Markets

Local: The ASX200 index rose 2.4% in March. The Consumer Discretionary sector lead the way with a 7.0% rise, while the Materials sector was the worst performer, falling 3.0% over the period.

Global: The S&P500 index rose 4.4% in March.

Gold: Spot price for Gold fell to $1,691.05.

Iron Ore: Iron Ore fell to US $165 per ton.

Oil: Brent Oil slipped to US $63.54 per ton.

Property

Housing: CoreLogic dwelling prices boomed 2.6% in March, the strongest single month rise seen since 1988. Supply is very low, with new listings in March 25.5% below the 5-year average while demand is strong, seeing sales jump ~43% year-on-year. This interaction is now the driving force pushing prices up.

Building Approvals: Private sector housing approvals rose by 15.1% in February, reaching a new record high of 13,939 houses. Approvals for private sector dwellings increased 45.3% in February but remain 28.7% lower than February 2020.

Economy

Interest Rates: RBA Cash rate remained unchanged at 0.10%. More details can be found regarding the RBA Cash Rate in the Comments sections

Retail Sales: February retail sales fell 0.8%. While disappointing to some, it is a considerable improvement compared to the 4.1% fall in December.

Bond Yields: Australian government 10-year bond yield fell 10 points to 1.79%.

Exchange Rate: The Aussie dollar fell slightly to both the American dollar, at $0.760, and to the Euro at $0.649.

Consumer Confidence: Westpac’s Melbourne Institute recorded another lift in consumer sentiment, up 2.6% following the strong showing in February (1.9%).

Business Conditions: Meanwhile, NAB business conditions rebounded to +15.4 in February (previous: +9.1), and business confidence lifted to +16.4 (previous: +12.0).

Employment: Job Vacancies increased strongly in the Feb-21 quarter, bringing a year-on-year increase of 26.8%, the fastest rise in over a decade. Unemployment is currently sitting at 5.8% and is about to increase by up to 0.5% due to the cessation of the JobKeeper payment. These two factors should work to cancel each other out, with many people who lose employment post-JobKeeper being able to gain new employment quickly.

Purchasing Managers Index: Rather than measure an economy directly, a PMI measures the business activity that helps drive it. A PMI above 50 indicates an expanding market, while a PMI below 50 indicates a contraction. The Australian PMI has risen 1.87% to 59.9 while the US PMI has risen 6.41% to 64.7.

Covid: Infection levels are rising in 69 countries. 131 million infections have been recorded by the end of March, resulting in 2.9 million deaths. 152 countries have started vaccination campaigns, with 664 million doses being delivered so far.

Comment

Tis the Season

The business Reporting Season is complete, and it looks like there will be plenty to be jolly about in the coming years. Large, publicly listed companies release reports about their activities twice a year, once starting around February then again around August.

Earnings estimates were substantially lowered this season, with many organisations either directly affected by Covid or indirectly affected by the economic slump Covid brought with it. Despite the challenges of the moment, 51% of companies managed to beat their estimates, the highest percentage of positive surprises in over a decade.

The strongest performing sectors were Miners and the Banks, with the Macquarie Wealth Management team predicting that “together they will account for the majority of the forecast dividend recovery for the Australian market over the coming 2 years”.

While sectors directly impacted by the pandemic (Travel, energy etc) did not perform as strongly, the market is clearly optimistic about recovery. These factors combine to provide the highest Earnings per Share ratio seen in recent history, as shown in the graph below.

What is Needed for Interest Rates to Rise?

When you see the media discussing interest rates, they are usually talking about the Cash Rate Target. This rate is set by the Reserve Bank of Australia (RBA) during their monthly board meeting. It is the interest rate on overnight, unsecured loans between the banks. While this is not something that will ever affect you directly, all banks use this rate as the basis of determining their other rates. If the Cash Rate rises by 0.25% for example, your home loan is likely to see the same increases shortly afterwards.

What is the RBA trying to achieve by making these changes? In their own words, the RBA “Works to maintain a strong financial system” and manipulating the Cash Rate is one way to steer the national economy in their attempt to achieve that goal.

RBA deputy governor Guy Debelle has recently discussed the cash rate, currently sitting at a record low of 0.1%pa. He said he would like to see unemployment drop to “Low 4s” or “High 3s” before increasing interest rates. The Australian unemployment rate is currently 5.80% as Covid19 continues to disrupt the labour market.

Dr Debelle further explained that his real concern is Wage Growth, which is closely linked to the unemployment rate. Whenever unemployment is high, wage growth is usually low, as there is a lot of competition for any one role. Dr Debelle does not expect the labour market to be tight enough to increase Wage Growth thereby justifying tighter monetary policy until at least 2024. This is clearly a view that is shared by the Commonwealth Bank of Australia, who have further lowered their two-year fixed interest rates, but have increased their four-year rates.

Suez Concerns

While factors affecting the global economy are often intangible constructs like ‘confidence’, occasionally there is a factor that can be seen with the naked eye. In the case of the Ever Given, it could be seen from space. The Ever Given is a 224,000-ton container ship that got lodged in the Suez Canal for 6 days, 7 hours and was refloated and cleared from the passage 29th March.

While a single ship lodged in a single passage may seem insignificant, the impact on global trade is disproportionately large. Around 12% of all trade globally passes through the Suez Canal. Llyod’s List, a London base shipping journal estimates the value of delayed goods to be ~400 million US Dollars every hour the passage is disrupted.

As the disruption lasted less than a week, the flow on effects of this event will be limited in most areas, though industries facing existing shortages, such as semiconductors and high-end processors, will be hit hard. We know that the blockage was cleared so quickly with the clarity of hindsight alone. Without this knowledge, many vessels have already been redirected around the Cape of Good Hope, adding significant additional costs and delays to the logistic chains of millions of products, while vessels that chose to wait will face significant delays while the backlog is cleared.

This event highlights both the importance of artificial nature of all international shipping lanes importance to global economic activity.

Markets

Local: The ASX200 index rose 3% in April. The Information Technology sector lead the way with a 10% rise, while the Energy sector was one of the few to end the month lower than where it started, down 4.9%.

Global: The S&P500 index rose 4.7% in April.

Gold: Spot price for Gold rose to $1,767.70.

Iron Ore: Iron Ore rose sharply to US $184 per ton.

Oil: Brent Oil maintained value, closing at US $63.58 per ton.

Property

Housing: Australian housing prices gained 1.8% in April according to CoreLogic’s national home value index, with the pace of gains easing slightly from a 32-year high in March. The continued growth in this area is pricing new entrants out of the market, with first home buyers dropping 4%.

CoreLogic’s research director, Tim Lawless, says the pace of capital gains could slow further over the coming months as inventory levels rise and affordability constraints dampen housing demand.

April saw 40,630 new residential property listings added to the market nationally over the four weeks ending April 25; substantially higher relative to the previous two years and almost 14% above the five-year average.

Economy

Interest Rates: RBA Cash rate remained unchanged at 0.10%.

Retail Sales: March retail sales rose 1.4%, with cafes, restaurants and takeaway food services leading the rises by industry, gaining 6.0%

Bond Yields: Australian government 10-year bond slipped to 1.69%.

Exchange Rate: The Aussie dollar maintained value against both the American dollar, at $0.770, and the the Euro at $0.642.

Consumer Confidence: Westpac’s Melbourne Institute recorded a third straight lift in consumer sentiment, surging ahead up 6.2%. That left the index up a huge 57% on April last year when coronavirus lockdowns sent confidence crashing. The index reading of 118.8 was the highest since August 2010 and showed optimists now far outnumbered pessimists.

Business Conditions: The ABS reports that 18% of all surveyed companies conveyed a drop in revenue in April. This figure represents a 6% decrease from March, and the lowest monthly figure recorded since July 2020, when nearly half of all businesses recorded plummeting revenues. 22% of firms reported a revenue uptick and the number of businesses reporting an increase in staff remains level at 9%, echoing encouraging unemployment figures and record-high numbers of new job listings.

Purchasing Managers Index: Rather than measure an economy directly, a PMI measures the business activity that helps drive it. A PMI above 50 indicates an expanding market, while a PMI below 50 indicates a contraction. The Australian PMI has risen again to 61.7, while the US PMI has pulled back from 64.7 to 60.7.

Covid: Infection levels are rising in 32 countries, down from 69 countries in March. 153 million infections have been recorded by the end of April, resulting in 3.35 million deaths. 181 countries have started vaccination campaigns, with 1.68 billion doses being delivered so far.

Comment

Rainy Day

Saved a few pennies during the pandemic? Well, you are not the only one. Consumers all around the world have been saving, with a combined value of ~7 trillion dollars stockpiled since the pandemic began.

The credit rating agency Moody’s produced this figure by comparing current data to 2019 saving patterns and the results are quite impressive. The seven trillion saved is approximately 6% of global gross domestic product. Global gross domestic product is the total worth of all goods and services produced over the year.

The combination of more than a years’ worth of pent-up demand, fueled by exceptionally high savings is expected to result in the perfect storm of consumer spending. If just a third of consumer excess savings are spent, Mark Zandi, chief economist at Moody’s Analytics estimates that global economic output would be boosted by 2% both this year and next.

2020 saw the largest fall in global output in modern history, yet household incomes were largely shielded by the unprecedented government assistance provided by most advanced economies.

The only factor that could restrain the economic boost is the inequality seen in the savings figures. Jan Hatzius, economist at Goldman Sachs, estimated that nearly two-thirds of US excess savings were held by the richest 40 per cent of the population, which similar inequity observed around the world.

Full Steam Ahead

Australians are just starting to get back to their pre-pandemic lives, but the economy may be a step ahead of us all. NAB Chief economist, Alan Oster, has forecast that GDP will have recovered to pre-pandemic levels in the March quarter of this year. (Complex economic indicators like GPD can take many months to calculate, so March quarter figures are not yet known)

Mr Oster has good reason to be so optimistic about recovery. The NAB quarterly business survey indicates business investment plans for the next 12 months have risen to their highest level in 27 years. Business conditions, hiring intentions and capital expenditure are all well above their pre-Covid levels, indicating that this forward momentum is likely to be sustained over coming quarters and will help drive economic growth.

Forward orders are a leading indicator measured in the survey. By measuring the inputs that will be converted to GDP in the coming months and years, forward orders have historically provided a useful guide to underlying momentum in the economy. This indicator also strengthened further in Q1, reaching its highest level since 1994.

It is worth noting that there is considerable variance in the recovery seen by different sectors of the economy. Capacity utilisation in the retail sector for example, which in aggregate has been boosted by the change in spending patterns, is well above its pre-Covid level. Some service industries however, as well as mining, remain below according to most recent data.

Sources: ABS, AFR, NAB Group Economics, Deloitte Access Economics, Macquarie MWM Research, RBA, UBS

The 2021-22 Federal Budget is a balancing act between a better than anticipated deficit ($106 bn), an impending election, and the need to invest in the long term.

Key initiatives include:

• Extension of temporary full expensing and loss-carry back providing immediate deductions for business investment in capital assets
• Introduction of a ‘patent box’ offering tax concessions on income derived from medical and biotech patents
• Tax and investment incentives for the digital economy
• Extension of the low and middle income tax offset
• Child care subsidy increase for families with multiple children
• $17.7 billion over 5 years to reform aged care
• $2.3 billion on mental health infrastructure and programs
• New and extended home ownership programs for first home owners and single parents

It is also a human budget (cynics would say voter focussed), with $17.7 billion dedicated to aged care, more money in the pockets of low income earners, the COVID vaccine rollout, $2 billion for mental health, a women’s economic package including a child care subsidy increase and funding to prevent violence, and a Royal Commission into defence and veteran suicide.

There will also be a lot of money flowing through to the private sector to those that are capable of developing new technologies. Momentum and drive to develop new initiatives is a strong theme and in some circumstances the Government will offset the risk of those initiatives – if you are in the right sectors.

The $1.2 billion digital economy strategy seeks to rewrite Australia’s underlying infrastructure and incentivise business to boldly develop towards a digital future. The program is broad – from upskilling the workforce, the expansion of consumer digital rights, the development of SME digitisation, Government service delivery, to cybersecurity.

Beyond digital, co-funding and seed capital is available to those developing new technologies that reduce emissions, and grow new export markets and jobs in this sector.

Productivity is a key take-out with several measures targeted at encouraging industry to innovate and develop including the extension of full expensing and the loss carry back measures.

If we can assist you to take advantage of any of the Budget measures, or to risk protect your position, please let us know.

For You & Your Family

Low and middle income tax offset extended

As widely predicted, the Low and Middle Income Tax Offset (LMITO) will be extended for another year. The LMITO provides a reduction in tax of up to $1,080 for individuals with a taxable income of up to $126,000 and will be retained for the 2021-22 year.

The tax offset is triggered when a taxpayer lodges their tax return.

Medicare levy low income threshold

The Government will increase the Medicare levy low-income thresholds for singles, families, and seniors and pensioners from 1 July 2020 to take account of recent movements in the CPI so that low-income taxpayers generally continue to be exempt from paying the Medicare levy.

For each dependent child or student, the family income thresholds increase by a further $3,597 instead of the previous amount of $3,533.

$250 self-education expense reduction removed

Currently, individuals claiming a deduction for self-education expenses sometimes need to reduce the deductible amount by up to $250. The rules in this area are complex as they only apply to self-education expenses that fall within a specific category and certain non-deductible expenses can be offset against the $250 reduction. This reduction will be removed, which should make it easier for individuals to calculate their self-education deductions.

Child care subsidy increase for families with multiple children under 5 in child care

From 1 July 2022 the Government will:

• Increase child care subsidies available to families with more than one child aged five and under in child care, and
• Remove the $10,560 cap on the Child Care Subsidy.

For those families with more than one child in child care, the level of subsidy received will increase by 30% to a maximum subsidy of 95% of fees paid for their second and subsequent children (tapered by income and hours of care).

Under the current system, the maximum child care subsidy payable is 85% of child care fees and it applies at the same rate per child, regardless of how many children a family may have in care.

Why? In October 2020, analysis by the Grattan Institute revealed that mothers lose 80%, 90% and even 100% of their take-home pay from working a fourth or fifth day after the additional childcare costs, clawback of the childcare subsidy, and tax and benefit changes are factored in.

“Unsurprisingly, not many find the option of working for free or close to it particularly attractive. The “1.5 earner” model has become the norm in Australia. And our rates of part-time work for women are third-highest in the OECD.

Childcare costs are the biggest contributor to these “workforce disincentives“. The maximum subsidy is not high enough for low-income families, and the steep taper and annual cap limit incentives to work beyond three days, across the income spectrum,” the report said.

Media release – Making child care more affordable and boosting workforce participation

Underwriting home ownership

The Government has announced new and expanded programs to assist Australians to buy a home.

2% deposit home loans for single parents

The Government will guarantee 10,000 single parents with dependants to enable them to access a home loan with a deposit as low as 2% under the Family Home Guarantee. Similar to the first home loan deposit scheme, the program will guarantee the additional 18% normally required for a deposit without lenders mortgage insurance.

The Family Home Guarantee is aimed at single parents with dependants, regardless of whether that single parent is a first home buyer or previous owner-occupier. Applicants must be Australian citizens, at least 18 years of age and have an annual taxable income of no more than $125,000.

Media release – Update from the Australian Government: Family Home Guarantee

Media release – Improving opportunities for home ownership

5% deposit home loans for first home buyers building new homes

The First Home Loan Deposit Scheme will be extended by another 10,000 places from 1 July 2021 to 30 June 2022. Eligible first home buyers can build a new home with a deposit of as little as 5% (lenders criteria apply). The Government guarantees a participating lender up to 15% of the value of the property purchased that is financed by an eligible first home buyer’s home loan. Twenty seven participating lenders offer places under the scheme.

Under the scheme, first home buyers can build or purchase a new home, including newly-constructed dwellings, off-the-plan dwellings, house and land packages, land and a separate contract to build a new home, and can be used in conjunction with other schemes and concessions for first home buyers. Conditions and timeframes apply.

Media release – Update from the Australian Government: Family Home Guarantee

Media release – Improving opportunities for home ownership

FHLDS eligibility

First home saver scheme cap increase

The first home super saver (FHSS) scheme allows you to save money for your first home inside your super fund, enabling you to save faster by accessing the concessional tax treatment of superannuation. You can make voluntary concessional (before-tax) and voluntary non-concessional (after-tax) contributions into your super fund and then apply to release those funds.

Currently under the scheme, participants can release up to $15,000 of the voluntary contributions (and earnings) they have made in a financial year up to a total of $30,000 across all years.

The Government has announced that the current maximum releasable amount of $30,000 will increase to $50,000.

The voluntary contributions made to superannuation are assessed under the applicable contribution caps; there is no separate cap for these amounts.

Amounts withdrawn will be taxed at marginal rates less a 30% offset. Non-concessional contributions made to the FHSS are not taxed.

To be eligible for the scheme, you must be 18 years of age or over, never owned property in Australia, and have not previously applied to release superannuation amounts under the scheme. Eligibility is assessed on an individual basis. This means that couples, siblings or friends can each access their own eligible FHSS contributions to purchase the same property.

Media release – Improving opportunities for home ownership

JobTrainer extended

The Government has committed an additional $500 million to extend the JobTrainer Fund by a further 163,000 places and extend the program until 31 December 2022. JobTrainer is matched by state and territory governments and provides job seekers, school leavers and young people access to free or low-fee training places in areas of skills shortages.

Full tax exemption for ADF personnel – operation Paladin

The Government will provide a full income tax exemption for the pay and allowances of Australian Defence Force (ADF) personnel deployed to Operation Paladin. Operation Paladin is Australia’s contribution to the United Nations Truce Supervision Organisation, with ADF personnel deployed in Israel, Jordan, Syria, Lebanon and Egypt.

Your superannuation

Work test repealed for voluntary superannuation contributions

Individuals aged 67 to 74 years will be able to make or receive non-concessional or salary sacrifice superannuation contributions without meeting the work test. The contributions are subject to existing contribution caps and include contributions under the bring-forward rule.

Currently, the ‘work test’ requires individuals aged 67 to 74 years to work at least 40 hours over a 30 day period in a financial year to be able to make voluntary contributions (both concessional and non-concessional) to their superannuation, or receive contributions from their spouse.

Personal concessional contributions will remain subject to the ‘work test’ for those aged between 67-74.

Expanded access to ‘downsizer’ contributions from sale of family home

The eligibility age to access downsizer contributions will decrease from 65 years of age to 60.

Currently, downsizer contributions enable those over the age of 65 to contribute $300,000 from the proceeds of selling their home to their superannuation fund. These contributions are excluded from the existing age test, work test and the $1.7 million transfer balance threshold (but will not be exempt from your transfer balance cap).

Both members of a couple can take advantage of the concession for the same home. That is, if a couple have joint ownership of a property and meet the other criteria, both people can contribute up to $300,000 ($600,000 per couple).

Downsizer contributions apply to sales of a principal residence owned for the past ten or more years.

Sale proceeds contributed to superannuation under this measure will count towards the Age Pension assets test.

SMSF residency tests relaxed

The residency rules for Self Managed Superannuation Funds (SMSFs) and small APRA regulated funds (SAFs) will be relaxed by extending the central control and management test safe harbour from two to five years for SMSFs, and removing the active member test for both fund types.

