AuthorMichael Scott

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.

2282dabc32f706ac9ef438d862a0ed498da0f716-1906_AI_NL_Election_2019

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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Budget 2019

Paving the way to an election
Treasurer Josh Frydenberg has delivered a ‘back in the black’ Budget aimed squarely at voters, stressing the Morrison Government’s commitment to financial discipline and low taxes.

As expected, the Treasurer signaled sweeping tax cuts and major infrastructure spending if the Coalition wins the upcoming federal election widely expected to be held in May.

This largesse is made possible as the Budget heads towards surplus for the first time in 12 years. Extra revenue has flowed into the Government’s coffers from a surge in company tax on the back of higher commodity prices, and a higher personal tax take as more Australians find work.

The Big Picture

The Federal Budget is all but balanced. The Government expects a small underlying Budget deficit of $4.2 billion this financial year, unchanged since the mid-year Budget update in December, before moving to a $7.1 billion surplus in 2019-20.

The Budget’s big spending promises come despite a worsening economic outlook over the past six months. The Treasurer forecast growth of 2.25 per cent this year rising to 2.75 per cent in 2019-20 and 2020-21, slightly lower than the 3 per cent forecast in the mid-year update.

Growth could also suffer from a cut in the permanent migrant intake from 190,000 to 160,000 a year. The Government predicts current net debt of $370 billion will fall to 18 per cent of GDP in 2019-20 and be wiped out in 10 years.

Bigger tax cuts

The centerpiece of the Budget is an extension of the already announced multi-year tax package. Low and middle-income workers will receive immediate income tax relief of up to $1080 for single income families and up to $2160 for dual income families from 2018-19.

By 2024-25, 94 per cent of taxpayers on incomes below $200,000 will pay no more than 30c tax in the dollar. Incomes above $200,000 will pay 45c in the dollar.

The Low and Middle Income Tax Offset (LMITO) will almost double from $530 to a maximum of $1080 a year for people earning between $48,000 and $90,000, to be received after people submit their 2018-19 tax return. People on income below $37,000 will receive an offset of up to $255.

The popular instant asset write-off for small business has been increased from $25,000 to $30,000 a year, extended to businesses with turnover up to $50 million (previously $10 million) and will apply as of 2 April 2019. This allows small and medium size businesses to deduct the cost of assets such as cars and equipment.

Major infrastructure spending

The Government’s other signature spending initiative is a $100 billion boost to infrastructure spending over the next decade, an increase of about one third on last year’s Budget.

This includes $2 billion for a fast rail link from Melbourne to Geelong. The Government will also co-fund five business cases with state governments for fast rail from Sydney to Wollongong, Sydney to Parkes (via Bathurst and Orange), Melbourne to Albury Wodonga, Melbourne to Traralgon, and Brisbane to the Gold Coast and will build on projects already underway.

There is also a $3 billion increase (to $4 billion) in the Urban Congestion Fund, including $500 million for a commuter carpark fund.

A further $1 billion will be invested to improve the Princes Highway in NSW, Victoria and South Australia, with additional funding for road and rail projects in all states and territories.

Beefed up regulation and compliance

In the wake of the Banking Royal Commission, financial regulators Australian Securities and Investments Commission (ASIC) and Australian Prudential Regulation Authority (APRA) will be given a boost of more than $550 million to clamp down on misconduct.

The Australian Taxation Office will be given extra funds to crack down on welfare cheats and tax dodging.

Healthcare and welfare

The Government has pledged $527.9 million for a Royal Commission into the abuse of people with disabilities. It has also recommitted to fully funding the National Disability Insurance Scheme, but a slow take-up of the NDIS has delivered a $1.6 billion saving to the Budget’s bottom line and contributed to the projected Budget surplus.

In response to the national crisis in mental health and youth suicide, $461.1 million will go to prevention and treatment programs.

The creation of a new $337.2 million drug strategy to address harmful opioid use, improve family support services and increase capacity of drug and alcohol services in remote and regional areas.

The cashless welfare card will be extended to all the Northern Territory and Cape York communities in Queensland at a cost of $129 million.

Aged care services will receive a further boost of $282.4 million to fund 10,000 new home care packages and increasing home care supplements for dementia and cognition.

