Markets

Local: The ASX200 index fell -6.4% representing its worst start to a year since 2008.

Global: The S&P500 also fell -5.2%.

Gold: Spot price for Gold fell this month to US$1,795/oz.

Iron Ore: Iron Ore rose this month to US$144/Mt.

Oil: Brent Oil value continued its surge to $91/bbl. Driven by global supply concerns.

Property

Housing: CoreLogic’s national measure of housing values rose by 1.1% in January, up 10 basis points from the December result, when the national index was up 1.0%. Five of the eight capital cities recorded a modest uptick in the monthly rate of growth, including Melbourne, which had posted a slight decline in values in the previous month. However, the quarterly change continued to soften, reflecting the longer-term trend of slowing growth across most regions of Australia.

CoreLogic’s Research Director, Tim Lawless, notes housing stock is thinly traded during January, and it will be important to monitor the trend as transactional activity picks up

Regional markets have again shown a substantially stronger result for housing values, with the combined regionals index up 1.8% over the month and 6.3% over the rolling quarter. This compares with a 0.8% and 2.6% rise respectively across the combined capital cities over the same periods.

Economy

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

Retail Sales: December retail values were materially weaker than expected, slumping 4.4% m/m. This is likely reflected by a worse than expected hit from Omicron.

Bond Yields: Australian government 10-year bond rose 22 bps to 1.89%. US 10-year bond rose 27bps to 1.78%

Exchange Rate: The Aussie dollar continued to fall against the American dollar, at $0.705, and the Euro at $0.629.

Consumer Confidence: The Westpac-Melbourne Institute Index of Consumer Sentiment fell by 2.0% to 102.2 in January from 104.3 in December. This is a surprisingly solid result given the rapid spread of the Omicron Covid-19 variant over the last month. The 2% decline compares to the 5.2% drop seen in the first month of the delta outbreak in NSW, a 6.1% drop heading into Victoria’s ‘second wave’ outbreak in 2020 and the epic 17.7% collapse when the pandemic first hit in early 2020.

Employment: The Australian economy added 64,800 jobs in December, lowering the unemployment rate to 4.2% from a previously reported 4.6% in November. This is the lowest level of unemployment since August 2008.

US Employment: The unemployment rate is at a 22-month low of 3.9%, a sign the labour market is at or close to full employment.

Agriculture: The gross value of Australia’s agricultural production is forecast to reach a record $78 billion in 2022. This $5.4 billion upward revision from the outlook issued in September is the result of further improvements in domestic growing conditions, downgrades for key overseas competitors driving prices higher, and steep increases in logistics and fertiliser costs worldwide. Prices are at multi-year highs for many agricultural commodities. Many of the factors driving international prices are driven by poor seasonal conditions, so there is considerable uncertainty how long prices will remain at these levels – posing a risk to the forecast values being realised.

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 by 6.4 points to 48.4 points over the summer holiday period (December 2021 and January 2022) from 54.8 in November, pointing to a contraction in the factory sector, amid lower demand over a normally quiet period.

Covid: There are currently 367,000 active cases of Covid-19 across Australia, with total case numbers of 2,213,084 (as of 01/02/2022). There are currently 375 cases in ICU with a total of 3,835 deaths recorded.

Sources: ABS, AFR, AWE, CoreLogic, Macquarie MWM Research, RBA, UBS.

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The Big Inflation Challenge

The term inflation can be a dubious matter when reflecting on the state of any economy, many would see high inflation as a negative outcome. But some levels of inflation can be good for an economy’s advancement and sustainability. The term inflation isn’t necessarily good or bad and normally happens in times of transition between economic cycles. For instance, a bout of mild inflation can be good if it is generated by a growing economy and stimulates consumer demand or consumption, but it can quickly be undesirable if it becomes too low or too high and embeds itself into future economic expectations.

We are currently starting to see a spike in inflation which is spooking markets and causing the RBA to rethink its interest rate environment. Many are prepared to wait out the inflationary threat on the basis that it will be more transitory, but until this is confirmed markets may be at the mercy of inflation developments.

Much attention has been focused on Jerome Powell, the head of the US Federal Reserve. After recent comments stating that the US would be “nimble” in responding to inflationary pressures, whilst strongly hinting at a rapid-fire series of rate hikes beginning in March. The central bank is trying to prevent high inflation from becoming a permanent feature of the economy. Prices in December were up 7% in the US from the previous year, the sharpest jump in nearly 4 decades.

“Inflation has persisted longer than we thought, and of course, we are prepared to use our tools to ensure that higher inflation does not become entrenched” stated Mr Powell.

Australia has been seen to have taken a much more dovish stance than their US counterparts, Phillip Lowe has consistently emphasised the Reserve Banks determination to remain patient and hold off raising interest rates until actual inflation is sustainably between 2-3%.

So what can we expect next from the RBA?

On Tuesday the Reserve Bank terminated its $350 billion pandemic bond buying program, citing significant improvements in the economy and inflation running years ahead of their original forecasts. They have still kept the cash rate at its historic low of 0.1% but did upgrade its outlook for unemployment figures to fall below 4% late this year and to around 3.75% by the end of 2023. This has been reiterated by the central bank’s commitment to “maintaining highly supportive monetary conditions” to achieve full employment and keep inflation within the bank’s target range.

Phillip Lowe went on to say that “wages growth also remains modest, and it is likely to be some time yet before aggregate wages growth is at a rate consistent with inflation remaining sustainably within the target range.” A key condition the RBA wants to see moving higher is wages, which has been stated needs to be growing at 3% or more annually for inflation to be sustainably within the target band. In their most recent statement on monetary policy in November the bank forecasts the Wages Price Index (WPI) to be below 3% until December 2023.

Furthermore, Phillip Lowe commented at the National Press Club saying that “If they resolve in one way, then we’ll raise rates, if they resolve in another way it is still plausible that the first increase in interest rates is a year or longer away.” This would indicate that the raising of interest rates this year is a probable scenario based on the economic conditions we are currently facing. However this is not the only one as there are a lot of factors that need to be met first before an increase is seen.

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

Will Our Housing Boom Last?

After the fastest annual price growth in decades has taken over the Aussie property market, do we now face the prospect of falling house prices that could stay around for years to come. That is if past economic downturns are anything to go by.

Core Logics Tim Lawless says. “Once a market peaks, the typical trend is that values will experience a period of decline. But it’s impossible to know the timing, duration or magnitude of the housing downturn as it depends on so many factors, especially at the moment with so much uncertainty”.

It is usual that interest rates will normalise over several years rather than a rapid return to average levels which should help to cushion the size of any housing downturn, but if credit policies become overly restrictive too soon, it could become amplified.

Another factor that could hurt the housing boom is a return of employees to the office, especially in regional areas. It could even be more detrimental than any small interest rate rises we may see over the next year. Louis Christopher from SQM research, said historically regional markets were less affected by interest rate rises, but more sensitive to changes in local economic trends and housing demand. “The regions are more volatile than the capital cities, simply because they are smaller markets with lower liquidity. It doesn’t take much of a change for there to be a significant change in the market on the ground.”

One of the main competitive advantages for regional areas was their price affordability compared to the larger cities, with this advantage slowly eroding the novelty of moving there may also be diminishing. There are already some regions that are seeing a slowdown in momentum such as the Southern Highlands-Shoalhaven region, which notched the highest annual growth rate in 2021 at 37.7%, it has recently posted a 0.8% drop in its growth rate to 8.7% in the three months ending December.

One of the big changes that we have seen in the property sector is that there are now 3 regional areas that are more expensive than Melbourne: The Illawarra, Sunshine Coast and Richmond-Tweed. Prior to the pandemic there was none. Finally, the dwelling excess is forecast to increase over the next 2-3 years turning the market away from its current sellers’ market to a buyers’ market.

The graphs provided by BIS Oxford Economics provides us with some clarity on the direction the housing market will go in years to come and the slowdown in median housing prices. The main reasons for these current forecasts stem from, increased interest rates, the re-opening of the economy, a reduction in stimulus packages and the reduction in population growth. Price momentum is expected to continue near term but then taper as the higher prices and interest rate increases/ macro-prudential policies reduce overall affordability.

Sources: AFR, BIS Oxford Economics

Year of the Tiger: Roaring or Bellowing?

The 2022 Luna New Year, Year of the Tiger, is courage and bravery. It is a year to drive out evil and one of momentum and change. The message; walk boldly with courage. And it seems the Reserve Bank Governor is aligned with this sentiment.

The Tiger economy

At a recent speech to the National Press Club, Reserve Bank Governor Philip Lowe was optimistic about Australia’s prospects in 2022. This optimism is driven by strong GDP growth that saw growth outstrip the RBA’s forecast to reach 5%, and strong jobs growth with the unemployment rate at 4.2% – the lowest rate since the resources boom. Unemployment is expected to reduce further to 3.75% by the end of 2022, and if it does, it will be the lowest unemployment level since the early 1970s. Underemployment is also at its lowest rate in 13 years.

In addition, “household and business balance sheets are generally in good shape and wages growth is picking up.”

The surprise inflation figures

While wages growth is “picking up”, the forecast remains sluggish at 2.25%. Australia’s wages growth has remained lethargic for a decade now, which will come as a surprise to many business operators competing for skilled workers as, on the ground, the opposite feels true. Combined with a surprise spike in inflation (CPI) well above expectations at 3.5% (+2% on RBA forecasts), pushed predominantly by a sharp increase in petrol prices (32% over the past year) and the cost of constructing new homes, the purchasing power of Australians has declined. There has also been a large increase in the price of consumer durables (cars, fridges etc.,) and less discounting in the face of strong demand as supply chain problems take hold.

Australia is not alone in this. The UK inflation rate jumped to 5.4%, 5.7% in the United States and 5.9% in New Zealand in the same period.

Supply woes

The sharp increase in interest rates comes on the back of, “very significant disruptions in supply chains and distribution networks,” with labour shortages in particular dominating news coverage as businesses struggle to maintain momentum with staff impacted by either COVID-19 or isolation requirements. National Cabinet harmonised the definition of a ‘close contact’ at the end of December 2021 for most Australian States and Territories and reduced the isolation period to seven days (from 14).

The recent NAB quarterly business survey reported that, “ongoing supply chain issues and border closures saw 85% of firms report availability of labour as a constraint on output, while 47% reported availability of materials as a constraint – both records in the history of the survey. As a result, both cost growth and retail price growth remained elevated.” With global staff shortages, come bottlenecks in the supply chain. For many businesses, estimating what stock they need has become a crystal ball exercise rather than a predictable science and in some cases they are ordering ahead to reduce the supply risks, which has a knock-on effect of increasing demand for raw materials. And, this is without factoring in the problem of panic buying (toilet paper anyone) as customers anxiously watch dwindling supplies on supermarket shelves. Supply chain problems, both in Australia and globally, are not anticipated to normalise for another 12 to 24 months.

The RBA Governor’s three takeaways are:

• The economy has been remarkably resilient;
• The link between the strength of the real economy and prices and wages remains alive; and
• The supply side matters for both economic activity and prices.

You could almost add, no one really knows, as a fourth point as an unexpected change, like a new virulent COVID variant, or further lockdowns, could rewrite the forecasts. But, there is plenty of room for optimism. What we have seen to date is that when there is an opportunity to rebound, to return to normal, the economy bounces back quickly and often much faster than anticipated. Afterall, health, not the economy, has been the catalyst for the crisis.

When will interest rates rise?

During his National Press Club address, Mr Lowe was asked the question, “those people are now looking very carefully at your words, trying to read the tea leaves and work out what they do with their mortgages? You obviously can’t go to the RBA Governor looking for individual financial advice. But, if it was your mortgage, would you be scrambling for a fixed rate or sticking with a variable?”

His response, “… the advice that I would give to people is, make sure that you have buffers. Interest rates will go up. And the stronger the economy, the better progress on unemployment, the faster and the sooner the increase in interest rates will be. So, interest rates will go up.”

A rate increase by the RBA would be the first since November 2020. Westpac and AMP Capital are both forecasting the first increase to occur in August this year, then a second towards the end of 2022.

While the RBA might be taking a ‘steady as she goes’ approach, many lenders have already factored in increases as the international cost of funding increases. RateCity data shows that, “a total of 17 lenders have hiked fixed rates so far this year, but that number will rise and quickly” – Westpac increased its fixed rates at the end of January and the CBA and ING (for new customers only) at the start of February.

But with households having accumulated more than $200 billion in additional savings over the past 2 years, the RBA is hopeful that any increase will dampen inflation pressures but not impinge on growth.

Professional Services Firm Profits Guidance Finalised

The Australian Taxation Office’s finalised position on the allocation of profits from professional firms starts on 1 July 2022.

The ATO’s guidance uses a series of factors to determine the level of risk associated with profits generated by a professional services firm and how they flow through to individual practitioners and their related parties. The ATO may look to apply the general anti-avoidance rules in Part IVA to practitioners who don’t fall within the low-risk category.

With the new guidelines taking effect on 1 July 2022, professional firms will need to assess their structures now to understand their risk rating, and if necessary, either make changes to reduce their risks level or ensure appropriate documentation is in place to justify their position.

The problem

The finalised guidance has had a long gestation period. The ATO has been concerned for some time about how many professional services firms are structured – specifically, professional practices such as lawyers, accountants, architects, medical practices, engineers, architects etc., operating through trusts, companies and partnerships of discretionary trusts and how the profits from these practices are being taxed.

The ATO guidance takes a strong stance on structures designed to divert income in a way that results in principal practitioners receiving relatively small amounts of income personally for their work and reducing their taxable income. Where these structures appear to be in place to divert income to create a tax benefit for the professional, Part IVA may apply. Part IVA is an integrity rule which allows the Commissioner to remove any tax benefit received by a taxpayer where they entered into an arrangement in a contrived manner in order to obtain a tax benefit. Significant penalties can also apply when Part IVA is triggered.

Determining the risk rating

The guidance sets out a series of tests which are used to calculate a risk score. This risk score is then used to classify the practitioner as falling within a Green, Amber or Red risk zone, which determines if the ATO should take a closer look at you and your firm. Those in the green zone are at low risk of the ATO directing its compliance efforts to you. Those in the red zone, however, can expect the ATO to conduct further analysis as a matter of priority which could lead to an ATO audit.

Before calculating the risk score it is necessary to consider two gateway tests:

• Gateway 1 – considers whether there is commercial rationale for the business structure and the way in which profits are distributed, especially in the form of remuneration paid. Red flags would include arrangements that are more complex than necessary to achieve the relevant commercial objective, and where the tax result is at odds with the commercial venture, for example, where a tax loss is claimed for a profitable commercial venture.
• Gateway 2 – requires an assessment of whether there are any high-risk features. The ATO sets out some examples of arrangements that would be considered high-risk, including the use of financing arrangements relating to transactions between related parties.

If the gateway tests are passed, then you can self-assess your risk level against the ATO’s risk assessment factors. There are three factors to be considered:

• The professional’s share of profit from the firm (and service entities etc) compared with the share of firm profit derived by the professional and their related parties;
• The total effective tax rate for income received from the firm by the professional and their related parties; and
• The professional’s remuneration as a percentage of the commercial benchmark for the services provided to the firm.

The resulting ‘score’ from these factors determines your risk zone. Some arrangements that were considered low risk in prior years under the ATO’s previous guidance may now fall into a higher risk zone. In these cases, the ATO is allowing a transitional period for those practitioners to continue to apply the previous guidelines until 30 June 2024.

For professional services firms, it will be important to assess the risk level and this needs to be done for each principal practitioner separately. Those in the amber or red zone who want to be classified as low risk need to start thinking about what needs to change to move into the lower risk zone.

Where other compliance issues are present – such as failure to recognise capital gains, misuse of the superannuation systems, failure to lodge returns or late lodgement, etc., – a green zone risk assessment will not apply.

We will contact clients who might be impacted by the incoming guidance. If you are concerned about your position, please contact us.

PCR and RAT tests to be tax deductible, FBT free

The Treasurer has announced that PCR and rapid antigen tests (RAT) will be tax deductible for individuals and exempt from fringe benefits tax (FBT) for employers if purchased for work purposes.

There has been confusion over the tax treatment of RAT tests with the Prime Minister stating for some time that they are tax deductible, but in reality, the tests were probably only deductible in limited circumstances.

If you have had to purchase RAT tests to be able to work, you will be able to receive a tax deduction for the cost you have incurred from 1 July 2021 (you will need evidence of the expense). If the RAT test cost $20, someone on a marginal tax rate of 32.5% would receive a tax benefit of $6.50.

For business, it is expected that RAT, PCR and other coronavirus tests will be exempt from FBT from the 2021-22 FBT year.

Legislation enabling the change is expected before Parliament this week.

Cash injection for struggling businesses

Businesses struggling with the Omicron wave of the pandemic have been offered new grants and support in NSW, SA and WA.

New South Wales

The NSW Small Business Support package provides eligible employing businesses with a lump sum payment of 20% of weekly payroll, up to a maximum of $5,000 per week for the month of February 2022. The minimum weekly payment for employers is $750 per week.

Eligible non-employing businesses will receive $500 per week (paid as a lump sum of $2,000).

To access the package, businesses must:

• Have an aggregated annual turnover between $75,000 and $50 million (inclusive) for the year ended 30 June 2021; and
• Experienced a decline in turnover of at least 40% due to Public Health Orders or the impact of COVID-19 during the month of January 2022 compared to January 2021 or January 2020; and
• Experienced a decline in turnover of 40% or more from 1 to 14 February 2022 compared to the same fortnight in either 2021 or 2020 (you must use the same comparison year utilised in the decline in turnover test for January); and
• Maintain their employee headcount from “the date of the announcement of the scheme” (30 January 2022).

The support package only covers the month of February 2022. Applications for support are expected to open mid-February.

South Australia

The South Australian Government has introduced two rounds of support for businesses impacted by health restrictions:

• The Tourism, hospitality and gym grant provides $6,000 for employing businesses and $2,000 for non-employing business whose turnover reduced by 30% or more between 10 January 2022 to 30 January 2022 (inclusive) comparable to 2019-20 (or 2020-21 for new business). The grant will automatically be paid to those who applied for and received the grant based on the turnover period 27/12/21 to 9/1/22.
• The Business hardship grant provides $6,000 for employing businesses and $2,000 for non-employing businesses whose turnover reduced by 50% or more between 10 January 2022 to 30 January 2022 (inclusive) comparable to 2019-20 (or 2020-21 for new business). The grant will automatically be paid to those who applied for and received the grant based on the turnover period 27/12/21 to 9/1/22.

Applications for the grants open 14 February 2022.

Western Australia

Western Australia has been hit with compounding issues of border closures, COVID-19 and natural disasters.

The latest grant provides financial assistance of up to $12,500 ($1,130 for each impacted day) to small businesses in the hospitality, music events or arts sectors that were directly financially impacted by the Chief Health Officer’s COVID Restrictions (Directions) from 23 December 2021 to 4 January 2022. Non-employing businesses will receive up to $4,400 ($400 per day).

To be eligible, your business must:

• Be located within the Perth, Rottnest or Peel regions; and
• Have a valid ABN; and
• Have an annual turnover of more than $50,000; and
• Australia wide payroll of less than $4m in 2020-21; and
• Operate in the hospitality sector, the music events industry or the creative and performing arts sectors that were directly impacted by the restrictions; and
• Have experienced a decline in turnover of at least 30% compared to the same period in the prior year (or another comparable period for new businesses).

Applications are open through SmartyGrants.

Pandemic Leave Disaster Payments rules change

The rules for the Pandemic Leave Disaster Payment, the payment accessible to those who have lost work because they have had to self-isolate with COVID-19, or are caring for someone who contracted it, changed on 18 January 2022.

The new rules change the definition of a close contact in line with the harmonised national definition. The payment is now accessible if you are a close contact because you either usually live with the person who has tested positive with COVID-19, or have stayed in the same household for more than 4 hours with the person who has tested positive with COVID-19 during their infectious period.

The payment provides:

• $450 if you lost at least 8 hours or a full day’s work, and less than 20 hours of work
• $750 if you lost 20 hours or more of work.

To claim the payment, you will need to be an Australian citizen, permanent visa holder (or temporary visa holder with a right to work) or a New Zealand passport holder. The payment is also subject to means testing with a $10,000 illiquid assets test.

Quote of the month

“Regard your good name as the richest jewel you can possibly be possessed of — for credit is like fire; when once you have kindled it you may easily preserve it, but if you once extinguish it, you will find it an arduous task to rekindle it again. The way to a good reputation is to endeavor to be what you desire to appear.”

Socrates

Note: The material and contents provided in this publication are informative in nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone. If expert assistance is required, professional advice should be obtained.

Markets

Local: The ASX200 index rose 2.1% in February. The Energy sector lead the way with an 8.6% rise, while the Information Technology sector was the worst performing, down -6.6%.

Global: The S&P 500 was down 3.14% in February, bringing its YTD return to -8.23%.

Gold: Spot price for Gold rose sharply in February to $1,908.

Iron Ore: Iron Ore prices fell slightly to US$136.50/Mt.

Oil: Brent Oil price rose sharply to US $100.99/bbl. The first time the price has exceeded the $100 mark since 2014. A large contributor to global inflationary pressures.

Property

Housing: CoreLogic’s Home Value Index (HVI), released last week, shows a broad-based slowdown in the rate of value growth. National housing values were up 0.6% in February, the slowest monthly rate of growth since September 2020.

Previous analysis from CoreLogic shows a strong inverse correlation between movements in the cash rate and housing values, albeit with the strongest correlation based on a lag, but other factors are also likely to influence the trajectory of housing values.

Fixed term mortgage rates have been rising through most of last year, housing is less affordable, credit policy has tightened, and lenders are likely to be more cautious in lending decisions. Additionally, household savings are likely to fall which could take some demand out of the housing market, and advertised inventory is rising, providing more choice and less urgency for buyers.

Economy

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

Retail Sales: January retail sales recovered slightly from its previous month, rising 1.8% m/m. This is a significant upturn from the 12 months prior. Rising 6.4% y/y compared to January 2021.

Bond Yields: Australian government 10-year bond rose 27 bps to 2.16% from the previous month. The US 10-year bond also rose slightly by 4 bps to 1.82%.

Exchange Rate: The Aussie dollar maintained value against both the American dollar, at $0.716, and the Euro at $0.648.

Inflation: Consumer price inflation in the December quarter was 1.3% and 3.5% over the year, led by increases in the prices of new dwellings, durable goods and fuel. Underlying inflation has also picked up in recent quarters and is forecast to increase further to 3.25% in mid-2022.

Consumer Confidence: The Westpac-Melbourne Institute Index of Consumer Sentiment fell by 1.3% to 100.8 in February from 102.2 in January. Given that the health disruptions from the Omicron variant have eased and the labour market has strengthened it is surprising that we did not see some improvement in the Index in February. Virus developments do look to have seen an improved assessment of the economy, as measured by the components of the Index that relate to the economic outlook, and confidence in the jobs market.

Employment: The unemployment rate remained at 4.2%, with the participation rate increasing to 66.2%.

US Employment: Total nonfarm payroll employment rose by 467,000 in January, and the unemployment rate was little changed at 4.0%. Employment growth continued in leisure and hospitality, in professional and business services, in retail trade, and in transportation and warehousing.

Purchasing Managers Index: The Australian Industry Group Performance of Manufacturing Index (Australian PMI®) rose by 4.8 points to 53.2 in February, reflecting mild improvements and a rebound into positive territory after a sharp decline in the December 2021-January 2022 report. Readings above 50 points indicate expansion in activity, with higher results indicating a faster rate of expansion.

Covid: As of 27th February 2022, a total of 2,829,173 cases of COVID-19 have been reported in Australia, including 5,159 deaths, and approximately 205,889 active cases.

Sources: ABS, AFR, AWE, CoreLogic, Macquarie MWM Research, RBA, UBS, Department of Health, Westpac.

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The Russia Ukraine War – What has happened and what will our world look like tomorrow?

What we know so far

• Russian forces launch a 3-pronged invasion from the north, east and south. With attacks on Kyiv, Kharkiv and Kherson respectively. With Kherson now being the first city to have been taken over by Russian military.
• Mixed casualty numbers have been stated by both sides. Russia claims 498 of their troops have died, whilst Ukraine states over 7000 Russian servicemen have been killed since the start of the invasion.
• Russia has taken over several key strategic locations in areas surrounding Kyiv, this includes places such as Chernobyl and several air bases.
• Ukraine and Russia have begun consulting on a time and place for the beginning of cease fire negotiations but there is little credibility to this statement.
• Ukrainian men aged between 16 & 60 have been banned from leaving the country, with President Zelenskyy guaranteeing that all citizens wishing to receive a gun can do so.
• International condemnation has begun a series of international economic sanctions against Russia, making up most of the damage to the Kremlin.

What Sanctions Have Been Imposed

• Western leaders have agreed upon excluding certain Russian banks from the SWIFT network which allows banks around the globe to communicate about cross-border payments securely and quickly.
• Restrictions were also imposed on the Russian Central Bank from deploying its international currency reserves, this effectively removes their ability to support the Ruble with their US $600bn worth of currency reserves. This severely restricts the flow of imports and exports and will likely cause high inflation.
• Assets of financial/ military linked institutions and notable individuals linked to the Russian government were frozen, as well as restrictions placed on their ability to transact and travel outside of domestic borders.
• The largest fear on sanctions was based around global energy markets, the Nord 2 stream has been put on hold as expected, but no major sanctions have been placed on energy producing companies, the worlds unhealthy dependence on Russian energy is the main reason behind this.

Global dependence on Russian oil and natural gas has proven to mitigate any major upward pressure on commodity prices for now and will likely continue to be the case as western nations deal with the awkward balancing act of looking out for the wellbeing of the Ukrainian people but also the health of their economies. Should commodity prices remain somewhat contained, Australian and US equity markets will likely continue to remain relatively unaffected by the conflict, given the lack of economic ties to Russia.

What can we expect to happen?

Scenario 1 – The Worse Case

Unless Vladimir Putin has a change of heart or the West can do their best to deter him, it appears that Mr Putin is willing to kill as many people as necessary and destroy as much of Ukraine’s infrastructure as possible to erase Ukraine as an independent state. This sort of action could lead to some of the largest war crimes seen since the devolvement of the Nazi party. The new globalised world has never had to deal with an erratic leader whose country landmass spans over 11 time zones, is one of the world’s largest oil and gas producers and possesses a large arsenal of nuclear warheads.

