through to yields on Australian 10-year government bonds which fell to just 1.37 per cent.<supviii< sup=””> However, falling bond yields result in higher bond prices and this lifted total returns from government bonds by around 8 per cent.ix

Retirees and others who rely on income from bank term deposits had another difficult year, with interest rates generally below 2 per cent. After inflation, the real return was close to zero.x It’s little wonder then that many looked elsewhere for a better return on their money.

Bumper year for shares

The hunt for yield was one reason Australian shares jumped 18.4 per cent in 2019, the best performance in a decade.xi The market climbed a wall of worries to hit a record high in November on optimism about a US-China trade deal, then eased back on concerns about slowing economic growth.

Despite low interest rates and personal tax cuts, consumers are reluctant to spend. The Westpac/Melbourne Institute survey of consumer sentiment fell to 95.1 in December – anything below 100 denotes pessimism.xii

Property prices recovering

Australian residential property prices rebounded strongly in the second half of 2019, driven by lower mortgage interest rates, a relaxation of bank lending practices and renewed certainty around the taxation of investment property following the May federal election.

According to CoreLogic, property prices rose 2.3 per cent on average, led by Melbourne and Sydney, both up 5.3 per cent. Also up were Hobart (3.9 per cent), Canberra (3.1 per cent) and Brisbane (0.3 per cent). The only capitals to fall in value were Darwin (-9.7 per cent), Perth (-6.8 per cent) and Adelaide (-0.2 per cent).

When rental income is included, the total return from residential property was 6.3 per cent.xiii

Looking ahead

Property prices are expected to recover further this year but with shares looking fully valued and bond yields near rock bottom, returns could be more modest.

The Australian government is under pressure to do more to stimulate the economy in the short term to head off further rate cuts by the Reserve Bank. More fiscal stimulus could inject fresh life into the local economy and financial markets.

Overseas, the US-China trade war is far from resolved and could remain up in the air until after the US Presidential election in November. There is also uncertainty over the Brexit deal and its impact on trade across Europe.

The one thing we do know is that a diversified investment portfolio is the best way to navigate unpredictable markets.

If you would like to speak to us about your overall investment strategy, give us a call.

i Econonomic Insights: Sharemarket winners and losers, CommSec Economics, 2 January 2019

ii Trading Economics, viewed 1 Jan 2020, https://tradingeconomics.com/indicators

iii https://dfat.gov.au/trade/resources/trade-statistics/Pages/australias-trade-balance.aspx

iv Trading economics, as at 31 Dec 2019, viewed 1 Jan 2020, https://tradingeconomics.com/commodities

v Econonomic Insights: Sharemarket winners and losers, CommSec Economics, 2 January 2019

vi Trading economics, as at 31 Dec 2019, viewed 1 Jan 2020, https://tradingeconomics.com/commodities

vii Trading economics, as at 31 Dec 2019, viewed 1 Jan 2020, https://tradingeconomics.com/currencies

viii RBA, https://www.rba.gov.au/statistics/tables/#interest-rates

ix Economic Insights: Year in Review; Year in Preview, CommSec 2 January 2020.

x Canstar, https://www.canstar.com.au/term-deposits/highest-term-deposit-rates/

xi Trading economics, viewed 1 January 2020 https://tradingeconomics.com/stocks

xii https://www.westpac.com.au/content/dam/public/wbc/documents/pdf/aw/economics-research/er20191211BullConsumerSentiment.pdf

xiii https://www.corelogic.com.au/news/corelogic-december-2019-home-value-index-strong-finish-housing-values-2019-corelogic-national

SUMMER 2019

December is here which marks the official start to summer. Unfortunately, the bush fire season is already underway. We would like to take this opportunity to express our heartfelt thanks to the firefighters, emergency services personnel and community members who have been working tirelessly to save lives and property.

After keeping interest rates on hold at 0.75 per cent in November, Reserve Bank Governor Philip Lowe said in a speech he would only consider unconventional measures to stimulate the economy if rates fell to 0.25 per cent. He ruled out negative interest rates but said he might consider buying government bonds.

Economic activity remains patchy. The Reserve Bank forecasts Australia’s economy will stay flatter for longer with growth of 2.25 per cent this year rising to 2.75 per cent by the end of 2020. Business and consumer confidence remain weak, which was reflected in a 0.2 per cent decline in retail sales in the year to September, the biggest fall in 28 years. New vehicle sales followed the trend, down 9.1 per cent in the year to October, the biggest fall in a decade. Residential building was also down, by 10.6 per cent in the year to September, the biggest fall in 18 years. Unemployment rose slightly from 5.2 per cent to 5.3 per cent in October as the number of people in work fell for the first time in 17 months.