Superannuation sweetener

In a bid to help older Australians boost their retirement savings, the Government intends allowing 65 and 66-year-olds to make voluntary contributions to their super from 2020-21 without meeting the work test.

The same group will also be allowed to make three years’ voluntary non-concessional (after tax) contributions, currently capped at $100,000 a year, in one year.

Education

There are no big-ticket announcements for schools or universities, but $453 million will go to extend pre-school education in the year before school.

The focus instead is on a new $525.3 million skills package to provide vocational education and training that will fund 80,000 new apprenticeships and double incentives to employers to $8000 per placement.

Training hubs will be established in 10 regional areas with high youth unemployment.

Environment and energy

The Government hopes to shore up its climate and energy credentials with $3.5 billion for a new Climate Solutions Package, including $2 billion for the Climate Solutions Fund (previously called the Emissions Reduction Fund).

Pensioners, carers and veterans will receive a one-off cash payment to help with energy bills. The Energy Assistance Payment is worth $75 for singles and $125 for couples.

It has also previously announced $1.4 billion for Snowy Hydro 2.0 and a $56 million Battery of the Nation in Tasmania.

Regional communities will receive $6.3 billion in drought support and $3.3 billion in flood support. A $3.9 billion Emergency Response Fund will be set up to help with future natural disaster efforts.

National security

There will be a continued focus on national security, with $512.8 million for the Australian Federal Police and $58.6 million to the Australian Security Intelligence Organisation.

The Government will also spend $34.8 million over four years to counter foreign interference.

Looking ahead

This is an unusual Budget as there will be little chance of legislating most of the spending measures before a federal election in May.

The biggest risk to the Budget forecasts for growth is the falling property market and concerns that it could flow through to the broader economy. According to CoreLogic, national house prices are down 7.4 per cent since their 2017 high, with most pundits predicting further falls this year.i

Monetary support could come from the Reserve Bank which announced yesterday the official cash rate will remain on hold at a record low of 1.5 per cent while also signaling it is prepared to cut rates this year to support growth if needed.

For its part, the Government’s proposed tax cuts and other stimulus measures could provide the kick the economy needs to get people spending, companies hiring and flat wages rising.

Labor has flagged it will deliver its own economic statement later this year if elected. We will have to wait until after the election to see whose policies will take Australia forwards.

https://www.corelogic.com.au/news/housing-downturn-loses-some-steam-corelogic-national-home-value-index-down-06-march

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.

 

Happy New Year

Investors started 2018 full of hope, with the global economy and financial markets in good shape, but by year’s end they were uncertain and a little anxious about what lay ahead. Markets responded with last minute falls across all asset classes.

The issues that weighed heavily at the end of 2018 were the unresolved trade dispute between the US and China, confusion over the final Brexit deal, rising US interest rates, falling oil and commodity prices and the US government shutdown. Australians were also distracted by political instability and falling house prices in Sydney and Melbourne.

With so much focus on what may, or may not, lie ahead, it was easy to lose sight of the solid progress we’ve made.

Positive economic growth

The global economy grew at a steady clip of 3.1 per cent. However, the World Bank estimates global growth will ease slightly to 3 per cent this year and 2.9 per cent in 2020 as central banks remove monetary stimulus in place since the financial crisis.i

The US economy continued its strong recovery with growth of 3 per cent in the year to September.

China’s growth slowed to 6.5 per cent, still remarkably strong by global standards but its lowest since 2010, as the effects of its trade dispute with the US begin to bite.ii

Australia enjoyed steady growth of 2.8 per cent in the year to September as we notched up a world-beating 27 years without recession. Corporate profits are at record levels, inflation is a tame 1.9 per cent and unemployment fell to 5.1 per cent. While wages growth of 2.3 per cent was an improvement, it’s still well below the 20-year average of 3.25 per cent.