Intervention against someone this hostile, risks igniting the first war in Europe involving nuclear weapons. You can understand why global leaders are being sheepish. Putin believes in the idealism of a “Russian World” where Ukrainians and Russians are one people. To realise such a vision Putin believes it is his right to challenge the rules-based system, in which things that a country desire is not taken by force. If anyone tries to get in his way or attempt to humiliate the Russian leader, he has categorically stated that he will not hold back.

Scenario 2 – The Compromise

This scenario is likely to take some time, it will only happen if somehow the Ukrainian military and people manage to hold off against the Russian attack long enough that the economic sanctions start to have a deeply wounding effect on the Russian economy.

This would suggest that in return for a ceasefire and withdrawal of Russian troops, Ukraine’s eastern cities now under de facto Russian control would be formally handed over to Russia, while Ukraine would vow never to join NATO. At the same time the US and its allies that had previously held sanctions against Russia would be required to lift them.

This scenario does remain unlikely as it requires Putin to dismantle himself from his political pedestal, whilst paying a hefty price in terms of economic disruption and the deaths of Russian soldiers.

Scenario 3 – The Best Case

A scenario that would seem the least likely but one with the best global outcome is that the people of Russia demonstrate as much bravery and commitment to their own freedoms as the Ukrainian people have shown to their own. Many Russians would be starting (or already have) to worry that if Putin is their leader, they have a very grim and dismal future. Thousands have already taken to the street to protest this war, doing so at immediate danger to their lives.

The international push back is immense against the Putin regime, as it should be. From culture to commerce, sports to travel, the world is shunning Russia in a myriad of ways to stand up and protest. Then there is the “Putin tax” that every Russian will have to pay indefinitely whilst Putin is in charge. The mounting sanctions that are being placed on Russia will have a significant effect on Russian lives.

The Russian central bank has recently been forced to raise interest rates in one day to 20% just to try and encourage people to hold Rubles, even then the currency dived 30% against the US dollar, now worth less than 1 US cent.

Only time will tell what will happen with this war, we all hope a resolution is round the corner, but nothing would surprise us after the past few unpredictable years.

Sources: AFR, Mason Stevens.

How Important Are Environmental, Social and Governance (ESG) Concerns When Investing?

What is ESG?

ESG means using environmental, social and governance factors to evaluate companies and countries on how far advanced they are with sustainability. Once companies collate enough data on these metrics, they can be integrated into the investment process when deciding what equities or bonds to buy.

The environmental factors include the contribution a company or government makes to climate change through greenhouse gas emissions, along with waste management and energy efficiency. Given renewed efforts to combat global warming, cutting emissions and decarbonising are becoming ever more important.

The social factors include human rights, labour standards in supply chains, exposure to illegal child labour and adherence to workplace health and safety. A social score rises if a company is well integrated with its local community and therefore has a ‘social license’ to operate freely.

Finally, the governance factors refer to a set of rules or principles defining, rights, responsibilities and expectations between different stakeholders in the governance of corporations. A well-defined corporate governance system can be used to balance or align interests between stakeholders and can work as a tool to support a company’s long-term strategy.

What does the future hold?

Amid COVID disruptions ESG has become increasingly important for many Australian CFOs and interested parties. They recognise that investors, customers and staff members all want some sort of action on ESG.

Deloitte Access Economics have put together research around this area and can show how ESG is becoming more influential in investors thought process.

Of the eleven ESG activities identified, only 13% (on average) of CFOs believe they have completed them or that the activities are in place, while 70% (on average) believe these activities are planned or are still in progress.

Further, a lack of capability and a lack of resources are both listed as key barriers to ESG efforts. Some 60% of surveyed CFOs either personally drive, co-drive ESG or have oversight of it in their organisation, but of this group only 22% feel confident in doing so. 56% of CFOs are somewhat confident and working on actively upskilling. That leaves a further 22% who don’t feel they have the skills, capability, or support they need to contribute meaningfully on ESG, despite understanding the urgency of action.

There is a changing demographic, a new generation of investors who feel quite strongly about how their money ought to be managed. Investors can align their personal values with their investments, given an ever-increasing range of suitable options.

Furthermore, poor performers within the market can adapt and evolve through smarter capital allocation and changes to corporate behaviour. Companies can make substantial changes and be viewed in a fresh light when they change their ways. ESG investing is not set in stone.

The importance of ESG is very much in the infancy stage, but companies and investors must get up to date with this area before they get left behind the pack.

Sources: Deloitte Access Economics

The ATO’s Attack on Trusts and Trust Distributions

Late last month, the Australian Taxation Office (ATO) released a package of new guidance material that directly targets how trusts distribute income. Many family groups will pay higher taxes (now and potentially retrospectively) as a result of the ATO’s more aggressive approach.

Family trust beneficiaries at risk

The tax legislation contains an integrity rule, section 100A, which is aimed at situations where income of a trust is appointed in favour of a beneficiary but the economic benefit of the distribution is provided to another individual or entity. If trust distributions are caught by section 100A, then this generally results in the trustee being taxed at penalty rates rather than the beneficiary being taxed at their own marginal tax rates.

The latest guidance suggests that the ATO will be looking to apply section 100A to some arrangements that are commonly used for tax planning purposes by family groups. The result is a much smaller boundary on what is acceptable to the ATO which means that some family trusts are at risk of higher tax liabilities and penalties.

ATO redrawing the boundaries of what is acceptable

Section 100A has been around since 1979 but to date, has rarely been invoked by the ATO except where there is obvious and deliberate trust stripping at play. However, the ATO’s latest guidance suggests that the ATO is now willing to use section 100A to attack a wider range of scenarios.

There are some important exceptions to section 100A, including where income is appointed to minor beneficiaries and where the arrangement is part of an ordinary family or commercial dealing. Much of the ATO’s recent guidance focuses on whether arrangements form part of an ordinary family or commercial dealing. The ATO notes that this exclusion won’t necessarily apply simply because arrangements are commonplace or they involve members of a family group. For example, the ATO suggests that section 100A could apply to some situations where a child gifts money that is attributable to a family trust distribution to their parents.

The ATO’s guidance sets out four ‘risk zones’ – referred to as the white, green, blue and red zones. The risk zone for a particular arrangement will determine the ATO’s response:

White zone

This is aimed at pre-1 July 2014 arrangements. The ATO will not look into these arrangements unless it is part of an ongoing investigation, for arrangements that continue after this date, or where the trust and beneficiaries failed to lodge tax returns by 1 July 2017.

Green zone

Green zone arrangements are low risk arrangements and are unlikely to be reviewed by the ATO, assuming the arrangement is properly documented. For example, the ATO suggests that when a trust appoints income to an individual but the funds are paid into a joint bank account that the individual holds with their spouse then this would ordinarily be a low-risk scenario. Or, where parents pay for the deposit on an adult child’s mortgage using their trust distribution and this is a one-off arrangement.

Blue zone

Arrangements in the blue zone might be reviewed by the ATO. The blue zone is basically the default zone and covers arrangements that don’t fall within one of the other risk zones. The blue zone is likely to include scenarios where funds are retained by the trustee, but the arrangement doesn’t fall within the scope of the specific scenarios covered in the green zone.

Section 100A does not automatically apply to blue zone arrangements, it just means that the ATO will need to be satisfied that the arrangement is not subject to section 100A.

Red zone

Red zone arrangements will be reviewed in detail. These are arrangements the ATO suspects are designed to deliberately reduce tax, or where an individual or entity other than the beneficiary is benefiting.

High on the ATO’s list for the red zone are arrangements where an adult child’s entitlement to trust income is paid to a parent or other caregiver to reimburse them for expenses incurred before the adult child turned 18. For example, school fees at a private school. Or, where a loan (debit balance account) is provided by the trust to the adult child for expenses they incurred before they were 18 and the entitlement is used to pay off the loan. These arrangements will be looked at closely and if the ATO determines that section 100A applies, tax will be applied at the top marginal rate to the relevant amount and this could apply across a number of income years.

The ATO indicated that circular arrangements could also fall within the scope of section 100A. For example, this can occur when a trust owns shares in a company, the company is a beneficiary of that trust and where income is circulated between the entities on a repeating basis. For example, section 100A could be triggered if:

• The trustee resolves to appoint income to the company at the end of year 1.
• The company includes its share of the trust’s net income in its assessable income for year 1 and pays tax at the corporate rate.
• The company pays a fully franked dividend to the trustee in year 2, sourced from the trust income, and the dividend forms part of the trust income and net income in year 2.
• The trustee makes the company presently entitled to some or all of the trust income at the end of year 2 (which might include the franked distribution).
• These steps are repeated in subsequent years.

Distributions from a trust to an entity with losses could also fall within the red zone unless it is clear that the economic benefit associated with the income is provided to the beneficiary with the losses. If the economic benefit associated with the income that has been appointed to the entity with losses is utilised by the trust or another entity then section 100A could apply.

Who is likely to be impacted?

The ATO’s updated guidance focuses primarily on distributions made to adult children, corporate beneficiaries, and entities with losses. Depending on how arrangements are structured, there is potentially a significant level of risk. However, it is important to remember that section 100A is not confined to these situations.

Distributions to beneficiaries who are under a legal disability (e.g., children under 18) are excluded from these rules.

For those with discretionary trusts it is important to ensure that all trust distribution arrangements are reviewed in light of the ATO’s latest guidance to determine the level of risk associated with the arrangements. It is also vital to ensure that appropriate documentation is in place to demonstrate how funds relating to trust distributions are being used or applied for the benefit of beneficiaries.

Companies entitled to trust income

As part of the broader package of updated guidance targeting trusts and trust distributions, the ATO has also released a draft determination dealing specifically with unpaid distributions owed by trusts to corporate beneficiaries. If the amount owed by the trust is deemed to be a loan then it can potentially fall within the scope of another integrity provision in the tax law, Division 7A.

Division 7A captures situations where shareholders or their related parties access company profits in the form of loans, payments or forgiven debts. If certain steps are not taken, such as placing the loan under a complying loan agreement, these amounts can be treated as deemed unfranked dividends for tax purposes and taxable at the taxpayer’s marginal tax rate.

The latest ATO guidance looks at when an unpaid entitlement to trust income will start being treated as a loan. The treatment of unpaid entitlements to trust income as loans for Division 7A purposes is not new. What is new is the ATO’s approach in determining the timing of when these amounts start being treated as loans. Under the new guidance, if a trustee resolves to appoint income to a corporate beneficiary, then the time the unpaid entitlement starts being treated as a loan will depend on how the entitlement is expressed by the trustee (e.g., in trust distribution resolutions etc):

• If the company is entitled to a fixed dollar amount of trust income the unpaid entitlement will generally be treated as a loan for Division 7A purposes in the year the present entitlement arises; or
• If the company is entitled to a percentage of trust income, or some other part of trust income identified in a calculable manner, the unpaid entitlement will generally be treated as a loan from the time the trust income (or the amount the company is entitled to) is calculated, which will often be after the end of the year in which the entitlement arose.

This is relevant in determining when a complying loan agreement needs to be put in place to prevent the full unpaid amount being treated as a deemed dividend for tax purposes when the trust needs to start making principal and interest repayments to the company.

The ATO’s views on “sub-trust arrangements” has also been updated. Basically, the ATO is suggesting that sub-trust arrangements will no longer be effective in preventing an unpaid trust distribution from being treated as a loan for Division 7A purposes if the funds are used by the trust, shareholder of the company or any of their related parties.

The new guidance represents a significant departure from the ATO’s previous position in some ways. The upshot is that in some circumstances, the management of unpaid entitlements will need to change. But, unlike the guidance on section 100A, these changes will only apply to trust entitlements arising on or after 1 July 2022.

Immediate Deductions Extended

Temporary full expensing enables your business to fully expense the cost of:

• new depreciable assets
• improvements to existing eligible assets, and
• second hand assets

in the first year of use.

Introduced in the 2020-21 Budget and now extended until 30 June 2023, this measure enables an asset’s cost to be fully deductible upfront rather than being claimed over the asset’s life, regardless of the cost of the asset. Legislation passed by Parliament last month extends the rules to cover assets that are first used or installed ready for use by 30 June 2023.

Some expenses are excluded including 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.

For companies it is important to note that the loss carry back rules have not as yet been extended to 30 June 2023 – we’re still waiting for the relevant legislation to be passed. If a company claims large deductions for depreciating assets in a particular income year and this puts the company into a loss position then the tax loss can generally only be carried forward to future years. However, the loss carry back rules allow some companies to apply current year losses against taxable profits in prior years and claim a refund of the tax that has been paid. At this stage the loss carry back rules are due to expire at the end of the 2022 income year, but we are hopeful that the rules will be extended to cover the 2023 income year as well.

Federal Budget 2022-23

The Federal Budget has been brought forward to 29 March 2022. With the pandemic and the war in Ukraine we have seen a lot less commentary this year about what to expect in the Budget. But, as an election budget, we typically expect to see a series of measures designed to boost productivity, many of which are likely to benefit businesses willing to invest in the future. Bolstering the workforce, and measures to increase the participation of women, is also a potential feature as Australia struggles with post pandemic worker shortages. Fiscally, the Budget is likely to be in a better position than expected in previous Budgets so there is more in the Government coffers to spend on initiatives. Look out for our update on the important issues the day after the Budget is released.

Are Your Contractors Really Employees?

Two landmark cases before the High Court highlight the problem of identifying whether a worker is an independent contractor or employee for tax and superannuation purposes.

Many business owners assume that if they hire independent contractors they will not be responsible for PAYG withholding, superannuation guarantee, payroll tax and workers compensation obligations. However, each set of rules operates a bit differently and in some cases genuine contractors can be treated as if they were employees. Also, correctly classifying the employment relationship can be difficult and there are significant penalties faced by businesses that get it wrong.

Two cases handed down by the High Court late last month clarify the way the courts determine whether a worker is an employee or an independent contractor. The High Court confirmed that it is necessary to look at the totality of the relationship and use a ‘multifactorial approach’ in determining whether a worker is an employee. That is, if it walks like a duck and quacks like a duck, it’s probably a duck, even if on paper, you call it a chicken.

In CFMMEU v Personnel Contracting and ZG Operations Australia v Jamse, the court placed a significant amount of weight on the terms of the written contract that the parties had entered into. The court took the approach that if the written agreement was not a sham and not in dispute, then the terms of the agreement could be relied on to determine the relationship. However, this does not mean that simply calling a worker an independent contractor in an agreement classifies them as a contractor. In this case, a labour hire contractor was determined to be an employee despite the contract stating he was an independent contractor.

In this case, Personnel Contracting offered the labourer a role with the labour hire company. The labourer, a backpacker with some but limited experience on construction sites, signed an Administrative Services Agreement (ASA) which described him as a “self-employed contractor.” The labourer was offered work the next day on a construction site run by a client of Personnel Contracting, performing labouring tasks at the direction of a supervisor employed by the client. The labourer worked on the site for several months before leaving the state. Some months later, he returned and started work at another site of the Personnel Contracting’s same client. The question before the court was whether the labourer was an employee.

Overturning a previous decision by the Full Federal Court, the High Court held that despite the contract stating the labourer was an independent contractor, under the terms of the contract, the labourer was required to work as directed by the company and its client. In return, he was entitled to be paid for the work he performed. In effect, the contract with the client was a “contract of service rather than a contract for services”, as such the labourer was an employee.

The second case, ZG Operations Australia v Jamse produced a different result.

In this case, two truck drivers were employed by ZG Operations for nearly 40 years. In the mid-1980’s, the company insisted that it would no longer employ the drivers, and would continue to use their services only if they purchased their trucks and entered into contracts to carry goods for the company. The respondents agreed to the new arrangement and Mr Jamsek and Mr Whitby each set up a partnership with their wife. Each partnership executed a written contract with the company for the provision of delivery services, purchased trucks from the company, paid the maintenance and operational costs of those trucks, invoiced the company for its delivery services, and was paid by the company for those services. The income from the work was declared as partnership income for tax purposes and split between each individual and their wife.

Overturning a previous decision in the Full Federal Court, the High Court held that the drivers were not employees of the company.

Consistent with the decision in the Personnel Contracting case, a majority of the court held that where parties have comprehensively committed the terms of their relationship to a written contract (and this is not challenged on the basis that it is a sham or is otherwise ineffective under general law or statute), the characterisation of the relationship must be determined with reference to the rights and obligations of the parties under that contract.

After 1985 or 1986, the contracting parties were the partnerships and the company. The contracts between the partnerships and the company involved the provision by the partnerships of both the use of the trucks owned by the partnerships and the services of a driver to drive those trucks. This relationship was not an employment relationship. In this case the fact that the workers owned and maintained significant assets that were used in carrying out the work carried a significant amount of weight.

For employers struggling to work out if they have correctly classified their contractors as employees, it will be important to review the agreements to ensure that the “rights and obligations of the parties under that contract” are consistent with an independent contracting arrangement. Merely labelling a worker as an independent contractor is not enough if the rights and obligations under the agreement are not consistent with the label. The High Court stated, “To say that the legal character of a relationship between persons is to be determined by the rights and obligations which are established by the parties’ written contract is distinctly not to say that the “label” which the parties may have chosen to describe their relationship is determinative of, or even relevant to, that characterisation.”

A genuine independent contractor who is providing personal services will typically be:

• Autonomous rather than subservient in their decision-making;
• Financially self-reliant rather than economically dependent upon the business of another; and,
• Chasing profit (that is a return on risk) rather than simply a payment for the time, skill and effort provided.

Every business that employs contractors should have a process in place to ensure the correct classification of employment arrangements and review those arrangements over time. Even when a worker is a genuine independent contractor this doesn’t necessarily mean that the business won’t have at least some employment-like obligations to meet. For example, some contractors are deemed to be employees for superannuation guarantee and payroll tax purposes.

Quote of the month

“The ultimate measure of a man is not where he stands in moments of comfort and convenience, but where he stands at times of challenge and controversy.”

Martin Luther King, Jr.

The material and contents provided in this publication are informative in nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone. If expert assistance is required, professional advice should be obtained. We are here to help, contact us today.

Markets

Local: The ASX200 index improved well over March with a 6.9% rise.

Global: The S&P500 index rose 3.7% in March to improve on a disappointing quarter.

Gold: Spot price for Gold continued to rise, ending the month at $1,933.

Iron Ore: Iron Ore prices rose slightly m/m closing at US$153/Mt

Oil: Brent Oil rose slightly this month, closing at US $107.67 per ton.

Property

Housing: The first quarter of the year has seen Australian dwelling values rise by 2.4%, adding approximately $17,000 to the value of an Australian dwelling. A year ago, values were rising at more than double the current pace, up 5.8% over the three months to March 2021 before the quarterly rate of growth peaked at 7.0% over the three months ending May 2021.

Sydney’s growth rate is showing the most significant slowdown, falling from a peak of 9.3% in the three months to May 2021, to 0.3% in the first quarter of 2022. Melbourne’s housing market has seen the quarterly rate of growth slow from 5.8% in April last year to just 0.1% over the past three months.

CoreLogic’s research director, Tim Lawless, says while the monthly rate of growth was up among some cities and regions, there is mounting evidence that housing growth rates are losing momentum.

Economy

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

Retail Sales: Retail sales in Australia increased by 1.8% m/m. February’s result saw retail sales hit their second highest level on record after November 2021, amid lower COVID-19 cases and further easing of curbs. Sales at cafes and restaurants gained the most (9.7% vs -0.5% in January), as businesses overcame staff shortages and closures from prior months to return to a more normal situation.

Bond Yields: Both the Australian and US government 10-year bonds continued to rise finishing the month at 2.79% and 2.35% respectively.

Exchange Rate: The Aussie dollar maintained value against both the American dollar at $0.748, and the Euro at $0.670.

Employment: The seasonally adjusted unemployment rate fell to 4.0% in February 2022, the lowest unemployment rate since August 2008.

US Employment: The U.S. economy added 431,000 nonfarm payroll jobs in March 2022, as the unemployment rate dropped to 3.6%. “Notable” job gains continued in leisure and hospitality, professional and business services, retail trade, and manufacturing.

Consumer Confidence: The Westpac-Melbourne Institute Index of Consumer Sentiment fell by 4.2% to 96.6 in March from 100.8 in February. This is the weakest point since September 2020, which is also the last time the index was below the 100-level indicating that pessimists outnumber optimists. The survey was conducted in the week of February 28 to March 4. It would have captured most of the response to the south-east Queensland and Northern NSW floods.

Business Conditions: The ABS reports that 39% of all surveyed companies expected the price of their goods and services to increase more than usual. 40% of all businesses also reported an increase in operating expenses over the last month compared to just 24% over the same period 12 months earlier. Almost one in five of employing businesses had staff unavailable due to COVID-19.

Purchasing Managers Index: Manufacturing PMI in Australia increased to 55.70 points in March from 53.20 points in February 2022. It was the highest reading since July 2021. Five of the six manufacturing sectors reported positive trading conditions, with buoyant conditions reported by manufacturers in the machinery & equipment, building materials, and TCF, paper & printing products sectors. Readings above 50 points indicate expansion in activity, with higher results indicating a faster rate of expansion.

Sources: ABS, AFR, BLS, CoreLogic, NAB Group Economics, RBA, UBS, Westpac

Comments

Central Banks and the Interest Rate Knife Edge

The recent war in Ukraine and a further slowdown in the Chinese economy linked to COVID-19 has introduced new complications for many central banks trying to gently tighten monetary policy without causing a recession. Many central banks globally have had a poor record of avoiding a recession when there has been an interest rate rise. The mix of geopolitical events has disrupted the task even further. Since the 1970`s there has been 8 tightening cycles in the US and 5 in the UK, while the European Central Bank has embarked on three since it was formed two decades ago, with the combined 16 cycles, 13 have ended up in a recession. Neil Shearing from Capital Economics stated that “history shows that the path to a soft landing is narrow and the inflation shock from the war in Ukraine has narrowed it further”. The below graph shows this trend.

The aggressive rate hikes that are now being forecast by Fed officials have raised concerns that by focusing on inflation, policymakers could end up tipping the economy into recession.

Commodity prices exported by Russia and Ukraine have surged in the past few weeks, putting increased inflationary pressure on consumers. Europe is particularly vulnerable to the economic conflicts given its regional proximity and high reliance on Russian exports.

The Russian Federation and Ukraine are among the most important producers of agricultural commodities in the world. In the cereal sector, their contribution to global production is especially significant for barley, wheat and maize. Combined, the two countries, on average and respectively, accounted for 19, 14 and 4 percent of global output of these crops between 2016/17 and 2020/21.

The Russian Federation stands out as the top global wheat exporter, shipping a total of 32.9 million tonnes of wheat and meslin, or the equivalent of 18 percent of global shipments. Ukraine stood as the sixth largest wheat exporter in 2021, exporting 20 million tonnes of wheat and meslin and with a 10 percent global market share. Worryingly, the resulting global supply gaps caused by these shortfalls could raise international food prices by 9 to 22 percent above their already inflated price levels.

Energy prices, notably those for natural gas and crude oil, have seen swift and substantial increases, largely caused by the conflict. With crude oil prices exceeding USD 126/bbl on 8 March 2022, an increasing number of feedstocks could again become competitive as inputs into the energy sector add upward pressure on feedstock prices, notably on maize, sugar and various vegetable oils. The added demand will only diminish when feedstock prices have risen far enough to become too expensive. The additional demand will eventually come to a halt when the energy parity price of an agricultural feedstock is reached and the agricultural feedstocks price themselves out of the energy market.

Sources: AFR, Capital Economics, FAO

Australian Population Growth Diminishing

The latest release from the Australian Bureau of Statistics shows some interesting characteristics about Australia’s population trends. After recording its first population decline since World War 1 after the first spout of lockdowns were announced around the country, Australia’s population numbers have returned to growth. However, at a much lower rate than has been seen historically. Most recent population statistics reported by the ABS showed that for Q3 of 2021, Australia’s population grew by a mere 0.05% to a total of 25.75 million. Much of the diminishing growth can be attributed to record low (NOM) Net Overseas Migration, which fell by 20,000 over the same period, during a time when Australia’s international borders were largely still closed.

The recent results put Australia’s current population up by 68,900 ahead of where it was 12 months prior. Growth of just 0.3% with NOM contracting by 67,300 people.

We are also getting a glimpse into the potential impact that easing border restrictions will have on overseas arrivals. Provisional estimates for February 2022 show that although short-term international arrivals have lifted, they are still a fraction of what they were before the pandemic hit. The month saw 272,000 short-term arrivals – only 15% of the level seen in the corresponding month in 2019.

Overall, the lack of flow of people from overseas continues to affect the domestic labour market, showing up as significant skill shortages across many sectors. Given both the lack of overseas arrivals and Australia’s ageing population, the working age population fell by almost 84,000 through 2020-21.

While international migration is doing little to support population growth, internal migration has provided a much-needed boost for some states and territories. In the year to September 2021, Queensland’s population grew by 57,500 (1.1%), where Net Interstate Migration (NIM) contributed almost 41,000 people. This is in stark contrast to New South Wales and Victoria, with both states experiencing large population losses as people moved out. This large flow of migration can be largely correlated to the severe spike in house prices in major Australian cities such as Sydney and Melbourne, causing people to cash up and move interstate.

When compared to what we’ve seen previously, this is an extraordinary result for Queensland, with NIM contributing almost three times what it had across the 10 years prior to the onset of COVID.

The result has primarily come at the expense of Victoria which, up to the beginning of the pandemic in early 2020, was experiencing a strong rate of NIM population growth. The significant decline in the state’s internal migration has been a culmination of larger than usual outflows and smaller inflows, with inflows falling from 87,000 to 66,000 and outflows rising from 68,700 to 84,000 in the 2015-16 and 2020-21 financial years respectively.

Although a negative NIM has been the norm for New South Wales over recent history, it has jumped to a level well beyond what was seen previously. The decrease in NIM is especially problematic as, without the usual large inflows it sees from overseas to offset this, the state’s population growth is now just slightly bigger (up only 0.2% over the year).

Sources: ABS, Deloitte Access Economics

Markets

Local: The ASX200 index fell slightly by -0.9% relatively outperforming the developed markets which did not fare as well.

Global: The S&P 500 fell significantly by -8.7% in April.

Gold: Spot price for Gold fell m/m to $1,911.

Iron Ore: Iron Ore prices dropped by US$11 to US$142/Mt.

Oil: The Brent Oil price climbed US$1 to US$109/bbl.