On a brighter note, Australia trade surplus rose for the 21st successive month in September, as our annual trade surplus with China hit a new record of $67.3 billion. Our exports have been supported by the weaker Aussie dollar which eased in November from US69c to US67.7c.

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Our retirement system: great, but room for improvement

You could be forgiven for thinking Australia’s superannuation system is a mess. Depending who you talk to, fees are too high, super funds lack transparency and Governments of all political persuasions should stop tinkering.

Yet according to the latest global assessment, Australia’s overall retirement system is not just super, it’s top class.

According to the 11th annual 2019 Melbourne Mercer Global Pension Index, Australia’s retirement system ranks third in the world from a field of 37 countries representing 63 per cent of the world’s population. Only the Netherlands and Denmark rate higher.i

What we’re getting right

While super is an important part of our retirement system, it’s just one of three pillars. The other two pillars being the Age Pension and private savings outside super.

Writing recently in The Australian, Mercer senior partner, David Knox said one of the reasons Australia rates so highly is our relatively generous Age Pension. “Expressed as a percentage of the average wage, it is higher than that of France, Germany, the Netherlands, the UK and the US.”ii

As for super, we have a comparatively high level of coverage thanks to compulsory Superannuation Guarantee payments by employers which reduces reliance on the Age Pension. In fact, Knox says Australia is likely to have the lowest Government expenditure on pensions of any OECD country within the next 20 years.

Superannuation assets have skyrocketed over the last 20 years from 40 per cent of our gross domestic product (GDP) to 140 per cent. “A strong result as funds are being set aside for the future retirement benefits of Aussies,” says Knox. Even so, on this count we lag Canada, Denmark, the Netherlands and the US.

Room for improvement

For all we are getting right, the global report cites five areas where Australia could improve:

  • Reducing the Age Pension asset test to increase payments for average income earners
  • Raising the level of household saving and reducing household debt
  • Require retirees to take part of their super benefit as an income stream
  • Increase the participation rate of older workers as life expectancies rise
  • Increase Age Pension age as life expectancies rise.

Retiree advocates have been asking for a reduction in the assets test taper rate since it was doubled almost three years ago.

Since 1 January 2017, the amount of Age Pension a person receives reduces by $3 a fortnight for every $1,000 in assets they own above a certain threshold (singles and couples combined).iii

Other suggested improvements, such as increasing the age at which retirees can access the Age Pension, present challenges as they would be deeply unpopular.
The Retirement Income Review

One roadblock standing in the way of ongoing improvements to our retirement system is reform fatigue.

In recent years we have had the Productivity Commission review of superannuation, the banking Royal Commission which included scrutiny of super funds, and currently the Retirement Income Review.

The Retirement Income Review will focus on the current state of the system and how it will perform as we live longer. It will also consider incentives for people to self-fund their retirement, the role of the three pillars, the sustainability of the system and the level of support given to different groups in society.
The fourth pillar

One issue that the Government has ruled out of the Review is the inclusion of the family home in the Age Pension assets test.

Australia’s retirement income system is built around the assumption that most people enter retirement with a home fully paid for, making it a de facto fourth pillar of our retirement system.

With house prices on the rise again in Sydney and Melbourne and falling levels of home ownership, there are growing calls for more assistance for retirees in the private rental market.
The big picture

Despite the challenge of ensuring a comfortable and dignified retirement for all Australians, it’s worth pausing to reflect on the big picture. The Global Pension Index is a reminder of how far we have come even as we hammer out ways to make our retirement system even better.

If you would like to discuss your retirement income plan, give us a call. 
i https://info.mercer.com/rs/521-DEV-513/images/MMGPI%202019%20Full%20Report.pdf

ii https://www.theaustralian.com.au/commentary/our-retirement-system-is-far-from-perfect-but-its-still-better-than-most/news-story/d3db43e68b3b93d8c6d6e8a8c17a491d?btr=4ff6fe5e96c92f060a779127475fa258

iii https://guides.dss.gov.au/guide-social-security-law/4/2/3

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Tax Alert December 2019

If the introduction of Single Touch Payroll (STP) wasn’t a big enough challenge, small businesses can now look forward to the arrival of e invoicing and changes to the Superannuation Guarantee (SG) rules.

Here’s a roundup of some of the latest tax developments.
E-invoicing to be rolled out

Small businesses can look forward to increasing use of e-invoicing following the ATO’s appointment as the local Peppol Authority. Currently being used in 34 countries, the Peppol framework provides a standardised e invoice for both domestic and international trade.

With e-invoicing, invoices are directly exchanged between the supplier’s and the buyer’s accounting systems – even if they use different software.

According to the ATO, by adopting e-invoicing businesses of all sizes can expect to see improved cashflow and quicker payments, easier processing and cost savings, fewer errors and reduced risk of compromised invoices.