This change will enable SMSF and SAF members to contribute to their super while temporarily overseas, (as members of large APRA-regulated funds can do).

An SMSF must be considered an Australian Superannuation Fund in order to be a complying superannuation fund and receive tax concessions. If a super fund fails to meet the definition of an Australian Superannuation Fund then it is likely to become a non-complying, if this occurs the fund’s assets and income are taxed at the highest marginal tax rate.

This measure will enable SMSF and SAF members to keep and continue to contribute to their fund while predominantly undertaking overseas work and education opportunities.

SMSF legacy product conversions

Individuals will be able to exit a specified range of legacy retirement products, together with any associated reserves, for a two-year period. This includes market-linked, life-expectancy and lifetime products, but not flexi-pension products or a lifetime product in a large APRA-regulated or public sector defined benefit scheme.

Currently, these products can only be converted into another like product and limits apply to the allocation of any associated reserves without counting towards an individual’s contribution caps. The measure will permit full access to all of the product’s underlying capital, including any reserves, and allow individuals to potentially shift to more contemporary retirement products.

This will be a voluntary measure and not a mandated requirement for those individuals who hold these legacy accounts.

Social security and taxation treatment will not be grandfathered for any new products commenced with commuted funds and the commuted reserves will be taxed as an assessable contribution.

Early release of super scheme for victims of domestic violence not proceeding

The Government is not proceeding with the measure to extend early release of superannuation to victims of family and domestic violence.

Technical changes to First Home Super Saver Scheme

Technical changes will be made to the First Home Super Saver Scheme to reduce errors and streamline applications. These include:

• Increasing the discretion of the Commissioner of Taxation to amend and revoke FHSSS applications
• Allowing individuals to withdraw or amend their applications prior to receiving an FHSSS amount, and allow those who withdraw to re-apply for FHSSS releases in the future
• Allowing the Commissioner of Taxation to return any released FHSSS money to superannuation funds, provided that the money has not yet been released to the individual
• Clarifying that the money returned by the Commissioner of Taxation to superannuation funds is treated as funds’ non-assessable non-exempt income and does not count towards the individual’s contribution caps.

Business & employers

Temporary full expensing extension

Businesses with an aggregated turnover of less than $5 billion will be able to continue to fully expense the cost of new depreciable assets and the cost of improvements to existing eligible assets in the first year of use. Introduced in the 2020-21 Budget, this measure will enable an asset’s cost to continue to be fully deductible upfront rather than being claimed over the asset’s life, regardless of the cost of the asset. The extension means that the rules can apply to assets that are first used or installed ready for use by 30 June 2023.

Certain expenditure is excluded from this measure, such as improvements to land or buildings that are not treated as plant or as separate depreciating assets in their own right. Expenditure on these improvements would still normally be claimed at 2.5% or 4% per year.

The car limit will continue to place a cap on the deductions that can be claimed for luxury cars.

From 1 July 2023, normal depreciation arrangements will apply and the instant asset write-off threshold for small businesses with turnover of less than $10 million will revert back to $1,000.

Second-hand assets

For businesses with an aggregated turnover under $50 million, full expensing also applies to second-hand assets.

Small business pooling

Small business entities (with aggregated annual turnover of less than $10 million) using the simplified depreciation rules can deduct the full balance of their simplified depreciation pool at the end of the income year while full expensing applies. The provisions which prevent small businesses from re-entering the simplified depreciation regime for five years if they voluntarily leave the system will presumably continue to be suspended.

Opt-out rules

Taxpayers can choose not to apply the temporary full expensing rules to specific assets, although this choice is not currently available to small business entities that choose to apply the simplified depreciation rules for the relevant income year.

Temporary loss-carry back extension

Companies with an aggregated turnover of less than $5 billion will be able to carry back losses from the 2019-20, 2020-21, 2021-22 and 2022-23 income years to offset previously taxed profits in the 2018-19, 2019-20, 2020-21 and 2021-22 income years.

Under this measure tax losses can be applied against taxed profits in a previous year, generating a refundable tax offset in the year in which the loss is made. The amount carried back can be no more than the earlier taxed profits, limiting the refund by the company’s tax liabilities in the profit years. Further, the carry back cannot generate a franking account deficit meaning that the refund is further limited by the company’s franking account balance.

The tax refund will be available on election by eligible businesses when they lodge their 2020-21, 2021-22 and 2022-23 tax returns.

Before the measure was introduced in the 2020-21 Budget, companies were required to carry losses forward to offset profits in future years. Companies that do not elect to carry back losses can still carry losses forward as normal.

This measure will interact with the Government’s announcement to extend full expensing of investments in depreciating assets for another year. The new investment will generate significant tax losses in some cases which can then be carried back to generate cash refunds for eligible companies.

Residency tests rewrite

Determining whether an individual is a resident of Australia for tax purposes can be complex. The current residency tests for tax purposes can create uncertainty and are often subject to legal action.

The Government will replace the individual tax residency rules with a new, modernised framework. The primary test will be a simple ‘bright line’ test – a person who is physically present in Australia for 183 days or more in any income year will be an Australian tax resident. Individuals who do not meet the primary test will be subject to secondary tests that depend on a combination of physical presence and measurable, objective criteria.

The modernisation of the residency framework is based on the Board of Taxation’s 2019 report Reforming individual tax residency rules – a model for modernisation.

Employee share scheme simplification

Employee share schemes provide an opportunity for employers to offer employees a stake in the growth of the company by issuing interests such as shares, rights (including options) or other financial products to their employees, usually at a discount.

The Government has moved to simplify employee share schemes and make them more attractive by removing the cessation of employment taxing point for tax-deferred Employee Share Schemes (ESS). Currently, when an employee receives shares or options that are subject to deferred taxation the taxing point is triggered when they cease employment with the company, even if they could still lose the shares or options in future or have not yet exercised the options they have received.

This will mean that under a tax-deferred ESS, where certain criteria are met, employees may continue to defer the taxing point even if they are no longer employed by the company. In broad terms, following this change the deferred taxing point will be the earliest of:

• in the case of shares, when there is no risk of forfeiture and no restrictions on disposal
• in the case of options, when the employee exercises the option and there is no risk of forfeiting the resulting shares and no restriction on disposal
• the maximum period of deferral of 15 years.

Regulatory changes will also be made to reduce red tape where employers do not charge or lend to the employees to whom they offer ESS. Where employers do charge or lend, streamlining requirements will apply for unlisted companies making ESS offers that are valued at up to $30,000 per employee per year.

Fact sheet – Tax incentives to support the recovery

$450 per month threshold for super guarantee eligibility removed

Medical and biotech ‘patent box’ tax regime

Tax & investment incentives for the digital economy

As part of its Digital Economy Strategy package, the Government has committed to new and expanded funding to invest in the growth of digital industries and the adoption of digital technologies by small business.

Investment and tax incentives

The Government has committed to a series of tax incentives to support digital technologies:

Digital games tax offset

A 30% refundable tax offset for eligible businesses that spend a minimum of $500,000 on qualifying Australian games expenditure. The Digital Games Tax Offset will be available from 1 July 2022 to Australian resident companies or foreign resident companies with a permanent establishment in Australia. Industry consultation will commence in mid 2021 to establish the eligibility criteria and definition of qualifying expenditure.

Self-assessment of the effective life of certain intangible assets

The income tax laws will be amended to allow taxpayers to self-assess the effective life of certain intangible assets, rather than being required to use the effective life currently prescribed by statute. The measure applies to assets acquired from 1 July 2023 (after the temporary full expensing regime has concluded) including patents, registered designs, copyrights and in-house software for tax purposes. Taxpayers will be able to bring deductions forward if they self-assess the assets as having a shorter effective life to the statutory life.

Review of venture capital tax incentives

The effectiveness of the existing range of tax incentives designed to attract foreign investment and encourage venture capitalists to invest in early-stage Australian companies will be reviewed to ensure they are producing the intended results. This is code for the Government doesn’t think the money invested is achieving a genuine result and changes are likely to be recommended.

Australia’s digital economy – investment incentives fact sheet

Media release – A modern digital economy to secure Australia’s future

Emerging aviation technologies

The Government has committed $35.7m to support emerging aviation technologies, the bulk of which is committed to the Emerging Aviation Technology Partnerships (EATP) program. Partnering with industry, the program is focussed on:

• growing manufacturing jobs in electric aviation
• connecting regional communities
• digital farming
• boosting regional supply chains
• improving health outcomes for remote Indigenous communities.

and is expected to include electric engines, drones and electric vertical take-off and landing aircraft.

Applications for EATP partners will be sought from local and international industry through a competitive application process in late 2021.

Artificial intelligence development

A package of measures to oversee and develop Australia’s use and integration of artificial intelligence (AI) including:

National Al centre

A new national AI centre to create the foundation for Australia’s AI and digital ecosystem within the CSIRO’s Data61. The centre will support projects that lift AI capability, provide a “front door” or SMEs looking for talent, and provide a central coordination for strategically aligned AI projects. Four Digital Capability Centres will be appointed through a competitive process focussing on specific applications of AI, such as robotics or AI assisted manufacturing. These Centres will provide SMEs with connections to AI equipment, tools and research, access to advice and training to help SMEs confidently adopt AI technologies, and links with the required AI expertise to identify business needs and connect them to leading researchers.

AI grant funding

Two grant funding programs (one national and one specifically for regional initiatives) for business to pilot AI projects that address key national challenges. Grantees will retain the intellectual property of their solution.

Media release – A modern digital economy to secure Australia’s future

Artificial intelligence

Expansion of small business digital support services

The Government has committed to:

• A further $12.7m for the Digital Solutions – Australian Small Business Advisory Services Program that provides small businesses with access to digital solutions advisers to work with them to expand their use of digital technology. The Digital Solutions Program will pilot a program for the not-for-profit sector.
• $15.3 m has been dedicated to drive electronic invoicing through the business community by working with payment providers, supply chain pilots, and education campaigns (E-invoicing will be mandatory for Government by July 2022). No direct incentives for adoption.

Media release – A modern digital economy to secure Australia’s future

SME Digitalisation

Investments in new technologies to reduce emissions

The Government will provide $1.6 billion over ten years from 2021-22 (including $761.9 million over four years from 2021-22) to incentivise private investment in technologies identified in the Government’s Technology Investment Roadmap and Low Emissions Technology Statements. Funding includes:

• Creation of a technology co-investment facility that supports the development of regional hydrogen hubs, carbon capture, use and storage technologies, very low cost soil carbon measurement and new agricultural feed technologies, a high-integrity carbon offset scheme in the Indo-Pacific region, and support the implementation of the Technology Investment Roadmap and Low Emissions Technology Statements
• Establish the below baseline crediting mechanism recommended by the King Review and help realise abatement opportunities in large industrial facilities
• Support for Australian businesses and supply chains to reduce their energy costs and improve productivity through the uptake of more energy efficient industrial equipment and business practices
• Early stage seed capital financing function within the Australian Renewable Energy Agency (ARENA).

Media Release – Jobs Boost From New Emissions Reduction Projects

Media Release – Cutting Emissions And Creating Jobs With International Partnerships

Tax residency rules for trusts and limited partnerships

In the 2020-21 Budget, the Government announced that the corporate tax residency rules would be amended to address the uncertainty that currently exists when trying to determine the residency status of a company that has been incorporated overseas.

These amendments have not yet been made, but the Government has announced that it will also consult on broadening the scope of the amendments to trusts and corporate limited partnerships as part of the consultation process dealing with the company residency rules.

Junior Minerals exploration tax incentive extended

The Junior Minerals Exploration Incentive program provides a tax incentive for investment in junior minerals exploration companies raising capital to fund greenfields exploration activity.

Eligible companies are able to create exploration credits by giving up a portion of their tax losses relating to exploration expenditure, which can then be distributed to new investors as a refundable tax offset or a franking credit.

The program has been extended for four years from 1 July 2021 to 30 June 2025.

The Government will also make minor legislative amendments to allow unused exploration credits to be redistributed a year earlier than under current settings.

Tax relief for brewers and distillers – annual cap increased to $350k

From 1 July 2021, eligible brewers and distillers will be able to receive a full remission of any excise they pay, up to an annual cap of $350,000. Currently, eligible brewers and distillers are entitled to a refund of 60% of the excise they pay, up to an annual cap of $100,000.

The tax relief will align the benefit available under the Excise Refund Scheme for brewers and distillers with the Wine Equalisation Tax (WET) Producer Rebate.

Media release – Tax relief for small brewers and distillers to support jobs

Tax exemption for storm and flood grants for SMEs and primary producers

Qualifying grants made to primary producers and small businesses affected by the storms and floods will be non-assessable non-exempt income for tax purposes.

Qualifying grants are Category D grants provided under the Disaster Recovery Funding Arrangements 2018, where those grants relate to the storms and floods in Australia that occurred due to rainfall events between 19 February 2021 and 31 March 2021. These include small business recovery grants of up to $50,000 and primary producer recovery grants of up to $75,000.

Student visa holders working in key sectors

Student visa holders will temporarily be able to work more than 40 hours per fortnight in key sectors:

• Tourism and hospitality – student visa holders will be able to work more than 40 hours per fortnight, as long as they are employed in the tourism or hospitality sectors.
• Agricultural sector – From 5 January 2021, work limitation conditions placed on student visa holders were temporarily lifted to allow these visa holders to work more than 40 hours per fortnight if they are employed in the agriculture sector. The Government has removed the requirement for applicants for the Temporary Activity visa (subclass 408) to demonstrate their attempts to depart Australia if they intend to undertake agricultural work. The period in which a temporary visa holder can apply for the Temporary Activity visa has also been extended from 28 days prior to visa expiry to 90 days prior to visa expiry.

Support for tertiary and international education providers

The Government is implementing a series of measures to assist tertiary and international education providers to help mitigate some of the impact of COVID-19. Funding includes:

• $26.1 million over four years from 2021-22 to assist non-university higher education providers to attract more domestic students through offering 5,000 additional short course places in 2021
• $9.4 million in 2021-22 to provide grants of up to $150,000 to eligible higher education and English language providers to support innovative online and offshore education delivery models
• extending existing FEE-HELP loan fee exemption by six months to 31 December 2021

A range of Government fees and regulatory charges have also been either revised or postponed.

Extending supports for the arts sector

The Government will provide $222.9 million over two years from 2020-21 to continue to support the arts sector through the impacts of COVID-19.

Funding includes:

• Expansion of the Restart Investment to Sustain and Expand Fund to provide financial support to support events or productions
• Extension of the Temporary Interruption Fund for 2021-22
• A program of support for independent cinemas

Producer Tax Offset rate holds at 40% for 2021-21

The Producer Tax Offset rate will stay at 40% for feature films with a theatrical release. The 2020-21 Budget had intended to reduce the rate to 30%.

Heavy road vehicle charge increase

Education, skills & training

Government & regulators

New compliance requirements for NFP income tax exemptions

Media release – A modern digital economy to secure Australia’s future

Cyber security, safety and trust

Enhancing Government service delivery

Data and the digital economy

Other

Roads & building projects

‘Shovel ready’ projects are high on the Government’s agenda.

New South Wales

Key projects to be funded include:

Roads

• $2.03 billion for the Great Western Highway Upgrade – Katoomba to Lithgow – Construction of East and West Sections
• $400 million for the Princes Highway Corridor – Jervis Bay Road to Sussex Inlet Road – Stage 1
• $240 million for the Mount Ousley Interchange
• $100 million for the Princes Highway Corridor – Jervis Bay Road Intersection
• $87.5 million for M5 Motorway – Moorebank Avenue-Hume Highway Intersection Upgrade
• $52.8 million for Manns Road – Intersection Upgrades at Narara Creek Road and Stockyard Place; and
• $48 million for Pacific Highway – Harrington Road Intersection Upgrade, Coopernook.

Infrastructure

• $66 million – Newcastle airport upgrade to widen the runway to accommodate longer range domestic and international passenger services. The upgrade is expected to complete in 2023. More.

Victoria

Key projects to be funded include:

• $2 billion for initial investment in a new Melbourne Intermodal Terminal;
• An additional $307 million for the Pakenham Roads Upgrade;
• An additional $203.4 million for the Monash Roads Upgrade;
• An additional $20 million for the Green Triangle and $15 million for the Melbourne to Mildura Roads of Strategic Importance corridors;
• An additional $56.8 million for the Hall Road Upgrade;
• An additional $30.4 million for the Western Port Highway Upgrade;
• $17.5 million for the Dairy Supply Chain Road Upgrades; and
• $10 million for the Mallacoota-Genoa Road Upgrade.

Queensland

Key projects to be funded include:

• $400 million for the Inland Freight Route (Mungindi to Charters Towers) Upgrades
• An additional $400 million for Bruce Highway Upgrades
• $240 million for the Cairns Western Arterial Road Duplication
• $178.1 million for the Gold Coast Rail Line Capacity Improvement (Kuraby to Beenleigh) – Preconstruction
• $160 million for the Mooloolah River Interchange Upgrade (Packages 1 and 2)
• An additional $126.6 million for Gold Coast Light Rail – Stage 3
• $35.3 million for the Maryborough-Hervey Bay Road and Pialba-Burrum Heads Road Intersection Upgrade; and
• $10 million for the Caboolture – Bribie Island Road (Hickey Road-King John Creek) Upgrade.

Northern Territory

New projects to be funded include:

• $300k Development Study for a Proposed Tennant Creek Multimodal Facility and Rail Terminal
• $150m Northern Territory National Network Highway Upgrades (Phase 2)
• $173.6m Northern Territory Gas Industry Roads Upgrades

South Australia

Key projects to be funded include:

• $2.6 billion allocation of funding for the North-South Corridor – Darlington to Anzac Highway;
• $161.6 million for the Truro Bypass;
• $148 million for the Augusta Highway Duplication Stage 2;
• An additional $64 million for the Strzelecki Track Upgrade – Sealing;
• An additional $60 million for the Gawler Rail Line Electrification;
• $48 million for the Heysen Tunnel Refit and Upgrade – Stage 2
• An additional $27.6 million for the Overpass at Port Wakefield and Township Duplication;
• $32 million for the Kangaroo Island Road Safety and Bushfire Resilience Package, and
• $22.5 million for the Marion Road and Sir Donald Bradman Drive Intersection Upgrade

Tasmania

Key projects to be funded include:

• $80 million for the Tasmanian Roads Package – Bass Highway Safety and Freight Efficiency Upgrades Package – Future Priorities;
• $48 million for the Algona Road Grade Separated Interchange and Duplication of the Kingston Bypass;
• $44 million for the Rokeby Road – South Arm Road Upgrades;
• $37.8 million for the Midland Highway Upgrade – Campbell Town North (Campbell Town to Epping Forest);
• $36.4 million for the Midland Highway Upgrade – Oatlands (Jericho to South of York Plains);
• $35.7 million for the Midland Highway Upgrade – Ross (Mona Vale Road to Campbell Town);
• An additional $24 million for the Port of Burnie Shiploader Upgrade; and
• $13.2 million for the Huon Link Road.