Property

Housing: Sydney and Melbourne’s market slowdown has seen CoreLogic’s national Home Value Index (HVI) continue to lose steam through April. Housing values are still rising at the national level. However, the 0.6% monthly rate of growth is the lowest reading since October 2020.

Sydney and Melbourne, which have the heaviest weighting in the HVI, were the main drag on the headline growth rates. Sydney housing values recorded the third consecutive month-on-month decline, down 0.2%, while Melbourne values were flat. Technically values are down over three of the past five months in Melbourne. Hobart also recorded a negative monthly change (-0.3%), the city’s first monthly fall in 22 months.

Stretched housing affordability, higher fixed term mortgage rates, a rise in listing numbers across some cities and lower consumer sentiment have been weighing on housing conditions over the past year. As the cash rate rises, variable mortgage rates will also trend higher, reducing borrowing capacity and impacting borrower serviceability assessments.

Economy

Interest Rates: The RBA cash rate rose by 0.25% taking it to 0.35% at the start of May.

Retail Sales: Retail sales in Australia rose by 1.6% month-on-month in March 2022, following a 1.8% gain in the prior month and increasing for the third month in a row, a flash reading showed. March’s result saw retail sales hit their highest level on record of AUD33.63 billion after the previous record peak in November 2021, amid the continued easing of curbs.

Bond Yields: The Australian government 10-year bond continued to rise finishing the month at 3.12%. The US 10-year bond also rose significantly by 54 bps to 2.89% off the back of rising inflation fears and interest rate hikes.

Exchange Rate: The Aussie dollar fell slightly against the American dollar to hit $0.705 and remained steady against the Euro at $0.669.

Inflation: The annual inflation rate in Australia surged to 5.1% in Q1 of 2022 from 3.5% in Q4 of 2021, surpassing market estimates of 4.6% and marking the highest reading since the introduction of the Goods and Services Tax in the early 2000s, reflecting soaring fuel prices and surging building costs.

Consumer Confidence: The Westpac-Melbourne Institute Index of Consumer Sentiment fell by 0.9% to 95.8 in April from 96.6 in March. This modest decline follows the sharp 4.2% fall in March. At that time concerns around interest rates and inflation were starting to weigh on confidence. These were compounded by Russia’s invasion of Ukraine, an associated spike in petrol prices, and severe weather events.

Employment: The unemployment rate remained at 4.0%, employment numbers increased by 18,000 people and unemployment fell by 12,000 people, the unemployment rate decreased slightly, though remained at 4.0% in rounded terms.

US Employment: Total nonfarm payroll employment increased by 428,000 in April, and the unemployment rate was unchanged at 3.6%. Job growth was widespread, led by gains in leisure and hospitality, manufacturing and transportation and warehousing.

Purchasing Managers Index: The Australian Industry Group performance of manufacturing index increased to 58.5 in April 2022 from 55.7 in the previous month, the highest since July 2021.

Sources: ABS, AFR, AWE, BLS, CoreLogic, Trading Economics, RBA, UBS, Westpac

Comments

The Inflation Pandemic

Inflation is the talking point gripping the global economy and is becoming the pre-election elephant in the room. Headline inflation surged to 5.1% in Q1 2022, the highest annual level we have seen in more than 20 years. Economists have correctly tipped an early May pre-election rate rise, from 0.1% to 0.35%, with more rate hikes likely to come throughout the year.

The result came in much higher than its market expectation previously of 4.6%, while underlying inflation the Reserve Bank`s preferred method of measurement as it doesn’t take into account products of high volatility such as oil, lifted to 3.7%, way above their target band of 2-3%. Cost Price Inflation also lifted 2.1% over the quarter, well ahead of expectations. Trimmed mean inflation, which strips away large price movements, rose 1.4% and is now at its highest growth rate since 2009. The figures released by the Australian Bureau of Statistics have exceeded all expectations.

Households are currently feeling the greatest pinch from the current price rises, with non-discretionary inflation, this is inflation that included expenses such as petrol, food, housing and health, which has grown significantly to 6.6% over the year to March 31. These particular price rises can be attributed to increased transport costs, supply chain disruptions and increased input costs.

Currently, the biggest contributors to CPI were new dwellings, which have increased 5.7%, fuel which is up by 11% and tertiary education up by 6.3%. Automotive fuel has reached a record level for the third consecutive quarter with annual price rises at the fastest pace since Iraq`s invasion of Kuwait back in 1990.

Wages growth is another factor that is wanted sustainably between the 2-3% target before an increase in interest rates occurs. The most recent wage data which goes to the end of 2021 was at a 2.3% growth rate. Showing that the gap between wage growth and inflation is becoming ever more distant. Labor treasury spokesman Jim Chalmers stated that “hard-working Australians are being held back by pay that isn’t keeping up with prices, generational debt without a generational dividend and no real plan to fix the cost of living crisis beyond the election”. Wages pressure has been building due to the low 4% unemployment rate and current labour shortages which could be used as strong evidence to justify further rate rises.

With global inflation continuing to surprise and central banks around the world tightening monetary policy, the RBA may fall behind the curve if they do not act soon. A record low cash rate of 0.1% is clearly no longer appropriate for the current economy, this means the RBA must join other central banks around the world and tighten monetary policy sooner rather than later. The RBA could lose all credibility if they decide not to.

Looking overseas has been a good indicator for the Australian economy in recent times. From the COVID-19 pandemic to ways to reduce the impact of global warming this should be another occasion to do the same. With inflation at three-decade highs of 6.9% in New Zealand and 6.7% in Canada, both countries hiked interest rates by 50 basis points, lifting cash rates to 1.5% and 1% respectively. Following a 0.25 basis point rise in both February and March. The US Federal Reserve have also indicated a further 0.5% increase at the start of May.

Financial markets have also lifted expectations for where they believe the cash rate will fall by year’s end from 2% to 2.5%, they then expect rates to increase to 3.4% by September 2023. Equating to 13 rate hikes.

The global pressures we are currently facing, from China`s rigid lockdowns, supply-side struggles and the Ukraine-Russia conflict will all play a significant role in the inflation forecast for the next 12 months. If the global economy can control these areas a smooth landing should be on the cards, if not the dooms of a recession could be knocking on our door.

Sources: ABS, AFR, Deloitte

Australia’s Road to a More Connected Healthcare System

Following the emergence of COVID-19 and a significant upturn in investment in digital health infrastructure, Australia`s health system, like all health systems globally, is rapidly changing to a more digitalised future. The reimagining Healthcare Survey 2022, one of the largest to be initiated since the start of the pandemic, found that around 70% of Australians are willing and ready to use virtual health and over 80% are ready to share their health data in a digitally enabled health system.

In response to the pandemic, the health system was able to support increased access to the health system by rapidly shifting to telehealth, which grew from 1% to more than 25% of all Medicare consultations. The question now is whether the sector will continue to sustain this momentum post COVID-19 rather than reverting back to their pre-pandemic ways. The sector is enthusiastic to maintain this feature across general practices, specialist care and allied health with a payment mechanism to support it.

An increase in digital health enablement policies is the first sign of stamina for telehealth, the inclusion in major policies such as the National Preventative Health Strategy and the draft Primary Health Care 10 year plan are both promising signs for the sector. The acceleration of telehealth was entirely necessary during the recent lockdowns, it must be noted that we should not look at merely replacing existing healthcare practices but rather enhance healthcare as a whole to improve the consumer experience.

This can be achieved by working with consumers to co-design a digitally enabled future healthcare system that empowers Australian people and integrates virtual and traditional systems.

Looking ahead, the health workforce is expected to experience significant shifts in its age profile, resulting in declining workforce participation rates and a real challenge to meet the health needs of an ageing population. Australia’s population is estimated to reach 35.9 million by 2050, with the proportion of people aged over 65 increasing by 6% to a total of 22%. Over this same period, the workforce participation rate is expected to decline from 66% to 64%. This decline, together with expected growth in healthcare demand driven by an ageing population, will have a catalytic effect on both the workers and the health care system as a whole. It is estimated that our health workforce must become four times more productive by 2050 to meet this increase in demand.

It is clear to see that the current system is unsustainable, a Deloitte model of public and private hospital bed requirements from 2016 to 2036, shows that Australia must build a 375 acute bed hospital every month for the next 15 years to keep pace with demand and replacement of ageing stock.

The whitepaper, Australia’s Health Reimagined has identified a 3 horizon shift that will need to happen in order to meet changing health care needs. For the purpose of this article we will not go into depth but will highlight the different areas.

Horizon 1: Connected Consumer – This is where people experience a fragmented, one size fits all type of care. The health system is focused solely on treating illness and little data sharing occurs.

Horizon 2: Empowered Consumer – This is where people are empowered to access care and services that are easier to navigate and access. There is moderate data sharing and workflows ease the administrative workload of health staff.

Horizon 3: Confident Consumer – This is where people take an active role in managing their health and wellbeing and have strong relationships with their healthcare providers. The system has robust data interoperability, digital tools system and a connected ecosystem.

Reaching the optimal outcomes in horizon 3 will only be possible if the existing digital health technologies in horizon 1 are improved and made more efficient, by doing this it will effectively form the building blocks required for new and augmented models of care in horizon 2 and 3. It is vital that the Australian healthcare system takes advantage of our current situation and seizes the opportunity for lasting change.

The Australian community will benefit from this change as there will be greater availability of well-designed and developed digital health solutions, leading to improved patient and clinician choice and experience. There will be increased rates of industry developing and scaling innovative digital health care services. More people will have the opportunity to improve their digital skills and participate in a digitalised economy. Digital health solutions will contribute to building a strong and entrepreneurial economy. Australia will also be acknowledged globally as a leader in digital health solutions that deliver improved health outcomes.

Sources: ADHA, Deloitte

The 120% deduction for skills training and technology costs

It’s a great headline isn’t it? Spend $100 and get a $120 tax deduction. Days after the Federal Budget announcement that businesses will be able to claim a 120% deduction for expenditure on training and technology costs, we started receiving marketing emails encouraging us to spend now to access the deduction.

But, there are a few problems. Firstly, the announcement is just that, it is not yet law. And, given the Government is in caretaker mode for the Federal election, we do not know the position of the incoming Government on this measure. And, even if the incoming Government is supportive, we are yet to see draft legislation or detail to determine the practical application of the measure.

What was announced?

The 2022-23 Federal Budget announced two ‘Investment Boosts’ available to small businesses with an aggregated annual turnover of less than $50 million.

The Skills and Training Boost is intended to apply to expenditure from Budget night, 29 March 2022 until 30 June 2024. The business, however, will not be able to claim the deduction until the 2023 tax return. That is, for expenditure between 29 March 2022 and 30 June 2022, the boost, the additional 20%, will not be claimable until the 2022-23 tax return, assuming the announced start dates are maintained if and when the legislation passes Parliament.

The Technology Investment Boost is intended to apply to expenditure from Budget night, 29 March 2022 until 30 June 2023. As with the Skills and Training Boost, the additional 20% deduction for eligible expenditure incurred by 30 June 2022 will be claimed in the 2023 tax return.

The boost for eligible expenditure incurred on or after 1 July 2022 will be included in the income year in which the expenditure is incurred.

Technology Investment Boost

A 120% tax deduction for expenditure incurred by small businesses on business expenses and depreciating assets that support their digital adoption, such as portable payment devices, cyber security systems, or subscriptions to cloud-based services, capped at $100,000 per annum.

We have received a lot of questions about the specific expenditure the boost might apply to, for example does it cover website development or SEO services? But until we see the legislation, nothing is certain.

Skills and Training Boost

A 120% tax deduction for expenditure incurred by small businesses on external training courses provided to employees. External training courses will need to be provided to employees in Australia or online, and delivered by entities registered in Australia.

Some exclusions will apply, such as for in-house or on-the-job training and expenditure on external training courses for persons other than employees.

We are waiting on further details of this initiative to be released to confirm whether there will need to be a nexus between the training program and the current employment activities of the employees undertaking the course. So once again, until we have something more than the announcement, we cannot confirm how the measure will apply in practice or how broad (or otherwise) the definition of skills training is.

What happens if I have already spent money on training and technology in anticipation of the bolstered deduction?

If the measure becomes law, and the start date of the measure remains the same, we expect that any qualifying expenditure incurred in the 2021-22 financial year will be claimed in your tax return. But, the ‘boost’, the extra 20% will not be claimable until the 2022-23 financial year.

If the measure does not come to fruition, you should be able to claim a deduction under normal rules for the actual business expense.

Fuel tax credit changes

The Government temporarily halved the excise and excise equivalent customs duty rates for petrol, diesel and all other petroleum-based products (except aviation fuels) for 6 months from 30 March 2022 until 28 September 2022. This has caused a reduction in fuel tax credit rates.

During this 6 month period, businesses using fuel in heavy vehicles for travelling on public roads won’t be able to claim fuel tax credits for fuel used for this purpose. This is because the road user charge exceeds the excise duty payable, and this reduces the fuel tax credit rate to nil.

You can find the ATO’s updated fuel tax credit rates that apply for the period from 30 March 2022 to 30 June 2022 here. The ATO’s fuel tax credit calculator has been updated to apply the current rates.

Can I claim a tax deduction for my gym membership?

There are lots of reasons to keep fit but very few of them have to do with how we earn our income. As a result, a tax deduction for a gym membership isn’t available to most people. And yes, the Tax Office has heard all the arguments before about how keeping fit reduces sickness and therefore is important to earning an income, and ‘…the way I look is important to my job’.

In general, a tax deduction for fitness expenses is only available if your job requires you to have an extremely high level of fitness. The nexus between how you earn your income and the deduction is about the physical demands and requirements of your specific role. Firefighters are a case in point. A person with what the ATO describes as a “general duties firefighter” role cannot claim a deduction for the money they have spent keeping fit, but a firefighter in a specialist search and rescue operations team for example, trained in a range of specialist skills including structural collapses and tunnel emergencies, and who is tested on fitness and ongoing strenuous physical activity as an essential part of their job, would be able to claim fitness expenses. Similarly, a professional ballet dancer is likely to be able to claim their fitness expenses. A model however, might not be able to claim their expenses as, while they need to look a particular way, their modelling role does not require physical training and exertion (clearly the ATO has not seen some of the poses that models have to hold!). So, access to a deduction is about the specialist physical demands and requirements of your role.

A recent case before the administrative appeals tribunal (AAT) explored the boundary of who can claim fitness expenses, confirming that a prison dog handler could claim a deduction for the cost of his gym membership. In this case, the dog handler was responsible for training and maintaining two dogs. He was required to be available to assist in emergencies that might arise. While these emergencies didn’t arise often, the handler had to be prepared for the possibility of an emergency arising at any time. Reaching this decision, the AAT noted the handler:

• Was required to maintain a high degree of anaerobic fitness (including muscle strength sufficient to control a large German shepherd on a lead in a volatile situation);
• Was required to maintain a high degree of aerobic fitness (that is, a degree of speed and agility sufficient to enable him to move effectively with, and control and direct, his dog in an emergency); and
• Must also be prepared to restrain prisoners himself.

While the employer in this case did not specify any particular level of fitness for the dog handler role, the AAT held that a superior level of fitness was implicitly demanded. However, it did not all go the way of the dog handler. His claim for supplement expenses, travel to and from the gym, and gym clothing was denied.

While some commentators have suggested that the floodgates are now open for gym membership claims, as always, the devil is in the detail. To claim a tax deduction for fitness expenses it is generally necessary to be part of a specialist workforce. Police Officers for example cannot generally claim fitness expenses despite the fact that, like the dog handler in the AAT case, they need to respond quickly to emergencies and may need to subdue people. Unless they are part of a specialist response unit that is required to have a specific, high level of fitness, they are unlikely to be able to claim their gym membership expenses.

So, for the rest of us, gym memberships will continue to be a labour of self-love and care and not an essential part of how we earn our income.

What’s changing on 1 July 2022?

A series of reforms and changes will commence on 1 July 2022. Here’s what is coming up:

For business

Superannuation guarantee increase to 10.5%

The Superannuation Guarantee (SG) rate will rise from 10% to 10.5% on 1 July 2022 and will continue to increase by 0.5% each year until it reaches 12% on 1 July 2025.

If you have employees, what this will mean depends on your employment agreements. If the employment agreement states the employee is paid on a ‘total remuneration’ basis (base plus SG and any other allowances), then their take home pay might be reduced by 0.5%. That is, a greater percentage of their total remuneration will be directed to their superannuation fund. For employees paid a rate plus superannuation, then their take home pay will remain the same and the 0.5% increase will be added to their SG payments.

$450 super guarantee threshold removed

From 1 July 2022, the $450 threshold test will be removed and all employees aged 18 or over will need to be paid superannuation guarantee regardless of how much they earn. It is important to ensure that your payroll system accommodates this change so you do not inadvertently underpay superannuation.

For employees under the age of 18, super guarantee is only paid if the employee works more than 30 hours per week.

Profits of professional services firms

The ATO has been concerned for some time about how many professional services firms are structured – specifically, professional practices such as lawyers, accountants, architects, medical practices, engineers, architects etc., operating through trusts, companies and partnerships of discretionary trusts and how the profits from these practices are being taxed.

New ATO guidance that comes into effect from 1 July 2022, takes a strong stance on structures designed to divert income in a way that results in principal practitioners receiving relatively small amounts of income personally for their work and reducing their taxable income. Where these structures appear to be in place to divert income to create a tax benefit for the professional, Part IVA may apply. Part IVA is an integrity rule which allows the Tax Commissioner to remove any tax benefit received by a taxpayer where they entered into an arrangement in a contrived manner in order to obtain a tax benefit. Significant penalties can also apply when Part IVA is triggered.

A new method of assessing the level of risk associated with profits generated by a professional services firm and how they flow through to individual practitioners and their related parties, will come into effect from 1 July 2022. Professional firms will need to assess their structures to understand their risk rating, and if necessary, either make changes to reduce their risks level or ensure appropriate documentation is in place to justify their position.

Lowering tax instalments for small business – PAYG

PAYG instalments are regular prepayments made during the year of the tax on business and investment income. The actual amount owing is then reconciled at the end of the income year when the tax return is lodged.

Normally, GST and PAYG instalment amounts are adjusted using a GDP adjustment or uplift. For the 2022-23 income year, the Government has set this uplift factor at 2% instead of the 10% that would have applied. The 2% uplift rate will apply to small to medium enterprises eligible to use the relevant instalment methods for instalments for the 2022-23 income year:

• Up to $10 million annual aggregated turnover for GST instalments, and
• $50 million annual aggregated turnover for PAYG instalments

The effect of the change is that small businesses using this PAYG instalment method will have more cash during the year to utilise. However, the actual amount of tax owing on the tax return will not change, just the amount you need to contribute during the year.

Trust distributions to companies

The ATO recently released a draft tax determination dealing specifically with unpaid distributions owed by trusts to corporate beneficiaries. If the amount owed by the trust is deemed to be a loan then it can potentially fall within the scope of the integrity provisions in Division 7A. If certain steps are not taken, such as placing the unpaid amount under a complying loan agreement, these amounts can be treated as deemed unfranked dividends for tax purposes and taxable at the taxpayer’s marginal tax rate. The ATO guidance deals specifically with, and potentially changes, when an unpaid entitlement to trust income will start being treated as a loan depending on the wording of the resolution to pay a distribution. The new guidance applies to trust entitlements arising on or after 1 July 2022.

For you

Home loan guarantee scheme extended

The Home Guarantee Scheme guarantees part of an eligible buyer’s home loan, enabling people to buy a home with a smaller deposit and without the need for lenders mortgage insurance. An additional 25,000 guarantees will be available for eligible first home owners (35,000 per year), and 2,500 additional single parent family home guarantees (5,000 per year).

Your superannuation

Work-test repeal – enabling those under 75 to contribute to super

Currently, a work test applies to superannuation contributions made by people aged 67 or over. In general, the work test requires that you are gainfully employed for at least 40 hours over a 30 day period in the financial year.

From 1 July 2022, the work-test has been scrapped and individuals aged younger than 75 years will be able to make or receive non-concessional (including under the bring-forward rule) or salary sacrifice superannuation contributions without meeting the work test, subject to existing contribution caps.

The work test will still apply to personal deductible contributions.

This change will also see those aged under 75 be able to access the ‘bring forward rule’ if your total superannuation balance allows. The bring forward rule enables you to contribute up to three years’ worth of non-concessional contributions to your super in one year.

Downsizer contributions from age 60

From 1 July 2022, eligible individuals aged 60 years or older can choose to make a ‘downsizer contribution’ into their superannuation of up to $300,000 per person ($600,000 per couple) from the proceeds of selling their home. Currently, you need to be 65 years or older to utilise downsizer contributions.

Downsizer contributions can be made from the sale of your principal residence that you have owned for the past ten or more years. These contributions are excluded from the age test, work test and your total superannuation balance (but not exempt from your transfer balance cap).

First home saver scheme – using super to save for a first home

The First Home Super Saver Scheme enables first home buyers to withdraw voluntary contributions they have made to superannuation and any associated earnings, to put toward the cost of a first home. At present, the maximum amount of voluntary contributions you can make and withdraw is $30,000. From 1 July 2022, the maximum amount will increase to $50,000. The benefit of this scheme is the concessional tax treatment of superannuation.

ATO ramps up heat on directors

Throughout March, the ATO sent letters to directors who are potentially in breach of their obligations to ensure that the company they represent has met its PAYG withholding, superannuation guarantee charge, or GST obligations.

These letters are a warning shot and should not be ignored.

The director penalty regime ensures that directors are personally liable for certain debts of the company if the debts are not actively managed. The liability applies to both current and former directors.

To recover this debt, the ATO will issue a director penalty notice to the individual directors. The ATO can then take action to recover the unpaid amount, including:

• By issuing garnishee notices,
• By offsetting tax credits owed to the director against the penalty, or
• By initiating legal recovery proceedings against the director.

In some cases it is possible for the penalty to be remitted but this depends on when the PAYGW, GST or SGC amounts are reported to the ATO. For example, in some cases the penalty can be remitted if an administrator or small business restructuring practitioner is appointed to the company, or the company begins to be wound up. However, this is normally only possible for PAYGW and GST amounts if they are reported to the ATO within 3 months of the due date. For SGC amounts this is only possible if the unpaid amount is reported by the due date of the SGC statement.

If the unpaid amounts are not reported to the ATO by the relevant deadline then the only way for the penalty to be remitted is for the debt to be paid in full. Winding up the company at this stage will not make the liability of the directors go away.

If you have received a warning letter from the ATO or a director penalty notice then please contact us immediately.

Tax Time Targets

The ATO has flagged four priority areas this tax season where people are making mistakes.

With tax season almost upon us, the Australian Taxation Office (ATO) has revealed its four areas of focus this tax season:

1. Record-keeping

2. Work-related expenses

3. Rental property income and deductions, and

4. Capital gains from crypto assets, property, and shares.

In general, there are three ‘golden rules’ when claiming tax deductions:

• You must have spent the money and not been reimbursed;
• If the expense is for a mix of work related (income producing) and private use, you can only claim the portion that relates to how you earn your income; and
• You need to have a record to prove it.

1.0 Record Keeping

The primary rule of tax deductions is that you can’t claim it if you can’t prove it. If you are audited, the ATO will disallow deductions for unsubstantiated or unreasonable expenses. Even if the expense is below the substantiation threshold of $300 ($150 for laundry), the ATO might ask how you came up with that number. For example, if you claim $300 in work related expenses (that is, make a claim right up to the substantiation threshold), how did you come up with that number and not something else?

In addition to the obvious records of salary, wages, allowances, government payments or pensions and annuities, you need to keep records of:

• Interest or managed funds.
• Records of expenses for any deductions claimed including a record of how that expense relates to the way you earn your income. That is, the expense must be related to how you earn your income. For example, if you claim the cost of RAT tests, you need to be able to prove that the RAT test was necessary to enable you to work. If you were working from home and not required to leave home, it will be harder to claim the cost of the test.
• Assets such as shares or units in a trust, rental properties or holiday homes, if you purchased a home or inherited a property, or disposed of an asset (including cryptocurrency).

You need to keep your records for five years. These can be digital copies of the records as long as they are clear and legible copies of the original. If your records are digital, keep a backup.

Records can be tax invoices, receipts, diary entries or something else that proves you incurred the expense and how it related to how you earn your income.

2.0 Work-related expenses

To claim a deduction, you need to have incurred the expense yourself and not been reimbursed by your employer or business, and the expense needs to be directly related to your work.

What expenses are related to work?

You can claim a deduction for all losses and outgoings “to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.” That is, there must be a connection between the expenses you are claiming and how you earn your income.

It all sounds simple enough until you start applying this rule. Take the example of an actor. To land the acting job she needs to attend auditions. She wants to claim the cost of having her hair and make-up done for the audition. But, because she is not generating income at the stage of the audition, she cannot claim her expenses. The expense must be related to how you are currently earning your income, not future potential income. The same issue applies to upskilling. If you attend investment seminars with the intention of building your investment portfolio the seminar is not deductible as a self-education expense unless it relates to managing your existing investment portfolio – not a future one. Or, a nurse’s aide who attends university to qualify as a nurse. The university degree and the expenses associated with this are not deductible as the nursing degree is not required to fulfil the role of a nurse’s aide.

The second area of confusion is over what can be claimed for work. If the item is “conventional” it’s unlikely to be deductible. For example, you can’t claim conventional clothing (including footwear) as a work-related expense, even if your employer requires you to wear it and you only wear the items of clothing at work. To be deductible clothing must be protective, occupation specific such as a chef’s chequered pants, a compulsory uniform, or a registered non-compulsory uniform.

Work-related or private?

Another area of confusion is where expenses are incurred for work purposes but used privately. Internet access or mobile phone services are typical. A lot of people take the view that the expense had to be incurred for work so what does it matter if it’s used for private purposes? But, if you use the service on more than an ad-hoc basis for any purpose other than work, then the expense needs to be apportioned and only the work-related percentage claimed as a deduction. And yes, the ATO does check usage in an audit.

Claims for COVID-19 tests will be a test of this rule. COVID-19 tests are deductible from 1 July 2021 if the purpose was to determine whether you may attend or remain at work. The tax deduction does not apply if you worked from home and didn’t intend to attend your workplace, or the test was used for private purposes (for example, to test the kids before school).

Claiming work from home expenses

Last financial year, one in three Australians claimed working from home expenses. Now we’re out of the pandemic, the ATO will be focussing specifically on what is being claimed. If you claimed work from home expenses last year and returned to the office this year, then there should be a reduction in your work from home claim. The ATO will be looking for discrepancies.