The ATO will now work with digital service providers to deliver a range of e invoicing products for local businesses.
Inactive ABNs will be cancelled

Inactive Australian Business Numbers (ABNs) are an increasing area of interest for the ATO. If the tax man believes your business is no longer carrying on an enterprise, you face the risk it could decide to cancel your ABN.

To determine if an ABN is still being used, the ATO is checking the ABN holder’s tax return, whether their compliance and lodgement documents are up-to-date and a range of third party information.

If your ABN is mistakenly cancelled, you can reapply for the same ABN if your business structure remains the same. But if the structure is different – such as a sole trader now operating as a company – you will receive a different ABN.
Rule change for salary sacrifice and SG

Legislation to prevent employers from using employee salary sacrificed amounts to reduce their minimum Superannuation Guarantee (SG) payments has passed Parliament and will apply from 1 July 2020.

The new rules mean an employer can no longer count the amount salary sacrificed by an employee as part of the amount the employer is required to pay in SG contributions.

Also, the base amount on which SG contributions are calculated can no longer be reduced by any salary sacrificed amounts.
Limiting deductions for vacant land

Tax deductions for losses or outgoings (such as interest costs) incurred when holding vacant land not genuinely being used to earn assessable income have been reduced under new legislation.

The changes limit the claimable deductions for holding vacant land on or after 1 July 2019 – even if the land was held prior to that date.

Tax deductions are not affected if the land is held by a corporate tax entity, used for carrying on a business, used for primary product and leased, or where exceptional circumstances have affected a permanent structure on the land.
ATO tip-offs on the rise

Small businesses in the café and restaurant industry are more likely to be subject to a tip-off and subsequent investigation by a specialist team, according to the ATO’s Tax Integrity Centre (TIC).

There are also high volumes of tip-offs about black economy behaviour in the hairdressing and beauty, building and construction, and cleaning industries.

The TIC is receiving 230 tip-offs a day about black economy activities by small businesses such as undeclared income, paying workers cash in hand and not reporting sales.
Tax man focussing on SG compliance

With the tax man currently checking SG contribution payments for around 400,000 employers for the 2018-19 financial year, small businesses will need to stay on top of their obligations in this area.

The ATO is now “heavily focused on reducing the incidence of non payment of SG” courtesy of new Single Touch Payroll information, according to deputy commissioner, James O’Halloran.

With an “unprecedented level of ‘visibility’ of super information at the account and transaction level”, the tax man plans to increase checks of SG payments and follow up employers not paying on time.

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Unwrapping the joys and pitfalls of giving

Christmas is a time of giving, when thoughts turn to family and to helping those less fortunate. To gift in a meaningful way that maximises the benefits, it’s important to consider tax.

While Australia doesn’t have a gift tax, there are tax considerations nonetheless for both the giver and the recipient.

Buying a toy for your grandchild is one thing but many parents wish to help their adult children or grandchildren with more substantial gifts such as a home deposit or a car. If you receive a Centrelink age pension now or are within five years of retiring, that “gift” will be counted as an asset and could affect your pension.
Helping family

Gifting with the potential to impact your Age Pension entitlements comes in many guises. It might be donating 10 per cent of your salary to your church, buying a car for your daughter or selling her a rental property you own for less than market value.

If you gift more than $10,000 a year or a total of $30,000 over a five-year period, then the excess will be counted as an asset by Centrelink for five years, when it assesses your eligibility for an aged pension.

Your gift won’t just count in the assets test but deeming may also be applied under the income test. Deeming rules are used to work out how much income you earn from your financial assets, irrespective of their actual earnings.i
How do the gifting rules work?

Say you lend your daughter $50,000 to buy a home two years before you retire. Centrelink would view the first $10,000 as an allowable gift and it would make no difference to your situation. However, it would treat the remaining $40,000 as a deprived asset subject to the gifting rules.

What’s worse, if your daughter were to repay $40,000 in two years, then not only would the original $40,000 be counted in the assets test and deemed under the income test but now the $40,000 she repays would be added to this sum.
Can you afford to give?

Clearly, it’s wonderful to give with a warm heart and help relatives when they need it and you can see the joy it brings. Even so, you need to be very mindful of the repercussions for your own wellbeing.

It may be that you don’t qualify for a pension on retirement, but what if you give away a sizeable sum and then need to fall back on the pension sooner than anticipated? If the help were needed within five years of your gift giving, then the amount would be subject to the gifting rules.
Tax implications for children

It’s not just the giver who can run into problems. You need to be mindful of any repercussions for the recipient of your generosity. It’s natural to want to give money to your grandchildren, but there may be tax implications if they’re under 16.