Western Australia

Key projects to be funded include:

• $347.5 million for METRONET: Hamilton Street-Wharf Street Grade Separations and Elevation of Associated Stations, including Queens Park Station and Cannington Station and an enhanced METRONET Byford Rail Extension project, with new grade separated rail crossing at Armadale Road and an elevated station at Armadale
• $200 million for the Great Eastern Highway Upgrades – Coates Gully, Walgoolan to Southern Cross and Ghooli to Benari
• $160 million for the WA Agricultural Supply Chain Improvements – Package 1
• $112.5 million for the Reid Highway – Altone Road and Daviot Road-Drumpellier Drive – Grade-separated intersections
• $85 million for the Perth Airport Precinct – Northern Access
• $64 million for the Toodyay Road Upgrade – Dryandra to Toodyay
• $55 million for the Mandurah Estuary Bridge Duplication, and
• $31.5 million towards the METRONET High Capacity Signalling project

ACT

New projects to be funded include:

• $2.5m Beltana Road Improvements
• $132.5m Canberra Light Rail – Stage 2A
• $26.5m William Hovell Drive Duplication

The deficit, thanks in part to surging iron ore prices, is lower than anticipated in the 2020-21 Federal Budget at $161 billion in 2020-21, a $52.7 billion improvement to estimates. The underlying cash balance is expected to be a deficit of $106.6 billion in 2021-22 and continue to improve over the forward estimates to a deficit of $57 billion in 2024-25. While the deficit is large, it did its job.

Real GDP grew strongly over the latter half of 2020, marking the first time on record when Australia has experienced two consecutive quarters of economic growth above 3% – output is expected to have exceeded its pre-pandemic level in the March quarter of 2021. Real GDP is forecast to grow by 1.25% in 2020-21, by 4.25% in 2021-22 and 2.5% in 2022-23. After falling by 2.5% in 2020, real GDP is expected to grow by 5.25% in 2021, and by 2.75% in 2022.

Key budget assumptions

• A population-wide vaccination program is likely to be in place by the end of 2021.
• During 2021, localised outbreaks of COVID-19 are assumed to occur but are effectively contained.
• General social distancing restrictions and hygiene practices will continue until medical advice recommends removing them.
• No extended or sustained state border restrictions in place over the forecast period.
• A gradual return of temporary and permanent migrants from mid-2022. Small phased programs for international students will commence in late 2021 and gradually increase from 2022. The rate of international arrivals will continue to be constrained by state and territory quarantine caps over 2021 and the first half of 2022, with the exception of passengers from Safe Travel Zones.
• Inbound and outbound international travel is expected to remain low through to mid-2022, after which a gradual recovery in international tourism is assumed to occur.

Revenue: Where 2021-22 Budget revenue comes from

Expenditure: How the 2021-22 Budget is spent

Source: Budget 2021-22

Markets

Local: The ASX200 index rose 2.26% in June. Capping off an 8% quarterly total return for the index.

Global: The S&P500 index also rose well by 2.2% over June.

Gold: Spot price for Gold fell to $1,763.15.

Iron Ore: Iron Ore continued to rise strongly to US $215.5 per ton, a $14 rise on the previous month.

Oil: Brent Oil rose again to close out the month at $75.13 a barrel.

Property

Housing: National home values rose 1.9% in June, taking annual growth to 13.5% for the financial year. The growth in Australian dwelling values was led by houses, which rose 15.6% over the year, compared to a 6.8% lift in unit values. Each of the capital cities saw an uplift in dwelling values in June, ranging from a 3.0% rise in Hobart to a more subdued 0.2% lift in Perth. The performance gap has narrowed between regional Australia and the capital cities, though regional Australia did outperform slightly in monthly growth terms, rising 2.0% through June compared to 1.9% across the combined capital cities. Darwin maintained the highest annual rate of growth across the capital cities, increasing 21.0% in value over the financial year, followed by Hobart 19.6%. Across regional Australia, regional NSW had the highest annual growth in dwelling values 21.1%, followed by regional Tasmania at 20.8%.

Meanwhile in the US, new home sales have dropped 5.9% to a seasonally adjusted rate of 769,000 units last month, the lowest levels seen since May 2020. The median house price jumped 18.1% over the previous 12 months to US$374,400, with sellers looking to cash out on the inflated market. The number of U.S. homes for sale climbed to 6.7%. Cooling prices may be on the horizon as home-price growth is expected to slow to less than 10%. Demand may also slow if buyers are priced out, especially with the expectation of interest rates to increase in the near future.

Economy

Interest Rates: RBA Cash rate remained unchanged at 0.10%.

Employment: The unemployment rate dropped very sharply again to 5.1%, the equal lowest since 2019, remarkably now only 0.2% above the lowest since 2008, nearly reaching our forecast of 5% for the end of 2021. The participation rate rebounded to 66.2%, near a record high 66.3%. The broadest under-utilisation rate fell even more sharply to 12.5%, the lowest since 2013.

US Employment: Job growth accelerated in June, with payrolls gaining the most over the past 10 months. The largest payroll gains were in the hospitality and leisure sector adding back 343,000 jobs. Non-farm payrolls increased by 850,000, 130,000 more than was previously forecast. The unemployment rate rose slightly to 5.9% from 5.8% in May.

Bond Yields: Australian government 10-year bonds slipped slightly to 1.51%.

Exchange Rate: The Aussie dollar fell slightly against both the American dollar, at $0.751, and the Euro at $0.630.

Consumer Confidence: The Westpac-Melbourne Institute Index of Consumer Sentiment fell 5.2% to 107.2 in June from 113.1 in May. The latest fall in June is almost certainly due to concerns around the two-week lockdown in Melbourne. The survey was conducted during the first week of the lockdown. The Index is now back at the level we saw back in January when the country was impacted by significant lockdowns in parts of Sydney and Queensland.

Business Conditions: Trading conditions and business sentiments related to revenue have improved throughout the financial year. In July 2020, nearly half (47%) of businesses reported decreased revenue over the previous month, compared to less than a quarter (24%) of businesses in June 2021. Monthly revenue data has weakened between May and June 2021, with a higher proportion of businesses reporting decreased revenue and a lower proportion reporting increased revenue. Some businesses commented that their revenue had been affected due to recent lockdowns in Victoria. In June, 19% of employing businesses reported that they did not have enough employees based on current operations, compared to 12% in March 2021 and 15% in December 2020.

Purchasing Managers Index: Rather than measure an economy directly, a PMI measures the business activity that helps drive it. A PMI above 50 indicates an expanding market, while a PMI below 50 indicates a contraction. The Australian PMI has risen again to 63.2 with a 2.27% rise from the previous month, while the US PMI has fallen slightly from 61.2 in May to 60.6 in June.

Covid: Overall global cases passed 181 million in June. The number of cases linked to Sydney’s Bondi cluster grew to 143 on Tuesday 29^th of June, with NSW announcing a further 22 cases on June 30. Parts of Victoria, Queensland, New South Wales and the Northern Territory have been placed under lockdown as state governments attempt to stop the spread of the Delta variant. So far, only around 5% of the population is fully vaccinated and approximately 30% have had their first shot.

Comments

The Intergenerational Report examines the long-term sustainability of current policies and how demographic, technological and other structural trends may affect the economy and the budget over the next 40 years. The COVID-19 pandemic has produced a stumbling block to recent economic growth causing the most severe global shock since the Great Depression.

However, due to a strong fiscal position the government was able to respond decisively to the pandemic with $291 billion in direct economic support. The current speed of Australia’s economic recovery is exceeding even the most optimistic of expectations, currently outperforming all major advanced economies.

Despite such positive news on the back of the COVID-19 pandemic the next 40 years might be more of a challenge than previously anticipated. The Australian economy is projected to grow at a slower pace over the next 40 years than it has in the 40 years prior. Slower population growth is the main reason for the expected slowdown in economic growth. Australia’s total population is projected to reach 38.8 million by 2060-61, 1.2 million less than previously forecast. This is below previous projections due to lower levels of migration resulting from the COVID-19 pandemic and a lower fertility rate.

In 2060-61, 23% of the population is projected to be over 65, a rise of around 7 percentage points from 2020-21. The ratio of working-age people to those over 65 is projected to fall from 4.0 to 2.7 people over the next 40 years. Australia is currently in the middle of a significant demographic transition, as people in the baby boomer generation reach 65. This has already driven a rapid fall in the ratio of working-age people to those over 65 through the past decade, which will continue for the next decade. Furthermore, the labour force participation rate is also expected to fall from a record high of 66.3% in March 2021 to 63.6% by 2060-61, reflecting Australia’s ageing population.

GDP (Gross Domestic Product) – The total monetary or market value of all goods and services produced within a country’s borders over a specific time period.

GNI (Gross National Income) – The total amount of money earned by a nations businesses and people, including investment income regardless of where it was earned. It is used to measure and track a nation’s wealth year to year.

The larger slowdown in GNI growth than GDP growth reflects an assumption that the terms of trade will decline before leveling out at long-term levels. Over the past 4 decades there have been periods where significant increases in commodity prices and the terms of trade have boosted growth in incomes, which could be a factor in the upcoming economic slowdown.

In terms of economic productivity, the economy in real and nominal GDP terms, would be nearly 10% smaller, while gross national income per person would be $32,000 lower than the baseline scenario. By 2061, the deficit would roughly double – from 2.3% of GDP to 4.5%. Net debt as a percentage of GDP would also be higher at 57%.

After falling from a pandemic-induced high, government spending is projected to gradually increase over time. Health will comprise the single largest component of spending, accounting for 26% of spending in 2060-61. Real per person health spending is projected to more than double over the next 40 years, considerably due to rising incomes, changes in preferences and the costs of using new health technology.

In the future, more Australians will retire having made superannuation contributions while working. This will reduce the call for government support through the Age Pension. However, superannuation entices favourable tax treatment which reduces government revenues. The projected combined total of Age and Service Pension expenditure and superannuation tax concessions is estimated to grow from around 4.5 per cent of GDP in 2020-21 to 5.0 per cent of GDP in 2060-61.

Lastly, social policy will dictate the budget and create huge difficulties for politicians seeking fiscal restraint. Health is expected to increase from 4.6% of GDP in 2021-22 to 6.2% by 2060-61 mostly due to rising income, population ageing, public hospital demands and advancement in medical technology. The report also optimistically projects the NDIS to level out at 1.4% of GDP nearly 30% higher than predicted by the 2015 IGR.

The IGR is valuable as it assumes current policy but looks at the structural and demographic trends. The real debate our nation needs is about our future economic performance, the ultimate message from the report suggests that Australia should not be a passive player. It needs a strong far sighted and active policy agenda, whether this will happen is another debate entirely.

Interest Rates, A Worldwide Dilemma?

Even before coronavirus, Australia was experiencing a gradual decline in interest rates. Since June 2020, the RBA has maintained record-low interest rates – noting that it will maintain supportive monetary conditions for some time and will not increase the cash rate again until its economic (i.e. employment and inflation) targets have been met.

The Fed lowered its US federal funds rate to help support economic conditions in the face of coronavirus. While noting the economic recovery is far from complete and that inflation is expected to increase temporarily, the ongoing economic recovery has called for a change to monetary policy settings – with markets anticipating an announcement later in the year.

After lowering interest rates in 2020, Russia increased interest rates again in 2021, noting that the rapid recovery of demand coupled with inflationary pressures required a return to earlier monetary policy settings – a time marked by higher interest rates.

After a period of low interest rates (due likely to coronavirus), Turkey raised interest rates again in 2021 in an attempt to dampen inflation in an uncertain economic environment.

Japan has had negative interest rates since 2015, which meant the central bank relied on other monetary policy easing measures to support its economy during coronavirus – particularly in 2020.

As economic activity continues to pick up, interest rates could start to rise to combat inflationary pressure. However, the progress in vaccination distribution remains uncertain, especially in emerging markets. In tandem with this, global central banks are applying unproven monetary policy frameworks, including money creation and large-scale bond purchases. While studies show that interest rates have been falling over the past several centuries, the confluence of these factors will be revealing in the years that follow.

Sources: ABS, AFR, CoreLogic, Deloitte Access Economics, RBA, Treasury, Trading Economics, UBS, Westpac.

Why are some businesses returning JobKeeper to the ATO?

Super Retail Group – owner of the Supercheap Auto, Rebel, BCF and Macpac brands – handed back $1.7 million in JobKeeper payments in January after releasing a trading update showing sales growth of 23% to December 2020. Toyota announced that it will return $18 million in JobKeeper payments after a record fourth quarter. And, Domino’s Pizza has also handed back $792,000 of JobKeeper payments.

Toyota, Super Retail Group, and Domino’s were not obliged to hand back JobKeeper. Under the rules at the time, the companies qualified to access the payment. However, Toyota CEO Matthew Callachor said, “Like most businesses, Toyota faced an extremely uncertain future when the COVID-19 health crisis developed into an economic crisis …We claimed JobKeeper payments to help support the job security of almost 1,400 Toyota employees around Australia ….In the end, we were very fortunate to weather the storm better than most, so our management and board decided that returning JobKeeper payments was the right thing to do as a responsible corporate citizen.”

Domino’s Group CEO and Managing Director, Don Meij said, “We appreciate the availability and support of JobKeeper during a period of significant uncertainty. That period has passed, the assistance package has served its purpose, and we return it to Australian taxpayers with our thanks.”

Companies that received JobKeeper and subsequently paid dividends to shareholders and executive bonuses have come under particular scrutiny, not just by the regulators but by public opinion.

The first phase of JobKeeper did not require businesses to prove that they had actually suffered a downturn in revenue, just have evidence turnover was likely to drop in a particular month or quarter. For many businesses, early trends indicated that the pandemic would have a devastating impact on revenue. Many also took action and prevented the trend entrenching by actioning plans to protect their workforce and revenue. The fact that business improved, does not impact on initial JobKeeper eligibility. In the first phase of JobKeeper, employers were not obliged to stop JobKeeper payments if trends improved.

Speaking at the Senate Select Committee on COVID-19, ATO Deputy Commissioner Jeremey Hirschhorn stated that the ATO rejected some $180 million in JobKeeper claims pre-issuance. Approximately, $340 million in overpayments have been identified. Of these, $50 million were honest mistakes and will not be clawed back where the payment had been passed on to the employee.

Where the ATO determines that JobKeeper overpayments need to be repaid, they will contact you and let you know the amount and how the repayment should be made. Administrative penalties generally will not apply unless there is evidence of a deliberate attempt to manipulate the circumstances to gain the payment.

Taxpayers can object to the ATO’s JobKeeper overpayment assessment. If you are contacted by the ATO, please contact us immediately for assistance and we will work with the ATO on your behalf.

COVID-19 Vaccinations and the Workplace

The first COVID-19 vaccination in Australia rolled out on 21 February 2021 preceded by a wave of protests. With the rollout, comes a thorny question for employers about individual rights, workplace health and safety, and vaccination enforcement.

The rollout, managed in phases, is expected to to completed by the end of 2021 (you can check your eligibility here). While the Australian Government’s COVID-19 vaccination policy states that vaccination “is not mandatory and individuals may choose not to vaccinate”, this does not mean that there will not be punitive initiatives for those failing to vaccinate including proof of vaccination to move across borders. Australia for example, already has a precedent with “No Jab, No Play” policies in place to access child care payments (the ability to object to vaccination on non-medical grounds was removed from 1 January 2016).

There are currently no laws or public health orders in Australia that specifically enable employers to require their employees to be vaccinated against coronavirus. However, it is likely that in some circumstances an employer may require an employee to be vaccinated.

Can an employer require an employee to be vaccinated?

For most employers, probably not. The Fair Work Ombudsman, however, states that there are “limited circumstances where an employer may require their employees to be vaccinated.” These are:

• The State or Territory Government enacts a public health order requiring the vaccination of workers (for example, in identified high-risk workplaces or industries).
• An agreement or contract requires it – some employment agreements already require employees to be vaccinated and where these clauses exist, they will need to be reviewed to determine if they also apply to the COVID-19 vaccine.
• A lawful and reasonable direction – employers are able to issue a direction for employees to be vaccinated but whether that direction is lawful and reasonable will be assessed on a case by case basis. It’s more likely a direction will be “reasonable” where, for example, there is an elevated risk such as border control and quarantine facilities, or where employees have contact with vulnerable people such as those working in health care or aged care.

If an employee refuses to be vaccinated on non-medical grounds in a workplace that requires it, standard protocols apply. That is, the employer will need to follow through with disciplinary action – there are no special provisions that enable suspensions or stand downs for employees who refuse to be vaccinated against COVID-19.

Can an employer require evidence of vaccination?

In general, an employer can only require evidence of vaccination if they have a lawful and reasonable reason to do so. Requesting access to medical records and storing data of an individual’s medical information will also have privacy implications (see the Office of the Information Commissioner for more details).

Your immunisation history is already accessible through your myGov account when it is linked to Medicare. The Express Plus Medicare app enables you to access this information on your phone.

More details are expected shortly on Australia’s “vaccine passport” that will enable the quick identification of an individual’s vaccination status. Israel’s “Green Pass” for example uses a simple QR code but there are already concerns that it is easily forged.

Can we require customers to be vaccinated?

Some high risk industries are likely to require customers to be vaccinated or where they cannot be vaccinated, subject to heightened measures such as quarantine and/or testing. Qantas CEO Alan Joyce recently told A Current Affair, “We are looking at changing our terms and conditions to say, for international travellers, that we will ask people to have a vaccination before they can get on the aircraft.” Qantas is expected to release its position middle-to-end 2021 on domestic and international travel.

For employers in high risk industries, it’s important to maintain a conversation with employees and consult an industrial relations specialist if your workplace intends to require vaccinations for employees and/or customers.

FBT 2021: Tax & Employee Benefits

Fringe benefits tax (FBT) is one of Australia’s most disliked taxes because it’s cumbersome and generates a lot of paperwork. The COVID-19 lockdowns have added another layer of complexity as many work patterns and behaviours changed.

A fringe benefit is a ‘payment’ to an employee or an associate (an associate is someone related to you such as a spouse, child or even a friend), but in a different form to salary or wages. A benefit might be as simple as hosting a work Christmas party, providing car parking, using a work vehicle, or providing the goods or services of the business at a reduced rate to what the public pay.

If your business is not already registered for FBT, it’s important to understand if fringe benefits have been provided. Generally, the ATO will look closely at unregistered employers and where there are mismatches in data.

With the FBT year ending on 31 March, we look at the key issues and the Australian Taxation Office’s (ATO) hotspots.

What is exempt from FBT?

Certain benefits are excluded from the FBT rules if they are provided primarily for use in the employee’s employment. These include:

• Portable electronic devices (e.g., laptop, ipad, printers, GPS, etc.,). Larger businesses are limited to the purchase or reimbursement of one portable electronic device for each employee per FBT year;
• A handbag, briefcase or satchel to carry items you are required to use and carry for work, such as laptops, tablets, work papers or diaries. Be warned that if you are using these bags for a mix of personal and work use, then the use needs to be apportioned and will not be fully exempt from FBT. The ATO is not going to pay for your Gucci bag even if you do throw your ipad into it on occasion.
• Tools of trade.

Also, if the item or service provided to the employee is less than $300 and is a one-off, it’s generally classed as a minor benefit and exempt from fringe benefits tax.