If you are claiming your expenses, there are three methods you can use:

• The ATO’s simplified 80 cents per hour short-cut method – you can claim 80 cents for every hour you worked from home from 1 March 2020 to 30 June 2022. You will need to have evidence of hours worked like a timesheet or diary. The rate covers all of your expenses and you cannot claim individual items separately, such as office furniture or a computer.
• Fixed rate 52 cents per hour method – applies if you have set up a home office but are not running a business from home. You can claim 52 cents for every hour and this covers the running expenses of your home. You can claim your phone, internet, or the decline in value of equipment separately.
• Actual expenses method – you can claim the actual expenses you incur (and reduce the claim by any personal use and use by other family members). You will need to ensure you have kept records such as receipts to use this method.

It’s this last method, the actual method, the ATO is scrutinising because people using this method tend to lodge much higher claims in their tax return. Ineligible expenses include:

• Personal expenses such as coffee, tea and toilet paper;
• Expenses related to a child’s education, such as online learning courses or laptops;
• Claiming large expenses up-front (instead of claiming depreciation for assets); and
• Occupancy expenses such as rent, mortgage interest, property insurance, and land taxes and rates, that cannot generally be claimed by employees working from home (especially by those who are working from home solely due to a lockdown).

3.0 Rental property income and deductions

For landlords, the focus is on ensuring that all income received, whether long-term, short-term, rental bonds, back payments, or insurance pay-outs, are recognised in your tax return.

If your rental property is outside of Australia, and you are an Australian resident for tax purposes, you must recognise the rental income you received in your tax return (excluding any tax you have paid overseas), unless you are classified as a temporary resident for tax purposes. You can claim expenses related to the property, although there are some special rules that need to be considered when it comes to interest deductions. For example, if you have borrowed money from an overseas lender you might be subject to withholding tax obligations.

Co-owned properties

For tax purposes, rental income and expenses need to be recognised in line with the legal ownership of the property, except in very limited circumstances where it can be shown that the equitable interest in the property is different from the legal title. The ATO will assume that where the taxpayers are related, the equitable right is the same as the legal title (unless there is evidence to suggest otherwise such as a deed of trust etc).

This means that if you hold a 25% legal interest in a property then you should recognise 25% of the rental income and rental expenses in your tax returns even if you pay most or all of the rental property expenses (the ATO would treat this as a private arrangement between the owners).

The main exception is where the parties have separately borrowed money to acquire their interest in the property, then they would claim their own interest deductions.

4.0 Capital gains from crypto, property or other assets

If you dispose of an asset – property, shares, crypto or NFTs, collectables (costing $500 or more) – you will need to calculate the capital gain or loss and record this in your tax return. Capital gains tax (CGT) does not apply to personal use assets such as a boat if you bought it for less than $10,000.

Crypto and capital gains tax

A question that often comes up is when do I pay tax on cryptocurrency?

If you acquire the cryptocurrency to make a private purchase and you don’t hold onto it, the crypto might qualify as a personal use asset. But in most cases, that is not the case and people acquire crypto as an investment, even if they do sometimes use it to buy things.

Generally, a CGT event occurs when disposing of cryptocurrency. This can include selling cryptocurrency for a fiat currency (e.g. $AUD), exchanging one cryptocurrency for another, gifting it, trading it, or using it to pay for goods or services.

Each cryptocurrency is a separate asset for CGT purposes. When you dispose of one cryptocurrency to acquire another, you are disposing of one CGT asset and acquiring another CGT asset. This triggers a taxing event.

Transferring cryptocurrency from one wallet to another is not a CGT disposal if you maintain ownership of the coin.

Record keeping is extremely important – you need receipts and details of the type of coin, purchase price, date and time of transactions in Australian dollars, records for any exchanges, digital wallet and keys, and what has been paid in commissions or brokerage fees, and records of tax agent, accountant and legal costs. The ATO regularly runs data matching projects, and has access to the data from many crypto platforms and banks.

If you make a loss on cryptocurrency, you can generally only claim the loss as a deduction if you are in the business of trading.

Gifting an asset might still incur tax

Donating or gifting an asset does not avoid capital gains tax. If you receive nothing or less than the market value of the asset, the market value substitution rules might come into play. The market value substitution rule can treat you as having received the market value of the asset you donated or gifted for the purpose of your CGT calculations.

For example, if Mum & Dad buy a block of land then eventually gift the block of land to their daughter, the ATO will look at the value of the land at the point they gifted it. If the market value of the land is higher than the amount that Mum & Dad paid for it, then this would normally trigger a capital gains tax liability. It does not matter that Mum & Dad did not receive any money for the land.

Donations of cryptocurrency might also trigger capital gains tax. If you donate cryptocurrency to a charity, you are likely to be assessed on the market value of the crypto at the point you donated it. You can only claim a tax deduction for the donation if the charity is a deductible gift recipient and the charity is set up to accept cryptocurrency.

What to expect from the new Government

Anthony Albanese has been sworn in as Australia’s 31st Prime Minister and a Government formed. We look at what we know so far about the policies of the new Government in an environment with plenty of problems and no easy fixes.

The Economy

The Government has stated that its economic priority is, “creating jobs, boosting participation, improving and increasing productivity, generating new business investment, and increasing wages and household incomes.”

A second Federal Budget will be released in October this year to set the fiscal policy direction of the Government. The Albanese Government has stated that its focus is on growing the economy as opposed to increasing taxes, but it is a delicate balance to keep growth ahead of inflation. Treasurer Jim Chalmers has said that the Government will look to “redirect spending from unproductive purposes to more productive purposes.”

In a recent speech, Treasury Secretary Dr Steven Kennedy, summed it up when he said that the most significant economic development of late has been the, “…higher-than-expected surge in inflation. Headline inflation reached 5.1% in the March quarter of 2022, the highest rate of inflation in more than 2 decades… Price increases are reflecting a range of shocks, some temporary and some more persistent.” These shocks include:

• Increased global demand for goods straining supply chains, increasing shipping costs, and clogging ports;
• The Russian invasion of Ukraine which sharply increased the price of oil, energy and food. Russia accounts for 18% of global gas and 12% of global oil supply. Together Russia and Ukraine account for around one quarter of global trade in wheat; and
• COVID-19 lockdowns in China impacting supply chains. China maintains a zero-COVID policy.

In Australia, energy prices have contributed strongly to inflation (the temporary reduction in fuel excise ends on 28 September 2022).

Personal income tax

The 2019-20 Budget announced a series of personal income tax reforms. Stage 3 of those reforms is legislated to commence on 1 July 2024. Stage 3 radically simplifies the tax brackets by collapsing the 32.5% and 37% rates into a single 30% rate for those earning between $45,001 and $200,000. Mr Albanese told Sky News, “People are entitled to have that certainty of the tax cuts that have been legislated… We won’t be changing them. What we want going forward is that certainty.”

Where will the money come from?

It is unclear at this stage how the Government intends to tackle the $1.2 trillion deficit. The general commentary from Finance Minister Katy Gallagher is that Treasury and Finance have been tasked with working through the Budget line by line to, “…see where there are areas where we can make sensible savings and return that money back to the Budget.”

Multinationals

Multinationals paying their fair share of tax was a go-to target during the election campaign. The plan for multinationals implements elements of the Organisation for Economic Co-operation and Development (OECD) two-pillar framework to reform international taxation rules and ensure Multinational Enterprises (MNEs) are subject to a minimum 15% tax rate from 2023. Australia and 129 other countries and jurisdictions, representing more than 90% of global GDP, are signatories to the framework.

The Government’s multinational policy supports the OECD framework by:

• Limiting debt-related deductions by multinationals at 30% of profits, consistent with the OECD’s recommended approach, while maintaining the arm’s length test and the worldwide gearing ratio;
• Limiting the ability for multinationals to abuse Australia’s tax treaties when holding intellectual property in tax havens from 1 July 2023. A tax deduction would be denied for payments for the use of intellectual property when they are paid to a jurisdiction where they don’t pay sufficient tax; and
• Introducing transparency measures including reporting requirements on tax information, beneficial ownership, tax haven exposure and in relation to government tenders.

The reforms will follow consultation and are not anticipated to take effect until 2023.

No change to SG rate and rate increase

No change to the legislated superannuation guarantee rate increase. The SG rate will increase to 10.5% on 1 July 2022 and steadily increase by 0.5% each year until it reaches 12% on 1 July 2025.

ATO refocus on debt collection

The ATO has not pursued many business tax debts during the pandemic and allowed tax refunds to flow through even if the business had a tax debt. That position has now changed and the ATO has resumed debt collection and offsetting tax debts against refunds. If you have a tax debt that has been on-hold, expect the ATO to offset any refunds against this debt, and take steps to actively pursue the payment of the debt. Small business account for around two thirds of the total debt owed to the ATO. If you have a tax debt, it is important that you engage with the ATO to work out how this debt will be paid.

Quote of the month

“Nothing in life is to be feared, it is only to be understood.”

Marie Curie, dual Nobel prize winning scientist

It’s Not Easy Being Green

Climate change featured heavily during the election and now the Albanese Government is putting into place some of the promises it made. We look at the current state of play and the likely impact.

The Government’s Climate Change Bill passed the House of Representatives in early August and is now before the Senate Environment and Communications Legislation Committee for review. But what impact does the legislation have on business and consumers in Australia?

Under the Paris Agreement, a legally binding international treaty, Australia and 192 other parties committed to substantially reduce global greenhouse gas emissions to limit the global temperature increase in this century to 2 degrees Celsius while pursuing efforts to limit the increase even further to 1.5 degrees. At this level, the more extreme impacts of climate change – floods, heatwaves, rising sea levels, threats to food production – can be arrested. As part of this commitment, the parties are required to communicate their emissions reduction ambitions through a Nationally Determined Contribution (NDC). On 16 June 2022, Australia communicated its updated NDC to the UN, confirming Australia’s commitment to achieve net zero emissions by 2050, and a new, increased target of 43% below 2005 levels by 2030 (a 15% increase on the previous target). The Climate Change Bill enshrines these emission targets into legislation.

The Bill itself sets an accountability framework for climate targets but does not introduce mechanisms to cut emissions.

Impacted industries

The energy sector is at the heart of climate change producing around three-quarters of global greenhouse gas emissions. In Australia, the CSIRO says energy contributes approximately 33.6% of all emissions, with a further 20.54% from stationary energy (from manufacturing, mining, residential and commercial fuel use), transport 17.6%, and agriculture 14.6%. The future of the energy industry is also at the crux of the Government Powering Australia policy.

Emissions reduction is not just a social obligation but a necessity as investment tilts towards lower emission suppliers. As an example, the 2022-23 Federal Budget committed a $120 billion 10-year infrastructure pipeline. The June 2022 Business Council of Australia Infrastructure in a world moving to net zero report provides a series of recommendations to address the way in which Government invests including the adoption of low carbon materials on public projects and options for reducing emissions during construction, understanding the whole of life emissions impact of infrastructure projects and potentially adopting the UK style PAS2080 standard on carbon management infrastructure, and a shift in procurement to lower carbon supply chains. If these considerations have not made it into business production and supply chain planning, they will soon.

Amongst other initiatives the Government have committed to:

• $20bn investment in Australia’s electricity grid to accelerate the decarbonisation.
• An additional $300m to deliver community batteries and solar banks across Australia.
• Up to $3bn investment in the new National Reconstruction Fund to support renewables manufacturing and low emissions technologies.
• Powering the Regions Fund to support the development of new clean energy industries and the decarbonisation priorities of existing industry.
• Double existing investment in electric vehicle charging and establish hydrogen refuelling infrastructure (to $500m).
• Review the effectiveness of the Emissions Reduction Fund that provides businesses with the opportunity to earn Australian carbon credit units for every tonne of carbon dioxide equivalent a business stores or avoids emitting through adopting new practices and technologies.
• New standardised and internationally-aligned reporting requirements for climate risks and opportunities for large businesses.
• Reduce the emissions of Commonwealth Government agencies to net zero by 2030.

In essence, business can expect directed funding for co-investment in emission reduction technology, Government spending to be through the lens of the renewed emissions targets, and for new funding opportunities to advance low emission technology.

But emissions reduction is not just about industry. Land use change can have a significant impact on emissions through reductions. For example, a reduction in forest clearing in 2020 reduced emissions by 4.9%. One initiative needs to go hand in hand with the other.

In 2021, fossil fuels represented 67.5% (59.1% coal) of the total annual electricity generation and renewables 32.5% (an increase of 5% on the previous year with the spike contributed by small scale solar, and large scale solar and wind farms).

FBT-free Electric Cars

New legislation before Parliament, if enacted, will make zero or low emission vehicles FBT-free. We explore who can access the concession and how.

Electric vehicles (EV) represent just under 2% of the new car market in Australia but it is a rapidly growing sector with a 62.3% jump in new EV registrations between 2020 and 2021.

Making EVs FBT-free is just the first step in the Government’s plan to make zero and low emission vehicles the car of choice for Australians, focussing on affordability and overcoming “range anxiety” by:

• Cutting import tariffs
• Placing EV fast chargers once every 150 kilometres on the nation’s highways
• Creating a national Hydrogen Highways refuelling network, to deliver stations on Australia’s busiest freight routes
• Converting the Commonwealth fleet to 75% no-emissions vehicles

It is on this last point, fleet cars, that the FBT exemption on EVs is targeted. In Australia, business account for around 40% of light vehicle sales according to a research report by Griffith and Monash Universities. However, EV sales to business fleets comprised a mere 0.08% of the market in 2020. The Government can control what it purchases and has committed to converting its fleet to no-emission vehicles, but for the private sector, there is a wide gap between the total cost of ownership of EVs and traditional combustion engine vehicles. It’s more expensive overall and the Government is looking to reduce that impediment through the FBT system.

How the EV FBT exemption will work

The proposed FBT exemption is intended to apply to cars provided by an employer to an employee under the following conditions:

If an electric car qualifies for the FBT exemption, then associated benefits relating to running the car for the period the car fringe benefit is provided, can also be exempt from FBT.

Government modelling states that if an EV valued at about $50,000 is provided by an employer through this arrangement, the FBT exemption would save the employer up to $9,000 a year.

While the measure provides an exemption from FBT, the value of that fringe benefit is still taken into account in determining the reportable fringe benefits amount of the employee. That is, the value of the benefit is reported on the employee’s income statement. While income tax is not paid on this amount, it is used to determine the employee’s adjusted taxable income for a range of areas such as the Medicare levy surcharge, private health insurance rebate, employee share scheme reduction, and social security payments.

Can I salary sacrifice an electric car?

Assuming your employer agrees, and the car meets the criteria, salary packaging is an option. While some FBT concessions are not available if the benefit is provided under a salary sacrifice arrangement, the exemption for electric cars will be available. In order for a salary sacrifice arrangement to be effective for tax purposes, it needs to be agreed, documented, and in place prior to the employee earning the income that they are sacrificing.

Government modelling suggests that for individuals using a salary sacrifice arrangement to pay for a $50,000 electric vehicle, the saving would be up to $4,700 a year.

Who cannot access the FBT exemption

Your business structure makes a difference

By its nature, the FBT exemption only applies where an employer provides a car to an employee. Partners of a partnership and sole traders will not be able to access the benefits of the exemption as they are not employees of the business. When it comes to beneficiaries of a trust and shareholders of a company it will be important to determine whether the benefit will be provided to them in their capacity as an employee or director of the entity.

Exemption is limited to cars

As the FBT exemption only relates to cars, other vehicles like vans are excluded. Cars are defined as motor vehicles (including four-wheel drives) designed to carry a load less than one tonne and fewer than nine passengers.

EV State and Territory tax concessions

The Federal Government is not alone in using concessions to encourage electric vehicle ownership.

ACT

The ACT Government offers a stamp duty exemption on new zero emission vehicles, and up to two years free registration for new or second hand zero emission vehicles (registered between 24 May 2021 and before 30 June 2024).

New South Wales

Reimbursement of stamp duty paid on purchases of new or used full battery electric vehicles (BEVs) and hydrogen fuel cell electric vehicles (FCEVs), with a dutiable value up to and including $78,000.

Northern Territory

For plug-in electric vehicles (battery and hybrid plug-in), from 1 July 2022 until 30 June 2027, access free registration for new and existing vehicles and a stamp duty concession of up to $1,500 on the first $50,000 of the car’s market/sale value – 3% thereafter.

Queensland

Discounted registration duty for hybrid and electric vehicles. And, a limited $3,000 rebate for new eligible zero emission vehicles with a purchase price (dutiable value) of up to $58,000 (including GST) on or after 16 March 2022.

South Australia

A limited $3,000 subsidy and a 3-year registration exemption on eligible new battery electric and hydrogen fuel cell vehicles first registered from 28 October 2021.

Tasmania

From 1 July 2022 until 30 June 2022, no stamp duty applies to light electric or hydrogen fuel-cell motor vehicle (including motorcycles). Vehicles with an internal combustion engine do not qualify.

Victoria

A limited $3,000 subsidy is available for new eligible zero emission vehicles purchased on or after 2 May 2021. More than 20,000 subsidies are available under the program. Plus, stamp duty for ‘green passenger cars’ is set at the one rate regardless of value ($8.40 per $200 or part thereof).

Zero emission vehicles receive a $100 annual registration concession but are also subject to a per kilometre road user charge.

Western Australia

A $3,500 rebate on the purchase of a new zero emission, hydrogen fuel cell or battery light vehicle with a value of up to $70,000 purchased on or after 10 May 2022.

Can I claim my crypto losses?

The ATO has released updated information on claiming cryptocurrency losses and gains in your tax return.

The first point to understand is that gains and losses from crypto are only reported in your tax return when you dispose of it – you sell it, convert it to fiat currency, exchange it for another type of asset, buy something with it, etc. You cannot recognise market fluctuations or claim a loss because the value of your crypto assets changed until the loss is realised or crystallised.

Gains and losses from the disposal of cryptocurrency should be reported in your tax return in the year that the disposal occurred.

If you made a capital gain on crypto that was held as an investment and you held the crypto for more than 12 months then you may be able to access the 50% Capital Gains Tax (CGT) discount and halve the tax you pay.

If you made a loss on the cryptocurrency (capital loss) when you disposed of it, you can generally offset the loss against capital gains you might have (unless the crypto is a personal use asset). But, you can only offset capital losses against capital gains. You cannot offset these losses against other forms of income like salary and wages, unfortunately. If you don’t have any capital gains to offset, you can hold the losses and carry them forward for another future year when you can use them.

If you earned income from crypto such as airdrops or staking rewards, then these also need to be reported in your tax return.

And remember, keep records of your crypto transactions. The ATO has sophisticated data matching programs in place and cryptocurrency reporting is a major area of focus.

How high will interest rates go?

The RBA lifted the cash rate to 1.85% in early August 2022. The increase comes a few weeks after Reserve Bank Governor Philip Lowe told the Australian Strategic Business Forum that “…we’re going through a process now of steadily increasing interest rates, and there’s more of that to come. We’ve got to move away from these very low levels of interest rates we had during the emergency.” He went on to say that we should expect interest rates of 2.5% – how quickly we get there really depends on inflation.

The RBA Governor has come under increasing pressure over comments made in October 2021 suggesting that interest rates would not rise until 2024. At the time however, Australia was coming out of the Delta outbreak, wage and pricing pressure was subdued, and inflation was low. That all changed and changed dramatically. Inflation is now forecast to reach 7.75% over 2022 before trending down. We’re not expected to reach the RBA’s target inflation rate range of 2% to 3% until the 2023-24 financial year.

In the UK, the situation is worse with the Bank of England predicting that inflation will reach around 13% over the next few months. The UK has been heavily impacted by the war in Ukraine with the price of gas doubling, compounding pressure from post pandemic supply chain issues and price increases.

With interest rates rising, what can we expect? Deputy RBA Governor Michele Bullock recently said that Australia’s household credit-to-income ratio is a relatively high 150%, increasing in an environment that enabled households to service higher levels of debt. But it is not all doom and gloom. “Strong growth in housing prices over 2021 and early 2022 has boosted asset values for many homeowners, with housing assets now comprising around half of household assets,” she said. The recent downturn in house prices has only marginally eroded the large increases over recent years. Plus, households have saved around $260m since the pandemic creating a buffer for rising interest rates. This, however, is a macro view of the economy at large and individual households and businesses will face different pressures depending on their individual circumstances.

For businesses, the rate increase has a twofold effect. It is not just the rate rise and the higher cost of funds in their borrowings. That by itself is significant but at this stage, if anything, it is the lesser issue. The more significant impact comes from negative consumer sentiment and the flow through effect on sales and cash flow.

• In general, your debts should not exceed around 35-40% of your assets. There will be some exceptions to this with new business start-ups and first home buyers.
• Review the cost of cash in your business, reviewing rates, and the configuration and mix of loans to ensure you are not paying more than you need to.
• If possible, avoid having private debt as well as business and investment debts. You can’t get tax relief on your private debt.
• Keep an eye on debtors and don’t become your customer’s bank.

Quote of the month

“Never doubt that a small group of thoughtful, committed citizens can change the world; indeed, it’s the only thing that ever has.”

Margaret Mead, anthropologist

The material and contents provided in this publication are informative in nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone. If expert assistance is required, professional advice should be obtained.

Markets

Local: The ASX200 index lifted 1.2% in August, driven by a resilient reporting season where results impressed in a tough environment.

Global: The S&P 500 lost ground in August dropping -4.1%.

Gold: Gold prices continue to trend lower, moving down US$38 to US$1,716, amid US dollar strength and higher real rates.

Iron Ore: Iron Ore prices dropped US$19 to US$99/Mt as COVID impacts linger and supply lifts.

Oil: Brent Oil prices also declined US$14 to US$96/bbl after a de-escalation in Iraq, stabilized oil exports.

Property

Housing: CoreLogic’s national Home Value Index (HVI) recorded a fourth consecutive month of decline in August, with the downturn accelerating and becoming more geographically broad-based. Down -1.6% over the month, the national index recorded the largest month-on-month decline since 1983.

Every capital city apart from Darwin is now in a housing downturn, with a similar scenario playing out across the rest-of-state regions, where only regional South Australia recorded an increase in housing values for the month.

Sydney continued to the lead the downswing, with values falling -2.3% over the month, however weaker conditions in Brisbane accelerated sharply through August, with values falling -1.8%.

Rental rates increased a further 0.8% in August across CoreLogic’s national rental index, easing after the monthly trend peaked in May when rents rose by 1.0%.

Economy

Interest Rates: The RBA Cash rate has now had 5 consecutive rate rises. A 0.5% rise at the start of September has pushed the cash rate to 2.35%. With more rate rises likely before year end.

Retail Sales: Retail sales in Australia rose by 1.3 percent MoM to a fresh record level of AUD 34.67 billion in July 2022, unrevised from the preliminary figure and picking up from a 0.2% gain in the prior month. The latest result marked the strongest pace in retail trade since March, despite cost-of-living pressures.

Bond Yields: The Australian government 10-year bond jumped by 54 bps to 3.60% from the previous month. The US 10-year bond also jumped by 49 bps to 3.13%, as investors are pricing in a more hawkish outlook.

Exchange Rate: The Aussie dollar lost some value against the American dollar at $0.690 and gained value against the Euro at $0.687 for August.

Inflation: Inflation in Australia is currently sitting at 6.1% (June 2022 quarter), the quarterly increase of 1.8% was the second highest since the introduction of the Goods and Services Tax (GST), following the 2.1% increase last quarter (March 2022).

Consumer Confidence: The Westpac Melbourne Institute of Consumer Sentiment fell by 3% from 83.8 in July to 81.2 in August. This reading is on a par with the lows of the Covid and Global Financial Crisis although still well above the lows during the late 80’s / early 90’s recession. Since the recent peak in November 2021 the Index has fallen every month for a cumulative decrease of 22.9%.

Employment: Australia’s unemployment rate unexpectedly hit a new record low of 3.4% in July 2022, compared with June’s print and market forecasts of 3.5%. The number of unemployed fell by 20,000 to 473,900, with the number of people looking for a full-time job falling by 26,000 to 316,700.

US Employment: Total nonfarm payroll employment increased by 315,000 in August, and the unemployment rate rose to 3.7%. Notable job gains occurred in professional and business services, health care, and retail trade.

Agriculture: The gross value of agriculture production is forecast to fall 4% to $81.8 billion, and the value of exports is forecast to be a record $70.3 billion in 2022–23. Global inflation pressures for consumer goods and farm inputs are clouding outlook for demand and farm incomes.

Purchasing Managers Index: The Australian Industry Group Australian Performance of Manufacturing Index (Australian PMI®) dropped 3.2 points to 49.3 points in August 2022, indicating a slight contraction. This is the first time the index has contracted since January 2022 following the Omicron outbreak. Results below 50 points indicate contraction, with lower results indicating a faster rate of contraction.

Sources: ABS, AFR, AWE, BLS, CoreLogic, Macquarie MWM Research, RBA, TradingEconomics, UBS, Westpac

Comments

Can Migration Fix Our Skill Shortage

According to Deloitte Access Economics’ latest issue of Employment Forecasts, Australia’s labour market has been the standout indicator of success since COVID first hit. The unemployment rate is at 3.4%, a near 50 year low, while the labour force participation rate remains near a record high of 66.4%.

The impact of pandemic-era international border closures, combined with an incredibly tight labour market, has seen the number of vacant jobs reach new highs – to the point where there are now fewer unemployed people than job vacancies.

Going forward, growth in the Australian economy is expected to slow amid the impact of inflation running ahead of wages, continued rising interest rates, and weaker global economic conditions. Despite future headwinds, there are still opportunities for white collar workers in Australia, and it may still be some time before the number of unfilled job vacancies returns to more normal levels.

Expectations are that total national white collar employment gains may moderate from a record breaking 352,200 in 2021-22, to a still strong 205,200 in 2022-23. National white collar employment is expected to grow on average by 1.6% per year between June 2022 and June 2032 – outpacing total national employment which is forecast to grow on average by 1.4% per year.

Register your .au domain!

23:59 UTC on 20 September 2022 is the cut-off to register for your .au direct domain. The .au domain is the new, general purpose, shorter Australian domain name option.

If you do not register the direct match of your existing domain for the direct .au domain, you risk your brand equity being consumed by someone else, rivals redirecting your clients to their products and services, squatters holding the domain, or cybercriminals impersonating your business. The opening of the new .au domain is the single biggest shift in Australian cyber real estate in decades and the risks for business are high.