Depending on your circumstances, we may be able to help you find a more tax friendly investment to suit the needs of both you and your young family members.
Giving to charity

Giving to charity is often top of mind at Christmas too. Any donation over $2 is tax deductible but this has no bearing if you are retired and not paying tax. Of course, the reason for giving should never be predicated on tax considerations, although it may be handy.

A tax deduction only applies if the charity is a deductible gift recipient (DGR) endorsed by the ATO or listed by name in the tax law, so you need to check that the charity has DGR endorsement.

Giving to those in need or to those you love can be a rewarding experience no matter what time of year, but it’s important to understand the implications for both giver and receiver.

If you would like to know more about how gift giving will impact on your financial wellbeing and that of your family, then give us a call.
i https://www.humanservices.gov.au/individuals/topics/deeming/29656

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Spring 2019

It’s September and spring is in the air. It’s time to shake off the winter cobwebs, get out into the garden or the great outdoors. It’s also a good time to plan your summer break.

August was a challenging month for investors. Global markets reacted negatively to an escalation in the US-China trade war and the looming no-deal Brexit. US economic growth slowed to an annual rate of 2 per cent in the June quarter, down from 3.1 per cent the previous quarter. China’s economy is also slowing – industrial production, retail sales and fixed asset investment all recorded lower growth in the year to July.

To stimulate the US economy, the US Federal Reserve cut rates by 25 basis points, the first cut since 2008. US short-term bond yields rose as did the US dollar, but shares fell around the globe. In the US, shares were down around 2 per cent for the month while Australian shares shed 3 per cent. The Hong Kong market fell more than 7 per cent as protests continued and UK shares fell 5 per cent on Brexit worries.

In Australia, most companies reported positive earnings for the 2019 financial year, but only a little over half managed to lift profits. One challenge is retail spending, up 0.2 per cent in the year to June, the weakest in 28 years. The NAB business confidence index rose in July, but the business conditions index fell to 2.4 points (the long-term average is 5.8 points).

On the bright side, Australia’s trade surplus hit a new record high of $49.9 billion in the year to June. The Australian dollar finished the month lower at around US67c, which should support our exporters.

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Positives and negatives of gearing

Negatively gearing an investment property is viewed by many Australians as a tax effective way to get ahead.

According to Treasury, more than 1.9 million people earned rental income in 2012-13 and of those about 1.3 million reported a net rental loss.

So it was no surprise that many people were worried about how they would be affected if Labor had won the May 2019 federal election and negative gearing was phased out as they had proposed. With the Coalition victory, it appears negative gearing is here to stay.

While that may have brought a sigh of relief for many, negative gearing is not always the best investment strategy. Your individual circumstances will determine whether negative gearing is advisable. For many, it may pay to positively gear.

So, what is gearing?

Basically, it’s when you borrow money to make an investment. That goes for any investment, but property is where the strategy is most commonly used.

If the rental returns from an investment property are less than the amount you pay in interest and outgoings you can offset this loss against your other assessable income. This is what’s called negative gearing.

In contrast, positive gearing is when the income from your investment is greater than the outgoings and you make a profit. When this occurs, you may be liable for tax on the net income you receive but you could still end up ahead.

While negative gearing may prove tax effective, it’s dependent on the after-tax capital gain ultimately outstripping your accumulated losses.

The importance of capital gains

If your investment falls in value or doesn’t appreciate, then you will be out of pocket. Not only will you have lost money on the way through, but you won’t have made up that loss through a capital gain when you sell.

That’s the key reason why you should never buy an investment property solely for tax breaks.

But if the investment does indeed grow in value, then as long as you have owned it for more than 12 months you will only be taxed on 50 per cent of any increase in value.

When it pays to think positive

If you are retired and have most of your money in superannuation, negative gearing may not be so attractive. This is because all monies in your super are tax-free on withdrawal. And thanks to the Seniors and Pensioners Tax Offset (SAPTO), you may also earn up to $32,279 as a single or $57,948 as a couple outside super before being subject to tax.

It makes more sense to negatively gear during your working years with the aim of being in positive territory by the time you retire so you can live off the income from your investment.

While buying the right property at a time of your life when you are working and paying reasonable amounts in tax may make negative gearing a good option, sometimes positive gearing may still be a better strategy.

Case study

ASIC’s MoneySmart website compares two people each on an income of $70,000 a year. They each buy an investment property worth $400,000, paying 6 per cent interest. Additional expenses are $5000 a year while the rental income is $500 a week.

Rod negatively gears, borrowing the full purchase price; Karen is positively geared with a loan of $100,000. In terms of annual net income, Rod who negatively geared is worse off than if he had not invested in a property at all, with net income of $52,868.

Positively geared Karen ended up $10,000 ahead, with net income for the year of $64,433.

Of course, if his property grows in value over time, Rod should ultimately recoup some or all these extra payments.