COVID-19 & FBT

The ATO has changed how it will approach FBT compliance this year because of the impact of COVID-19 on work patterns and conditions.

Emergency assistance such as flights and accommodation – emergency assistance to provide immediate relief to employees because the employee is at risk of being adversely affected by COVID-19 will generally not be subject to FBT. This might include:

• Expenses incurred relocating an employee, including paying for flights home to Australia.
• Expenses incurred for food and temporary accommodation if an employee cannot travel due to restrictions (domestic, interstate or intrastate).
• Benefits provided that allow an employee to self-isolate or quarantine.
• Transporting or paying for an employee’s transport expenses including car hire and transport to temporary accommodation.

For fly-in fly-out workers, this includes temporary accommodation and meals where they were unable to return home because of border or travel restrictions.

Health care – Providing flu vaccinations to employees is generally exempt from FBT because it is work-related preventative health care. However, health care treatment is only exempt from FBT if it is provided to your employees at your workplace or adjacent to your worksite. The cost of ongoing medical costs are generally not exempt.

Company cars – a company car garaged at an employee’s home will generally attract FBT. However, this FBT year, many company carparks and places of business were closed. As a result, the ATO has stated that for employers using the operating cost method, if the “car has not been driven at all during the period it has been garaged at home, or has only been driven briefly for the purpose of maintaining the car, we will accept that you don’t hold the car for the purpose of providing fringe benefits to your employee.” But, you will need to maintain odometer readings that show the car has not been used.

If the car was used, fringe benefits generally applies. However, if the car was used for business purposes then this use reduces the taxable value. If the car was only used for business, the taxable value may be reduced to zero.

Logbooks – COVID-19 is likely to have impacted on driving patterns and the ATO have made some concessions where the 12 week log book period was interrupted.

If you are already using the logbook method and have an existing logbook in place, you can still rely on this logbook. However, you must keep odometer records for the year to show how much the car has been driven during the year including during any lockdown period.

If this is the first year you have used a logbook, you still need to keep an accurate 12 week logbook. However, if COVID-19 impacted driving patterns during that 12 weeks, then the ATO will allow you to adjust the use indicated in the logbook to account for the change in driving patterns.

Not-for-profit salary packaging – Not-for-profit employers often provide salary-packaged meal entertainment to employees to take advantage of the exempt or rebatable cap. For the FBT year ending 31 March 2021, the ATO has stated that they will not look into these arrangements where meals are provided by a supplier that was authorised as a meal entertainment provider as at 1 March 2020.

Cancellation fees – non-refundable costs for cancelled events are exempt from FBT unless the employee paid for the event themselves and was reimbursed by you. That is, if the employer paid for the event then the cancellation fee is the employer’s obligation as no benefit was provided. If the employee paid for the event, the cancellation fee is the employee’s obligation that has been reimbursed. It really depends on who the arrangement was between.

ATO ‘red flags’

One of the easiest ways for the ATO to pick up on problem areas is where there are mismatches in the information provided to the ATO. Common problem areas include:

Entertainment deductions with no corresponding fringe benefit – A simple way for the ATO to pick up on a problem is when an employer claims a deduction for expensive entertainment expenses – meals out, tickets to cricket matches, etc., – but there is not a corresponding recognition of the fringe benefit. Entertainment expenses are generally not deductible and no GST credits can be claimed unless the expenses are subject to FBT.

If your business uses the ‘actual’ method for FBT purposes and the value of the benefits provided is less than $300 then there might not be any FBT implications. This is because benefits provided to a client are not subject to FBT and minor benefits provided to employees (i.e., value of less than $300) on an infrequent and irregular basis are generally exempt from FBT. However, no deductions should be claimed for the entertainment and no GST credits would normally be available either.

If the business uses the 50/50 method, then 50% of the meal entertainment expenses would be subject to FBT (the minor benefits exemption would not apply). As a result, 50% of the expenses would be deductible and the company would be able to claim 50% of the GST credits.

Employee contributions reduce fringe benefits tax but not recognised in income tax return – Where employee contributions reduce the amount of fringe benefits tax payable (for example where an employee makes a contribution relating to a car fringe benefit), a corresponding amount needs to be recognised in the income tax return of the employer.

The Pandemic Productivity Gap

A recent article published in the Harvard Business Review by Bain & Co suggests that the pandemic has widened the productivity gap between top performing companies and others stating, “Some have remained remarkably productive during the Covid-era, capitalizing on the latest technology to collaborate effectively and efficiently. Most, however, are less productive now than they were 12 months ago. The key difference between the best and the rest is how successful they were at managing the scarce time, talent, and energy of their workforces before Covid-19.”

Atlassian data scientists also crunched the numbers on the intensity and length of work days of software users during the pandemic. The results found that workdays were longer with a general inability to separate work and home life, and workers were working longer hours (predominantly because during lockdowns, there is no set start and end of the workday routine). Interestingly, the average length of a day for Australian workers is shorter than our international peers by up to an hour pre pandemic. Australia’s average working day is around 6.8 active hours whereas the US is close to 7.2.

However, working longer does not mean working more productively. Atlassian’s research shows that while the length of the working day increased and the intensity of work increased earlier and later in the day, intensity during “normal” hours generally decreased.

So, how do we measure productivity? Bain & Co suggests:

• The best companies have minimised wasted time and kept employees focused; the rest have not. Those that were able to collaborate effectively with team members and customers pre pandemic fared the best. Poor collaboration and inefficient work practices reduce productivity.
• The best have capitalised on changing work patterns to access difference-making talent (they acquire, develop, team, and lead scarce, difference-making talent).
• The best have found ways to engage and inspire their employees. Research shows an engaged employee is 45% more productive than one that is merely a satisfied worker.

The productivity gap was always there. The pandemic merely brought the gap into stark contrast.

Quote of the month

“Knowledge is of no value unless you put it into practice.”

Anton Chekhov

Markets

Local: The ASX 200 rose steadily at 1.09% over July, a tenth straight monthly gain.

Global: The S&P500 index rose 2.3% in July.

Gold: Spot price for Gold increased slightly from the previous month to $1813.58.

Iron Ore: Iron Ore has continued its recent price surge to US $215.50 per ton.

Oil: Brent Oil continued its strong rise this year, closing at US $73.95 per ton.

Property

Housing: Australian housing values increased a further 1.6% in July, according to CoreLogic’s national home value index. The latest rise takes housing values 14.1% higher over the first seven months of the year and 16.1% higher over the past twelve months. The fastest pace of annual growth since February 2004. On the flip side, demand is being stocked by record low mortgage rates and the prospect that interest rates will remain low for an extended period of time. Dwelling sales are tracking approximately 40% above the five-year average while active listings remain about -26% below the five-year average. The mismatch between demand and advertised supply remains a key factor placing upwards pressure on housing prices.

The pace of dwelling price appreciation has slowed across each of the capital cities. Sydney has recorded the sharpest reduction, with the monthly capital gain falling from 3.7% in March to 2.0% in July. However, the annual growth rate in Sydney was still high at 18.2%.

Economy

Interest Rates: RBA Cash rate remained unchanged at 0.10%.

Bond Yields: Australian government 10-year bonds slipped to 1.19%.

Exchange Rate: The Aussie dollar depreciated again this month against both the American dollar, at $0.735, and the Euro at $0.621.

Job Ads: Despite lockdowns, ANZ job ads remain resilient in July, down by only 0.5% from the month prior and still up a very strong 94.1% over the past 12 months.

Employment: The unemployment rate stayed low at 5.1% with employment growth at 8.1%. However, with the most recent lockdowns employment could fall by 200,000 and unemployment may increase by 50,000.

UK Employment: The UK also continued its economic recovery with a further reduction in the unemployment rate to 4.8%, with restrictions easing there were 862,000 job vacancies in April-June 2021, 77,500 above pre-pandemic levels.

Consumer Confidence: The Westpac-Melbourne Institute Index of Consumer Sentiment rose by 1.5% to 108.8 in July from 107.2 in June. The modest sentiment increase in July follows a 9.8% fall in the index over the previous 2 months. The sharp rise in COVID cases and associated move to lockdown in Sydney hit NSW consumer confidence hard, the state index dropping 10.2%, including a 13.6% fall in Sydney. However, this was fully offset by strong recoveries in Victoria (up 10.5%) and Western Australia (up 15%) as both states came out of lockdown. The current fall in Sydney compares with a 7.3% fall in Sydney during the Northern Beaches lockdown at the start of the year and the 18.7% fall in Melbourne heading into the ‘second wave’ lockdown in June-August last year.

GDP: A contraction of 2.2% in Q3 is now expected because of the NSW lockdowns. Activity in NSW fell 7.8%.

Purchasing Managers Index: Rather than measure an economy directly, a PMI measures the business activity that helps drive it. A PMI above 50 indicates an expanding market, while a PMI below 50 indicates a contraction. Australia stayed in strong expansionary territory at 60.8 points in July but eased by 2.4 points from the record high in June (seasonally adjusted). This indicated strong (but decelerating) growth for manufacturing activity in June, despite widespread lockdowns. This was the tenth consecutive month of recovery for the Australian PMI following the severe disruptions of COVID-19 in 2020.

Covid: At the end of July 2021 a total of 33,732 cases of COVID-19 have been reported in Australia, 922 deaths and approximately 2,857 active cases. To date, more than 24,697,500 tests have been conducted nationally. Of those tests conducted, 0.1% have been positive. Currently in Australia, 41% have received one dose and 19% have received both doses. This is in stark contrast to other developed economies such as the UK which currently has 90% of the adult population having a least one dose and over 70% of the adult population have had both doses.

Comment

Brisbane Olympic Games 2032 – Worth its weight in gold?

Markets

• Market Performance – ASX200 rose 0.3% in January.
• Global – in the US the S&P500 index dropped 1% in January.
• Gold – dropped $23.80 to $1,863.80.
• Iron Ore – was steady at US $158.00/ton.
• Oil – rose to US$55.88/bbl up $4.08 in the month of January.

Property

• Housing – National CoreLogic national dwelling prices rose 0.7% month on month in January with houses gaining more than units again.
• Auction Clearance Rates – January data is always light on volume due to the holiday period, but clearance rates are rising with recent weeks seeing clearance rates above 80%.
• Building Approvals – the seasonally adjusted estimate for total dwellings approved rose by a strong 10.9% in December 2020.
• Finance – new loan commitments rose 8.6% for housing in December. This represents a massive 31.2% increase compared to December 2019. Construction loan commitments rose 17.1% in December, more than doubling since the June 2020 implementation of the Federal Government Homebuilder grant scheme.

Economy

• Interest Rates – remained at 0.10% in January – the lowest on record.
• RBA – the $100 billion of government bond buying program to lower rates for longer has now been extended further.
• Retail Sales – November retail sales surged 7.1%, while preliminary December sales fell 4.2%.
• Bond Yield – Australian 10 year government bond yields rose to 1.09% in January. US 10 year government bond yields rose by 17bps to 1.09%, also.
• Exchange Rates – the Australian Dollar dropped against the US Dollar to AUD76.7 cents.
• Business Conditions – lifted further to +14.2 in December.
• New Motor Vehicles – sales for December 2020 totalled 95,652. This is a 13.5% increase compared to the sales in December 2019. Toyota retained the biggest market share of sales of new vehicles in Australia.
• Employment – unemployment dropped to 6.6% in December. Employment to population ratio increased to 61.8%.
• Consumer Confidence – decreased in Australia in December. The Westpac Melbourne Institute Consumer Confidence Index dropped 4.5% to 107 following strong rises in October and November 2020.
• Chicago Purchasing Managers Index (PMI) increased to 63.80 in January up from 58.7 in December indicating strong growth in the US economy.
• US Unemployment – fell from 6.6% in December to 6.3% in January.
• COVID-19 – Global COVID cases passed 100 million in January.
• Inflation – was better than expected at 0.9% in the December quarter. With ultra low interest rates and record government spending what happens to inflation as a result is the big unknown.

Comment

Reserve Bank

• The Reserve Bank of Australia (RBA) has announced an extension of its Bond Buying Program, committing an additional $100 billion to the initial $100 billion commitment.
• This is aimed at keeping interest rates at their current ultra low levels until at least 2024.
• The RBA has also forecast unemployment to drop to 6% from 6.3% during 2021 and down to 5.2% in 2022.

Savings in Australia

• In November 2020 we saw the combined stock of household and business savings/deposits climb to a massive $216 billion. This represents 11% of Australia’s GDP. This is huge.
• Household savings are at levels not seen since the 1970’s.
• What happens to these savings, whether they get spent or grow further will have profound implications for our economy and investment markets.

Sources: UBS, Westpac, S&P Dow Jones Indices, ABS, US BLS, CoreLogic, Morningstar.

Markets

• ASX200 index – rose 1.5% in February.
• S&P500 index – rose 2.8% in February.
• Gold – dropped to $1,742.85.
• Iron Ore – rose $16 to US $174/ton.
• Oil – rose to US$66.13/bbl up $10.25 in the month of February.
• MSC1 World Developed Markets Index – rose 2.6%.
• MSC1 Emerging Markets World Index – rose 0.8% in USD terms.

Property

• Housing – National CoreLogic national dwelling prices surged 1.7% in February with houses gaining more than units again. Regional house prices outpacing capital city growth.
• Auction Clearance Rates – are above 80% in all states.

Economy

• Interest Rates – remained at 0.10% in February – the lowest on record.
• RBA – continues its $200 billion bond buying program.
• Retail Sales – December sales fell 4.1%.
• Bond Yield – Australian 10 year government bond yields rose from 1.09% in January to 1.88% in February.
• Bond Yield – US 10 year government bond yields rose from 1.09% in January to 1.46% in February.
• Bond Yield – New Zealand 10 year government bond yields rose from 0.5% in November 2020 to 2.0% in February. A massive increase.
• Exchange Rates – the Australian Dollar rose against the US Dollar to AUD77.4 cents.
• Business Conditions – lifted further to +14.2 in December.
• New Motor Vehicles – sales in January totalled 79,666. This is 11.1% above the number of car sales in January 2020. The Toyota Hilux has maintained its long reign as Australia’s best selling vehicle with the Ford Ranger the 2nd most popular with Toyota’s RAV4 coming in 3rd place.
• Employment – unemployment dropped to 6.4% in January.
• Consumer Confidence – The Westpac Melbourne Institute Consumer Confidence Index rebounded up 1.9% in February after falling 4.5% in January.
• Chicago Purchasing Managers Index (PMI) – fell 59.5 in February down from 63.8 in January indicating slower growth in the US economy.

Comment

Property Market

CoreLogic data released this week confirmed housing values grew last month at the fastest rate nationally in 17 years and more growth is expected.

The boom has come as listings remain at low levels while buyer demand, boosted by record low interest rates, has been surging.

CoreLogic head of research Tim Lawless said the mismatch between supply and demand was a central factor pushing prices higher.

“Although new listings are likely to track higher over coming months, if buyer demand continues to lift it’s likely overall advertised stock levels will remain low,” Mr Lawless said.

Buyers are likely confronting a sense of FOMO which limits their ability to negotiate.”

Vendor discounting rates were estimated at a record low of 2.6 per cent in February, and auction clearance rates have consistently been well above average at about 80 per cent, Mr Lawless added.

“Serious buyers would be well advised to have their financing pre-approved and be ready to act fast in order to secure a property under such tight supply conditions.”

Does your portfolio need bitcoin?

Bitcoin investors have been on a wild ride lately. After dropping about 74 per cent in 2018, the digital currency nearly doubled in price in 2019, and then nearly quadrupled during 2020. Trading volumes have also skyrocketed as individual investors have embraced cryptocurrencies through commission-free trading platforms such as Robinhood.

Originally conceived as a digital, encrypted alternative to traditional currencies controlled by central banks, bitcoin has also been attracting more interest from mainstream investors. For example, BlackRock recently added prospectus language giving three of its mutual funds the flexibility to invest in bitcoin futures. In late 2020, insurance provider MassMutual purchased $100 million in bitcoin in late 2020 for its investment portfolio.

But there are reasons to be skeptical. As a virtual asset that doesn’t generate cash flows, bitcoin has no intrinsic value. Its value depends largely on what people are willing to pay. When Guggenheim’s Scott Minerd was quoted in December 2020 claiming bitcoin could be worth as much as $400,000, bitcoin prices quickly escalated. But without a strong foundation to support an underlying value, asset prices can rapidly drop.

That’s exactly what happened in 2018, when the CMBI Bitcoin TR index dropped 74 per cent. More recently, bitcoin’s price shed nearly 30 per cent from its peak on Jan 8 until briefly dropping below $30,000 on Jan 27, 2021. Even intra-day pricing tends toward the extreme, with prices often swinging by double-digit percentages within the same trading day. These sharp price moves mean bitcoin owners must be prepared to “HODL”—hold on for dear life.

Bitcoin is often described as digital gold, but it hasn’t held up particularly well during periods of market crisis. In the fourth quarter of 2018, for example, bitcoin lost about 44 per cent of its value, compared with about 14 per cent for the broader market. When the novel coronavirus roiled the market from Feb 19 through March 23, 2020, bitcoin lost about 38 per cent, compared with 34.5 per cent for Morningstar’s US Market index. During weeks when the overall equity market posted negative total returns (over the period from August 2010 through the end of 2020), bitcoin notched positive results only about half of the time.

Bitcoin proponents often argue that limited supply should create a floor for bitcoin’s value. But while the supply of bitcoin itself is limited, there’s nothing preventing competing cryptocurrencies from emerging. There are already numerous bitcoin alternatives available, including Ethereum, Litecoin, Cardano, Bitcoin Cash, and Lumens, to name a few.

As such we consider Bitcoin a gamble not an investment. Accordingly, we are not recommending it to our clients.

With 30 June fast approaching, it is time to review your superannuation position to see if there are any strategies that might benefit you. The superannuation environment is a great place to invest for your future. You can invest in all the same asset types you can utilise outside of superannuation while benefiting from the concessional (more generous) taxation rules that superannuation provides.

If you think that one or more of these options could be right for you, please contact us as soon as possible. While we have tried to make this summary as simple as possible, some of these strategies can be quite complicated or time-consuming to implement.

Tax Deductible Superannuation Contribution

From 1 July 2017, individuals eligible to make contributions to superannuation, have been able to claim an income tax deduction for personal superannuation contributions up to the concessional contribution cap of $25,000.

Remember that the $25,000 cap also includes your employer compulsory contributions.

If you have surplus cash available, you could make a concessional contribution to your superannuation fund and claim a deduction for the contribution in your tax return. The tax deduction lowers your taxable income and therefore your personal income tax liability. This could lower the amount of tax you need to pay or turn a tax bill into a tax refund.

Please see the below example based on taxable income for the year of $80,000.

By making a $10,000 concessional contribution, this person has saved for their retirement, sheltered their funds from future taxes by moving funds them into the superannuation environment, and reduced their income tax payable by $1,950 ($16,987 – $15,037).

Catch Up Contribution

Since 1 July 2018, individuals with superannuation balances of less than $500,000 can make additional concessional contributions using any concessional contribution cap left unused since 1st July 2018.

This could be a good strategy if you made a capital gain this financial year and have unused contributions from 2018/2019 or 2019/2020.