Yet consumers remain cautiously upbeat. The Westpac Melbourne Institute rose a percentage point over the year to 104.4 – anything over 100 is regarded as optimistic.iii

 

Australian Key Indices as at
31 December 2018
Share Markets (% change)
Jan – Dec 2018
GDP annual growth rate* 2.8% Australia ASX 200 -6.9
RBA cash rate 1.5% US S&P 500 -6.5
Inflation 1.9% Euro Stoxx 50 -14.0
Unemployment 5.1% Shanghai Composite -25.5
Consumer confidence index 104.4 Japan Nikkei 225 -12.1

 

*Year to September 30, 2018 Sources: RBA, Westpac Melbourne Institute, Trading Economics

Focus on interest rates

The Australian dollar fell 10 per cent in 2018 to finish at US70c, due largely to US dollar strength and a widening of the gap between local and US interest rates. High US interest rates increase the global cost of borrowing and boost the value of the greenback.

The US Federal Reserve lifted rates four times to 2.5 per cent but indicated there may be only two more hikes in 2019, rather than three as previously forecast, due to the slowing economy. By contrast, Australia’s cash rate finished the year where it started at 1.5 per cent.

At the other end of the yield curve, US 10-year government bond yields were barely changed at 2.7 per cent, reflecting market fears of economic slowdown. Yields on Australian 10-year bonds eased to 2.3 per cent.iv

Falling commodity prices

The lower dollar is good news for our exporters and should soften the impact of falling commodity prices which have been caught in the cross-hairs of trade wars and fears about an economic slowdown.

Iron ore was down 3 per cent to US$71.50 a tonne while oil, copper, aluminium, zinc and nickel prices dropped between 16 and 19 per cent. The one bright spot for local producers was wheat, up almost 20 per cent.iv

Sharemarket correction

Global sharemarkets retreated as the year came to an end, with the MSCI World Index down 10.4 per cent on a world of worries.v

US shares fell 6.5 per cent, their worst annual performance in a decade. In Europe, UK shares fell 12 per cent with no Brexit deal in sight while political and economic uncertainty also weighted heavily on share prices across the Eurozone. In Asia, Chinese shares suffered the heaviest losses (-25.5 per cent) while the Japanese market fell 12 per cent.iv

Australian shares tapped into the global mood, with the ASX 200 down 6.9 per cent, its worst year since 2011. However, when you add dividends the total return from shares was down just 3.5 per cent, and closer to zero after franking credits are taken into account.vi

Property market loses steam

The heat came out of Australia’s residential property market in 2018, with big falls in Sydney and Melbourne dragging the national market down 4.8 per cent according to figures from CoreLogic.vii This is the biggest annual fall in a decade and follows tighter lending practices, rising supply, higher mortgage interest rate and falling investor demand.

After rental income is included, the annual return from property was down 1.2 per cent.

It was a case of the further they rose, the harder they fell. Sydney (-8.9 per cent) and Melbourne (-7 per cent) were hardest hit, while Perth (-4.7 per cent) and Darwin (-1.5) were also in retreat. Prices continued to climb in Hobart (8.7 per cent), Canberra (3.3 per cent), Adelaide (1.3 per cent) and Brisbane (0.2 per cent).vii

Looking ahead

The late market reversals of 2018 were driven by gloomy expectations rather than the reality of solid economic progress. Future performance will depend on US interest rates, the resolution of trade tensions between the US and China and, to a lesser extent, the negotiation of a workable Brexit.

In Australia, uncertainty will persist until the Federal election is out of the way. Then investors can get back to focusing on fundamentals such as our solid economic growth, a strong corporate sector, resilient consumers, low interest rates and more affordable housing.

i World Bank, 5 June 2018, http://www.worldbank.org/en/news/press-release/2018/06/05/global-economy-to-expand-by-3-1-percent-in-2018-slower-growth-seen-ahead

ii Trading economics, as at September 2018, https://tradingeconomics.com/china/gdp-growth-annual

iii Westpac Melbourne Institute, 12 December 2018, https://melbourneinstitute.unimelb.edu.au/__data/assets/pdf_file/0009/2943036/PressReleaseCSI20181212.pdf

iv Trading economics.

v Financial Times, 1 January 2019, https://markets.ft.com/data/indices/tearsheet/summary?s=MS-WX:MSI

vi Year in Review 2018, CommSec Economic Insights, 2 January 2019

vii CoreLogic, 2 January 2019, https://www.corelogic.com.au/news/australian-dwelling-values-fell-48-through-2018-marking-weakest-housing-market-conditions-0