Claiming expenses

If you do negatively gear, then it’s important that you claim everything that’s allowed and keep accurate records.

For investment property, this includes advertising for tenants, body corporate fees, gardening and lawn moving, pest control and insurance along with your interest payments.

If you want to know whether negative gearing is the right strategy for you, then call us to discuss.

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Tax Alert September 2019

The landscape of Australia’s personal income tax system has changed significantly following the passage of the Morrison Government’s tax legislation through the Parliament.

Here’s a roundup of some of the other recent developments in the world of tax.

Tax reform legislation passes

Many Aussies are receiving a larger tax refund following passage of The Treasury Laws Amendment Act 2019, which made law the three-stage income tax cuts announced in the 2019–20 Federal Budget.

The new legislation increases the base and maximum amounts of the Low and Middle Income Tax Offset (LMITO) for the period 2018-19 to 2021-22.

It also lifts the top threshold of the 19 per cent income tax bracket from $41,000 to $45,000 from 2022-23 and reduces the 32.5 per cent tax rate to 30 per cent from the 2024-25 financial year.

Guidance on FBT exemption for taxis

Employers need to take note of new guidance released by the ATO clarifying that the existing FBT exemption for employee taxi travel does not extend to ride-sourcing services such as Uber. Unlike its previous view, the ATO has now stated the FBT Assessment Act limits the definition of ‘taxi’ to a vehicle licensed to operate as a taxi by the relevant state or territory. This definition of taxi travel is different to the one used for GST purposes.

Employee travel is still eligible for FBT relief if it involves a traditional taxi service used for a single trip beginning or ending at the employee’s place of work, or if the travel is due to employee sickness or injury.

Tip-offs likely to grow with new hotline

After a record 70,000 tip-offs were received by the ATO during 2018-19, the introduction of its new Black Economy Hotline and Tax Integrity Centre (TIC) is likely to see this number rise further.

From 1 July 2019, Australians can report known or suspected tax evasion, black economy and phoenix activities via an ATO website tip-off form, the ATO app, or the new Black Economy Hotline (1800 060 062).

Behaviours such as demanding or paying for work cash-in-hand to avoid tax, not reporting or under-reporting income, underpayment of wages, ID fraud, sham contracting arrangements, GST fraud and money laundering can all be reported.

No deductions for unreported employee payments

The tax man is reminding employers that unreported cash-in-hand payments made to workers after 1 July 2019 are no longer eligible for tax deductions. In addition to the loss of a tax deduction, employers not complying with their PAYG withholding obligations may be penalised.

The new rules cover payments to employees not complying with PAYG withholding obligations as well as payments to contractors who do not provide an ABN where tax is not withheld. The change affects payments made during 2019-20 and all subsequent financial years.

As an employer, if you fail to withhold or report your PAYG obligations and voluntarily disclose this before any compliance action is taken, you won’t lose your deduction. You may also be entitled to reduced penalties.

New luxury car tax thresholds

The luxury car tax (LCT) thresholds for cars imported, acquired or sold during 2019-20 have been announced by the ATO. If you buy a car with a GST inclusive value over the LCT threshold, the purchase attracts the 33 per cent tax.

For the 2019-20 financial year, the new threshold for fuel-efficient vehicles is $75,526, which is the same as in 2018-19. The LCT threshold for other cars is $67,525, up from the 2018-19 limit of $66,331.

Escape Australia, not your student debt

Expats are being contacted by the tax man to remind them that heading offshore doesn’t mean leaving their student loans behind.

Under new rules, student debtors with an income contingent loan travelling overseas need to notify the ATO of their new address and lodge an overseas travel notification. They are also required to report their worldwide income if they earn $11,470.

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How super is your life insurance?

For most people, life insurance provides a safety net against unexpected events. This is particularly the case if you have a mortgage, debts or family who are dependent on you earning an income.

In many cases, life insurance has been automatically offered through superannuation. Although 85 per cent of people hold life insurance this way, a recent survey found one third of them don’t even realise.i

Now some super members may have lost their insurance cover and may not be aware of it.

Millions could lose cover

Concern that super balances were being eroded through insurance premiums and fees has led the government to introduce Protecting your Superannuation legislation.

As a result, from July 1 this year your insurance cover is to be cancelled, if your fund has been inactive for more than 16 months.ii

Letters were sent towards the end of the financial year to those with inactive funds, advising you to contact your fund to make a contribution or risk losing your life cover.If you didn’t respond, your life insurance policy may have been cancelled.

It’s estimated that up to 3 million super members may have been affected.iii And while you can buy a new life insurance policy, you may not be able to reactivate your previous one unless your fund offered an extension of the deadline to reactivate cover. If not, you may have to face a medical examination and/or pay higher premiums in order to take out a new policy.