Contribution Caps

There are limits to the amount you can contribute into superannuation per year. These caps are:

Non-concessional contributions are after-tax contributions such as spouse contributions and contributions made under the Super Co-Contribution Scheme. Non-concessional contributions were previously known as undeducted contributions.

Concessional contributions are before-tax contributions and include your employer’s compulsory contributions, additional employer contributions, and any amounts that you salary sacrifice into superannuation.

Superannuation Co-Contribution

Superannuation co-contributions help eligible people boost their retirement savings. If you are a low or middle-income earner and make an after-tax contribution to your super fund, the government may also make a contribution (called a co-contribution) up to a maximum amount of $500.

The eligibility criteria are as follows:

• Your total income is equal to or less than the lower threshold of $39,837 for the 2020/2021 financial year,
• At least 10% of your assessable income must come from either employment-related activities or carrying on a business,
• You will be younger than 71 years old at the end of the financial year, and
• You lodge a tax return.

If you satisfy the above criteria, a strong case can be made for a $1,000 contribution to your superannuation fund before 30 June 2021. The federal government will then also contribute to your account, to the effect of $500. This can be thought of as an immediate and guaranteed 50% return on your investment.

If your eligible income is above the lower threshold of $39,837 but below the upper threshold of $54,837 for the 2020/2021 financial year, and you satisfy the above criteria, you will be eligible for a reduced Government Co-Contribution.

You do not even need to apply for the super co-contribution. When you lodge your tax return, the ATO will determine if you are eligible. If the super fund has your tax file number (TFN) the payment will be made directly to your superannuation account.

Spouse Contribution

If you have a spouse who earns less than $37,000 and you make a spouse super contribution of up to $3,000, you can claim a personal tax offset of 18% of the contribution up to the maximum rebate of $540. The tax offset phases out when your spouse earns $40,000 or more.

Your spouse’s income includes their assessable income, reportable fringe benefits and any reportable employer super contributions such as salary sacrifice.

Non-Concessional Superannuation Contribution

Non-concessional contributions are super contributions made from your own after-tax monies. You do not claim a tax deduction for these contributions, and they are capped at $100,000 each year. You must be under 67, or if aged between 67 and 74, meet the work test to qualify. And your total super balance (as at 1 July 2020) must also be less than $1,600,000.

If you are under age 65 (or were as of 1st July 2020), then you can access the “bring-forward rule” which allows you to make up to three-years’ worth of contributions or $300,000 in one go. A couple could potentially contribute $600,000 into super. Ability to access this is further limited by your total super balance (under $1.4m full amount; $1.4m to $1.5m $200,000; $1.5m to $1.6m $100,000).

Superannuation is a tax effective investment vehicle, if you have surplus cash this may be a good strategy for you to consider especially in the lead up to retirement.

Minimum Pension Drawdown

You are required to drawdown a minimum amount of pension each year to satisfy legislative requirements. This amount must be withdrawn before 30 June.

The Government reduced the minimum pension drawdown for 2019/20 and 2020/21 to assist retirees following the Covid-19 pandemic. The minimum drawdown factor is determined by your age and is calculated each year. The table below illustrates the reduced minimum pension factors for each age group for the 2020/2021 financial year:

Markets

Local: The ASX200 index rose 1.93% in May. CBA share price hit $100 for the first time ever, while BHP and RIO also ended the month well.

Global: The S&P500 index rose steadily by 0.5% in May.

Gold: Spot price for Gold rose to $1,899.35.

Iron Ore: Iron Ore continued to rise strongly to US $204 per ton.

Oil: Brent Oil maintained value, closing at US $66.32 per ton.

Property

Housing: Housing markets nationally continued to surge in May with CoreLogic’s national Home Value Index up 2.2% over the month, still under the 32-year high recorded in March when values surged 2.8%. The continued growth and shortened supply are pushing prices higher and limiting new entrants into the market.

CoreLogic’s research director, Tim Lawless, says the fundamentals driving strength in the housing market remain in place. “The combination of improving economic conditions and low interest rates is continuing to support consumer confidence which, in turn has created persistently strong demand for housing.”

Total property listings across Australia dropped 6.3% in the month to 245,953 in May, but the yearly contraction was even more severe, with listings down 19.2% in the space of just 12 months, latest figures from SQM Research revealed.

Economy

Interest Rates: RBA Cash rate remained unchanged at 0.10%.

Employment: The Aus unemployment rate fell to 5.5% with 33,600 less people unemployed, youth unemployment also fell 1.1% to 10.6%. In the United States the unemployment rate fell 0.3% to 5.8% with the number of unemployed falling by 496,000 to 9.3 million.

Retail Sales: April retail sales rose 1.1%, with cafes, restaurants and takeaway food services leading the industry with a 2.5% increase, especially strong in NSW.

Bond Yields: Australian government 10-year bond slipped slightly to 1.65%.

Exchange Rate: The Aussie dollar maintained value against both the American dollar, at $0.774, and the Euro at $0.634.

Consumer Confidence: Westpac’s Melbourne Institute recorded a fall of 4.8% in consumer sentiment following three consecutive increases of 11% in the three months prior. This has still left the index up 28.5% on May last year when coronavirus lockdowns were in full force. The index reading of 113.1 was still the second highest since August 2010 showing confidence is still positive after the Federal Budget was announced, which may have been a factor in the slight decline.

Business Conditions: The ABS reports that 78% of all surveyed companies reported either no change or an increase in revenue during May, unchanged from April. Businesses reported an increase in the number of employees at 9% slightly under the expected increase amount of 10%, echoing encouraging unemployment figures and record-high numbers of new job listings. 20% of businesses have stopped accessing at least one support measure since March, the Government wage subsidies take the largest portion of that at 17%.

Purchasing Managers Index: Rather than measure an economy directly, a PMI measures the business activity that helps drive it. A PMI above 50 indicates an expanding market, while a PMI below 50 indicates a contraction. The Australian PMI has risen again to 61.8, while the US PMI has risen slightly from 60.7 in April to 61.2 in May.

Covid: 171 million infections have been recorded by the end of May, resulting in 3.7 million deaths. The daily average has fallen from 884,000 a day in April to 516,000 in May. 181 countries have started vaccination campaigns, with 846 million people receiving at least 1 dose.

Comment

Illawarra’s Decentralisation of the workforce

The emergence of Covid-19 has been the catalyst of a major expansion in remote working across the world and the Illawarra is no exception. Tremendous practical and technological barriers had to be overcome in the early days of 2020’s voluntary isolation and quarantining orders. Now that many of these barriers have been removed and thousands of businesses and workers have had their unplanned experiment with remote working, an increasing number of people are looking to hybrid working models as the future for the Illawarra area.

A hybrid work model, where some tasks are performed at home while others are completed from an office or job site, are more practical in some industries than others. Global research indicates that employees in finance, insurance, management, and professional services can effectively complete between 62% and 76% of all tasks remotely. On the other hand, only 7% to 15% of tasks in construction, the retail and health services industries, and agriculture can be completed remotely.

Given our high commuter workforce, relative affordability of housing and natural amenity, our local region is uniquely suited to this type of employment model. Simple analysis conducted by Deloitte’s highly respected Access Economics team indicated that 38% of our current workforce could work entirely from home. Demand for this type of work model is growing on the side of employees, particularly those commuting to the Greater Sydney region. Surveys of the region indicate commuters have a preference to work from home three to five days per week, while non-commuters prefer two to three days working remotely.

The benefits from this type of arrangement flow both ways. Employees benefit from improved work-life balance, especially those workers that commute, while employers’ benefit from reduced absenteeism, increased employee engagement and an uplift in productivity. This uplift in productivity can be significant, with an average uplift of 16% reported amongst non-commuters and an even larger 22% reported by commuters.

The shift towards remote work also brings an economic boost to the region. Commuters indicate they spent an additional $5.63 per day at local businesses when working from home during COVID-19. Extrapolating that result across the additional time worked from home by commuters in the future would induce an additional $4.1 million in local spending per annum.

If you are a business owner and would like to enable more hybrid work, Deloitte highlight several key areas of your business to review:

• Adjust recruiting processes to increase the talent pool available to your business.
• Adapt physical spaces for the tasks that are best completed in person, such as collaboration.
• Invest in enabling infrastructure such as communication tools and in training staff to use these platforms effectively.
• Be proactive in maintaining social connections between your staff.
• Update your work-from-home policy to address the challenges of remote work, such as communication and collaboration.
• Be flexible in how you approach remote working, tailoring each arrangement to suit the individual and the role they perform.
• Review OH&S and Privacy policies to make sure they are suitable for remote work.
• Engage with all levels of government to encourage investment in the infrastructure needed to facilitate remote work.

Semiconductor Shortage due to Weather, not Covid

We live in a digital era, surrounded by computerised systems making our lives more comfortable in countless tiny ways. From the car you drive to the grocery store, to the stock management system that ensures there is fresh food available when you get there, computers have infiltrated every part of modern life. So, what does this have to do with frosts in Texas and a drought in Taiwan?

Because computers are integrated into so many products, when the supply of these components is disrupted, it affects the production of tens of thousands of seemingly unrelated items. The world is currently experiencing an extreme shortage of high-performance semiconductors, though this shortage has more to do with the weather than the pandemic that many assume to be the cause. High end silicon requires precision beyond human hands, and the robotic production lines that are required for manufacturing are immune to this virus.

When unseasonably cold weather caused the collapse of the Texan energy grid in February, it halted production by NXP (one of the world’s largest automotive chip makers), Samsung (the world’s second largest semiconductor maker) and Infineon (top 10 global semiconductor maker), with facilities remaining offline for weeks.

To give context to the scale of the disruption, Herbert Diess, board chairman for Volkswagen described the business as being ‘in crisis mode’ due to the inability to source appropriate silicon parts. The shortage has forced GM, the 113-year-old automotive giant, to remove a fuel economy enhancement system from it’s most popular vehicles. Dodge has removed the intelligent rear mirror from its vehicles and Nissan is removing the navigation systems from its new cars. Whilst Ford Motor Company anticipates a $US 2.5 billion ($3.2 billion) chip shortage cost.

Texas is important to silicon manufacturing however, Taiwan is the king, with more than 50% of the world’s semiconductor manufacturing taking place within its borders. Taiwan is also in the middle of a severe drought. Semiconductor manufacturing is an extremely water intensive process. TSMC for instance, uses 156 million litres of water a day to produce chips. Water supply is not usually an issue in a country that experiences three to four typhoons a year, but 2020 did not see any, for the first time in more than half a century. With water rationing in force for households and businesses, it looks like the shortage will continue to worsen.

The number of products affected is also likely to rise over the coming year, as manufacturing companies make decisions about which type of chips to prioritise given the limited water resources available. Samsung has announced that television and appliance production is being disrupted, and they may skip the launch of the next Galaxy Note smartphone.

Sources: ABS, AFR, Deloitte Access Economics, RBA, UBS, BLS, CoreLogic, CIPS, Australian Financial Review

With the greater Sydney area in lockdown until at least 9 July, there are many businesses and individuals unable to continue to work as usual. Fortunately for many there is financial support available, however there is strict eligibility criteria to access it.

The current COVID-19 specific financial support available includes:

• Grants of between $5,000 and $10,000 for small businesses experiencing a significant decline in turnover as a result of the lockdown
• COVID-19 disaster repayments for those who cannot work due to the lockdown
• Pandemic Disaster Leave Payments for those who are directed to self-isolate or quarantine

Support for Businesses

The NSW Government has announced today targeted relief for small businesses that are severely impacted by the lockdown with grants of between $5,000 and $10,000. These payments will be available from 19 July 2021.

In addition to the announcement of these grants, the NSW Government has announced:

• Payroll tax deferrals for all employers
• An extension of the Dine and Discover program to the end of August
• The option to defer gaming machine taxes for hotels and clubs

As the announcements were only made this morning, many of the finer details are yet to be released.

Small Business COVID-19 Support Grant

The details announced today specify that the grant is available for small businesses that meet the following criteria

• Annual turnover between $75,000 and $1,200,000; and
• Has less than 20 full-time equivalent employees; and
• Has an ABN; and
• Able to demonstrate they are physically located and primarily operating in NSW, and
• Experience a decline in turnover.

The amount of the grant a business is eligible for will be determined by the impact of the lockdown on your turnover and whilst we do not know the period this will be assessed over, it has been announced that:

• Businesses experiencing a decline in turnover of 70% will receive the full $10,000
• Businesses experiencing a decline in turnover of 50% will receive $7,000
• Businesses experiencing a decline in turnover of 30% will receive $5,000

Individuals

There are two main forms of financial relief available to individuals:

• COVID-19 Disaster payments
• Pandemic Disaster Leave Payment

COVID-19 Disaster Payments

This is a one-off payment to assist individuals where a lockdown lasts for more than 7 days. The eligibility criteria is quite strict.

To be eligible you must meet the following criteria:

1. You are an Australian resident or hold an eligible working VISA, and
2. You are 17 years or older, and
3. You live or work in a Commonwealth-declared COVID-19 hotspot, and
4. You cannot attend work or have lost income on or after day 8 of the lockdown, and
5. You do not have any appropriate paid leave entitlements, and
6. You are not in receipt of an income support payment, the Pandemic Leave Disaster Payment, a state or territory pandemic payment, or state small business payment for the same period, and
7. You have liquid assets of less than $10,000

The amount you will receive will depend on your situation.

As noted above, the payment is only available for lockdowns that last more than 7 days. In addition, the payment only applies from the 8th day of lockdown. In other words, it is not available for the first week of lockdown, only for the second and subsequent weeks (if any) of a lockdown.

If you are eligible to receive this payment, the payment is taxable and will need to be included in your income tax return.

For more information, click here.

Pandemic Leave Disaster Payment

The Pandemic Leave Disaster Payment is support available for individuals who cannot earn an income because they must self-isolate, quarantine or are caring for someone with COVID-19.

The payment is $1,500 for each 14-day period you are advised to self-isolate or quarantine.

You must have been directed to self-isolate or quarantine by NSW Health for one of the following reasons:

• you have coronavirus (COVID-19)
• you’ve been in close contact with a person who has COVID-19
• you care for a child, 16 years or under, who has COVID-19
• you care for a child, 16 years or under, who’s been in close contact with a person who has COVID-19.

You may also be eligible if you’re caring for someone who has COVID-19.

In addition to the above criteria, you must be:

1. You are an Australian resident or hold an eligible working VISA, and
2. You are 17 years or older, and
3. You are unable to go to work and earn an income, and
4. You have no appropriate leave entitlements, including pandemic sick leave, personal leave or leave to care for another person, and
5. You did not receive any income, earnings or salary from paid work, income support payments, ABSTUDY Living Allowance, Paid Parental Leave or Dad and Partner Pay.

If you are eligible to receive this payment, the payment is taxable and will need to be included in your income tax return.

For more information, click here.

Both payments are accessible through Services Australia and applications can be made through your MyGov account if you have created and linked a Centrelink account.

Other Forms of Financial Relief

The NSW Government COVID-19 website is a good source of information for information about COVID-19 for residents in NSW including the current lockdown as well as links to financial support and assistance. Click here to access this page.

Markets

Local: The ASX200 rose 2.5% for August, completing an 11th consecutive month of gains for the Australian benchmark. Led by roaring gains in information technology.

Global: The S&P500 index rose 3.17% in August.

Gold: Spot price for Gold rose to $1,810.40.

Iron Ore: Iron Ore fell to US $159.25 per ton.

Oil: Brent Oil rose steadily, closing at US $71.69 per ton.

Property

Housing: According to CoreLogic’s national home value index, dwelling values rose 1.5% in August; a rate of growth that is still well above average, but the lowest monthly rise since January. The lift in housing values continues to be broad-based, with every capital city, apart from Darwin (-0.1%) recording a rise in values throughout the month, although it is important to note CoreLogic has withheld the Perth and Regional WA index results pending the resolution of a divergence from other housing market measurements in WA.

Housing prices have risen almost 11 times faster than wages growth over the past year, creating a more significant barrier to entry for those who don’t yet own a home. Lockdowns are having a clear impact on consumer sentiment. The August update takes Australian housing values 15.8% higher over the first eight months of the year and 18.4% above levels a year ago. In dollar terms, the annual increase in national dwelling values equates to approximately $103,400, or $1,990 per week. In comparison, Australian wages are rising at the average annual rate of 1.7%.

Economy

Interest Rates: RBA Cash rate remained unchanged at 0.10%.

Bond Yields: Australian government 10-year bond remained stable at 1.21%

Exchange Rate: The Australian dollar (AUD) fell slightly again this month against major currencies, $0.734 and $0.62 against the US dollar and Euro respectively.

Consumer Confidence: The Westpac-Melbourne Institute Index of Consumer Sentiment for Australia fell by 4.4% mom to the lowest in a year of 104.1 in August 2021, as three major cities in the country were in lockdowns. All index components declined: the economic conditions in the next 12 months (-8.3 % to 100.4), the family finances economic conditions in the next 12 months (-2.7% to 107.0), the family finances vs a year ago (-1.9 % to 91.9), the economic conditions in the next 5 years (-1.2% 109.2), and time to buy a major household item (-7.2 percent to 112.0). At the same time, unemployment expectations jumped sharply (13.7 % to 124.6).

Employment: The unemployment rate (seasonally adjusted) has fallen to as low as 4.6%, however this figure can be offset by an increase in underemployment to 8.3% and monthly hours worked decreasing by 3 million hours.

US Employment: Private payrolls rose just 374,000 for the month, well below the Dow Jones estimate of 600,000 though above July’s 326,000, which was revised downward slightly from an initial 330,000 reading. Most of the new jobs came from leisure and hospitality, which added 201,000 positions in a somewhat hopeful sign that an industry beset by a labor shortage continues to recover.

Car Sales: New vehicles sales climbed by 33% in August in Australia compared with the same month last year even though the extended lockdown in Sydney constrained sales in New South Wales.

Purchasing Managers Index: Rather than measure an economy directly, a PMI measures the business activity that helps drive it. A PMI above 50 indicates an expanding market, while a PMI below 50 indicates a contraction. The Australian PMI fell dramatically this month to 51.60 falling from 60.8 in July. This was the first fall in the PMI rate since November 2020.

Covid: As at 30 August 2021, a total of 52,612 cases of COVID-19 have been reported in Australia, including 1,002 deaths, and approximately 18,039 active cases. However, in more positive news over 70% of the NSW eligible population has received at least one vaccination dose, passing the 7 million mark. 40% of the world population have received at least one dose of a COVID-19 vaccine with 5.38 billion doses being administered worldwide.

Sources: ABS, AFR, CoreLogic, NAB Group Economics, Deloitte Access Economics, RBA, UBS, Trading Economics.

Comment

NSW Treasurer a Hedge Fund Manager or Public Servant?

Many people might wonder what the business of government is. Is it roads and rail? Health and education services? Economic Regulation? All of them are correct but only a partial element of the story.