If you are registering:

• an exact match of your existing domain name, for example .com.au or net.au; and
• you held your domain name prior to 24 March 2022

then you have priority access but only up until 23:59 UTC on 20 September 2022 (9:59am AEST on 21 September). Once this deadline has passed, the .au direct domain name will be available to anyone with a connection to Australia to register from 21:00 UTC 3 October 2022 (8:00am AEDT 4 Oct).

While you can register for the .au domain through any number of providers, the most efficient method is to utilise your existing provider. To do this, you will need your domain’s access information. If these details cannot be found, for example, the details were held by a former staff member, it can take some time to recover them so do not leave the registration process until the last minute.

Once you have applied for your matching .au domain, if your application is uncontested, you will be able to use the .au direct name soon after applying for priority status.

What happens if .com.au and .net.au both apply for the .au name?

If you share a domain name with another entity, for example, one entity owns .com.au and the other .net.au, the right to register the .au domain will cascade according to priority. Category 1 are those that secured the domain on or before 4 February 2018. Category 1 applicants have priority over Category 2 applicants who registered their domain after 4 February 2018. If the name is contested by a Category 1 and a Category 2 applicant, the Category 1 applicant will secure the name. If two Category 2 applicants apply for the name, the name is allocated to the applicant with the earlier domain license creation date. But, it gets tricky when two Category 1 applicants apply for the name. In these circumstances, both parties must agree on the allocation or the name remains unallocated.

How to sell your business

We’re often asked the best way to sell a business.

There are two key components at play in the sale of a business: structuring the transaction; and positioning the business to the market. Both elements are important and can significantly impact your result.

Structuring the transaction covers areas such as pricing the business, the terms and conditions attaching to the sale, key terms in the contract, and ensuring the transaction structure is as tax effective as possible. Much of the structuring is about ensuring the vendors secure the most efficient and effective outcome from the sale. It is about maximising the vendor’s position.

Positioning the business for sale is all about ensuring that you achieve a sale and maximise your price. It covers areas such as ensuring there are no hurdles within the business that will limit its saleability, identifying the competitive position of the business within its market segment, ensuring that operating performance is as good as it can be, and that the business benchmarks well in its market. Positioning also includes identifying the best time to take the business to the market, how to take it to the market, and who the most likely buyers will be.

Positioning is about doing everything needed to maximise the probability of a sale occurring, whereas structuring is about getting the best outcome from a transaction once it has occurred. A lot of people make the mistake of spending most of their energy on the structuring of the transaction. It is important but only becomes important if the sale is achieved.

Structuring should be addressed first to help identify any key decisions that need to be made but put most of your effort into positioning the business for sale. To do this, you need an objective assessment of how the business compares in its market, its competitive position, and what if any impediments to sale exist – all the things a buyer will look at and look for when they assess your business. Most buyers believe that we are currently in a buyer’s market and will try to drive down price expectations. Whether or not you are in a buyer’s market depends on your industry segment but regardless of this, you are in a competitive market. Buyers may be comparing your business to similar businesses but also opportunities in other industry segments. Securing a sale at the best possible price is about having your business positioned for sale. Preparation time is needed to achieve this well in advance of putting your business on the market.

Thinking of selling your business? Talk to us today about preparing your business for sale.

120% deduction for skills training and technology costs

The Government has reinvigorated the 120% skills training and technology costs deduction for small and medium business.

An election ago, the 2022-23 Budget proposed a 120% tax deduction for expenditure by small and medium businesses on technology, or skills and training for their staff. This proposal has now been adopted by the current Government and details released in recent exposure draft by Treasury.

Timing

Two investment ‘boosts’ will be available to small and medium businesses with an aggregated annual turnover of less than $50 million:

• Skills & Training Boost
• Technology Investment Boost

The Skills and Training Boost is intended to apply to expenditure from 7.30pm ACT time on Budget night, 29 March 2022 until 30 June 2024. The business, however, will not be able to start claiming the bonus deduction until the 2023 tax return. That is, for expenditure incurred between 29 March 2022 and 30 June 2022, the additional 20% ‘boost’ deduction will not be claimable until the 2022-23 tax return (assuming the announced start dates are maintained if and when the legislation passes Parliament).

The Technology Investment Boost is intended to apply to expenditure from 7.30pm ACT time on Budget night, 29 March 2022 until 30 June 2023. As with the Skills and Training Boost, the additional 20% deduction for eligible expenditure incurred by 30 June 2022 will be claimed in the 2023 tax return.

The boost for eligible expenditure incurred on or after 1 July 2022 will be included in the income year in which the expenditure is incurred.

When it comes to expenditure on depreciating assets, the bonus deduction is equal to 20% of the cost of the asset that is used for a taxable purpose. This means that, regardless of the method of deduction that the entity takes (i.e., whether immediate or over time), the bonus deduction in respect of a depreciating asset is calculated based on the asset’s cost.

Technology Investment Boost

The Technology Investment Boost is a 120% tax deduction for expenditure incurred on business expenses and depreciating assets that support digital adoption, such as portable payment devices, cyber security systems, or subscriptions to cloud-based services.

The boost is capped at $100,000 per income year with a maximum deduction of $20,000.

To be eligible for the bonus deduction:

• The expenditure must be eligible for deduction (salary and wage costs are excluded for the purpose of these rules)
• The expenditure must have been incurred between 7.30pm (AEST), 29 March 2022 and 30 June 2023
• If the expenditure is on a depreciating asset, the asset must be first used or installed ready for use by 30 June 2023.

To be eligible, the expenditure must be wholly or substantially for the entity’s digital operations or digitising its operations. For example:

• digital enabling items – computer and telecommunications hardware and equipment, software, systems and services that form and facilitate the use of computer networks;
• digital media and marketing – audio and visual content that can be created, accessed, stored or viewed on digital devices; and
• e-commerce – supporting digitally ordered or platform enabled online

Repair and maintenance costs can be claimed as long as the expenses meet the eligibility criteria.

Where the expenditure has mixed use (i.e., partly private), the bonus deduction applies to the proportion of the expenditure that is for an assessable income producing purpose.

The bonus deduction is not intended to cover general operating costs relating to employing staff, raising capital, the construction of the business premises, and the cost of goods and services the business sells. The boost will not apply to:

• Assets that are sold while the boost is available
• Capital works costs (for example, improvements to a building used as business premises)
• Financing costs such as interest expenses
• Salary or wage costs
• Training or education costs
• Trading stock or the cost of trading stock

For example:

A Co Pty Ltd (A Co) is a small business entity. On 15 July 2022, A Co purchased multiple laptops to allow its employees to work from home. The total cost was $100,000 (GST-exclusive). The laptops were delivered on 19 July 2022 and immediately issued to staff entirely for business use. As the holder of the assets, A Co is entitled to claim a deduction for the depreciation of a capital expense.

A Co can claim the full purchase price of the laptops ($100,000) as a deduction under temporary full expensing in its 2022-23 income tax return. It can also claim the maximum $20,000 bonus deduction in its 2022-23 income tax return.

The $20,000 bonus deduction is not paid to the business in cash but is used to offset against A Co’s assessable income. If the company is in a loss position, then the bonus deduction would increase the tax loss. The cash value to the business of the bonus deduction will depend on whether it generates a taxable profit or loss during the relevant year and the rate of tax that applies.

Skills and Training Boost

The Skills and Training boost is a 120% tax deduction for expenditure incurred on external training courses provided to employees.

External training courses will need to be provided to employees in Australia or online, and delivered by training organisations registered in Australia.

To be eligible for the bonus deduction:

• The expenditure must be for training employees, either in-person in Australia, or online
• The expenditure must be charged, directly or indirectly, by a registered training provider and be for training within the scope (if any) of the provider’s registration
• The registered training provider must not be the small business or an associate of the small business
• The expenditure must be deductible
• Enrolment for the training must be on or after 7.30pm, 29 March 2022.

The training must be necessarily incurred in carrying on a business for the purpose of gaining or producing income. That is, there needs to be a nexus between the training provided and how the business produces its income.

Only the amount charged by the training organisation is deductible. In some circumstances, this might include incidental costs such as manuals and books, but only if charged by the training organisation.

Some exclusions will apply, such as for in-house or on-the-job training and expenditure on external training courses for persons other than employees. The training boost is not available to:

• Sole traders, partners in a partnership, or independent contractors (who are not employees)
• Associates of the business such as a relative, spouse or partner of an entity or person, a trustee of a trust that benefits an entity or person and a company that is sufficiently influenced by an entity or person.

For example:

Cockablue Pets Pty Ltd is a small business entity that operates a veterinary centre. The business recently took on a new employee to assist with jobs across the centre. The employee has some prior experience in animal studies and is keen to upskill to become a veterinary nurse. The business pays $3,500 (GST exclusive) for the

employee to undertake external training in veterinary nursing. The training is delivered by a registered training provider, whose scope of registration includes veterinary nursing.

The bonus deduction is calculated as 20% of 100% of the amount of expenditure that can be deducted under another provision of the taxation law. In this case, the full $3,500 is deductible under section 8-1 of the ITAA 1997 as a business operating expense. Assuming the other eligibility criteria for the bonus deduction are satisfied, the bonus deduction is calculated as 20% of $3,500. That is, $700.

In this example, the bonus deduction available is $700. That does not mean the business receives $700 back from the ATO in cash, it means that the business is able to reduce its taxable income by $700. If the company has a positive amount of taxable income for the year and is subject to a 25% tax rate, then the net impact is a reduction in the company’s tax liability of $175. This also means that the company will generate fewer franking credits, which could mean more top-up tax needs to be paid when the company pays out its profits as dividends to the shareholders.

Tax reprieve for double taxation of Indian technical support

The tax system currently allows Australia to tax payments made by an Australian customer in relation to technical services provided by an Indian firm, even when the services are provided remotely. This is due to the wording contained in the double tax agreement between Australia and India.

Under an agreement reached in connection with the Australia‑India Economic Cooperation and Trade Agreement (AI-ECTA), these payments will no longer be taxed in Australia. The typical categories of services intended to be covered by the amendments include:

• engineering services;
• architectural services; and
• computer software development.

The amendment to the tax rules is in consultation phase and not yet law. If enacted, it will apply once the amendments receive Royal Assent, assuming the AI-ECTA has been entered into force.

Acquiring collectibles inside your SMSF

Clients with self managed superannuation funds (SMSF) often ask what assets the SMSF can acquire.

‘Why’?

The golden rule for acquiring assets inside your SMSF is why? To be compliant, your fund must be maintained for the sole purpose of providing retirement benefits to members, or to their dependants if a member dies before retirement. The sole purpose test (section 62 of the Superannuation Industry (Supervision) Act 1993), is your starting point. If the collectible you are looking to acquire does not fulfil this purpose, then you have an immediate problem.

Let’s assume you are looking to acquire vintage cars. The question to ask is, is the acquisition a viable investment or simply a desire of the members to own vintage cars. Does the investment ‘stack up’ relative to other forms of investment to build/protect the retirement savings of members?

The sole purpose test extends to how the collectible is managed once acquired. Given the asset is for the sole purpose of the member’s retirement benefits, the members (or their associates) cannot use or enjoy the asset in any way. This means:

• Storage of the collectible cannot be at the trustee’s residence or displayed at their office. The ATO says, “You can store (but not display) collectables and personal use assets in premises owned by a related party provided it is not their private residence. They can’t be displayed because this means they are being used by the related party. For example, if your SMSF invests in artwork it can’t be hung in the business premises of a related party where it is visible to clients and employees.”
• Leasing or use of the collectible can only be undertaken with an unrelated party.
• The collectible must have its own insurance policy owned by the SMSF (multiple items can be listed on the same policy i.e., wines of different brands). The insurance policy must be in place within 7 days of acquisition.
• Like all other assets, if a collectible is sold to a related party, then it must be sold at market value. Collectibles also require a qualified independent valuation if sold to a related party.

This means you cannot stay in a holiday home owned by your SMSF, you cannot drive a vehicle owned by the SMSF, and you cannot enjoy artwork held by the SMSF. And, those bottles of Penfolds Grange owned by the SMSF that broke (wink, wink) are likely to trigger an audit as they should have been properly stored in a way that prevents breakage.

Your investment strategy

An SMSF investment strategy should articulate the plan trustees have for a fund and the investments they choose to hold. It should drill down into the reasons why certain assets will be acquired (or sold) and how these choices align to the retirement goals of the members. If your SMSF is considering purchasing collectibles, it is essential that your investment strategy is aligned to these types of investments and articulates why the asset fits within the strategy. This is particularly important if the collectible/s will dominate the types of assets held by the fund, its liquidity, and diversity.

A common question is, can my SMSF purchase, let’s say artwork, from a member or a related party of the fund? The answer is no. SMSFs are not allowed to purchase assets, other than listed shares and business real property, from related parties. But, the SMSF could transfer the artwork to a member as an in-specie lump sum payment if the member meets a condition of release, or sell the asset to the member but only if the transaction is at arms length, and an independent valuation confirms the market value of the asset.

Quote of the month

“Even if you’re on the right track, you’ll get run over if you just sit there.”

Will Rogers, actor

The material and contents provided in this publication are informative in nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone. If expert assistance is required, professional advice should be obtained.

Markets

Local: The ASX200 index fell -6.2% over September, as investors priced in the most aggressive rate hiking cycle since the 1990’s from the RBA.

Global: The S&P 500 also lost ground, dropping -9.2%.

Gold: Spot price for Gold continued to trend lower, moving down US $44 to US $1,672 amid US dollar strength and higher real rates.

Iron Ore: Iron Ore price dropped US $1 to US$98/Mt.

Oil: Brent Oil price also declined US $9 to reach US $88/bbl amid a deteriorating demand outlook.

Property

Housing: CoreLogic reported a further fall in housing values through the first month of spring, with the national Home Value Index (HVI) recording a -1.4% decline in September. Although values continue to trend lower, the rate of decline eased from a -1.6% fall in August.

The loss of momentum in the pace of value decline was evident across most of the capital cities and broad rest-of-state regions, with a few exceptions. Housing value falls accelerated in Adelaide and Perth this month, however both cities continue to record only a mild reduction in values relative to the other capitals (down -0.2% and -0.4% respectively in September). Sydney’s monthly rate of decline eased from -2.3% in August to -1.8% in September, Melbourne tapered from -1.2% to -1.1% and Brisbane falls went from -1.8% to -1.7%. Darwin remains the only capital city where housing values haven’t started to trend lower, although dwelling values remain -10.1% below the 2014 peak.

Economy

Interest Rates: The RBA Cash rate has now had 6 consecutive rate rises. A slightly more conservative rise of 0.25% at the start of October has pushed the cash rate to 2.6%. With more rate rises likely before year end.

Retail Sales: Retail sales in Australia rose by 0.6% MoM to a fresh record level of AUD 34.88 billion in August 2022.

Bond Yields: Australian government 10-year bond rose again by 29 bps to 3.89% from the previous month. The US 10-year bond also rose significantly by 67 bps to 3.80% as Bond markets also reflected a hawkish outlook.

Exchange Rate: The Aussie dollar fell again over September against both the American dollar, at $0.650, and the Euro at $0.662.

Inflation: The Australian inflation rate in August reached an annual rate of 6.8%, down from 7% reported in July.

Consumer Confidence: The Westpac Melbourne Institute Index of Consumer Sentiment rose by 3.9% from 81.2 in August to 84.4 in September. Consumers may be a little less fearful, but confidence remains very weak. As noted previously, we have only seen sentiment at these low levels in the past during recessions or major economic disturbances such as the COVID pandemic or the GFC. The September rise might be heralded as the likely start of a sustained revival. As welcome as that would be, it seems premature given ongoing challenges, especially around inflation, and prospects of further interest rate rises.

Employment: The seasonally adjusted unemployment rate rose to 3.5% in August 2022. With employment increasing by 33,000 people and unemployment by 14,000, the unemployment rate rose 0.1 percentage points to 3.5% in August, returning to the same rate as June.

US Employment: Total nonfarm payroll employment increased by 263,000 in September, and the unemployment rate edged down to 3.5 percent. Notable job gains occurred in leisure, hospitality, and health care.

Agriculture: The gross value of agricultural production is forecast to be $81.8 billion in 2022–23, down 4% from the record $85.3 billion of 2021–22. Another near-record Australian crop harvest is forecast with good soil moisture stores and a wetter than average outlook for spring. Global supply of cereals continues to be tight, so high prices are forecast to persist.

Purchasing Managers Index: The Australian Industry Group Australian Performance of Manufacturing Index (Australian PMI®) rose 0.9 points to 50.2 points in September 2022, indicating stable conditions. This is the second month of broadly stable conditions, following positive results since February 2022. Results above 50 points indicate expansion, with higher results indicating a faster rate of expansion.

Sources: ABS, AFR, AWE, BLS, CoreLogic, Macquarie MWM Research, RBA, TradingEconomics, UBS

Comment

The Housing Market Downturn

Based on current predictions, the cash rate in Australia is expected to peak up to 3.35%, with inflation possibly pushing as high as 7-8% by year end with the potential for it not to fall until 2024.

With the cash rate expected to reach these worrying levels, Aussies could see their mortgage payments get significantly more expensive. Analysis conducted by Canstar gives a brief overview of how much your home loan could increase by, relative to the size of the mortgage.

To cut or not to cut? Stage three personal tax cuts

In September, amid a climate of startling interest rates, UK Chancellor Kwasi Kwarteng announced a series of tax cuts, including the reduction of the top personal income tax rate that applies to those earning more than £150,000 from 45% to 40%. Just ten days later, following market turmoil that saw the British Pound drop at one point to a low of $1.035 USD, its lowest level since 1985, the decision was reversed calling the cuts “a massive distraction.”

Heading into the 2022-23 Federal Budget on 25 October, the question for the Australian Government is different. It is not whether to introduce personal income tax cuts but whether to keep, amend or repeal the cuts legislated to commence on 1 July 2024.

In Australia, the 2018-19 Budget introduced the Personal Income Tax Plan. The plan implemented three stages of income tax cuts over seven years that will, by 2024-25, simplify the tax brackets and enable taxpayers to earn up to $200,000 before paying a new top marginal tax rate of 45%. Stages of the plan, bringing relief for low and middle income earners, were brought forward in the 2019-20 Budget and again in 2020-21.

Labor’s pre-election Lower Taxes policy states, “An Albanese Labor Government will deliver tax relief for more than 9 million Australians through the legislated tax cuts that benefit everyone with incomes above $45,000.” But this month, the Treasurer has subtly changed the narrative from simply “our policy has not changed on stage three tax cuts” to “We do need to ensure that spending in the Budget, particularly in these uncertain global times, is geared toward what’s affordable and sustainable and responsible and sufficiently targeted. I think that’s one of the lessons from the UK.”

The public appeal of repealing the final stage three tax cuts is understandable. Back in 2018-19 when the plan was first introduced, the economy was in surplus and Australia was yet to feel the effects of a global pandemic, environmental extremities, and the Russian invasion of Ukraine. The tax cuts forego around $240bn of tax revenue over the next 10 years, and because it is percentage based, favours high income earners. The public policy think tank, the Grattan Institute, previously warned that if the government progressed with the stage three cuts “Australia’s income tax system will be less progressive than it’s been since the 1950s”.

Conversely, the rationale for reforming the current personal income tax regime where the highest marginal tax rate applies from around 2.5 times average full-time earnings (compared to around 4 times in Canada and 8 times in the US), is also understandable. When it comes to international competitiveness, New Zealand’s top marginal tax rate is 33% (from $180,000) and Singapore’s is 22%, increasing to 24% in 2023-24. If implemented, stage 3 of the income tax plan would see around 95% of taxpayers paying a marginal tax rate of 30% or less.

The 1 July 2024 tax cuts

Stage three of the Personal Income Tax Plan is legislated to take effect from 1 July 2024.

What the tax stats say

Personal income and withholding tax represents around 48% of the annual Commonwealth tax collections. Company tax, by comparison, is around 16%, and the goods and services tax (GST) just under 15% of total tax revenue collected.

Australia has a progressive personal tax system. That is, those with higher incomes pay not only a higher amount of tax, but a higher proportion of their income in tax. As a result, the 3.6% of taxpayers with taxable incomes of over $180,000 pay 31.6% of the total.

Where to from here?

The second 2022-23 Federal Budget will be announced on 25 October 2022. If the Government make no mention of the stage three tax cuts, they have another opportunity to refine their position in the 2023-24 Federal Budget released in May 2023, more than a year before the 1 July 2024 tax cuts come into effect.

Our best guess? The Government will announce a review of the stage three tax cuts, then open the issue to consultation, locking in the position, whatever it is, in the 2023-24 Federal Budget.

We’ll keep you posted!

Look out for our 2022-23 Federal Budget update on 26 October!

States move on property based taxes

Queensland backs down on Australia wide land tax assessment

The Queensland Government has backed away from an amendment that would have seen the land tax rate for investment property in Queensland assessed on the value of the investor’s Australia wide land holdings from 1 July 2023, not just the value of their Queensland property.

The amendment passed the Queensland Parliament and became law on 30 June 2022. The amendment would see the value of all of the landholder’s Australian investment property assessed, the value of Queensland land tax calculated on taxable Australian wide investments, then apportioned to the Queensland portion of the land. The amendment requires the landholder to declare their interstate landholdings and data from other sources to verify the landholdings. The end result is many investors being tipped into a higher land tax rate.

The Bill states, “The land tax reform is intended to make Queensland’s land tax system fairer by addressing an inequity which can result in a landholder with all of their landholdings in Queensland paying more land tax than a landholder with a similar value of landholdings spread across jurisdictions.”

Following the National Cabinet Meeting on 30 September, Premier Palaszczuk rescinded the reform as it relied on the “goodwill of other states, and if we can’t get that additional information, I will put that aside.”

Stamp duty or an annual property tax for NSW first home buyers?

First home buyers purchasing property in NSW of up to $1.5m will have a choice of paying stamp duty or an annual property tax from 16 January 2023.

The annual property tax payments will be based on the land value of the purchased property. The property tax rates for 2022-23 are:

• $400 plus 0.3% of land value for properties whose owners live in them
• $1,500 plus 1.1% of land value for investment properties.

Property tax assessments will be issued annually to home buyers who take the annual property tax option. As an example, a first buyer purchasing a $1.2m NSW property with a land tax value of $720,000, could pay stamp duty of $50,875 or opt to pay the annual property tax ($2,560 for 2022-23). The property tax rates will be indexed annually.

Eligible first home buyers who sign a contract of purchase on or after 16 January 2023 will be eligible to opt into the property tax. If the property tax option is selected, first home buyers must move into the property within 12 months of purchase and live in it continuously for at least 6 months.

The annual property tax is only applicable to the purchaser. If the property is sold, the property tax does not apply to subsequent purchasers. For eligibility details, see First Home Buyer Choice on the NSW Government website.

Legislation enabling the property tax is expected before the NSW Parliament this month. If passed, eligible first home buyers who sign a contract of purchase between the passage of the legislation and 15 January 2023 will be eligible to opt into the property tax. These purchasers will pay land stamp duty but will be able to apply for and receive a refund of that duty if they opt into property tax.

COVID downgraded but not gone

National Cabinet agreed to end the mandatory isolation requirements for COVID-19 effective from 14 October 2022. Each state and territory has, or will, implement the end of the isolation rules.

The Pandemic Leave Disaster Payment, the payment to workers who have lost income they needed to self isolate or care for someone with COVID-19, also end on 14 October. The Pandemic Leave Disaster Payment was extended beyond its 30 June end date but restricting the number of times claims can be made in a 6 month period.

While the Pandemic Leave Disaster Payment will end, National Cabinet agreed to continue targeted financial support for casual workers, on the same basis as the disaster payment, for workers in aged care, disability care, aboriginal healthcare and hospital care sectors. Final details of this new payment are yet to be released.

ATO contacts ‘at risk’ professional services firms

New guidelines for professional services firms – lawyers, architects, medical practitioners etc., came into effect on 1 July 2022. The guidance takes a strong stance on structures designed to divert income in a way that results in principal practitioners receiving relatively small amounts of income personally for their work and reducing their taxable income. The ATO is now contacting professionals who they believe might be at risk. Any structural changes that need to be made to reduce risk, should be completed by the end of the 2022-23 financial year. Where the ATO deems that income has been diverted inappropriately to create a tax benefit, they will remove that benefit and significant penalties may apply.

1 October minimum wage increase

Minimum wages in 10 awards in the aviation, tourism and hospitality sectors increased from 1 October 2022. The increase happens from the first full pay period on or after 1 October 2022. See the Fair Work Ombudsman for more details.

Director ID number deadline looming

If you are a Director of a company or registered foreign company and have not applied for your Director ID Number, the deadline is 30 November 2022. Don’t leave it until the last minute!

Australian super funds gorge on cryptocurrency

The value of cryptocurrency assets inside Australian self managed superannuation funds (SMSFs) increased by 589.9% ($1.17bn) between June 2019 and June 2022, according to the latest ATO statistics.

While cryptocurrency is a relatively small asset class at only 0.16% of the $837bn held in SMSFs, it is a growing asset class, larger than collectibles and personal use assets, and overseas property.

Smaller funds, with an asset value below $200,000, are more likely to have a larger proportion of their value in cryptocurrency.

ASIC warns of SMSF cryptocurrency scams

Earlier this year, the Australian Securities and Investments Commission (ASIC) issued a warning on an increase in marketing encouraging Australians to switch from retail superannuation funds to SMSFs so they can invest in ‘high return’ portfolios. The regulator states that crypto-assets are a high risk and speculative investment and best practice is to seek advice from a licensed financial adviser before agreeing to transfer superannuation out of a regulated fund into an SMSF.

An example of one of these schemes was A One Multi Services Pty Ltd that was shut down by ASIC late last year. The company promoted a scheme encouraging investors to roll their superannuation into an SMSF, then for the SMSF to loan money to A One Multi to generate “returns of between 10% and 20% on the investment and perhaps as high as 26%.” Over 60 SMSFs transferred $25 million into A One Multi’s accounts between January 2019 and June 2021. The money “invested” for the clients, between $7 million to $22 million of Bitcoin, was held in the name of one of the directors. An additional $5.7m was used by the directors to acquire property and luxury cars.