Younger members to opt-in

It is also proposed (although not yet legislated) that new superannuation fund members who are aged under 25 will no longer be given automatic life insurance cover as they have in the past. Instead, they would be given the opportunity to opt in to cover.

The argument in favour of this move is that young people with no responsibilities, have nothing to insure. But once you buy a home, get married or become a parent, the need for life insurance becomes paramount.

As you get older, once the family has flown the nest and you have paid off all your debts, the need for life insurance may reduce. However, with a blended family, a life insurance policy in super can prove a good financial strategy to ensure the right beneficiaries receive your money. That’s because superannuation ‘death benefits’ don’t form part of your Will but are paid out separately to your nominated beneficiaries.

SMSFs may also be caught out

Up until now, some self-managed super fund members have deliberately kept a public offer super fund active to take advantage of the cheaper insurance. But as stated above, if that public offer fund is inactive and an election to maintain cover has not been made, then cover may be lost.

The beauty of having life insurance in super is that the premiums are generally cheaper because you are charged at a group rate. In addition, it won’t affect your cashflow as premiums come out of your super. Of course, that is the point of this legislation. The monies available for investment to build your balance for retirement may be eroded through those very premiums.

Another precautionary note is that it may be harder to access a payout through super if you need to make a claim. If you haven’t correctly nominated a beneficiary in your super, then it is the trustees who decide who receives the payout. And because the insurer makes the payment via the fund, this can also take longer.iv

What happens next?

As part of the Protecting your Super changes, inactive funds with balances less than $6000 will see the monies transferred to the Australian Taxation Office. The ATO will then endeavour to amalgamate this money with an active superannuation fund of yours or hold the money for you until it is claimed.

If this happens, investment returns on the money held by the ATO may be significantly less than if you invested through your super.v

Don’t wait until you need to make a claim to discover you don’t have any insurance cover after all. If you have any questions about the changes or your insurance needs in general, give us a call.

i https://www.superannuation.asn.au/media/media-releases/2019/joint-media-release-10-june-2019

ii https://firststatesuper.com.au/member/super/manage-super/protect-your-super

iii https://www.superannuation.asn.au/media/media-releases/2019/joint-media-release-10-june-2019

iv https://www.moneysmart.gov.au/superannuation-and-retirement/how-super-works/insurance-through-super

v https://www.ato.gov.au/Individuals/Super/Growing-your-super/Keeping-track-of-your-super/ATO-held-super/

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Winter 2019

The end of the election uncertainty and the investor-friendly policies of the Coalition produced a relief rally on financial markets. The Australian dollar bounced back above US69c on Monday after falling to three-year lows the day before the election, while local shares surged to an 11-year high on Monday before losing some of their gains the following day.

The Australian dollar more broadly has suffered from a flight to safety as trade tensions between the US and China escalate, pushing the US dollar higher. Global bond yields and share prices have also fallen in May.

In Australia, the Reserve Bank has trimmed its economic growth forecast for 2019 from 3.0 per cent to 2.75 per cent where it is expected to stay until at least June 2021, despite rising iron ore prices. This is against the background of a lift in the unemployment rate from 5.1 per cent to 5.2 per cent in April and a slide in business sentiment. The NAB business conditions index fell from 7.2 points to 3.1 points in April while the business confidence index remains below zero. New vehicle sales, a bellwether for consumer confidence, fell to their weakest level in 9 years in April, down 8.9 per cent over the year.

Now that the federal election is out of the way, all eyes will be on the Reserve Bank and whether it decides to cut the cash rate from its current level of 1.5 per cent to stimulate the economy.

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Election 2019: A vote for continuity in an uncertain world

The Liberal/National Party Coalition has been returned to government, as Australians chose continuity over change and cautious economic management over Labor’s ambitious reform agenda.

The Coalition is promising sweeping tax cuts for individuals and continuity for investors with no big changes to existing investment or superannuation policies.

One of the first items of business for Prime Minister Scott Morrison will be to reconvene Parliament to pass legislation on a low and middle-income tax offset.

Individuals to pay less tax

Providing the legislation is passed quickly, from 1 July Australians earning less than $37,000 will receive a tax offset of up to $255 (effectively a cash rebate) with their tax returns. If you earn between $48,000 and $90,000 you will get the maximum amount of $1080. The offset then scales down to zero for those earning $126,000 or more.i

Further planned tax cuts could depend on the Coalition winning the next federal election.

From July 2022, the Coalition plans to raise the top threshold of the 19 per cent income tax bracket to $45,000. Then from July 2024, it plans to reduce the 32.5 per cent tax bracket to 30 per cent and do away with the 37 per cent rate entirely.

If adopted, these proposals will result in a flat 30 per cent tax rate for anyone earning between $45,000 and $200,000.