With the depth of the budget deficit hole getting bigger it is vital for governments to not only deliver for people today but also for future generations and move away from leaving a hefty bill. To his credit this is precisely what NSW Treasurer Dominic Perrottet has tried to achieve. The introduction of the NSW Generations Fund (NGF) was to create a rainy-day fiscal buffer after the NSW budget was running a $4 billion surplus back in 2018. However, jump to the modern day and our muddled COVID economy, is this really the right time to be leveraging taxpayers money on stocks and other high risk strategies? To put this into context it can be seen to have similarities to the “moral hazard” Macquarie Bank endured during the GFC, when it borrowed $13 billion of government-guaranteed money and embarked on a huge ‘carry trade’ by gambling this cash on foreign junk bonds. The premium yields on these securities came with the risk that had they defaulted, it could have blown up the bank, leaving taxpayers to foot the bill.

By funnelling money into the NGF they are hoping that by punting on riskier strategies that earn more than 4.5 per cent above inflation the NGF could outperform the cost of NSW`s debt. Taken to its logical extreme, this process could enable the government to become an investment business. A government however is not an investment business, and we were not supposed to be doing this as a money making scheme. The NSW Treasury appears to be gleefully taking advantage of the Reserve’s largesse. Its plan is exquisitely tailored to exploit the cheap debt and ballooning asset prices that more than a decade of central-bank-led quantitative easing has ignited. Yet the problem with all pro-cyclical strategies is that good times never last. Cycles end.

At its initiation the NGF received $3 billion of budget surplus by Perrottet, combined with $7 billion from the sale of the first half of WestConnex. With the second half being sold next month, reaping NSW taxpayer as much as $13 billion. All of which will be put into the NGF. It is stated that any proceeds put into the fund will be used to fund mass infrastructure projects over the state such as the Metro West train line from Sydney to Parramatta. However, to this day it is unclear if it will pay for even one cent. Even more remarkably, Perrottet`s advisers want to direct more than $10 billion of taxpayer revenue to the DRF (Debt Retirement Fund) a subsidiary of the NGF, and $20 billion to a range of investment funds with TCorp (NSW investment and debt issuance agency). Due to this, the DRF is perversely contributing to greatly lifting taxpayer debt, not reducing it, because of the revenue it is hijacking at a time when NSW budget is deep in the red. This is exacerbated by the fact that NSW has yet to use any of the DRF`s $15 billion, which will rise to more than $27 billion once the second half of WestConnex is sold, to pay for the unprecedented $108.5 billion of infrastructure Perrottet has committed to build. Because the former fundies and bankers running NSW want to keep all this money in TCorp`s funds, NSW has to raise more debt to replace it.

To make things look even worse, since 2018, the only people profiting from the NGF appear to be the fund managers running it. TCorp is a private for-profit entity that made a whopping $75 million in profit in 2020. TCorp has a theoretical interest in keeping all the money in the NGF as without this money TCorp would lose out on substantial fees. TCorp’s 184 executives were paid $53 million in 2020, and can earn significant bonuses, strongly influenced by TCorp’s profitability. There are many hands in the till capturing total fee payments of $150 million per year on the NGF`s $15 billion, reaching over $270 million once the WestConnex is put into the kitty. It seems preposterous that NSW taxpayers should load up on equities when valuations are at a 100-plus year high and interest rates are at record lows, only adding fuel to the uncertainty fire.

Unlike the major banks, super funds and insurers, no one can stop Perrottet from taking absurd risks if he wishes. State governments do not have to answer to any prudential regulators. For example, if the treasurer was running a superannuation fund, he wouldn’t be allowed to use debt to buy shares, this is illegal. But due to the rarity of state government-run funds, the treasurer sets his own rules. Indeed, lacking any legal obstruction. But Perrottet is not a hedge fund manager. He is a public servant. His job is to steward NSW’s finances responsibly. When he borrows $10 billion, he doesn’t do so with his own reputation. He is using the good name of his state and its 8 million people. Right now, he’s taking advantage of trust that doesn’t belong to him. Of course, the thing about high-risk manoeuvres like this is they can pay off handsomely. But they might also crash and burn. Regardless, what should now be clear is we urgently need to stop this potentially perilous investment scheme of the Treasurer and NSW’s Treasury officials. If banks and superannuation funds are barred from using debt to invest in stocks, the same logic should apply – and then some – to the NSW balance sheet. Embracing debt to buy stocks, and billing taxpayers is controversial in ordinary times. But right now, the state cannot afford to bankroll Perrottet’s huge bet. He might have a big risk appetite. NSW taxpayers do not.

Source: Australian Financial Review

Australian Housing Construction Costs Through the Roof

CoreLogic’s national measure of residential construction costs show an increase of 1.4% in the three months to June 2021, outpacing the Consumer Price Index of 0.8% for the same period. The latest Cordell Housing Index Price (CHIP) results show an annual growth rate of 3.9% and the largest quarterly change since the third quarter of 2014, when residential construction costs increased 1.5%. Widespread demand across the residential construction sector and a shortage of materials such as timber, PVC piping and fittings have contributed to the rise in costs with no sign of easing in the short-term.

Australia’s monthly dwelling approvals fell -6.7% in June in seasonally adjusted terms following a -7.6% decrease in May. The pipeline of approvals peaked in March after recording consecutive surges of 19.1% in February and 16.0% in March according to seasonally adjusted dwelling approval figures from the Australian Bureau of Statistics (ABS). Total dwelling approvals in the 2020-21 financial year were 27.3% higher than in the 2019-20 financial year, in seasonally adjusted terms. This was driven by private sector house approvals, which were 42.8% higher in 2020-21 than 2019-20.

Employment levels in the construction industry, which accounts for around 8.8% of Australia’s total workforce, increased 0.3% in the three months to May 2021, after a fall of -1.6% in the three months to February. Tim Lawless, CoreLogic’s Research Director, said “With the surge in dwelling approvals over the past 12 months, Australia’s residential construction sector is working through the early stages of what is set to be an extended period of heightened construction activity.”

CoreLogic’s national home value index saw Australian home values increase by 1.6% in July, taking the annual growth to 16.1%. It’s the fastest annual rate of growth since February 2004, despite the monthly growth rate trending lower since March, when the national index increased 2.8%.

Source: CoreLogic

It’s tax time again!

Another financial year has passed and your 2021 Income Tax Return is now due. As with previous years, we have prepared this summary with the aim of making this annual event as efficient for you as possible.

COVID-19 continues to impact us all and we have again included a dedicated section on what you can claim if you were required to work from home between the period 1 July 2020 to 30 June 2021.

This summary should act as a checklist of items to consider when collating your information for us.

To view our summary please click through to here.

Support for Businesses

If your business has been adversely impacted by the recent and extended lockdown and restrictions in NSW, support is available.

The NSW Government, with supported funding from the Federal Government has announced a series of new measures to support business during this extended lockdown. These include:

• Up to $15,000 through the expanded NSW 2021 COVID-19 business grants program
• Up to $10,000 cashflow support per week
• NSW micro business grants
• NSW payroll tax deferrals and a 25% payroll tax waiver
• NSW Rent protections and grants
• NSW Sector support for the arts and accommodation sector

You can streamline the process of applying for business support by ensuring:

• Your business and contact details are up to date on the Australian Business Register· – importantly your business address is correct
• You have a MyServiceNSW account with a business profile linked and you have registered your business as a COVID safe business.

The grants were released with minimal details. Services NSW is regularly updating their website as eligibility criteria and guidelines are released and/or refined. We will provide updates as these details become available.

Contact us

We’re available to assist you with the lockdown support for your business. If you need to contact us we are available via our usual phone or email, or alternatively we can arrange a Zoom meeting.

2021 COVID-19 Business Grant of up to $15,000

Small business grants of up to $15,000 are available to eligible businesses (including sole traders and not-for-profits) with turnover of over $75,000 and annual wages of up to $10 million.

The value of the grant is determined by the impact of the lockdown on your turnover. Your business will need to prove a decline in turnover across a minimum 2 week consecutive period after the commencement of the major restrictions.

How to apply

Applications are currently open and can be made online by business owners through ServiceNSW. Applications close at 11:59pm on 13 September 2021.

Eligibility

The 2021 COVID-19 business grant is available if you:

• Have an active ABN; and
• Can demonstrate that your business was operating in NSW as at 1 June 2021; and
• Have had an aggregated annual turnover between $75,000 and $50m (inclusive) for the year ended 30 June 2020; and
• Have had total annual Australian wages of $10million or less as at 1 July 2020; and
• Have unavoidable business costs from 1 June 2021 to 17 July 2021 for which there is no other government support available; and
• Maintain employee headcount as at 13 July 2021 – the number of people you employed in NSW including full time, part time and casuals that have been employed by the business for more than 12 months; and
• Have experienced a decline in turnover of at least 30% over a minimum 2-week consecutive period from 26 June 2021 to 17 July 2021, compared to the same period in 2019.
• For businesses and not-for profits on the NSW border with Victoria impacted by lockdown orders that began on 27 May 2021, use the turnover period from 27 May 2021 to 17 July 2021 compared to the same period in May and/or June and/or July 2019.

In determining whether the business has suffered a decline in turnover, you need to review your turnover based on the method of reporting used on your Business Activity Statement, this is known as the GST concept which can be on cash or accrual basis and you need to have experienced a decline of at least 30%. If you are unsure of your GST concept, please contact us.

Businesses that are not able to meet all the eligibility criteria may still potentially qualify for the grant, but you will need to contact Service NSW to discuss the situation before applying. This includes where a business was not operational before June 2019 and does not have a comparable period to assess the decline in turnover.

Non-employing businesses such as sole traders are not eligible to apply if persons associated with the business, and who derive income from it, have applied for, or are receiving, the Commonwealth COVID-19 Disaster Payment.

Evidence to support eligibility

Evidence to support the grant is slightly different based on whether your industry type has been identified as a highly impacted industry, please review the ServiceNSW list.

As part of the grant application, you will need to provide the following:

• A copy of your business’ 2020 financial year income tax return – if you have not just completed this, please get in touch with us; and
• For business’ that have been identified as highly impacted, you will need to provide details of your qualified accountant/ registered tax agent – this will be our office;
• For business’ that have not been identified as highly impacted, you will need to provide a letter from qualified accountant/ registered tax agent (our office) detailing the specific period used for the calculation and the decline in turnover.
  • Please note that for highly impacted businesses with a decline of 70% or more, to gain the full grant this letter will also need to be provided.

In the case of the above, please contact our office to make arrangements for this letter to be completed.

JobSaver: Cashflow Support of up to $10,000

A cashflow payment, similar to the cashflow boost initiative, will see eligible businesses receive up to 40% of the NSW payroll payments of the business between a minimum of $1,500 and maximum of $10,000 per week.

Businesses without employees that meet the eligibility criteria such as sole traders, will be able to access a payment of $1,000 per week.

The cashflow support will cease when lockdown restrictions are eased or when the Commonwealth hotspot declaration is removed.

The cashflow support payments will be made weekly.

How to apply

Applications for the cashflow support have not yet opened but you can register your interest through ServiceNSW. More information surrounding this should be available by 26th July 2021.

Eligibility

• Annual turnover between $75,000 and $50 million
• Demonstrate a 30% or more decline in turnover basec on GST concept
• Maintain your full time, part time and long-term casual staffing level as of 13 July 2021
• Impacted by the current Greater Sydney COVID-19 restrictions

$1,500 Micro Business Grants

A grant is available for micro businesses (including sole traders) providing $1,500 per fortnight while lockdown restrictions apply. The grants will cover from week one of the lockdown until restrictions are eased.

How to apply

Applications for this support have not yet opened but you can register your interest through ServiceNSW. More information surrounding this should be available by 26th July 2021.

Eligibility

• Annual turnover of more than $30,000 and less than $75,000
• Demonstrate a 30% or more decline in turnover
• The business provides the primary income source for a person associated with the business
• Impacted by the current Greater Sydney COVID-19 restrictions

Payroll tax relief

Payroll tax and lodgement deadline deferred

NSW payroll tax has been deferred for July and August 2021 until 7 October 2021 for all businesses.

The due date for the 2020-21 annual reconciliation has also been deferred until 7 October 2021.

Previous payroll tax deferrals and payment arrangements for 2020-21 due in July 2021 have not been deferred.

25% payroll tax waiver for businesses between $1.2m and $10m

Businesses with Australian wages of between $1.2 million and $10 million that have experienced a 30% decline in turnover, will be provided with a 25% payroll tax waiver in 2021-22. Further details of the reduction will be available by the end of August from RevenueNSW.

Rent protections and grants

Commercial and retail rent protections will be reinstituted.

Eviction moratorium

Legislative amendments will be introduced shortly providing a short-term eviction moratorium for rental arrears where a residential tenant suffers loss of income of 25% due to COVID-19 and meets certain other criteria. The moratorium applies to tenants with an annual turnover of $50 million or less.

Commercial and retail landlords will need to attempt mediation before recovering a security bond or locking-out or evicting a tenant impacted by Public Health Orders.

Land tax relief

Land tax relief equal to the value of rent reductions provided by commercial, retail and residential landlords to financially distressed tenants will be available for up to 100% of the 2021 land tax liability.

See Residential Tenancies Moratorium Application for rent negotiation

Specific sector based support

Arts community

A $75 million support package will be provided to the performing arts sector to be administered by Create NSW.

The package will be delivered in two stages:

• Immediate support to provide relief to eligible organisations who were staging performances during the period covered by the Public Health Orders.
• Funding available to support eligible organisations to reschedule performances once it is safe for restrictions to ease.

Eligible organisations include performing arts organisations with heavy reliance on box office income, including not-for-profit performing arts companies who were staging, or scheduled to stage performances during the lockdown period, commercial producers and some live music venues.

Organisations will need to provide evidence of performances scheduled, venues and average ticket prices.

CreateNSW will open applications from 23 July 2021.

Accommodation sector

A $26 million support package for eligible tourism accommodation providers that have lost business during the school holiday period. Assistance will be based on the number of cancelled ‘room nights’ of:

• $2,000 for up to 10 room nights
• $5,000 for 11 or more room nights

To be eligible, you will need to be able to show evidence of cancellations for lost room nights between 25 June and 11 July 2021.

Gaming machine tax deferrals

All businesses paying hotel or club gaming machine tax will be able to defer the taxes for the 2021-22 financial year:

Hotels: deferrals for June and September quarter until 21 January 2022.

Clubs: deferrals for the August quarter until 21 December 2022.

Support for Individuals

If you can’t work because you or someone in your household is impacted by COVID-19, support is available.

There are two payments accessible to individuals: the COVID-19 Disaster Payment; and, the Pandemic Leave Disaster Payment.

How to apply for support

You can apply for the COVID-19 Disaster Payment through your MyGov account if you have created and linked a Centrelink account. Apply for the Pandemic Leave Payment by phoning Services Australia on 180 22 66.

COVID-19 Disaster Payments

The COVID-19 Disaster Payment is a weekly payment available to eligible workers who can’t attend work or who have lost income because of a lockdown and don’t have access to certain paid leave entitlements. If you are a couple, both people can separately claim the payment.

Sole traders may apply for COVID-19 Disaster Payment if you are unable to operate your business from home. However, you will not be eligible if you are also receiving a state business grant such as the NSW 2021 COVID-19 Business Grant.

Timing of the payment

The disaster payment is generally accessible if the hotspot triggering the lockdown lasts more than 7 days as declared by the Chief Medical Officer (you can find the listing here).

However, the disaster payment will also be available:

• In NSW from 18 July 2021, to anyone who meets the eligibility criteria. The requirement to be in a Commonwealth declared hotspot has been removed and the payment will apply to anyone in NSW impacted by the lockdowns who meets the other eligibility criteria.
• In Victoria from 15 July 2021, to anyone who meets the eligibility criteria. The requirement to be in a Commonwealth declared hotspot has been removed and the payment will apply to anyone in Victoria impacted by the lockdowns who meets the other eligibility criteria. And, the 7 day requirement has been removed so that the payment will be made for the period from 15 July 2021 (paid in arrears from 23 July 2021).

Unwinding COVID-19 Relief

COVID-19 support will roll back as states and territories reach vaccination targets.

The National Plan, the road map out of COVID-19, does more than provide greater freedoms at 70% and 80% full vaccination rates, it withdraws the steady stream of Commonwealth financial support to individuals and business impacted by COVID-19 lockdowns and border closures. We look at the impact and the support that remains in place.

For individuals

The COVID-19 Disaster payment offered a lifeline to those who lost work because of lockdowns, particularly in the ACT, New South Wales, and Victoria where the Delta strain of the virus and long-term lockdowns had the greatest impact.

In late September, the Treasurer announced that the Disaster Payment will roll back as states and territories reach vaccination hurdles on the National Plan. Over $9 billion has been paid out to date on Disaster Payments and at 70% and 80% full adult vaccination, the disaster, apparently, is over.

At 70% full vaccination in your state or territory

In the first week a state or territory reaches 70% full adult vaccination, the automatic renewal that has been in place will end and individuals will need to reapply each week that a Commonwealth Hotspot remains in place to confirm their eligibility. The COVID-19 Disaster payment will not necessarily end, but anyone currently receiving the payment will need to reconfirm that they meet the eligibility criteria, including living or working in a Commonwealth declared hotspot.

Given that the time gap between 70% and 80% full vaccination might be as little as two weeks in some regions, the impact of the 70% restrictions might be a moot point.

At 80% full vaccination in your state or territory

In the first week a state or territory reaches 80% full adult vaccination, the COVID-19 Disaster Payment will phase out over a two week period before ending completely.

Those needing financial support will no longer be eligible for the disaster payment, regardless of whether a Commonwealth hotspot is in place, and instead will need to apply for another form of income support such as JobSeeker. Unlike the disaster payments, JobSeeker and most other income support payments are subject to income and assets tests.

The Pandemic Leave Disaster Payment, for those who cannot work because they need to self-isolate or care or quarantine, or care for someone with COVID-19, will remain in place until 30 June 2022.

Support for business

Each state and territory manages lockdown and financial support to businesses impacted by COVID-19 lockdowns and border closures differently. The way in which support is withdrawn will depend on how support has been provided and the extent of Commonwealth support.

Australian Capital Territory

The ACT Government has distributed grants to business jointly funded with the Commonwealth. The ACT COVID-19 Business Grant was recently extended with top-up grants of $10,000 for employing businesses and $3,750 for non-employing businesses distributed to previous grant recipients in industries impacted by continued lockdowns. Large businesses $2m to $5m received an additional top-up amount of between $10,000 and $30,000. The Tourism, Accommodation Provider, Arts, Events, Hospitality & Fitness Grants have also been topped up with grants between $5,000 and $25,000 to existing recipients and the grant has been expanded to the fitness/sports sector (more information will be available mid-October).

Lockdowns eased on 1 October and are scheduled to be lifted from 15 October, with a return to normal in early to mid December 2021 (see the pathway forward). While not specified, it is expected that grants will cease at this point and instead, directed into targeted industry specific initiatives (see the recovery plan).

New South Wales

The NSW JobSaver, which provides payments of up to 40% of weekly payroll, is jointly funded by the state and Commonwealth governments. From 13 September, businesses receiving JobSaver have been required to reconfirm their eligibility for the payment each fortnight including a 30% decline in turnover test and headcount test.