Investing in crypto

Trustees are free to invest in assets that meet the requirements of the fund and comply with the regulatory requirements:

• Trust Deed – must allow for cryptocurrency assets. Most SMSF trust deeds are drafted broadly to enable trustees to invest in assets permitted by the superannuation laws and leave the investment strategy to manage the choice of assets and their appropriateness. However, it is important to check.
• Investment strategy – With cryptocurrency’s high volatility and risks, there must be clearly articulated information in the Investment Strategy. That is, it must articulate the trustees’ plan for making, holding and realising assets in a in a way that is consistent with the retirement goals of members being mindful of the member’s individual circumstances.
• Separation of assets – cryptocurrency assets must be held in a wallet in the name of the SMSF and the IP address is provided to the SMSF auditors to verify the transactions (against the fund bank account). Problems often arise when a wallet (in the name of the SMSF) is connected to a personal credit card to acquire cryptocurrency. In these cases, the payment may be considered as either a contribution or a loan to the SMSF.
• Sole purpose test – Your SMSF needs to meet the sole purpose test to be eligible for the tax concessions normally available to super funds. This means your fund needs to be maintained for the sole purpose of providing retirement benefits to your members, or to their dependants if a member dies before retirement.

Lessons from a data breach

The Optus data breach is top of mind for a lot of Australians, particularly those who have had their data breached.

For business, the breach is a timely warning on the importance of understanding what data is held on your customers (and should you hold it?), how it is secured, how your systems work and the process to identify gaps and deficiencies, the appropriate actions if and when a breach occurs, and the impact on your relationship to your customer. This is not something that can be outsourced to IT but a whole of business issue.

The obligations on business

We all know that no system is 100% secure. For Optus, this is not the first time. In 2015, Optus agreed to an enforceable undertaking for breaching the Privacy Act in 2015.

A data breach happens when personal information is accessed or disclosed without authorisation or is lost. If the Privacy Act 1988 covers your business, you must notify affected individuals and the Office of the Australian Information Commissioner when a data breach involving personal information is likely to result in serious harm. The notification must be as soon as practicable but is expected to be no later than 30 days. Every day counts.

A business must take all reasonable steps to comply with its obligations to prevent data breaches occurring. These obligations are not limited to preventing cyber attacks. Malicious or criminal attacks represent 55% of all reported data breaches. But, human error is responsible for 41% and 4% through system faults. Where human error was involved, 43% was where personal information was emailed to the wrong recipient and 21% the unintended release or publication of personal information.

How to apologise

Your relationship with your client is about trust. Beyond the breach notification requirements, the other issue is the client relationship.

So, how should a business apologise? University of Chicago economist John List, Professor Benjamin Ho from Vassar College along with other academics studied this issue for Uber ride sharing – the experiment came about after John List, who was at the time Uber’s Chief Economist, had a bad ride sharing experience. The bottom line? The apology must come at a cost to be effective. That cost can be reputational, a commitment to do better in the future (the cost is the higher standard), or a monetary cost. The paper states: First, apologies are not a panacea – the efficacy of an apology and whether it may backfire depend on how the apology is made. Second, across treatments, money speaks louder than words – the best form of apology is to include a coupon for a future trip. Third, in some cases sending an apology is worse than sending nothing at all, particularly for repeated apologies and apologies that promise to do better.

Helping to protect against data breaches

• Understand your Privacy Act obligations. Specific industries and businesses that hold specific types of data often have advanced requirements.
• Review the personal information held on customers. Is their full date of birth a necessary part of what your business does? If you need to verify identify, do those identification documents really need to be stored once they have been validated? Or is positive confirmation enough? Is the data held securely and is access limited to only those who require access?
• Ensuring systems have multifactor authentication
• Improving staff awareness of not only cyber threats and how to prevent them – phishing, fraudulent messages etc, but reviewing how personal data is managed and accessed.
• Understanding your systems and how they work together to prevent security gaps or ‘backdoor’ systems access.

The material and contents provided in this publication are informative in nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone. If expert assistance is required, professional advice should be obtained.

The Treasury Laws Amendment Bill which implements the majority of changes proposed in the 2021-2022 Federal Budget has now passed both houses of Parliament. The following changes will apply from 1 July 2022.

Contribution Eligibility Age 67 – 74

Currently a member aged 67 – 74 must satisfy a work test (of 40 hours over 30 consecutive days) to make voluntary superannuation contributions.

From 1 July 2022 persons aged 67 – 74 will be able to make non-concessional contributions without the need to satisfy the work test.

Note persons wishing to claim a tax deduction for a personal superannuation contribution between age 67 – 74 will still need to satisfy the work test.

Increasing Access to the Bring Forward Rule

From 1 July 2022 persons aged 67 – 74 will also be able to utilise the bring forward rule for non-concessional contributions.

This change brings opportunities for members to contribute additional personal funds into superannuation of up to $330,000 per person or $660,000 per couple up to age 74.

It also provides the opportunity to implement re-contribution strategies, where by you change the taxation component within your superannuation fund in order to minimise any potential tax paid by beneficiaries.

Lowering the Downsizer Contribution Age

From 1 July 2022 the minimum age to make a downsizer contribution will reduce from age 65 to age 60.

The downsizer contribution allows each member of a couple to contribute up to $300,000 each into superannuation following the sale of their main residence. Note eligibility criteria applies.

Removing the $450 monthly Income Threshold for Superannuation Guarantee (SG) Purposes

Currently where an employee earns less than $450 in a calendar month, their employer is not required to pay superannuation guarantee (SG) on those earnings.

For SG quarters commencing 1 July 2022, this minimum SG threshold will be abolished and an employer will be required to pay SG on earnings less than $450 in a calendar month.

Increasing Maximum Release Amount Under First Home Save (FHSS) Scheme

Where a request for a FHSS Scheme determination is made to the commission on or after 1 July 2022, a member will be able to release up to $50,000 of eligible contributions (plus a deemed earnings rate) under the FHSS Scheme to purchase their first home. Currently the maximum release amount is $30,000 plus deemed earnings.

Note there is no change to the annual voluntary contribution limit which will remain at $15,000. This means that a member will need to make eligible contributions over at least 4 years to take maximum advantage of the scheme.

Please note that the above information has been provided as general information only.

There are limits on the amounts that you can contribute into superannuation as well as various rules and thresholds. Your personal circumstances should be reviewed before implementing any of the above.

Please contact Level One Financial Advisers should you wish for us to provide you with personal advice in relation to any of the above strategies.

Level One Financial Advisers Pty Ltd AFSL 280061.

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 $27,500.

Remember that the $27,500 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 into the superannuation environment, and reduced their income tax payable by $1,950 ($16,567 – $14,617).

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 1 July 2018.

This could be a good strategy if you made a capital gain this financial year and have unused contributions from 2019/2020 or 2020/2021.

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 $41,112 for the 2021/2022 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 2022. 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 $41,112 but below the upper threshold of $56,112 for the 2021/2022 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 $110,000 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 2021) must also be less than $1,700,000.

If you are under age 67 (or were as of 1^st July 2021), then you can access the “bring-forward rule” which allows you to make up to three-years’ worth of contributions or $330,000 in one go. A couple could potentially contribute $660,000 into super. Ability to access this is further limited by your total super balance (under $1.48m full amount; $1.48m to $1.59m $220,000; $1.59m to $1.7m $110,000).

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

Markets

Local: The ASX200 index rose 5.6% over November, as investors responded to a more dovish than expected RBA 25 bps hike in the cash rate to 2.85%.

Global: The S&P 500 gained 6.6% in November after a disappointing start to the quarter.

Gold: Spot price for Gold rose strongly by US $114 to US $1,754, as speculation the Federal Reserve is closer to the end of the hiking cycle supported investor interest, driving prices higher.

Iron Ore: Iron Ore prices gained US $21 to US $102/Mt on the news of government support for the Chinese property market and reopening expectations from the easing in the zero COVID policy.

Oil: Brent Oil prices fell US $9 to US $85/bbl amid speculation a production cut at the next OPEC meeting is unlikely.

Property

Housing: CoreLogic’s national Home Value Index (HVI) moved through a seventh month of decline in November, down -1.0% over the month to be -7.0%, or approximately -$53,400, below the peak value recorded in April 2022.

The decline comes after national housing values surged 28.6% higher through the recent upswing, adding roughly $170,700 to the value of the average dwelling.

Although values are continuing to trend lower, the rate of decline has been consistently moderating since the national index dropped by -1.6% in August.

CoreLogic’s research director, Tim Lawless, said the easing in the rate of decline is mostly emanating from the Sydney and Melbourne markets, but is also evident across many of the smaller capitals and most regional markets.

“Three months ago, Sydney housing values were falling at the monthly rate of -2.3%. That has now reduced by a full percentage point to a decline of -1.3% in November. In July, Melbourne home values were down -1.5% over the month, with the monthly decline almost halving last month to -0.8%.”

Economy

Interest Rates: The RBA Cash rate has now had 8 consecutive rate rises. A rise of 0.25% at the start of December has pushed the cash rate to 3.1%.

Retail Sales: Australian retail turnover fell 0.2 per cent in October 2022. This is the first monthly fall of the year in Retail Trade, following a 0.6 per cent rise in both August and September 2022. The October fall in retail turnover ends a run of nine straight monthly rises and suggests increased cost of living pressures including interest rate rises are starting to weigh more heavily on consumer spending.

Bond Yields: The Australian government 10-year bond moved down this month by 23 bps to 3.53%. U.S yields also lost ground off the back of Norman Powell`s comments signaling the Fed could be less hawkish than previously predicted, as U.S 10-year bonds fell by 38 bps to 3.70%.

Exchange Rate: The Aussie dollar rose over November against the American dollar, to finish the month at $0.670 and fell against the Euro at $0.647.

Inflation: The October monthly CPI indicator rose just 0.2% on the previous month, slowing to 6.9% over the year. A fall from 7.3% previously.

Consumer Confidence: The Westpac Melbourne Institute Consumer Sentiment Index fell by 6.9%, from 83.7 in October to 78.0 in November. Sentiment continues to plumb historic lows. This print of 78.0 is now below the low point of the GFC (79.0) and only slightly higher than when the COVID pandemic first hit in April 2020 (75.6). Prior to that, we need to go back to the deep recession in the early 1990s to find a weaker read. The latest sentiment decline follows ABS figures showing inflation surged from 6.1% in June to 7.3% in September, with official forecasts for inflation to go even higher by the end of 2022 and to remain relatively high through 2023.

Employment: The seasonally adjusted unemployment rate fell 0.1 percentage point to 3.4% in October 2022, seasonally adjusted employment increased by 32,000 people (0.2%) in October 2022. Given the size of this increase, the employment to population ratio increased 0.1 percentage point to 64.3%.

US Employment: Total nonfarm payroll employment increased by 263,000 in November, and the unemployment rate was unchanged at 3.7%. Notable job gains occurred in leisure and hospitality, health care, and government. Employment declined in retail trade, transportation, and warehousing.

GDP: GDP is expected to slow to under 1.0% over the next 1-2 years. This includes some very soft quarterly growth in the back end of 2023 and is well below trend growth of around 2.25-2.5%.

Purchasing Managers Index: The Australian Industry Group Australian Performance of Manufacturing Index (Australian PMI®) fell 4.9 points to 44.7 in November, indicating deteriorating conditions (readings below 50 points indicate contraction in activity, with lower results indicating a faster rate of contraction). This is the first month of contraction following three months of flat conditions.

Sources: ABS, AFR, AWE, BLS, CoreLogic, Macquarie MWM Research, RBA, TradingEconomics, UBS

Comments

Australian Economic Outlook

Falling retail values could put a welcome dint in the consumer boom

Retail sale values in October were weaker than originally expected, falling 0.2% from the previous month. This is the first negative reading since COVID-impacted 2021. It must be noted that non-seasonally adjusted data still lifted 3.6% on the previous month but increases are diminishing. The average monthly increase has slowed to 0.3% from 0.7% previously. Meanwhile the yearly change dropped to 12.5% from 17.9%. However, this level is still up a significant 26% since Feb-2020.

Inflation: Food remaining resilient, but non-food categories are starting to lag behind

By industry, food remained resilient with a 0.4% improvement on the month before and a 5.2% increase over the past 12 months. However, every other category retracted, with non-food down -0.6% on the previous month but in contrast remains up 17.7% on the year.

RBA`s Phil Lowe warns if wages compensate for inflation, “it will be painful”

The RBA`s Governor Phillip Lowe recently outlined his view of a wage-price spiral. “The issue that many central banks have been worried about including the RBA, is high inflation. This may lead the workforce to say, ‘well inflation is 7%, I should be compensated for that in my wages`. It is hard for people to understand that wages don’t rise with inflation. The alternative though will be more difficult for your everyday person. If we all bought into the idea that wages must go up with inflation, we could be in trouble. So best to avoid that situation”.

Government to push industrial relation changes to “get wages moving”

In Q3-22, the average wage increase for the private sector was already at a healthy 4.3%, the largest on record in the wage price index data. Meanwhile, the RBA`s November meeting minutes noted “an upside risk to inflation outlook over the medium term was the possibility that price, and wage-setting behaviour would shift, resulting in domestic inflationary pressures becoming more persistent.” Importantly, the Government announced that they will pass industrial relation changes to “get wages moving.” With the RBA signalling a desire to pause, we continue to expect an additional 25bps hike, to a peak of 3.35%, We will still see a 25bps increase in December, but will now be looking at another 25bps increase in Feb 2023. UBS has a very dovish outlook on global inflation views. Collapsing to 2% next year for G7 countries; and the US Fed slashing interest rates to 1.25% by Q1-2024. Conditionally on this view, we still expect the RBA to ease in 2023. However, the peak could last for longer, around 9 months, 3 month longer than the previous estimate. This pushes out the first rate decrease to Q4-2023. Overall, there is upside risk to forecasts for wages, inflation and unemployment. As well as downside risks to real GDP and house prices. These are constantly under review with the volatile environment.

Sources: Australian Financial Review, UBS

Partners Group mulls mid-2023 exit for Guardian Childcare

Many of our clients currently hold investments in the Partners Group Global Value Fund. The article below from the Australian Financial Review, demonstrates the type of investments held in the fund.

Private markets investor Partners Group has put its Australian childcare business Guardian Childcare and Education in next year’s M&A pipeline, with expectations brewing of a potential $1 billion exit.

It is understood Partners Group has started readying Guardian Childcare for sale and has hit the market for advisers to be involved in the potential sale.

Sources said Partners Group had gone to a small handful of investment banks in recent weeks, asking them to pitch potential deal structures, buyers and valuations in an effort to win the sell-side mandate.

Bankers are expected to pitch Guardian Childcare as a COVID-reopening play, with occupancy rebounding to more than 80 per cent this year and likely to go further as more parents get their kids back into early education.

The business was said to be making $80 million to $100 million EBITDA a year. Sector heavyweight G8 Education, which has been listed since 2007, was trading at 7-times forecast EBITDA and 17-times historical earnings on Tuesday.

Partners Group’s Cyrus Driver, a managing director based in Singapore, is on Guardian Childcare’s board and is overseeing the process, sources said. The firm’s expected to appoint an adviser early in the new year and, if business conditions and funding markets are suitable, it could be up for auction by the middle of the year.

Partners Group bought what was then called Guardian Early Learning in 2016, paying $440 million to pan-Asian buyout firm Navis Capital. The company was formerly owned by Australia’s Wolseley Private Equity.

Guardian Childcare is understood to have grown to more than 100 centres nationally under Partners Group’s ownership, with most of its sites in major capital cities Brisbane, Sydney, Canberra, Melbourne and Adelaide.

Inbound Interest

The company’s expected to attract interest from rival private equity firms, as well as strategic players. Ontario Teachers’ Pension Plan-backed Busy Bees has been the big buyer in Australian and New Zealand childcare in the past two years, while it’s been a rich hunting group for private equity (PE) in the past.

Sources said Partners Group had already seen inbound interest in the business, likely from PE firms realising the owner will be thinking about an exit after a six-year hold period.

As for the investment bank bake off, it’s expected to be hotly contested. It’s the time of year when managing directors inside the investment banks have to put together 2023 pipelines, and a $1 billion-odd Guardian Childcare mandate would be a good way to start the new year.

Source: Australian Financial Review

Markets

Local: The S&P/ASX 200 Index struggled in June. Rate hikes, recession fears, and rising inflation led to the benchmark index losing 8.9% of its value to finish at 6,568.1 points.

Global: The S&P 500 was down 8.39% in June, bringing its YTD return to -20.58%.

Gold: Spot price for Gold fell again in June to end the month at $1,806.

Iron Ore: Iron Ore prices fell sharply in June to US$122.5/Mt.

Oil: Brent Oil price fell significantly in June to reach US$109.03/bbl.

Property

Housing: CoreLogic’s national Home Value Index (HVI) recorded a second consecutive month of value declines in June, down -0.6%, to be -0.2% lower over the June quarter. Continued falls in Sydney dwelling values (-1.6% month and -2.8% quarter) and Melbourne (-1.1% month and -1.8% quarter) were the primary drivers of this month’s steeper drop, but housing values were also down in Hobart (-0.2% month and -0.1% quarter) as well as regional Victoria (-0.1% month and +1.2% quarter).

CoreLogic Research Director, Tim Lawless, noted that housing value growth has been easing since moving through a peak in March last year, when early drivers of the slowdown included rising fixed term mortgage rates, an expiry of fiscal support, a trend towards lower consumer sentiment, affordability challenges and tighter credit conditions.

More recently, surging inflation and a rapidly rising cash rate have added further momentum to the downwards trend. Since the initial cash rate hike on May 5, most housing markets around the country have seen a sharper reduction in the rate of growth.

Economy

Interest Rates: The RBA Cash rate has recently seen 2 rate rises. A 0.5% rise in June coinciding with a 0.5% rise in early July. The cash rate is now sitting at 1.35%. The highest the cash rate has been since Q1 2019.

Retail Sales: Retail sales in Australia rose by 0.9% month-over-month to another record level of AUD 34.23 billion in May 2022, this was also the fifth straight month of growth, as the economy recovered further from COVID-19 disruptions. Department stores had the largest rise (5.1% vs -2.5% in April), followed by cafes, restaurants, and takeaway food services (1.8% vs 3.3%).

Bond Yields: Australian government 10-year bond continued to rise in June to finish the month at 3.57%. The US 10-year bond also rose slightly to 2.97%.

Exchange Rate: In June the Aussie dollar fell slightly against the American dollar, at $0.689, and remained stable against the Euro at $0.664.

Inflation: The annual inflation rate is currently sitting at 5.1% based on the March 2022 quarter. With headline inflation expected to peak around the 6% y/y mark by Q3 2022.

Consumer Confidence: The Westpac-Melbourne Institute Index of Consumer Sentiment fell by 4.5% to 86.4 in June from 90.4 in May. Over the 46-year history of the survey, we have only seen Index reads at or below this level during major economic dislocations. The record lows have been during COVID-19 (75.6); the Global Financial Crisis (79.0); early 1990s recession (64.6); the mid-1980s slowdown (78.7) and the early 1980s recession (75.5). Those last three episodes were associated with high inflation; rising interest rates; and a contracting economy – a mix that may be threatening to repeat.

Employment: The seasonally adjusted unemployment rate remained at 3.9 per cent in May 2022. Seasonally adjusted employment increased by 61,000 people (0.5 per cent) in May 2022.

US Employment: Total nonfarm payroll employment rose by 372,000 in June, and the unemployment rate remained at 3.6 percent. Notable job gains occurred in professional and business services, leisure and hospitality, and health care.

Purchasing Managers Index: The Australian Industry Group Australian Performance of Manufacturing Index (Australian PMI®) rose by 1.6 points to 54.0 points in June 2022 (seasonally adjusted), indicating mild growth. The indicator has been in expansion since February 2022. Results above 50 points indicate expansion, with higher results indicating a faster rate of expansion.

Sources: ABS, AFR, AWE, BLS, CoreLogic, RBA, TradingEconomics, UBS, Westpac

Comments

Year in Review

Economic Backdrop

An initially strong first half…

The global economy started FY22 exceptionally strong, although momentum subsequently slowed as resurgent Covid variants and ensuing lockdowns weighed on the recovery. Nevertheless, the underlying story of the first half of the financial year was one of continued economic growth, albeit at a more normalised pace.

Was overshadowed by a surge in inflation…

However, surging consumer demand combined with pandemic-induced supply side bottlenecks triggered a global supply chain crisis late in 2021. Concurrently, soaring energy prices, particularly in Europe and China, caused an energy crunch. This resulted in the biggest surge in inflation in decades.

Which central banks then scrambled to tame…

The surge in inflation was initially expected to be ‘transitory’. However, this proved to be mistaken, with inflation proving to be higher and stickier than previously believed. This saw central banks fall ‘behind the curve’ and they were forced to raise rates more sharply and earlier than initially anticipated in an attempt to bring inflation under control in the second half of the financial year.

Slowing the economy…

Sharply rising interest rates, as well as the impact of high inflation, began to slow the economy markedly in the last six months of the financial year. US Q1 22 real GDP contracted for the first time since the pandemic. Consumer confidence plunged as high inflation eroded real incomes. A further hit to the global economy came from the Russian invasion of Ukraine in February, which sparked another sharp rise in energy-related commodity prices and consumer energy bills.

& raising the risk of recession.

Markets became increasingly concerned that central banks would raise rates so sharply to fight inflation that the economy would fall into a ‘hard landing’ or recession. Underscoring this was repeated statements by US Federal Reserve Chair Jay Powell that the Fed would do whatever it takes to tame inflation. The bond market appeared to be increasingly pricing in this risk, with the yield curve inverting (an event that has historically preceded recessions) in April.

China’s economy takes a hit from COVID

The Chinese economy was a laggard as it dealt with the impact of stringent lockdowns stemming from the government’s “zero COVID” policy, which resulted in shutdowns of major manufacturing centres. The Chinese authorities responded with various stimulus measures to boost the economy.

Australian economy strong but cracks appear…

The Australian economy performed well over FY22 and maintained momentum towards the end of the financial year. However, the economy was beginning to face a myriad of capacity constraints and inflation began surging albeit less so than overseas. Cracks began to appear in the previously red-hot housing market as rising mortgage rates, worsening affordability and deteriorating consumer sentiment took a toll. Dwelling prices rose 8.4% over FY22 according to CoreLogic although prices had already begun to fall from their peaks, led by Sydney and Melbourne.

As the RBA pivots from dovish to hawkish

The RBA abruptly pivoted from saying in October that rates would not go up until 2024 to then raising rates by 25 basis points in May (its first rate hike since 2010), a 50 basis point rise in June followed by a further 50 basis point rise in July.

Market backdrop

A ‘tale of two halves’ for equities

Global equities initially rallied for the first six months of the financial year and hit record highs around calendar year end. However, the last six months of the financial year saw equities hit by valuation compression due to sharply rising bond yields followed by concerns that central bank tightening might cause a recession. The S&P500 index at one point fell 24% from its early January all-time high, putting it firmly in ‘bear market’ territory. Consequently, global equities posted their worst 1H (1st January to 30th June) return since 1970.

Most equity markets post negative returns…

Over FY22 global equities posted a total return of -15.4% in US$ (-7.6% in AU$). Most major markets posted double-digit losses with the UK FTSE 100 (due to its exposure to oil stocks) and Japan TOPIX (due to a falling Yen boosting exporters) notable exceptions. However, given the strength of the US$, in common currency terms the S&P 500 was the strongest performing major market (-2.4% total return in AU$). Chinese equities were a major underperformer as the Chinese economy was impacted by COVID lockdowns.

As valuations come under pressure from rising rates.

The overwhelming driver of equity market weakness was falling valuations, which were in turn weighed down by rising bond yields. The S&P 500 and ASX 200 indices saw their forward P/E multiples fall 26% and 29% respectively over FY22 while earnings rose over the same period. Consequently, US equities are currently trading near their 20-year average P/E while Australian equities are currently trading slightly below.

Source: MWM Research

Vanguard Market Outlook

Market Returns are anything but average

With the recent release of the 2021 census, we have learned that the average Australian is “a female aged 30-39 years, living in a coupled family with children, in a greater capital city area, with an average weekly family income of $3,000 or more”. Average market returns can be seen as deceptive. This is because it is highly unlikely that any one year will deliver an average market return, which presents a challenge when we are trying to steer investors as to how markets might behave in the future.

S&P ASX 300 Total Return index performance (% p.a.) Calendar years 1990-2021

Past performance is not a reliable indicator of future results. Source: Morningstar, Vanguard calculations. Notes: S&P/ASX 300 Total Return, 1 January 1990 to 31 December 2021.

As you can see from the above graph, markets often don’t achieve anything approaching the average return of 10.6%. In fact, it was more than +/-10 percentage points away from this long-term average 60% of the time. Furthermore, it only came within +/-5 percentage points 37% of the time. If anything, what the chart underlines is just how volatile the markets can be – that is, just how much shares tend to bounce around their long-term averages from one year to the next. Returns of 17.5% for the year ended December 2021, and even with a 20% decline at the commencement of the Covid pandemic, an 8.8% annualised return was achieved for the five years ending December 2020.

Markets do not move in straight lines

In general, simply extrapolating future results from past performance is not a good idea. It is why we favour a more strategic approach to investing with low-cost funds and an asset allocation that represents peoples individual goals. With different regions around the world offering different opportunities, it is also important that investors follow a globally diversified approach to exploit these opportunities and offset the potential for some investments not to perform as expected. All asset classes will jump around in the short-term but over the long-term shares tend to return more than bonds and bonds more than cash.

Sources: Morningstar, Vanguard

Markets

Local: The ASX200 had a strong July posting a 9.2% gain following a disappointing June result.

Global: The S&P 500 also responded positively gaining 5.7% over the month.

Gold: Spot price for gold saw large falls as prices fell by US $60 to reach US $1,753.

Iron Ore: Iron Ore prices dropped by US $5 to hit US $118/Mt as Brazilian shipments reach record highs and demand remains soft.

Oil: Brent Oil price remained stable to end the month at US $110/bbl. This figure may continue to fall as bans on Russian shipments are delayed.

Property

Housing: Australian dwelling values fell by -1.3% in July, marking the third consecutive month CoreLogic’s national Home Value Index has fallen. After national dwelling values surged 28.6% through the pandemic growth phase, values are now -2.0% below April’s peak.

Five of the eight capital cities recorded a month-on-month decline in July, led by Sydney and Melbourne where values fell -2.2% and -1.5% respectively. Brisbane also edged into negative growth territory for the first time since August 2020, with values down -0.8%, while Canberra (-1.1%) and Hobart (-1.5%) were also down over the month.

CoreLogic’s Research Director, Tim Lawless states that although the housing market is only three months into a decline, the national Home Value Index shows that the rate of decline is comparable with the onset of the global financial crisis (GFC) in 2008, and the sharp downswing of the early 1980s. In Sydney, where the downturn has been particularly accelerated, we are seeing the sharpest value falls in almost 40 years.