Support for first home buyers

In a proposal that could also help stimulate the flagging residential property market, the Coalition has promised help for first home buyers trying to get a foot on the property ladder.

From January 2020, the proposed first Home Loan Deposit Scheme would allow eligible first home buyers with income of up to $125,000 (or $200,000 for a couple) to buy a home with a deposit as low as five per cent without incurring lenders mortgage insurance.ii

Help for small business

Small business has not been forgotten. As announced in the recent Budget, the popular instant asset write-off will be increased and extended to businesses with turnover of up to $50 million (previously $10 million).

Eligible businesses will be able to write off assets up to the value of $30,000 (previously $25,000) against their taxable income.

Investment tax concessions to stay

Investors can breathe easy now that controversial changes to dividend franking credits and negative gearing proposed by Labor will not go ahead.

Individuals, including those with a self-managed super fund, will continue to be entitled to a cash refund of franking credits attached to their share dividends if the franking credits exceed their tax liability.

Property investors have also earned a reprieve, with no changes to negative gearing rules.

Super changes at the margins

Australians hoping to boost their super in the run up to retirement will continue to enjoy existing tax concessions.

You will still be able to make catch-up concessional (pre-tax) contributions if you meet certain conditions. From the 2019-20 financial year, individuals who have not used their full $25,000 annual concessional contributions cap will be able to carry forward the shortfall for up to five years and claim a personal tax deduction. To be eligible, your total super balance must be below $500,000 on June 30 the previous financial year.iii

The non-concessional (after tax) contributions cap will remain at $100,000 a year for people with a total super balance below $1.6 million. Those under 65 can still bring forward up to three years’ contributions (or up to $300,000) with a proposal to increase the age limit to 67 from 1 July 2020.iv

The Coalition also plans to allow older Australians to make voluntary contributions until age 67 without meeting the work test. Subject to legislation, this measure would also begin on 1 July 2020.

Looking ahead

With the election out of the way, Australians can get back to the business of planning their finances with more certainty.

The initial response from financial markets was positive, with the Aussie dollar and local shares both up on the first day of trading after the election. However, the jury is still out on whether the Government’s tax cuts and spending promises will be enough to boost economic momentum.

If you would like to discuss your overall financial plan in the light of the election result, please give us a call.

i https://budget.gov.au/2019-20/content/tax.htm

ii https://www.liberal.org.au/latest-news/2019/05/12/helping-australians-buy-their-first-home

iii https://www.ato.gov.au/Individuals/Super/In-detail/Growing-your-super/Super-contributions—too-much-can-mean-extra-tax/?page=2#Concessional_contributions

iv https://www.ato.gov.au/Individuals/Super/In-detail/Growing-your-super/Super-contributions—too-much-can-mean-extra-tax/?page=3#Non_concessional_contributions

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Tax Alert – June 2019

Tax deductions face greater scrutiny

With the end of the financial year only weeks away, the ATO has announced that one of its key areas of focus this financial year-end will be rental property, although returns from taxpayers using cryptocurrency assets are also expected to come in for close attention.

To help you prepare for this year’s tax time, here’s a roundup of some recent developments in the world of tax.

Watch your property deductions and income

Rental property owners are being warned to check their claims are correct before lodging their tax return, with the ATO announcing plans to double the number of audits it will be conducting on deductions linked to rental properties. Failing to declare income received from renting out a room in your home via an online platform like AirBnB is also a good way to get the tax man’s attention this year.

ATO sampling of tax returns last financial year found nine out of ten returns contained an error related to rental property deductions, so the regulator says it will be “looking very closely at claims this year”.i The ATO will be focussing on over-claimed interest, capital works claimed as repairs and incorrect apportionment of expenses for holiday homes, as well as taxpayers omitting income earned from accommodation sharing.

As part of the crackdown, the ATO is using sophisticated analytics and third party information from banks, rental bonds and online accommodation booking platforms to “scrutinise every tax return”. During an audit, the data searched could include your utility bills, tolls, social media and online content.

Cryptocurrencies under tax spotlight

Returns lodged by taxpayers using cryptocurrencies will also receive more attention, with the ATO currently collecting bulk records from Australian cryptocurrency designated service providers (DSPs) to include in its data-matching program.

Data being supplied by DSPs includes cryptocurrency purchase and sale information to enable the tax office to identify taxpayers failing to disclose their income details correctly. If you are one of the estimated 500,000 to one million Australians invested in crypto-assets, you can expect to have your tax return pre-filled with the relevant information by the ATO in the same way as bank interest.

Calls for standardised work-related deductions

With statistics showing total work-related expense deductions cost almost $22 billion in 2016-17, the Inspector-General of Taxation (IGT) has called for the introduction of a standard deduction for work-related expenses.i

The recommendation in the IGT’s Future of the Tax Profession report comes despite comments by the ATO that its efforts to target incorrectly reported or overclaimed work related expenses resulted in fewer claims in the past financial year.