At 70% full adult vaccination (10 October 2021), JobSaver will reduce from 40% of weekly payroll to 30%. Then, at 80% full vaccination, the Commonwealth will withdraw funding. The NSW Government announced that it will continue to fund their portion of JobSaver up until 30 November 2021 (15% of payroll).

It is unclear at this stage of what the impact of the withdrawal of Commonwealth funding at 80% vaccination rates will mean to large tourism, hospitality, and recreation businesses.

The $1,500 fortnightly micro-business grant, will reduce to $750 per fortnight from 80% full vaccination and cease on 30 November 2021.

If you are uncertain how the easing of restrictions will impact on you and your workplace, see the roadmap.

Queensland

While not significantly impacted by local lockdowns, Queensland tourism is impacted by national and international border closures. A second round of Tourism and Hospitality Sector Hardship grants have been announced although no further details are currently available.

For businesses on the border with New South Wales, a hardship grant will become available if the closure remains in place until 14 October or longer with grants of $5,000 for employing entities and $1,000 for non-employing entities (see Business Queensland for details). To receive the grant, you must operate in a ‘border business zone’ and have received the COVID-19 Business Support Grant.

Pointedly, Federal Treasurer Josh Frydenberg has stated, “Governments must also hold up their end of the bargain and stick to the plan agreed at National Cabinet that will see restrictions ease and our borders open up as we reach our vaccination targets of 70 to 80 per cent.” The Queensland Government will be under significant pressure to open borders once vaccination rates reach 80% in December and prior to the school holiday period.

Victoria

The Victorian Government has distributed grants to business jointly funded with the Commonwealth. For many of these grants, funding has been topped up in line with lockdown extensions.

The small business hardship fund providing one-off grants of $20,000 for businesses that have suffered a 70% or more decline in turnover and were not eligible for other grants or funding, will reopen (see the BusinessVictoria website for details).

The Business Costs Assistance Program will provide automatic top-ups to existing recipients across October and into the first half of November (two fortnightly payments between 1-29 October on a rising scale). Businesses that remain closed or severely restricted between 70% and 80% double dose will receive an automatic payment for the period from 29 October to 13 November.

Licensed hospitality venue fund recipients will also receive weekly top-ups in October of between $5,000 and $20,000, stepped according to venue capacity. Between 70% and 80% double dose, payments for licensed premises in metropolitan Melbourne will be reduced by 25%, and in regional Victoria by 50%.

Victoria is not expected to reach the 70% vaccination target until the end of October, and 80% in early to mid-November. You can find Victoria’s broad road map here.

National

The National Plan stipulates that state and territory borders are to reopen at 80% double vaccination in that state or territory but this will depend on health advice at the time.

Generally, international borders will reopen in states and territories at 80% double vaccination with Australian and permanent residents able to quarantine at home for 7 days. Unvaccinated travellers will need to stay in hotel quarantine for 14 days. Commercial flights will also resume for vaccinated Australians with Australia expected to implement a ‘red light, green light’ system similar to the UK to designate safe countries.

For other regions such as South Australia and the Northern Territory, borders are expected to reopen at 80% double vaccination but with some nuances flagged. The Western Australian Government however has stated that it will announce an easing of border restrictions once an 80% double vaccination has been achieved for those over 12 years of age.

SME lending options

While there is likely to be an economic rebound when restrictions ease across the country, for many, a funding gap will remain between the assistance provided by Government grants and viable trading conditions.

The expanded SME recovery loan scheme took effect on 1 October 2021. Under the scheme, the Government will guarantee 80% of loan amounts to businesses that have been adversely impacted by COVID-19.

The lending terms, repayment, and interest rates are set by the lenders but cannot be backed by residential property, that is, if the Government is underwriting the loan, lenders cannot ask business owners to use their home as security. However, Directors guarantees are likely to be required.

Under the scheme, lenders can provide:

• A repayment holiday of up to 24 months
• Loans of up to $5m
• Loan terms of up to 10 years, and
• Secured and unsecured loans

The recovery loans can be used to refinance existing loans, purchase commercial property, purchase another business, or working capital. But, cannot be used to purchase residential property, financial products, lend to associated entities, or lease, rent, hire or hire purchase existing assets that are more than half way into their effective life.

The loan scheme is generally available to solvent businesses with a turnover of up to $250m, have an ABN, and a tax resident of Australia. Loans remain subject to lending conditions and generally the lenders will look to lend to viable businesses where it is clear that they can trade their way out of the impact of COVID-19 or the assets of the business make the break-up value attractive.

If you default on your loan, you cannot simply walk away from it. The Government is guaranteeing 80% of the lender’s risk not your debt. Director guarantees are still likely to be required and for many loans, it will be secured against a business asset. On the plus side, interest rates are very attractive right now and many of the lenders are providing a repayment holiday of up to 24 months and in some cases, existing debt can be bundled into the loan arrangements.

What happens to your superannuation when you die?

Superannuation is not like other assets as it is held in trust by the trustee of the superannuation fund. When you die, it does not automatically form part of your estate but instead, is paid to your eligible beneficiaries by the fund trustee according to the rules of fund, superannuation law, and the death nomination you made.

Death nominations

Most people have a death nomination in place to direct their superannuation to their nominated beneficiaries on their death. There are four types of death benefit nominations:

Binding death benefit nomination – Putting in place a binding death nomination will direct your superannuation to whoever you nominate. As long as that person is an eligible beneficiary, the trustee is bound by law to pay your superannuation to that person as soon as practicable after your death. Generally, death benefit nominations lapse after 3 years unless it is a non-lapsing binding death nomination.

Non-lapsing binding death benefit nomination – Non-lapsing binding death nominations, if permitted by your trust deed, remain in place unless the member cancels or replaces them. When you die, your super is directed to the person you nominate.

Non-binding death nomination – A non-binding death nomination is a guide for trustees as to who should receive your superannuation when you die but the trustee retains control over who the benefits are paid to. This might be the person you nominate but the trustees can use their discretion to pay the superannuation to someone else or to your estate.

Reversionary beneficiary – if you are taking an income stream from your superannuation at the time of your death (pension), the payments can revert to your nominated beneficiary at the time of your death and the pension will be automatically paid to that person. Only certain dependants can receive reversionary pensions, generally a spouse or child under 18 years.

If no death benefit nomination is in place – If you have not made a death benefit nomination, the trustees will decide who to pay your superannuation to according to state or territory laws. This will often be a financial dependant to the legal representative of your estate to then be distributed according to your Will.

Is your death benefit valid?

There have been a number of court cases over the years that have successfully contested the validity of death nominations, particularly within self managed superannuation funds. For a death nomination to be valid it must be in writing, signed and dated by you, and witnessed. The wording of your nomination also needs to be clear and legally binding. If you nominate a person, ensure you use their legal name and if the superannuation is to be directed to your estate, ensure the wording uses the correct legal terminology.

Who can receive your superannuation?

Your superannuation can be paid to a SIS dependant, your legal representative (for example, the executor of your will), or someone who has an interdependency relationship with you.

A dependant is defined in superannuation law as ‘the spouse of the person, any child of the person and any person with whom the person has an interdependency relationship’. An interdependency relationship is where someone depends on you for financial support or care.

Do beneficiaries pay tax on you superannuation?

Whether or not the beneficiaries of your superannuation pay tax depends on who the superannuation was paid to and how. If your superannuation is paid as a lump sum to a tax dependant, the superannuation is tax-free. The tax laws have a different definition of who is a dependant to the superannuation laws. A tax dependant for tax purposes is your spouse or former spouse, your child under the age of 18, or someone you have an interdependency relationship with. Special rules exist if you are a police officer, member of the defence force or protective service officer who died in the line of duty.

If your superannuation is paid to your estate, the tax laws use a ‘look through’ approach when superannuation death benefits are distributed to the deceased’s legal representative. This involves determining whether the final recipient of the superannuation is a dependant or a non-dependant of the deceased.

If the person is not a dependant for tax purposes, for example an adult child, then there might be tax to pay.

Recruiting new employees? The 1 November superannuation rule changes

When your business hires a new employee, the Choice of Fund form is used to identify where they want their superannuation to be directed. If the employee does not identify a fund, generally the employer directs their superannuation into a default fund.

From 1 November 2021, where an employee does not identify a fund, the employer is required to contact the ATO and request details of the employee’s existing superannuation fund or ‘stapled’ fund (the fund stapled to them). The request is made through the ATO’s online services through the ‘Employee Commencement Form’.

If the ATO confirms no other fund exists for the employee, contributions can be directed to the employer’s default fund or a fund specified under a workplace determination or an enterprise agreement (if the determination was made before 1 January 2021).

Quote of the month

“Personally, I’m always ready to learn, although I do not always like being taught.”

Winston Churchill

Markets

Local: The ASX200 index lost ground over the month falling 1.9%

Global: The S&P500 index also struggled over September falling 4.7%. The Evergrande situation led to global uncertainty which is reflected in the index prices.

Gold: Spot price for Gold fell this month to US $1760.

Iron Ore: Iron Ore prices collapsed this month to US $110 per metric ton.

Oil: Brent Oil rose by US $6 per barrel up to US $79 per barrel.

Property

Housing: CoreLogic’s national home value index rose another 1.5% in September, taking Australian housing values 17.6% higher over the first nine months of the year and 20.3% higher over the past 12 months. The annual growth rate is now tracking at the fastest pace since the year ending June 1989.

Although growth conditions remain positive, it is becoming increasingly clear the housing market moved past its peak rate of growth in March when nationally dwelling values increased by 2.8%. Since that time, the monthly rate of growth has eased back to 1.5%.

With housing values rising substantially faster than household incomes, raising a deposit has become more challenging for most cohorts of the market, especially first home buyers. Sydney is a prime example where the median house value is now just over $1.3 million. To raise a 20% deposit, the typical Sydney house buyer would need around $262,300. Existing homeowners looking to upgrade, downsize or move home may be less impacted as they have had the benefit of equity that has accrued as housing values surged.

Economy

Interest Rates: RBA Cash rate remained unchanged at 0.10%.

Retail Sales: The most recent report on Australian retail sales shows a 1.7% fall month-on-month. Also, a fall of 0.7% compared to August 2020.

Agriculture: Gross value of Australia’s agricultural production is forecast to reach a new all-time high of $73.0 billion in 2021-22.

Bond Yields: Australian government 10-year bond climbed 33bps to 1.49%

Employment: The Australian unemployment rate has fallen to a new low of 4.5%, however underemployment has increased to 9.4% and monthly hours decreased by 66 million hours.

UK Employment: The UK unemployment rate was at 4.6%. 0.3% lower than the previous quarter.

Exchange Rate: The Aussie dollar fell slightly against the American dollar, at $0.721, and held steady against the Euro at $0.623.

Consumer Confidence: The Westpac-Melbourne Institute Index of Consumer Sentiment increased by 2.0% to 106.2 in September from 104.1 in August. The resilience of consumer sentiment in a period when Australia’s two major cities have been locked down and the economy has been contracting is truly remarkable. The Index is still comfortably above the reads seen over the five years prior to the pandemic and is only 0.9% below its June print just prior to Sydney’s move into lock-down.

Purchasing Managers Index: The Australian Industry Group Australian Performance of Manufacturing Index (Australian PMI®) eased by 0.4 points to 51.2 in September, indicating a weaker rate of expansion across manufacturing and effectively stalling a solid period of recovery since late 2020 (readings above 50 points indicate expansion in activity, with higher results indicating a faster rate of expansion).

Covid: As of 29th September, 27,750,501 vaccine doses were administered nationally. In terms of covid disaster payments 3.71 million claims have been received. With 2.05 million individuals being paid a total of $9.11 billion AUD. Globally there is 2.69 billion people that are fully vaccinated representing 34.5% of the global population.

Sources: ABS, AFR, Bloomberg, CoreLogic, NAB Group Economics, RBA, UBS, OECD, Westpac.

Comment

Is it in the consumers best interest to keep rates low?

Interest rates around the world have fallen to unprecedented lows, currently, there is a record $US15 trillion worth of government, corporate and other bonds trading at negative interest rates. The ECB`s current policy remains at its record low of -0.50% while Japan`s policy rate is at -0.10%, if we roll back the clock to 4 or 5 years ago, such interest rates would have been unheard of.

The low interest environment has very much become normality for the everyday Australian with the deposit rate sitting at 0.10% since November 2020. Having interest rates this low can be great in an attempt to stimulate the economy. Such a tactic is often employed shortly after retractions in economic growth to reinstall confidence back into the community. This is especially great for homeowners as it will reduce their monthly mortgage payments. Similarly, prospective homeowners might be enticed into the market due to cheaper costs. A very significant factor in the recent property boom that can be seen across Australia today. Furthermore, this also means that people are able to borrow more, which in turn spurs demand for household goods. As well as allowing businesses to make larger purchases to boost their capital. This seems great! However, with positives there are always negatives.

If interest rates are kept low for a sustained period of time, then investment returns will also be affected. Anyone putting money into a savings account or similar vehicle won’t see much of a return during this period of monetary policy. Very much a Keynesian theory of economics – governments should increase spending and lower taxes when faced with a recession even in a high deficit environment, in order to create jobs and boost consumer buying power.

The RBA have laid down a marker for a 2.5% inflation target and have stated that they will not change the cash rate until this target has been met. If this is the case, we should take a deeper look into the current inflation forecasts to better understand when this rate could be met.

The Governor of the RBA Phillip Lowe has stated consistently that he does not believe there will be an increase of the cash rate until 2024. He strengthened this statement by raising the stakes in terms of his inflation guideline. “it won’t be enough for inflation to just sneak across the current target of 2-3% for a quarter or two. We want to see inflation around the middle of that target and have reasonable confidence that inflation will not fall below the 2-3% band again”.

By December 2023 Phillip Lowe expects the inflation rate to have reached 2.25% the unemployment rate to have reached 4% and wages growth at 2.75%. This forecast would anticipate the 2.5% inflation target to be met by mid-2024, implying any policy response to interest rates to be altered in Q3-Q4 of 2024. The current rationale behind the RBA`s inflation target is unclear and not in line with other developed economies. The US federal reserve, the ECB and the Bank of England all are targeting 2% whilst the Bank of Canada and Reserve Bank of New Zealand are targeting a 1-3% target with a 2% mid-point. By reducing the target between the 1-3% range rather than the current 2-3% it would recognise the structural changes in our economy since 1992, when the target was first adopted and aligned Australia with other central banks around the world.

As we can see from the graph above a 2.5% inflation target has not been met since early 2014. Getting back to this level will require a resistant and COVID free economy. But with the current prices especially in commodities such as silicon and coal booming to all-time highs and the supply-side shortages we are currently experiencing, it is hard to think that inflationary pressure will be staying away for long. The graphs below shows the price of Australian thermal coal and Shanghai Silicon spot prices. Such news would be enough to scare even the hardest of inflation sceptics.

Recent comments from Bill Evans the highly respected chief economist at Westpac expects interest rates to rise much earlier than the target set by the RBA. On June 18th they predicted the first hike will be in Q1 of 2023. Reaching 0.75% by the end of 2023 and peaking at 1.25% by the end of 2024.

It is expected that the lift in wages growth will be a key indicator to boost inflation through 2022. Bill Evans believes that the governors 2.5% inflation target will be met by December 2022. Achieving this target much earlier than first expected would allow the Governor to avoid the dangerous prospect of the impact on asset markets to withstand four consecutive years of a 0.1% cash rate.

It may be sensible to understand that the comments from the RBA over interest rates may be more political than economical. If inflation was to increase too much this could put a lot of pressure on assets and the stock market, causing the economy a different type of problem. Getting this balance right will be how the government is judged especially in the current environment. Such as, trade pressures from China, the Evergrande debacle, COVID-19 and the vaccination roll-out, the property price boom the list goes on. But in terms of interest rates, the question of interest rates rising is when not if.

Sources: AFR, RBA, Westpac, HSBC, Bloomberg.

Global Tax Rate

130 countries and jurisdictions that represent more than 90% of global GDP have joined a new two-pillar plan to reform current international taxation rules, this will ensure multinational corporations are paying their fair share of tax wherever they may operate.

This framework is significant as it updates a century-old international tax system, which no longer serves the purpose of the new digital and globalised economy. The new system will aim to ensure that large Multinational Enterprises pay tax where they operate and earn profits, while adding more stability to the international tax system.

Pillar One – Will ensure a fairer distribution of profits and taxing rights among countries with respect to the largest MNE`s. It reallocates some of the taxing rights from the MNE`s home countries to the markets in which they have business activity and earn profits, regardless of whether a physical presence is there or not.

Pillar Two – Will put a floor on competition over corporate income tax, this will be achieved through the introduction of a global minimum corporate tax rate that countries can use to protect their profit bases.

It is expected under Pillar One that taxing rights on more than 100 billion USD of profits are expected to be reallocated to their rightful market jurisdictions each year. Under Pillar Two with the introduction of a minimum tax rate of 15% this is expected to generate around 150 billion USD in additional global tax revenue per annum.

Between 2000-2018, a collection of US companies accounted for half of all foreign profits spread across seven low-tax jurisdictions: Bermuda, the Cayman Islands, Ireland, Luxembourg, the Netherlands, Singapore and Switzerland.

OECD Secretary-General and former Australian Minister for Finance Mathias Cormann quoted. “This package does not eliminate tax competition, as it should not, but it does set multilaterally agreed limitations on it. It also accommodates the various interests across the negotiating table, including those of small and developing economies. It is in everyone’s interest that we reach a final agreement among all Inclusive Framework Members as scheduled later this year”.

Under the proposed tax deal, countries would have to drop or refrain from national taxes in favour of the single global approach, in theory ending the trade disputes with large countries like the US and China.

The remaining elements of the framework, including the implementation plan will be finalised late next month. With implementation expected as early as 2023, depending on the amount of action taken up at national level. Countries would enact the minimum tax requirement into their own laws. Other parts could require a formal treaty. No matter how this plan continues to develop, the continued sense of bipartisanship between the member countries can only be seen as a positive. How effective this strategy will turn out to be, only time will tell.

Sources: AFR, OECD.

Markets

Local: For November, the ASX 200 fell by 0.92% although there were some big variances across the sectors: Materials were +6% while Energy was -8.4%, the biggest drag at the index level were the financials which fell by 8%.

Global: The S&P 500 posted a loss of 1% through November, outperforming mid and small-caps, as the S&P MidCap 400 and the S&P SmallCap 600 declined 3% and 2%, respectively.

Gold: Spot price for Gold remained stable at $1,804.40.

Iron Ore: Iron Ore dipped to $100 per metric ton as China`s industrial production growth continued to slow.

Oil: Crude Oil fell slightly m/m closing at US $81.49 per ton. The price has risen 90.89% over the past 12 months.

Property

Housing: Australian housing values were 1.3% higher in November marking the 14th consecutive month where CoreLogic’s national home value index recorded positive value growth. The November update takes national housing values 22.2% higher over the past 12 months, adding approximately $126,700 to the median value of an Australian home.

Although values are continuing to rise, the November result was the softest outcome since January when values rose 0.9%. Since a cyclical peak in the rate of growth in March, when housing values rose at 2.8%, there has been a notable trend towards milder price growth. Virtually every factor that has driven housing values higher has lost some potency over recent months. Fixed mortgage rates are rising, higher listings are taking some urgency away from buyers, affordability has become a more substantial barrier to entry and credit is less available.