Economy

Interest Rates: The RBA Cash rate has now had 4 consecutive rate rises. A 0.5% rise at the start of August has pushed the cash rate to 1.85%. With more rate rises likely before year end.

Retail Sales: Retail sales in Australia rose by 0.2% MoM to a fresh record level of AUD 34.24 billion in June 2022. The latest print was the softest rise in retail trade since a fall in December 2021, as cost-of-living pressures appear to be slowing the growth in spending. Cafes and restaurants had the largest rise (2.7% vs 1.8% in May), followed by clothing (1.3% vs -1.4%), and other retailing (0.5% vs 1.5%).

Bond Yields: The Australian government 10-year bond fell to 3.06% showing an improvement in investor sentiment. The US 10-year bond also fell to 2.64%.

Exchange Rate: In July the Aussie dollar gained value against both the US dollar at $0.700 and the Euro at $0.686 respectively.

Inflation: Inflation in Australia is currently sitting at 6.1% (June 2022 quarter), the quarterly increase of 1.8% was the second highest since the introduction of the Goods and Services Tax (GST), following the 2.1% increase last quarter (March 2022).

Consumer Confidence: The Westpac Melbourne Institute Index of Consumer Sentiment fell 3.0% to 83.8 in July, from 86.4 in June. The Index has now fallen 19.7% since December 2021, a precipitous tumble comparable to the two–month plunge during COVID (–20.8%); and the six–monthly declines seen heading into the Global Financial Crisis (–29.7%); the early 1990s recession (–20.5%); the mid–1980s downturn (–23.8%); and early 1980s recession (–18.8%).

Euro Area Consumer Confidence: The consumer confidence indicator in the Euro Area fell by 3.2 points to -27 in July 2022, from -23.8 in June. It Is the lowest reading since the series began in 1985 amid uncertain energy supplies from Russia and its impact on growth at a time the European Central Bank is starting to raise rates for the first time in 11 years.

Employment: The unemployment rate fell to 3.5% in June, with the participation rate increasing to 66.8%.

US Employment: The unemployment rate came in at 3.5% for July, the lowest reading since Feb 2020 but is in line with expectations. Nonfarm payrolls came in at 528,000, above the revised 398,000 in June and against expectations of 250,000.

Purchasing Managers Index: The Australian Industry Group Australian Performance of Manufacturing Index (Australian PMI®) declined by 1.5 points to 52.5 points in July 2022 (seasonally adjusted). This indicates a weaker rate of expansion across manufacturing in July. Results above 50 points indicate expansion, with higher results indicating a faster rate of expansion.

Sources: ABS, AFR, AWE, BLS, CoreLogic, Macquarie MWM Research, RBA, TradingEconomics, UBS, Westpac.

Comments

How does Australia stack up against the world’s top emitters?

Australia’s Inflation Outbreak

Source: Australian Financial Review

90-Year-Old Morgan Stanley Advisor Charged With Shooting Co-Worker

A 90-year-old Morgan Stanley financial advisor has been arrested and charged with shooting his business partner in the firm’s office in Oklahoma City.

The advisor, Leonard Bernstein, allegedly entered the building on Thursday, walked into the office of Chris Bayouth, and began firing, hitting Bayouth multiple times.

Bernstein has been charged with shooting with intent to kill, according to a spokeswoman for the Oklahoma City Police Department. He is out of jail on a $50,000 bond, according to local news outlet News On 6.

Officials said the shooting occurred after a shoving match between Bernstein and Bayouth, according to another local report, from KTUL.

A police officer who arrived on the scene said Bayouth may have been shot as many as five times, with injuries sustained to his torso, back, leg, and foot.

“Chris was laying on the floor behind his desk, and he was conscious and alert,” Officer Travis Ratcliffe wrote in an incident report obtained by Barron’s Advisor. “I asked Chris who did this to him, and he replied ‘Leonard Bernstein.’ Chris said Leonard works here, and they are (business) partners. I asked Chris what happened prior to the shooting. He said Leonard said he was going for a walk in the park and shot him.”

Police apprehended Bernstein after a traffic stop near the office building where the shooting occurred.

“There were several witnesses there that indicated that the suspect had walked in, fired several rounds at that victim and then left in his own personal vehicle,” said Sgt. Dillon Quirk of the Oklahoma City Police Department.

Bayouth was taken to the hospital and is expected to survive.

“We are cooperating with the authorities and our thoughts are with our employee,” a Morgan Stanley spokeswoman said in an email. She confirmed that the firm terminated Bernstein on Friday.

Bernstein has been facing declining health and had transferred his client accounts to Bayouth, according to News On 6.

Bernstein had worked at Morgan Stanley since August 2021, according to the online database BrokerCheck. Before that, he had worked for nine years at Wells Fargo and served two earlier stints with Morgan Stanley in a career that began in 1994.

Bayouth has been with Morgan Stanley since 1995, according to BrokerCheck. Both he and Bernstein are dually registered as investment advisors.

Source: Barron’s

There is nothing in this Budget that would create a UK style crisis. The stage 3 tax cuts legislated to commence on 1 July 2024 are not mentioned, and most funding initiatives appear to be a reallocation of previous Government initiatives. And, the commodity driven $54.4 billion improvement in tax receipts has largely been banked, not spent.

With seven months before the 2023-24 Budget released in May 2023, this Budget is a shuffling of the deck not a new set of cards. And to continue the pun, we need to play the hand we have been dealt, buffeted by externalities – war, floods, and global uncertainty.

Cost of living pressures will continue. While some initiatives such as the increase to child care subsidies will help, the Budget flags some fairly bracing economic expectations:

• Inflation expected to peak at 7.75% in the December quarter and will persist at higher rates for longer than expected before easing to 3.5% by June 2024.
• Real GDP is forecast to grow to 3.25% in 2022-23 then retract to 1.5% in 2023-24.
• Electricity prices are expected to increase nationally by an average of 20% in late 2022, with retail electricity prices expected to rise by a further 30% in 2023-24.
• The deficit sits at $36.9bn, while this is better than originally estimated, the deficit expands to $49.5bn by 2025-26.

Tight labour market conditions are expected to see annual wage growth pick up to 3.75% by June 2023. Even so, high inflation is expected to see real wages fall over 2022-23 before rising slightly over 2023-24. That is, your wages might increase but the gains will be eaten away by the increasing cost of living.

The ATO gets an extra $80m to extend its personal income tax compliance program, with $674m anticipated in increased receipts and over $80m in increased payments as a result. Tax deductions will be looked at closely.

As expected, multi-nationals are a target. New measures will limit opportunities to shift taxable profits offshore. And, the ATO’s Tax Avoidance Taskforce is expected to deliver a whopping $2.8bn in additional tax receipts and $1.1bn in payments over the 4 year period.

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

As always, we’re here if you need us!

Individuals & Families

Child Care Subsidy increase

As previously announced, the maximum Child Care Subsidy (CCS) rate will increase from 85% to 90% for families earning less than $80,000. Subsidy rates will then taper down one percentage point for each additional $5,000 in income until it reaches zero per cent for families earning $530,000.

The current higher CCS rates for families with multiple children aged 5 or under in child care will be maintained, with higher CCS rates to cease 26 weeks after the older child’s last session of care, or when the child turns 6 years old.

In addition, from 2022-23, a base entitlement to 36 hours per fortnight of subsidised early childhood education and care will be implemented for families with First Nations children, regardless of activity hours or income level.

The CCS increase also comes with a renewed focus on industry compliance requiring large providers to publicly report CCS related revenue and profits. In addition, the way the Child Care Subsidy is managed will change, requiring the electronic payment of early childhood education and care gap fees to weed out fraudulent claims for care not received.

Resources:

• Fact sheet
• Legislation Family Assistance
• Legislation Amendment (Cheaper Child Care) Bill 2022

Paid parental leave reforms

As previously announced, from 1 July 2023 the Government will introduce reforms to make the Paid Parental Leave Scheme flexible for families so that either parent is able to claim the payment and both birth parents and non-birth parents are allowed to receive the payment if they meet the eligibility criteria. Parents will also be able to claim weeks of the payment concurrently so they can take leave at the same time.

Eligibility will also be expanded with the introduction of a $350,000 family income test, which families can be assessed under if they do not meet the individual income test.

From 1 July 2024, the Government will begin expanding the scheme from the current 18 weeks by two additional weeks a year until it reaches a full 26 weeks from 1 July 2026.

Both parents will be able to share the leave entitlement, with a proportion maintained on a “use it or lose it” basis, to encourage and facilitate both parents to access the scheme and to share the caring responsibilities more equally. Sole parents will be able to access the full 26 weeks.

Resources:

• Fact sheet

Encouraging pensioners back into the workforce

Age and veterans pensioners will be able to work and earn more before their pension is reduced. The Government is providing a one-off $4,000 credit to their Work Bonus income bank.

The temporary income bank top-up will increase the amount pensioners can earn in 2022–23 from $7,800 to $11,800, before their pension is reduced, supporting pensioners who want to work or work more hours to do so without losing their pension.

The Work Bonus increases the amount an eligible pensioner can earn from work before it affects their pension rate. Under the current rules, the first $300 of fortnightly income from work is not assessed and is not counted under the pension income test. The Work Bonus operates in addition to the pension income test free area.

When the work bonus is not used in a fortnight it accumulates in an income bank where the standard maximum is $7,800. This allows pensioners who work on an ad hoc basis to not be disadvantaged compared to those with regular fortnightly income.

Superannuation & Investors

Change to taxation of off-market share buy-backs by listed companies

From Budget night, 7:30pm AEDT, 25 October 2022, the Government intends to align the tax treatment of off-market share buy-backs undertaken by listed public companies with the treatment of on-market buy-backs. The result is expected to deliver a saving of $550m.

An on-market buy-back is when a listed company buys its shares back on the stock exchange. All other buy-backs are treated as off-market buy-backs.

Under the current rules, when a company undertakes an off-market buy-back it is necessary to consider which portion of the proceeds is taxed as a dividend and which portion is taxed under the CGT rules. Franking credits can potentially be attached to the dividend component.

On the other hand, when a listed company undertakes an on-market buy-back the full proceeds are generally taxed under the CGT rules and franking credits cannot be passed onto the shareholders.

Off-market buy-backs potentially offer a tax advantage to low-taxed shareholders such as superannuation funds. It appears that the Government has become concerned that the difference in the tax treatment between on-market and off-market buy-backs has been exploited inappropriately.

The Budget measure only refers to listed public companies which presumably means that the current tax treatment for off-market buy-backs undertaken by private companies and public companies that are not listed will continue to apply.

While this measure is yet to legislated, with a Budget night implementation date, this could have an immediate tax impact on the treatment of new off-market share buy-backs.

‘Downsizer’ eligibility reduced to 55

As previously announced, the Government will reduce the age an individual can make a ‘downsizer’ contribution to superannuation from the current 60 years to 55 years of age.

Currently, eligible individuals aged 60 years or older can choose to make a ‘downsizer contribution’ into their superannuation of up to $300,000 per person ($600,000 per couple) from the proceeds of selling their home.

Downsizer contributions can be made from the sale of your principal residence in Australia that you have owned for the past ten or more years. These contributions are excluded from the age test, work test, and your total superannuation balance (but not exempt from your transfer balance cap).

Legislation enabling the expanding eligibility for downsizer contributions is currently before Parliament.

Resources:

• Legislation Treasury Laws Amendment (2022 Measures No. 2) Bill 2022

Delayed Relaxation of SMSF residency requirements

Scrapped 3 year SMSF audit requirement

For Business & Employers

Dramatic jump in penalties for competition and consumer law breaches

Government & regulators

ATO targets in sharp focus

Personal income tax deductions and incorrect reporting

The ATO will receive an additional $80.3 to crackdown on non-compliance including:

• Overclaiming deductions; and
• Incorrect reporting of income

The spend is expected to increase tax receipts by $674.4m and payment by $80.3m over 4 years.

Cash payments and tax evasion by business

The ‘shadow economy’, cash-in-hand payments including underpayment of wages, visa fraud, and other nefarious activity that deprives the economy of the income from tax receipts, will come under scrutiny with the extension of the ATO’s Shadow Economy Program for a further 3 years from 1 July 2023. Over this period, the program is estimated to increase tax receipts by $2.1bn and payments by $685.2m over the 4 years from 2022-23.

Multinational business and the Tax Avoidance Taskforce

The ATO’s Tax Avoidance Taskforce will receive an additional $200m over 4 years from 1 July 2022 primarily to pursue multinational enterprises and large public and private businesses. This taskforce is expected to deliver a whopping $2.8bn in additional tax receipts and $1.1bn in payments over the 4 year period.

Tax Practitioners Board to pursue dodgy tax agents

The Tax Practitioners Board will receive just over $30m to pursue high-risk tax practitioners and unregistered preparers. The TPB will use new “risk engines” to better identify tax practitioners who engage in poor and unlawful tax advice.

Other

Working with our Pacific Neighbours

Australia’s relationship in the Pacific has come into sharp focus of late. The Budget implements a series of initiatives to support development and labour mobility in the region:

• Additional infrastructure investment of $500m over 10 years in the Pacific and Timor-Leste will be provided through the Australian Infrastructure Financing Facility for the Pacific including an additional $50m for the establishment of a Pacific Climate Infrastructure Financing Partnership Facility.
• As previously announced, the Pacific Australia Labour Mobility scheme will be expanded to improve the benefits of the program for employers and workers including:
  • underwriting employers’ investment in upfront travel costs for seasonal workers by covering costs that cannot be recouped from workers
  • improvements to workplace standards for PALM visa holders, including increased workplace compliance activities
  • allowing primary visa holders on long-term placements to bring partners and children to Australia, where sponsored by employers, with additional social support including providing relevant minimum family assistance payments, with an initial rollout of 200 families
  • the expansion of the existing aged care skills pilot programs for aged care workers.
• A new Pacific Engagement Visa for nationals of Pacific Island countries and Timor-Leste. Up to 3,000 additional places will be made available in addition to those provided through the existing permanent Migration Program.

Resources:

• Income Tax Amendment (Labour Mobility Program) Bill 2022

Electric vehicle and hydrogen refuelling

Foreign investment review board fees increase

The economy

The Government appear keenly aware of the economic balancing act taking place, keeping the budget predominantly to election promises and redirecting existing initiatives to avoid exacerbating inflationary pressures. As the Treasurer said “Australians know this is a time of great challenge and change.”

The global economic environment has sharply deteriorated. Inflation has risen rapidly across advanced economies. The Russian invasion of Ukraine has significantly driven up global energy costs and exacerbated the impact of poor weather on global food prices. All of this impacts on Australia. Here are the highlights:

GDP – Real GDP is forecast to grow by 3¼ per cent in 2022-23 before slowing to 1½ per cent in 2023-24, as cost of living pressures and rising interest rates increasingly weigh on household disposable income and consumption.

The Government warn that with the highly uncertain global economic outlook, there are significant risks that could cause a sharper slowdown in domestic activity. Globally, key risks include a ‘hard landing’ or recession across major advanced economies, a sharper-than-expected downturn in China due to COVID-19 outbreaks and the property market downturn, a sudden tightening in financial market conditions and further energy price shocks stemming from the Russian invasion of Ukraine, which could drive inflation even higher.

And domestically, the full impact of recent floods is highly uncertain as the situation continues to develop.

Inflation – forecast to peak at 7¾ per cent in the December quarter of 2022. Supply disruptions have resulted in large price increases in home building, fuel and energy. Food prices remain elevated and have been further exacerbated by recent floods. Some of these pressures are expected to persist into 2023. Inflation is expected to remain elevated at 5¾ per cent over 2022-23 and 3½ per cent over 2023–24 before gradually easing and returning to within the Reserve Bank’s inflation target by 2024-25.

Deficit – lower than originally estimated at $36.9bn. However, the deficit is expected to climb to over $51bn by 2024-25 with the impact of higher inflation on indexed payments for services, the NDIS in particular.

Gross debt – is close to one trillion dollars and is at the highest level as a share of GDP in over 70 years.

Tax receipts – revised up by $54.4bn in 2022-23 and $142.0 billion over the 4 years to 2025-26.

Unemployment and wages growth – labour market conditions are expected to remain tight. The unemployment rate is forecast to rise to 4½ per cent by the June quarter of 2024. Tight labour market conditions are expected to see annual wage growth pick up to 3¾ per cent by June 2023. However, high inflation is expected to see real wages fall over 2022-23 before rising slightly over 2023-24.

Energy – Electricity and gas prices are expected to rise sharply over the next 2 years, as the cost of energy market disruptions are passed through to households. Treasury has assumed retail electricity prices will increase by an average of 20% nationally in late 2022. Retail electricity prices are expected to rise by a further 30% in 2023-24.

Domestic gas prices remain more than double their average prior to Russia’s invasion of Ukraine. Retail prices are expected to increase by up to 20% in 2022-23 and 2023-24.

Markets

Local: The ASX200 index relatively underperformed, falling -2.6% over May, as investors reacted to the RBA hiking the cash rate to 0.35%

Global: The S&P 500 index lifted slightly by 0.2%

Gold: Gold fell sharply by US $60 to US $1,852 as rising global rates proved a headwind.

Iron Ore: Iron Ore prices dropped by US $6 to US $137/Mt as Chinas intensifying COVID restrictions and property cycle impacted demand.

Oil: Brent Oil climbed by US $12 to US $122/bbl.

Property

Housing: Housing markets lost more steam in May as a combination of higher interest rates, rising inventory levels and lower sentiment dampened conditions. CoreLogic’s Home Value Index (HVI) showed Sydney (-1.0%) and Melbourne (-0.7%) dwelling values continued to record the most significant month-on-month falls, while Canberra (-0.1%) recorded its first monthly decline since July 2019.

CoreLogic’s Research Director Tim Lawless said despite the 0.5% rise in housing values across Australia’s combined regional areas, it was not enough to keep the national index in positive monthly territory, with the national HVI down -0.1% in May, the first monthly decline in the national index since September 2020.

Economy

Interest Rates: The RBA increased the cash rate to 0.35% at the start of May and has recently increased by another 0.5% to hit 0.85% at the start of June. The first back-to-back rate increase in 12 years.

Retail Sales: Retail sales in Australia rose by 0.9% mom to another record level of AUD 33.9 billion in April 2022, unrevised from the flash figure and after a final 1.6% gain in March. This was also the fourth straight month of growth in retail trade, as the economy recovered further from COVID-19. Food retailing led the rise (1.9% vs 0.5% in March), amid increased household spending over the April holiday period.

Bond Yields: Australian government 10-year bond rose 22 bps to 3.34% from the previous month. In contrast, the US 10-year bond fell slightly by 5 bps to 2.84%

Exchange Rate: The Aussie dollar increased slightly against the American dollar, at $0.7184, and remained stable against the Euro at $0.669.

Inflation: The annual inflation rate is currently sitting at 5.1% reflecting surging oil and food prices globally. Many believe this rate will increase even further in the coming months.

GDP: In Q1 2022 GDP rose by 0.8% q/q (3.3% y/y), a fairly solid result considering the disruptions to domestic activity in early 2022, following the strong pickup in Q4 2021.

Consumer Confidence: The Westpac-Melbourne Institute Index of Consumer Sentiment fell by 5.6% to 90.4 in May from 95.8 in April. The Index is now at its lowest level since August 2020 when households were unnerved by the ‘second wave’ lockdown in Victoria. The weakness in this survey is not related to another pandemic shock but to the combination of rising cost of living pressures and the prospect of rising interest rates.

Employment: The seasonally adjusted unemployment rate for April 2022 was 3.9%, Employment also increased by 4,000 people in April, the sixth consecutive monthly rise.

US Employment: Total nonfarm payroll employment rose by 390,000 in May, and the unemployment rate remained at 3.6%, notable job gains occurred in leisure and hospitality, professional and business services and transportation and warehousing. Employment in retail trade declined.

Purchasing Managers Index: The Australian Industry Group Australian Performance of Manufacturing Index (Australian PMI®) fell by 6.1 points to 52.4 points in May 2022, indicating a weaker pace of expansion. This halts three months of consistent acceleration for the Australian PMI® since February 2022. Results above 50 points indicate expansion, with higher results indicating a faster rate of expansion.

Sources: ABS, AFR, AiGroup, BLS, CoreLogic, RBA, NAB, UBS, Westpac

Comments

The Corrosion of Globalisation

Global Interconnectedness has been diminishing in recent years, and with countries feeling the need to become more self-reliant, deglobalisation could become a more constant occurrence.

It has become the norm that companies with more complex international supply chains have had to grapple with increased and unexpected costs. Firstly, the tariffs imposed by former US president Donald Trump that were applied with little warning, mainly against the Chinese government have started a political standoff. The emergence of the COVID-19 pandemic with its harsh lockdowns and travel restrictions, have put extreme pressure on Australian goods and the price of oil and agricultural commodities have soared due to the continued Russia-Ukraine conflict. With Russia now cut off from much of the world economy, there is the prospect of sustained shortages of crucial industrial materials including nickel, palladium and neon as well as important food sources such as barley and wheat.

China still remains the most critically important country in global supply chains and with this China is being somewhat careful not to run afoul of Western sanctions on Russia. Chinese companies still recognise their large reliance on the US and Europe.

The pandemic dramatically demonstrated the vulnerabilities in long supply chains and made countries start to look closer to home for their required goods as national self-reliance became more important. Many have stated that the pandemic has only accelerated what was already the end of sustained growth in the globalisation cycle.

If deglobalisation does take hold, or even a deceleration of globalisation, there will be some consequences that the world will have to face, this includes higher production costs that lead to higher prices for consumers and a lower real purchasing power. This shift away from efficiency could put further strain on already high inflationary pressures, especially if we need to look at replacement products that are heavily manufactured in Russia and Ukraine.

The flipside is that many global companies are wary of this excessive dependence on China as they could be open to sanctions from the west, either through its intimate relationship with Russia, or because of its own geopolitical actions. China`s continuing zero COVID case policy and the accompanying hard lockdowns that this policy has created is also creating a significant disruption to global supply chains.

It should be noted that the benefits of globalisation are not completely disappearing. In a competitive global market companies are still identifying the incentives to seek out the lowest cost and the greatest efficiencies. The changes in diversification could merely be a bump in the road and has not quite become accustomed to the world we are currently living. Some countries may even benefit if companies try to diversify themselves away from China. Regionalisation of supply chains could improve investment in emerging markets such as South America and Asia, which could improve efficiencies and consumer choice if done correctly.

Sources: AFR, Deloitte

Inflation Snapshot

Tax & the family home

Capital gains tax (CGT) applies to gains you have made on the sale of capital assets (assets you make money from). Unless an exemption or reduction applies, or you can offset the tax against a capital loss, any gain you made on an asset is taxed at your marginal tax rate.

What is the main residence exemption?

Your main residence is the home you live in. In general, CGT applies to the sale of your home unless you have an exemption, partial exemption, or you are able to offset the tax against a capital loss.

If you are an Australian resident for tax purposes, you can access the full main residence exemption when you sell your home if your home was your main residence for the whole time you owned it, the land your home is on is or is under 2 hectares, and you did not use your home to produce an income – for example running a business from your home or renting it out.

If the home is on more than 2 hectares, if eligible, you can treat the home and up to 2 hectares of the land it is on as one asset and claim the main residence exemption on this asset.

However, if you use your home to produce an income by running a business from home or renting it out, CGT can apply to the portion of the home used to produce income from that time onwards.

What’s a main residence?

For CGT purposes, your home normally qualifies as your main residence from the point you move in and start living there. However, if you move in as soon as practicable after the settlement date of the contract, that home is considered your main residence from the time you acquired it.

If you cannot move in straight away because you are in the process of selling your old home, you can treat both homes as your main residence for up to six months without impacting your eligibility to the main residence exemption. For example, where you have moved into your new home while finalising the sale of your old home. This applies if you were living in your old home for a continuous period of 3 months in the 12 months before you disposed of it, you did not use your old home to produce an income (rented it out or used it as a place of business) in any part of that 12 months when it was not your main residence, and your new property becomes your main residence.

If the sale takes more than six months and if eligible, the main residence exemption could apply to both homes only for the last six months prior to selling the old home. For any period before this it might be possible to choose which home is treated as your main residence (the other becomes subject to CGT).

If your new home is being rented to someone else when you purchase it and you cannot move in, the home is not your main residence until you move in.

If you cannot move in for some unforeseen reason, for example you end up in hospital or are posted overseas for a few months for work, then you still might be able to access the main residence exemption from the time you acquired the home if you move in as soon as practicable once the issue has been resolved. Inconvenience is not a valid reason and you will need to ensure that you have documentation to support your position.

Proof that your property is first established or continues to be your main residence is subjective and if the issue is ever queried, some of the factors the ATO will look at include:

The length of time you have lived in the dwelling

• Where your family live
• Whether you moved your personal belongings into the dwelling
• The address you have your mail delivered
• Your address on the Electoral Roll
• Your connection to services such as telephone, gas and electricity, and
• Your intention.

Foreign resident or resident?

The main residence rules changed in 2017 to exclude non-residents from accessing the main residence exemption.[1]

The rules focus on your tax residency status at the time of the CGT event (normally the time the contract of sale is entered into). That is, in most cases if you are a non-resident at the time you enter into the contract of sale, you will be unable to access the main residence exemption. This is the case even if you were a resident for part of the ownership period.

Conversely, if you are a resident at the time of the sale, and you meet the other eligibility criteria, the rules should apply as normal even if you were a non-resident for some of the ownership period. For example, an expat who maintains their main residence in Australia could return to Australia, become a resident for tax purposes again, then sell the property and if eligible, access the main residence exemption.

It’s important to recognise that the residency test is your tax residency not your visa status. Australia’s tax residency rules can be complex. If you are uncertain, please contact us and we will work through the rules with you.

The tax rules also contain integrity provisions that can deny the main residence exemption where someone circumvents the rules by deliberately structuring their affairs to access the exemption – for example, transferring the property to a related party prior to becoming a foreign resident to access the main residence exemption.

Can I treat my home as my main residence even if I don’t live there?

Once you have established your home as your main residence, in certain circumstances, you can treat it as your main residence even if you have stopped living there. The absence rule allows you to treat your home as your main residence for tax purposes:

• For up to 6 years if it’s used to produce income, for example you rent it out while you are away; or
• Indefinitely if it is not used to produce income.