According to the ATO, common mistakes are taxpayers assuming there is a standard work-related deduction they can claim of up to $300 without needing to substantiate it. Many taxpayers also assume that because up to 5,000 kilometres of car travel does not require a log book, they are entitled to claim this deduction.

Instant asset write-off rises again

The threshold for the instant asset write-off has risen again by $5,000 after the Treasurer announced the new annual limit of $30,000 with immediate effect from Budget night (2 April 2019). The immediate write-off has also been extended to include businesses with a turnover less than $50 million.

Eligible firms can claim a tax deduction on purchases of business equipment where the entire cost of the asset is less than the $30,000 threshold.

Although the instant asset write-off has been around since 2011 and has been extended until 30 June 2020, there is no guarantee it will be retained in future years. So if you have a small business and are interested in taking advantage of this benefit, it makes sense to keep this in mind come 30 June and next financial year.

Small business benchmarks updated

Small business owners interested in benchmarking their performance against similar businesses in the same industry have some new statistics they can use now the ATO has updated its business benchmark information with data from the 2016-17 financial year.

The Business Performance Check tool in the ATO app allows you to see how your business compares to your competitors using data from across more than 100 industries and 1.5 million small businesses in Australia.

i https://www.ato.gov.au/Media-centre/Media-releases/Tax-office-to-double-audits-of-dodgy-rental-deductions/

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Cruising through the finish line

– Tax tips for EOFY

The end of financial year can sometimes feel like a race to the finish. To help you cruise through the finish line come June 30, we’ve prepared a handy list of tips for both businesses and individuals.

Small business tips

Pay expenses, delay income

In most cases, it can be prudent to look for ways to bring forward tax-deductible expenses to the current financial year and delay income until July.

You may be able to pre-pay 12 months interest on a margin loan, or pre-pay 12 months premiums of income protection insurance held outside super, and claim the full deduction in this year’s return. You might also consider pre-paying membership fees for professional organisations and subscriptions for work-related publications.

Bad debts and obsolete stock

Think about writing off any bad debts in the business before June 30. You must have documentation to show you have made serious efforts to recover the debts which must have been previously included as assessable income.

Similarly, if you’ve got any inventory that you’re struggling to clear, it might be worth considering writing off or writing down obsolete stock.

Car expenses

When it comes to car expenses there are multiple ways to claim and calculations can be complex. It’s wise to get some advice on which method suits your company best.

Instant asset write-off

The threshold for the instant asset write-off has risen again by $5,000 and extended to include medium-sized businesses with turnover less than $50 million. Given that there have been a number of changes to the threshold, the amount you can claim will depend on when the asset was purchased or installed.

Relevant thresholds for the year:

Threshold Dates applicable
$30,000 7.30pm (AEDT) 2 April 2019 – 30 June 2020
$25,000 29 January 2019 – 7.30pm (AEDT) 2 April 2019
$20,000 Before 29 January 2019

Superannuation

Superannuation is another area to consider at the end of the financial year, both for you and your employees. While employees’ super guarantee contributions don’t need to be paid until July 28, it makes sense to pay them by June 30 so you can claim the tax deductions in the current year.

Personal EOFY tips

Topping up your super

Topping up your super before June 30 can be tax effective and assist you towards a more comfortable retirement. There are many ways to do this such as personal deductible contributions, salary sacrificing, or spousal contributions. If you are struggling to meet the $25,000 cap, as of July 1, you will be able to carry forward any unused cap amount for up to five years if you have less than $500,000 in super. Talk to us about which strategy will work best for you.

Review your investment portfolio

After a mixed year on global share markets, you may be sitting on paper losses on some of your stocks. This could be a good time to sell some of your poor performers to offset against capital gains made on the sale of other investments over the past 12 months. Look to sell investments held for at least 12 months if you want to take advantage of the 50 per cent capital gains tax discount, while also taking into account your longer-term investment goals.

Claiming relevant deductions

Work related expenses – You’re entitled to claim deductions for certain work expenses, most of which are directly related to earning your income such as tools, uniform and travel expenses.

Rental property – You can claim an immediate deduction for interest on your investment loan, maintenance and tenancy costs such as the preparation of a lease or eviction. Some expenses are also claimable over a number of years, such as the cost of depreciating assets, structural improvements and borrowing expenses such as stamp duty and loan fees.

Tax time doesn’t have to be a hassle if you get prepared early. Both business owners and individuals should start getting their books in order now to make the most of any concessions before the June 30 cut-off. And remember, we’re always here to help to make reaching the EOFY finish line a walk in the park.

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