Economy

Interest Rates: RBA Cash rate remained unchanged at 0.10%.

GDP: Due to recent lockdowns, real GDP dropped 1.9% over the previous quarter. However, it is only 0.2% below the pre-pandemic peak in Q4-2019.

Household Savings: The household savings ratio spiked far more than expected over the previous quarter hitting 19.8% after 11.8% previously. This is set to boost future spending on the economy re-opening.

Bond Yields: Australian government 10-year bond slipped from last month to 1.79%, whilst the US 10-year bond increased to 1.63%.

Exchange Rate: The Aussie dollar fell against both the American dollar, at $0.714, and the Euro at $0.627 respectively.

Consumer Confidence: The Westpac-Melbourne Institute Index of Consumer Sentiment increased by 0.6% to 105.3 in November from 104.6 in October. Firstly, the level of the Index is almost identical to the level just over a year ago in October 2020 (105.0) and has remained steady over the last two months despite both Sydney and Melbourne having moved out of their hard ‘delta’ lockdowns since September.

Agriculture: Winter crop production in Australia is forecast to increase by 5% in 2021–22 to a record 58.4 million tonnes. Production is expected to be a record high in Western Australia and the second highest on record in New South Wales and Queensland. Production in Victoria and South Australia is expected to be well above average. The December forecast is a 6.6% upward revision from the forecast ABARES published in the September 2021 edition of Australian Crop Report.

Employment: The current unemployment rate has crept up to 5.2% a 60 bps increase from the previous reported figure of 4.6%. Underemployment figures also rose slightly hitting 9.5%. Youth unemployment also rose dramatically m/m from 10.8% to 13.1%.

US Employment: The current unemployment figure stands at 4.6%, with the biggest improvement coming from males over 20 years of age falling by 0.4%.

Comment

Is Wage Growth Holding Back Our Rate Hikes

Despite the last year providing the strongest private sector wages growth for nearly seven years, as construction and professional industries deal with a labour shortage due to the pandemics restrictions and government housing stimulus, we are still seeing wages growth struggle to keep up with inflation.

The latest wages growth figures reported by the bureau of statistics showed private sector wages haven’t risen at this pace since 2014. Yet while sitting at the 2.4% mark they are still more than a 100 basis points below the RBA`s target of 3.5%. Some of the figures may start to look promising but the real-wages growth data does show for some dismal reading. Even though nominal wages have jumped, real wages continue to lag behind.

While notionally we are back at pre-pandemic wage growth, the pandemic still remains to be the main driver for that growth. Government housing stimulus programs have led to surges in construction which put pressure on construction wages as potential builders are looking for work. Other industries such as the professional, scientific and technical services are also clambering for more workers, not so much due to a surge in demand for their services but because border closures have kept skilled foreigners from being able to fill them. Despite certain scenarios causing wages growth to rise, the annual 2.4% growth only looks strong because the past decade has been so weak in comparison, with 34 consecutive quarters of sub-3% wages growth. Once sectors return back to normal with the reopening of our economy it is expectant that wages growth in these sectors will once again moderate. A pre-pandemic mindset that wages growth needs to be tampered with will keep wages growth to a minimal. Music to the ears of RBA`s Phillip Lowe whose relentless dovishness on both wages and monetary policy may be vindicated by such news.

During November the RBA reinstated their stance that there will be no interest rate increases in 2022 and has repeatedly said that they will not be expecting a wage breakout like that of the US or UK, where wage costs are rising at more than 4%. The current lagging behind in our wages growth is one of the main reasons why our core inflation rate is also significantly behind our AUKUS counterparts.

Currently only 10% of the labour market is capturing growth anywhere near the RBA`s current wages target. With construction, professional services and hospitality currently above 2.5%; the reasons stated earlier. Showing how far off we really are. Phillip Lowes main scepticism for any rate increases in the near future is our poor wages growth over the last decade, he does not believe that wages growth can accelerate fast enough to seriously rationalise any rate increase in 2022. It has been reiterated that usually you would incur persistently higher inflation with higher wages growth, the two generally go together. This would suggest that the labour market really is the key to unlocking our inflation rate target.

In recent weeks lenders have started to take matters into their own hands by increasing their lending rates and in hand tightening their own financial conditions, separate to the RBA. By doing this they may have released some of the pressure that that is currently heaped onto Phillip Lowe to raise interest rates in the short term.

Sources: ABS, AFR

The Global Energy Crisis

Crude oil hit $83 USD per barrel showing a 65% increase this year. Gasoline prices have also reached its highest level last month since 2015 at 1.27 USD/ Litre. Even coal is exploding with prices reaching US$269 recently a 400% increase. This energy boom is feeding into the inflationary loop, which in turn is pushing the prices up for energy-intensive metals such as steel and iron ore.

What has caused this? – It started when the global economy was tanking as the first and second waves of COVID-19 infected hospital systems and fuel production was curtailed as activity fell to a stop.

Then China banned Australian coal and tried to resupply this shortage from Indonesia, Russia and Mongolia but supply bottlenecks left inventories at 10 year lows and in-turn caused a huge surge in prices. Unfortunately, just how the whole pandemic started China continues to be the global problem. Since the GFC, Chinas phenomenal growth and huge stimulus programs have kept the economic powerhouse steaming ahead. Becoming the world factory and producing large amounts of manufactured goods. While also keeping prices down.

That’s now come to a grinding halt. China’s overblown property market is teetering, threatening a serious financial crisis and credit squeeze. Chinese real estate group Evergrande’s slow implosion is now spreading through the entire mainland property sector. That’s hit just as the country may be forced to drastically wind back its industrial production. With China not likely to change their political stance with the Australian government, coal imports may continue to be sparce over the winter months. On the other hand despite this Australia’s export earnings have held up well.

According to Citigroup, the coal and power crunch is likely to persist through the northern hemisphere winter, forcing the government to order at least a 12% cut in industrial power use in the next few months. If the winter is particularly harsh, the cuts could be greater just to ensure there’s enough fuel for basic heating. This could increase the possibility of stagflation risks and growth pressures on the Chinese and global economy over the coming months and push energy prices even higher. Right now, there is furious debate about how to deal with this. Money markets again are convinced central banks will be forced to raise interest rates much sooner than expected.

But that could spell disaster. As government debt has soared with pandemic support and developed world household debt rising exponentially as property values escalate, central banks may well find they have their hands tied. There’s no point raising interest rates if everyone is going to be bankrupted.

President Biden has come out recently willing to do whatever it takes to help curtail this energy price storm. This would mean releasing reserves and putting pressure on the big oil companies and petrol producers abroad. This all in an effort to stay away from a 1970`s style fuel crisis. In what must be the ultimate irony, given US President Joe Biden is leading the push for lower carbon emissions and to remove coal from electricity generation, American power plants are on track to burn 23 per cent more coal than last year. But by not tackling this problem now, inflation will get out of control and possibly even unemployment levels. Last week’s release of oil from the nation’s Strategic Petroleum Reserve is Bidens short-term political choice to make his long-term policy decisions possible. Instead of asking people to change their wasteful ways to beat back inflation, Biden believes it is the government’s job to solve big problems and relieve pain. It’s an effective political strategy that may also smooth the transition away from fossil fuels and help Americans plan for a better future. Only time will tell how successful this policy will be and 2022 looks like it will be another bumpy ride ahead for our most needed commodities.

Sources: AFR, Citigroup

Markets

Local: The ASX200 declined by -0.1% in October. As the Australian market lags in its pricing of higher-than-expected inflation and tightening monetary policies.

Global: The S&P500 index climbed 7.0% in October after a strong US earnings season.

Gold: Gold prices rose $26 to $1,769 per ounce.

Iron Ore: Iron Ore dipped $3 to $108 per metric ton as China`s industrial production growth slowed.

Oil: Oil climbed $6 to $84 per barrel a key factor on increasing inflationary worries.

Property

Housing: Australian housing values rose 1.5% in October, a similar result to August and September. However, taking the monthly change out another decimal point shows the market is continuing to slowly lose momentum since moving through a peak monthly rate of growth in March (2.8%). Nationally, the monthly growth rate eased to 1.49% in October from 1.51% in the previous month.

CoreLogic’s research director, Tim Lawless, says housing prices continue to outpace wages by a ratio of about 12:1. This is one of the reasons why first home buyers are becoming a progressively smaller component of housing demand. New listings have surged by 47% since the recent low in September and housing focused stimulus such as HomeBuilder and stamp duty concessions have now expired. Combining these factors with the subtle tightening of credit assessments set for November 1, and it’s highly likely the housing market will continue to gradually lose momentum.

Economy

Interest Rates: RBA Cash rate remained unchanged at 0.10%. With rate rises looking to come in late 2023.

Retail Sales: Retail sales rose 1.3% in September. The first monthly rise since May 2021, following falls of 1.7% in August and 2.7% in July. Mainly due to the Delta outbreak.

Consumer Price Index (CPI): The Consumer Price Index rose 0.8% this quarter. Over the twelve months to the September 2021 quarter, the CPI rose 3.0%.

Agriculture: The value of crop production is forecast to increase by 7% in 2021-2022 to a record $39.5 billion because of strong price increases for grains, cotton, and sugar. The value of livestock production is forecast to increase by 8% to $33.5 billion, driven by higher volumes. This is a $8.0 billion upward revision from the outlook issued in June, and the largest upgrade in a single quarter in at least 20 years.

Bond Yields: Australian government 10-year bond yields rose 69bps to 2.08%. The US 10-year treasury bond also rose to 1.594%

Exchange Rate: The Aussie dollar rose slightly against both the American dollar and the Euro, at $0.754 and $0.649 respectively.

Consumer Confidence: The Westpac-Melbourne Institute Index of Consumer Sentiment for Australia fell by 1.5% mom to 104.6 in October 2021, as worries over the longer-term outlook for the economy overshadowed relief from the loosening of COVID-19 restrictions. The economic conditions in the next 5 years dropped 5.6 percent to 108.1 and those in the next 12 months were down 1.7 percent to 103.2.

Employment: The national unemployment rate edged up to 4.6 per cent, from 4.5 per cent, with another dramatic deterioration in the participation rate the main reason why the unemployment rate did not jump further. The participation rate hit a 15-month low, with just 64.5 per cent of people aged 15 and over currently working or actively looking for work.

UK Employment: The UK unemployment rate was estimated at 4.5%, 0.5 percentage points higher than before the pandemic, but 0.4 percentage points lower than the previous quarter.

Purchasing Managers Index: The Australian Industry Group Australian Performance of Manufacturing Index (Australian PMI®) eased by 0.8 points to 50.4 points, indicating no improvement in average activity levels across manufacturing in October (seas. adj). This was the fourth consecutive month of deceleration and the weakest monthly result for the Australian PMI® since September 2020. Results above 50 points indicate expansion, with higher results indicating a faster rate of expansion.

Covid: Vaccination rates locally continue to rise especially in NSW with over 93% of eligible people receiving at least one dose of the vaccine and over 88% have received both doses. Globally 3.06 billion are fully vaccinated around 40% of the global population.

Sources: ABS, AFR, CoreLogic, NSW Health, Deloitte Access Economics, Macquarie MWM Research, RBA, UBS

Comments

What will kill our house price boom?

Sydney’s median house price is close to a record-breaking $1.5 million, as the Australian property market continues to boom during the COVID pandemic. With the RBA sticking to their 2-3% inflation target as the key driver to any cash rate change; it would be smart to assess the inflationary pressures the economy is starting to see.

The September quarter inflation reading was surprisingly high and has some economists (however unlikely) predicting up to three interest rate rises next year, this could finally see the record breaking house price boom on its last legs. The most significant price rises in the September quarter can be seen from new dwellings (+3.3%) and oil (+7.1%) with extreme changes like this the RBA may need to retract on its promise that interest rates will not rise until 2024. Other reasons for the house price surge can be less exciting, the implications of COVID have stopped people travelling not only overseas but also interstate as well as the shutting of clubs, pubs and restaurants giving people extra disposable income they may not have had prior. Meaning that homeowners are putting spare cash normally spent on travel into their home. This could partially explain the high level of demand for property over the past year or two as people are fast tracking their property decisions. Furthermore, due to interest rates being at an all-time low homeowners are able to leverage up the amount of debt they can accrue due to the low interest repayments. Credit growth lifted 0.9% in June, well above market consensus of 0.4%, driven primarily by business lending (up 1.6%), with the annualised growth rate now running at 4.5%. All contributory factors to inflationary pressure.

Contributions to house price growth can normally be separated into three economic fundamentals.

• Real wages growth
• Real growth in housing debt
• CPI inflation

One of the biggest influencers to house price growth especially in the last 10 years is the amount of housing debt per head which can be directly attributed to the low interest environment. The growth in the housing sector has led to Australian banks growing their loan sheets, with home mortgages accounting for 60% of total bank lending. With higher levels of household debt, mortgage owners will be more and more susceptible to any sort of economic shock. If households are constrained, in the sense that they do not have a great deal of income left after meeting their debt obligations, they are more likely to reduce consumption and in turn will amplify the impact of an economic shock.

Another point to highlight is Australia`s ability to have economic growth move at a strong pace without generating excessive wage costs. By itself, declining real wage cost should reduce the rate of real house price growth as generally people have less money to spend, but this has been more than offset by the dramatic rise in housing debt. The red bar in column C shows that real level of housing debt per person has increased by 3.4% pa above inflation a faster rate than at any other period in history.

Part of the reason for house price rises was from the low supply of homes due to the lockdowns, this problem is now likely to end with the re-opening of the economy, this in hand with being allowed to travel could reduce our obsession with property. On top of that, APRA is telling banks to make it harder for their prospective borrowers. Currently new variable home loans are typically offered something close to 2.8%. The new requirement will prevent lenders from offering such a loan unless the borrower can cope with an increase to 5.8%.

The graph above shows simply how all these factors could impact house prices, an increase in the supply of homes from S1 – S2 and a decrease in the demand of homes from D1-D2 could introduce a significant fall in house prices from P1-P2 in years to come.

The existential question is where the RBA and the US Federal Reserve’s “neutral” cash rates lie. Most economists think the local neutral rate is between 2 – 4%. If this is correct, it would mean that the RBA has to raise the cash rate to about 3% to ensure it is neither contractionary nor stimulatory. Many would say however that the neutral rate is a lot lower than people think, and closer to 1 – 1.5%. It’s ultimately an empirical question.

Even 100 basis points of increases would have profound consequences for asset pricing. Combined with some out-of-cycle rises from banks courtesy of normalising funding costs, this would probably force house prices, for example, to correct about 15 – 25%. In fact, the RBA’s own house price forecasting model implies a larger drawdown of about 33%.

In the decade since the global financial crisis, central banks have been able to pour seemingly infinite amounts of money on all economic problems because there have been no inflationary costs. It has long been argued that these policies will prove inflationary. Central banks increasingly face that invidious choice that their predecessors confronted decades ago: do you want higher growth or lower inflation in a climate in which inflation expectations are climbing?

With the consequence of core inflation moving into the RBA`s target band of 2-3% it is likely that the cash rate will most likely increase late 2022 or early 2023 to somewhat offset the increases we are bound to see on inflation.

Sources: ABS, AFR, Capital, RBA

How Sustainable is Australia’s Economy

In a time of serious change there does not seem to be a better opportunity than now for Australia to modernise its economy and pursue a more economically sophisticated future post Covid-19. You might be wondering why we need to pursue such an ambitious goal, but the data may surprise you.

It is safe to say that the Australian economy has defied expectations over the past 50 years, with current GDP per capita sitting among the highest in the developed world, on par with rich economies such as the US, Denmark, Singapore and Sweden. Prior to the Covid-19 pandemic Australia enjoyed an impressive 28 year spell of uninterrupted economic growth. However we need to unpack the reasons behind this success to show how we have become complacent and potentially vulnerable to global changes.

A recent report conducted by Deloitte Access Economics has summarised these issues through a sophistication index which ranks countries and their economies based on two measures: the value added to goods and services an economy currently produces; and how well connected the industries that make these products and services are in global supply chains. The productive knowledge or productive capabilities that an economy holds determine the frontiers of what they can produce and how much they can grow.

As you can see from the graph above Australia is ranked in 37^th place on the world sophistication index, saying it is too reliant on mining and agriculture and is too vulnerable to any global shift towards renewable energy. This ranking is on par with the countries like Latvia, Brazil and Greece.

Deloitte have highlighted 5 key issues to understand the reasoning behind the poor rating.

1. We are not as successful as an economy as we think we are. While GDP is high, our economy is not particularly complex and in fact can be seen to be quite fragile.
2. We have relied on luck which has started to create complacency.
3. We have neglected sectors with great future potential. Rather than taking a long-term view, Australia has focused on sectors like mineral resource and agriculture that have provided us with historical wealth.
4. We are not well connected to the rest of the world. This can make it more challenging to improve economic complexity, especially with the recent rise of Asia on Australia`s doorstep.
5. We are at the risk of the `tyranny of distance` again. With the world looking locally for supply chains, Australia is at risk because it is not engaging enough in the Asia Pacific region.

All of these points lead to a certain inflection point in the Australian economy and the pandemic has accelerated the time frame for this to occur.

Without diversification and innovation, an economy won’t be able to adapt quickly and absorb shocks. It must be noted that Australia has many of the building blocks to create new growth and improve resilience. This includes access to strategic minerals, renewable energy assets, proximity to the growth engine of Asia, successful agriculture exports, good education infrastructure and industry-leading digital technology.

But going forward Australia needs to move beyond these foundations to create a future-ready economy. Our challenge and our imperative is to find unique and differentiated ways to contribute to and connect with the globe.

There are seven opportunities highlighted that could promote Australia into the global economy to be more connected and find new opportunities for future growth.

1. Feeding the world – Demand for Australian food is strong, but the core industries involved in Australian food production – agriculture, forestry and fishing are among the least sophisticated.
2. Decarbonising the world – with competitive advantage in natural resources, technologies and energy, Australia can really take part in the move to global decarbonisation by producing new sustainable energy.
3. Shaping the future of health – Australia can create new value by using technology to turn its world-class health research into implementable health and wellbeing solutions.
4. Looking to the sky (and beyond) – Australia has a strong track record in the areas we have chosen to play in space, but also needs to grow its capabilities from niche research and manufacturing to end-to-end products and services
5. Manufacturing the future – To play a greater role in global manufacturing, Australia should have a clear focus on moving up the value chain by connecting advanced manufacturing into areas of greatest economic opportunity
6. Satisfying the senses – There is no ecosystem more agile and ever-changing than one that follows consumer demands. Australian organisations need to continue to be responsive and innovative by co-designing products and services
7. Servicing the world’s businesses – Using virtual and digital technology, a significant opportunity exists to export B2B services such as engineering, telecommunications, professional services, and financial and insurance services.

If successful, our Index score could more than double, placing Australia above even the highest of performers. But this would require a drastic shift in the structure of our economy. We would need to increase our business services sectors, build greater balance and diversity in our trade relationships. If we were successful, we’d see our incomes rise and vulnerability to shocks fall. We’d be nimbler and better prepared to make the most of new opportunities.

Sources: Deloitte Access Economics