By applying the absence rule to your home, this normally prevents you from applying the main residence exemption to any other property you own over the same period. Apart from limited exceptions, the other property is exposed to CGT.

Let’s say you moved overseas in 2019 and rented out your home while you were away. Then, you came back to Australia in 2021 and moved back into your house. Then in early 2022, you decided it is not your forever home and sold it. You elected to apply the absence rule to your home and didn’t treat any other property as your main residence during that same period. In this case, you should be able to access the full main residence exemption assuming you are a resident for tax purposes at the time of sale.

The 6 year period also resets if you re-establish the property as your main residence and subsequently stop living there but rent it out in between. So, if the time the home was income producing is limited to six years for each absence, it is likely the full main residence exemption will be available if the other eligibility criteria are met.

What happens if I have been running my business from home?

If your home is also set aside as a dedicated place of business (i.e., you do not have another office or workshop), then you might only be able to claim a partial main residence exemption. This is because income producing assets are excluded from the main residence exemption.

If you are running a business from home, you can usually claim a tax deduction for occupancy expenses such as interest on the mortgage, council rates, and insurance. If you claimed or were eligible to claim these expenses, then you will only be able to access a partial main residence exemption. These rules apply even if you have not claimed these expenses as a deduction; the fact that you are eligible to make a claim is enough to impact your access to the main residence exemption.

In many cases, if your home would have qualified for a full main residence exemption before it is used as a dedicated place of business, the cost base of your home for CGT purposes should also be reset to its market value at that time.

Also, if only a partial main residence exemption is available, you will need to check whether you can access the small business CGT concessions on any remaining capital gain. As these rules are complex, please contact us and we will work through the rules with you.

However, if you have only been working from home out of convenience and there is another office that you normally work from, then your eligibility to access the main residence exemption should be unaffected. The ATO has confirmed that all that time working from home temporarily during the pandemic should not impact your ability to access the main residence exemption.

If I rent out a room on AirBnB, can I still claim the exemption?

If your home has been used to produce income while you are living in it, the portion used to produce income will be excluded from the main residence exemption. The rules might apply differently if you move out of the home completely – see Can I treat my home as my main residence even if I don’t live there?

Before you start renting out a portion of your home, it is a good idea to have it valued. If you would have qualified for the main residence exemption just before it was rented out, there are some rules that can apply in most cases and for CGT purposes, you are taken to have re-acquired your home for its market value at that time. So, if your home has increased in value over and above its cost base, this should reduce any gain when you eventually sell.

Can I have a different main residence to my spouse?

Let’s say you and your spouse each own homes that you have separately established as your main residences for the same period. The rules do not allow you to claim the full CGT exemption on both homes. Instead, you can:

• Choose one of the dwellings as the main residence for both of you during the period; or
• Nominate different dwellings as your main residence for the period.

If you and your spouse nominate different dwellings, the exemption is split between you:

• If you own 50% or less of the residence chosen as your main residence, the dwelling is taken to be your main residence for that period and you will qualify for the main residence exemption for your ownership interest;
• If you own greater than 50% of the residence chosen as your main residence, the dwelling is taken to be your main residence for half of the period that you and your spouse had different homes.

The same rule applies to the spouse.

The rule applies to each home that the spouses own regardless of how the homes are held legally, i.e., sole ownership, tenants in common or joint tenants.

Divorce and the main residence rules

The last two years have seen the highest divorce rate in Australia for a decade. When a property settlement occurs between spouses and if the conditions are met, the marriage breakdown rollover rules apply to ignore any CGT gain on the property settlement.

Assuming the home is transferred to one of the spouses (and not to or from a trust or company), both individuals used the home solely as their main residence over their ownership period, and the other eligibility conditions are met, then a full main residence exemption should be available when the property is eventually sold.

If the home qualified for the main residence exemption for only part of the ownership period for either individual, then a partial exemption might be available. That is, the spouse receiving the property may need to pay CGT on the gain on their share of the property received as part of the property settlement when they eventually sell the property.

I have inherited a property, if I sell it, do I have to pay CGT?

Special rules exist that enable some beneficiaries or estates to access a full or partial main residence exemption on the inherited property. Assuming the house was the main residence of the deceased just before they died, they did not then use the home to produce an income, and the other eligibility criteria are met, a full exemption might be available to the executor or beneficiary if either (or both) of the following conditions are met:

• The dwelling is disposed of within two years of the deceased’s death; or
• The dwelling was the main residence of one or more of the following people from the date of death until the dwelling has been disposed of:
• The spouse of the deceased (unless they were separated);
• An individual who had a right to occupy the dwelling under the deceased’s will; or
• The beneficiary who is disposing of the dwelling.

An extension to the two year period can apply in limited certain circumstances, for example when the will is contested or complex.

If the deceased did not actually live in the property prior to their death and other eligibility criteria are satisfied, it still might be possible to apply the full exemption where the home was treated as their main residence under the absence rule.

If the full exemption is not available, a partial exemption might apply.

If you have any questions about how the main residence rules might apply to you, please drop us a line and we will be happy to work though it with you.

[1] Transitional rules ended on 30 June 2020.

What changed on 1 July?

A reminder of what changed on 1 July 2022

Business

• Superannuation guarantee increased to 10.5%
• $450 super guarantee threshold removed for employees aged 18 and over
• Small business GST and PAYG tax instalments lowered (the total tax liability remains the same, just the amount the business needs to pay through the year is lowered)
• ATO guidance on how profits of professional firms are structured comes into effect introducing new risk criteria
• New guidance on unpaid trust distributions to corporate beneficiaries comes into effect that may treat some unpaid distributions as loans and trigger tax consequences

Individuals

• Superannuation guarantee increased to 10.5%
• Work-test repealed for those under 75 to make or receive non-concessional or salary sacrifice super contributions (the work test still applies to personal deductible contributions)
• Age for downsizer super contributions reduced to 60 years and older
• Value of voluntary super contributions that can be withdrawn under the First Home Saver Scheme increased to a total of $50,000
• New ATO guidelines on trust distributions come into effect primarily impacting distributions to adult children
• Home loan guarantee scheme extended to 35,000 per year for first home buyers and 5,000 per year for single parents
• Australia’s minimum wage increased

Overcome your customers fear of spending

One of the biggest complaints from salespeople in a tight economy is the time it takes to achieve a sale. So, what can you do to speed up the sales process?

Sell the solution not the product

Branding is wonderful but unless your brand is as mighty as Coca Cola, it’s unlikely people will purchase what you have based on brand alone. It’s more important than ever to have clarity about why your product or service is valuable to your client and why they should be buying it from you.

Back in 2000, Berlei bras demonstrated the art of solution selling with their sports bra campaign, “only the ball should bounce.” For anyone that has seen a sports bras you know that aesthetically, they are the ugly duckling of the lingerie world; highly functional but very unattractive. Berlei used science to demonstrate how much damage exercising in anything but a sports bra could do (using television advertising, print, point of sale advertising, media, etc). The point is to understand what the most meaningful message is for your customer and that is unlikely to be a product feature list.

Sell the savings

Does your product offer your customer any form of efficiency gain or benefit beyond value over time? Can you justify it with real examples such as testimonials and worked examples? If it does, you need to ensure that you articulate this message. If there is a benefit, ensure you highlight it and emphasise the result. Try and stay away from long range forecasts. If it is going to take a few years to see the real value then this is not a compelling selling point in the current market.

You are only as strong as the weakest link in your sales process

If your first point of contact is the weakest link in your sales chain, then you need to fix it. Help your team identify and capitalise on opportunities by giving them the training and structure they need.

Value added discounts

Discounting is a common strategy to increase sales but it comes at the cost of your margin. If you are going to discount, do it strategically. For example, when David Jones wanted to build the number of customers holding a David Jones AMEX, they offered a limited time 30% discount store wide to everyone who either held or applied for the card on the spot. And, staff were trained to encourage the adoption of the AMEX at the checkout. Yes, it was a big discount, but it created an event for existing store card holders and ramped up acquisition to the store card program. The added benefit is that loyalty programs work; the probability of selling to an existing customer is around 14 times higher than a new customer.

In tough economic times, it’s common for the volume of products purchased by customers to go down. You can overcome some of this reticence by packaging items together and encouraging sales volume by offering a discount on the second item or on bundles. If you are going to package, ensure you are not packaging low margin products and then discounting them. Packaging works best when you package products with higher profit margins or where you boost the sales volume of slow moving stock by combining it with faster selling stock.

Quote of the month

“You can’t change conditions. Just the way you deal with them.”
Jessica Watson OAM, the youngest person to sail solo and unassisted around the world

The material and contents provided in this publication are informative in nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone. If expert assistance is required, professional advice should be obtained.

Can you prevent a hack?

In the wake of the Optus data leak, legislation before Parliament will lift the maximum fine for serious or repeated breaches of the Privacy Act from $2.2m to up to $50m. But there are no guarantees that even the strongest safety measures will prevent an attack. So, what does that mean for business and their customers?

Legislation before Parliament will lift penalties for serious or repeated privacy breaches, provide new powers to the Australian Information Commissioner, require entities to provide detailed data to the Information Commissioner to assess public risk, and give the regulator greater information sharing powers. In a statement, Attorney General Mark Dreyfus said, “When Australians are asked to hand over their personal data they have a right to expect it will be protected.” But the question is, can any business claim that customer data will be protected from hackers?

If a customer needs to disclose their personal information to your business to work with you, at the point the data is collected, your business is the custodian of that data. A duty of care exists from the moment the data is collected to the point the information is no longer required and destroyed.

The Privacy Act requires organisations to take “reasonable steps” to protect the data collected. ‘Reasonable’ steps “requires the existence of facts which are sufficient to [persuade] a reasonable person.” That is, in the event of a data breach, the business will need to prove the steps they have taken to protect client data.

Lessons from RI Advice

Australian Competition and Consumer Commission v RI Advice Group Pty Ltd was a landmark case. While specific to the obligations of an Australian Financial Services License (AFSL), it demonstrates that ASIC are willing to pursue not just companies that breach their duty of care but the directors and officers involved.

RI advice is a financial services company that, through its AFSL, authorised representatives to provide financial services. As you would expect, as part of providing financial services, the authorised representatives received, stored and accessed confidential and sensitive personal information. Between June 2014 and May 2020, nine cybersecurity incidents occurred at practices of RI Advice’s Authorised Representatives. Enquiries following the incidents revealed:

• Computer systems which did not have up-to-date antivirus software installed and operating
• No filtering or quarantining of emails
• No backup systems or back-ups being performed; and
• Poor password practices including sharing of passwords between employees, use of default passwords, passwords and other security details being held in easily accessible places or being known by third parties.

RI Advice took steps to manage their cybersecurity introducing a cyber resilience program, controls and risk management measures for its representatives including training, incident reporting, and contractual professional standard terms, but by its own admission, it took too long to implement.

RI Advice was ordered to pay $750,000 towards ASIC’s costs. Handing down the decision Justice Rofe said, “It is not possible to reduce cybersecurity risk to zero, but it is possible to materially reduce cybersecurity risk through adequate cybersecurity documentation and controls to an acceptable level.”

Scams and how to avoid them

I got a text the other day “Hi Mum, I have broken my phone and I am using this number.” The “Hi Mum” scam has exploded with more than 1,150 Australians falling victim to the ploy in the first seven months of 2022, with total reported losses of $2.6 million. Once the scammer establishes contact, they start requesting money for an urgent bill or a replacement phone etc. For those with children or dependant family members, it is not that hard to believe. According to the Australian Consumer and Competition Commission (ACCC), two-thirds of family impersonation scams were reported by women over 55 years of age.

Another common scam is the lost or unable to deliver package texts and voicemail. With Christmas just around the corner, we can expect to see another escalation of this scam where tracking links purportedly from Australia Post, Toll, or Amazon etc., are used to instal malware. Once accessed, the malware will access your contacts and spread the malware and potentially access your personal information and bank details.

In July, the Australian Taxation Office (ATO) reported a new wave of ‘Tax refund SMSF scams’. The texts purported to be from the ATO stating that the individual had a tax refund and to click on the link and complete the form. Another scam purporting to be from the ATO advised that the recipient was suspected of being involved in cryptocurrency tax evasion and requested that they connect their wallet. At which point the wallet was accessed and any assets stolen.

The ACCC’s Targeting Scams report states that in 2021, nearly $1.8bn in losses were reported but the real figure is likely to be well over $2bn.

The largest combined losses in 2021 were:

• $701 million lost to investment scams with 2021 figures significantly increased by cryptocurrency scams – more scammers are seeking payment with cryptocurrency and losses to this payment method increased 216% to $84 million.
• $227 million lost to payment redirection scams.
• $142 million lost to romance scams.

Protecting yourself from scams

• Help educate older relatives. The over 55s are the most likely to fall victim to a scam.
• Always use the primary website or app of your suppliers not a link from a text or email.
• Don’t click on links from emails or text messages unless you are (absolutely) certain of the source. For email, if the sending email domain is not clear or hidden, hover over the name of the sending account to check if the email is from the company domain.
• For Government services, use your MyGov account. Any messages to you from the ATO or other Government services need will be published to your MyGov account. Never click on links purporting to be from a bank, ATO or Government department.

Protecting your business from scams

Payment redirection scams, where the email of the business is compromised, caused the highest reported level of loss for business in 2021 at a combined $227 million.

Payment redirection scams involve scammers impersonating a business or its employees via email and requesting an upcoming payment be redirected to a fraudulent account. In some cases, scammers hack into a legitimate email account and pose as the business, intercepting legitimate invoices and amending the bank details before releasing emails to the unsuspecting business. Other times, scammers impersonate people using a registered email address that is very similar to one from a legitimate business.

• Educate your team about threats and what to look out for, the importance of passwords and password security, and how to manage customer information. Phishing attacks, if successful, provide direct access into your systems.
• Ensure staff only have access to the business systems and information they need. Assess what is required and close out access to anything not required. Also assess how customer personal information is accessed and communicated. Personal information should not be emailed. Email is not secure and it is too easy for staff to inadvertently send data to the wrong person.
• No shared login details or passwords.
• Complete a risk assessment of your systems and add cybersecurity to your risk management framework.
• Develop and implement cyber security policies and protocols. Have policies and procedures in place for who is responsible for cybersecurity, the expectations of staff, and what to do in the event of a breach. Your policies should prevent shadow IT systems, where employees download unauthorised software.
• Understand your organisation’s legal obligations. For example, beyond the Privacy Act some businesses considered critical infrastructure such as some freight and food supply operations are subject to the Security of Critical Infrastructure Act 2018. This might involve small businesses in the supply chain.
• Use multifactor authentication on your systems and third-party systems.
• Update software and devices regularly for patches
• Back-up data and have backup protocols in place. If hackers use ransomware to lock your systems, you can revert to your backup.
• If customer data is being shared with related or third parties domiciled overseas, ensure your customer is aware of where their data is domiciled and your business has taken all reasonable steps to enforce the Australian Privacy Principles. Your business is responsible for how the overseas recipient utilises your customer’s data.
• Only collect the customer data you need to provide the goods and services you offer.
• Ensure protocols are in place for accounts payable.
• Don’t forget the hardware – laptops, computers, phones.

Taxing fame: The ATO’s U-turn

Sportspeople, media personalities, celebrities and ‘insta’ influencers beware. The ATO has taken a U-turn on how fame and image should be taxed.

If you’re famous and make an income from your fame and image, the way the ATO believes you should be taxed on the income you make may change under a new draft determination set to take effect on 1 July 2023.

It is not uncommon for celebrities to attempt to transfer the rights to the use of their name, image, likeness, identity, reputation etc., to a related entity such as a company or trust. This related entity then manages these rights, generating income from exploiting their fame and image. For example, where a media personality’s image is used on product packaging. One of the aims of arrangements like this is to enable the income to taxed in the entity at a lower rate of tax or to be distributed to related parties who might be subject to lower tax rates.

What will change?

The new draft determination (TD 2022/D3) deals specifically with the rights to use a celebrity’s fame and image. The ATO’s argument is that the individual doesn’t have a proprietary right in their fame, which means that attempting to transfer the right relating to their fame to another entity would not be legally effective. That is, you cannot separate the fame from the individual, it vests with the individual regardless of any agreements put in place. As a result, any income relating to an individual’s fame or image that is received by a related entity is treated as if it was simply being collected on behalf of the individual and should be taxed in the hands of that individual.

If the related entity isn’t deriving income in its own right then it would be much more difficult for the entity to claim a deduction for expenses that it incurs.

The ATO’s updated approach doesn’t apply to situations where the individual is engaged by a related party to provide services. For example, if a celebrity is booked by a related entity to attend a product launch or promotional event the fees paid by the third party can potentially be treated as income of the related entity for tax purposes. However, in situations like this it is important to consider the potential application of the personal services income rules and the general anti-avoidance rules in Part IVA. The ATO’s general position is that income relating to the personal services of an individual should ultimately be taxed in the hands of that individual.

While the ATO’s new position will apply retrospectively and to income derived in future, the ATO indicates that a transitional approach will apply if the taxpayer entered into arrangements before 5 October 2022 that were consistent with the safe harbour approach that was set out in PCG 2017/D11. In these cases the ATO’s new approach will apply to income derived from 1 July 2023.

How high will interest rates go?

Low interest rates have been a mainstay since the global financial crisis of 2008. When the pandemic hit, Governments pushed stimulus measures through the economy and central banks reduced interest rates even further. Coming out of COVID, housing market demand was strong and prices boomed but at the same time, supply chains remained restricted and the problems amplified by geo-political tensions increasing input costs. Supply could not keep up with demand to support the recovery, pushing inflation higher and broader than expected for a longer period of time. To control inflation, central banks have responded by tightening monetary policy and lifting interest rates. But the good news is that inflation is likely to ease.

Inflation in the US has started to decrease from a high of over 9% in June 2022 to 7.7% in October, suggesting that interest rates may not rise as high and as aggressively as expected.

Similarly in Australia, the Reserve Bank of Australia (RBA) Board raised the cash rate by 0.25% to 2.60% at its October 2022 meeting, a lower increase than many expected. The lower than expected rise suggests that inflation pressures, particularly wages growth, will be more subdued in Australia than overseas. Comparatively, Australian households are more sensitive to interest rates with more than 60% of mortgages variable rate loans. This is unlike the US where most borrowers are on 30-year fixed loans.

The increase in interest rates is starting to take effect helping to restore price stability. However, in its statement, the RBA said that it will be a challenge to return inflation to 2-3% while at the same time “keeping the economy on an even keel”. It concluded the path to achieving this balance is “a narrow one and it is clouded in uncertainty”.

In housing, the correction in house prices deepened and broadened across Australia, with capital city prices falling by 1.4% in September 2022, rounding out a 4.3% decline over the third quarter. Housing finance approvals also continued to mirror the broader correction to date, with further declines across investor and owner-occupier loans.

So, where does all of this leave us? Inflation will stay higher for longer than originally anticipated. As a result, interest rates are expected to continue to increase, albeit at a slower rate, with the RBA resetting their view along the journey. Economists are predicting that the cash rate will increase to somewhere between 3.10% and 3.85% in the first half of 2023 and then remain stable until early 2024 before RBA policy pivots and interest rates lower in early 2024.

Canstar analysis suggests that a 3.85% cash rate translates to an average variable rate of 6.73%. The difference between a 5.73% variable rate mortgage and 6.73% is $650 per month on a $1 million, 30 year mortgage.

30 November director ID deadline

The deadline for existing directors of Australian companies to obtain a Director Identification Number is 30 November 2022.

All directors of a company, registered Australian body, registered foreign company or Aboriginal and Torres Strait Islander corporation (ATSI) will need a director ID. This includes directors of a corporate trustee of a self-managed super fund (SMSF).

A director ID is a 15 digit identification number that, once issued, will remain with that director for life regardless of whether they stop being a director, change companies, change their name, or move overseas.

For those who have been a director since 31 October 2021, the deadline for obtaining a director ID is 30 November 2022 unless you are a director of an Aboriginal and Torres Strait Islander corporation, then the deadline is 30 November 2023.

For overseas directors, the process to obtain a director ID can be onerous as applications cannot be made online. In addition to the paper application form, you will need copies of one primary and one secondary identity document (or primary identity documents) certified by notaries public or at an Australian embassy.

For those who have been invited to become a director but are not a director as yet, if you do not have a director ID, you will need to obtain one prior to being appointed.

You do not need a director ID if you are running a business as a sole trader or partnership, or you are a director in your job title but have not been appointed as a director under the Corporations Act or Corporations (Aboriginal and Torres Strait Islander) Act (CATSI).

Need an extension?

If you need an extension, as soon as possible contact the Australian Business Registry service on 13 62 50 (+61 2 6216 3440 outside of Australia). Your identity will need to be established so have your documentation ready. You can also apply for an extension using the paper form (https://www.abrs.gov.au/sites/default/files/2021-10/Application_for_an_extension_of_time_to_apply_for_a_director_ID.pdf)

What happens if I don’t obtain an ID?

If you are required to obtain a director ID but don’t, a criminal penalty of up to $13,200 might apply or a civil penalty of up to $1,100,000. Where an individual has deliberately applied for multiple IDs or misrepresented the director ID, the criminal penalty escalates to $26,640 and up to one year in prison.

Quote of the month

“The greatest glory in living lies not in never falling, but in rising every time we fall”

Nelson Mandela

The material and contents provided in this publication are informative in nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone. If expert assistance is required, professional advice should be obtained.

Markets

Local: The ASX200 index gained 6.0% over October, as investors responded to a more dovish than expected RBA 25bps hike to 2.60% and 2.85% in November.

Global: The S&P 500 rebounded in October after months of declines. Finishing the month up 8.0%.

Gold: Spot price for Gold continued to trend lower, moving down US $24 to US $1,648 amid US dollar strength and higher real rates continuing to weigh on prices.

Iron Ore: Iron Ore prices dropped US $16 to US $82/Mt due to seasonally lower steel demand and higher supply levels.

Oil: Brent Oil prices increased US $7 to US $95/bbl amid EU trade embargos lowering supply and production.

Property

Housing: CoreLogic’s national Home Value Index (HVI) moved through a sixth month of consistent declines, as values fell a further -1.2% in October.

Across the capital cities the month-on-month decline ranged from a -2.0% fall in Brisbane to Perth where dwelling values nudged -0.2% lower. Across the rest-of-state regions, monthly falls of more than -1% were recorded in Regional NSW (-1.7%), Regional Victoria (-1.4%) and Regional Queensland (-1.3%).

Although more regions are recording a fall in housing values, the rate of declines remain diverse. The pace of falls has eased over the past two months across Sydney and past three months in Melbourne but has gathered momentum in Brisbane where home values are now falling the most rapidly of any capital city or rest-of-state region. The changing dynamic across the largest cities has seen the rate of decline across the combined capitals index ease from a -1.6% drop in August to -1.4% in September and -1.1% in October.

Economy

Interest Rates: The RBA Cash rate has now had 7 consecutive rate rises. Slightly more conservative increases of 0.25% at the start of October and November has pushed the cash rate to 2.85%. With more rate rises likely before year end.

Retail Sales: Australian retail turnover rose 0.6% in September 2022. The September increase was the ninth consecutive rise, following a 0.6% rise in August 2022 and a 1.3% rise in July 2022.

Bond Yields: Australian government 10-year bond fell by 13 bps to 3.76% following a previous gain. The US 10-year bond rose again by 28 bps to finish the month at 4.07%.

Exchange Rate: The Aussie dollar fell again over October against both the American dollar, at $0.642, and the Euro at $0.644.

Inflation: The annual inflation rate in Australia climbed to 7.3% in Q3 of 2022 from 6.1% in Q2, above market forecasts of 7.0%. This was the highest level since Q2 1990.

Consumer Confidence: The Westpac Melbourne Institute Index of Consumer Sentiment fell by 0.9% from 84.4 in September to 83.7 in October. The Index remains in deeply pessimistic territory at a level comparable to the lows briefly reached during the pandemic and the extended weakness experienced during the Global Financial Crisis. The key drags on confidence continue to come from a surge in the cost of living, rising interest rates, and concerns about the near- term outlook for the economy.

Employment: Australia’s unemployment rate stood at 3.5% in September 2022, unchanged from the previous month, and matching market estimates. The number of unemployed climbed by 8,800 to 499,400, with the number of people looking for full-time jobs rising by 1,300 to 336,400.

US Employment: Total nonfarm payroll employment increased by 261,000 in October, and the unemployment rate rose to 3.7 percent. Notable job gains occurred in health care, professional and technical services, and manufacturing.

GDP: For GDP the revision to Q3 consumption sees a print of 1.3% q/q and 0.9% for overall GDP growth. In year-ended terms this points to growth of 2.8% in 2022 (reflecting the rebound from 2021 and ongoing healthy growth), before slowing to well below 2% over each of the next two years.

Purchasing Managers Index: The Australian Industry Group Australian Performance of Manufacturing Index (Australian PMI®) eased slightly in October, dropping 0.6 points to a broadly stable 49.6 (readings below 50 points indicate contraction in activity, with lower results indicating a faster rate of contraction). This is the third month of flat conditions, following positive results between February and July.

Sources: ABS, AFR, AWE, BLS, CoreLogic, Macquarie MWM Research, RBA, TradingEconomics, UBS.

Comment

The Housing Market Downturn

Sydney home values have reported a drop of -10.1%, equivalent to approximately $116,500 since the city hit peak value in February 2022. The double digit decline has come hand in hand with six successive cash rate hikes by the RBA and record low affordability. This follows the 27.9% surge or roughly $252,900 increase in the city dwelling values from the COVID-trough to peak.

The daily index shows Melbourne’s values are second to Sydney, falling -6.4% since 14 January 2022 while Brisbane is down -6.1 % since its 19 June 2022 peak. Adelaide and Perth have both declined less than -1% since their August peaks.

Furthermore, following research conducted by the RBA, record house price growth last year could be almost completely wiped out by the end of 2024, according to previously secret modelling done by the Reserve Bank of Australia earlier in the year.

Prices could fall 20 per cent from their peaks if people become increasingly pessimistic about the property market, either due to rising interest rates or because falling prices spark a downward spiral in the market.

The documents showed that a slump in the property market in the June quarter surprised RBA economists, given it came before most households began feeling the financial burden from rising interest rates.

It further showed that when the central bank started tightening policy in May, it did so assuming that the enormous circa 2.5% interest rate increases required to get back to what it believed was the minimum level of the “neutral” cash rate would have little impact on house prices.

It specifically forecast quarterly house price changes only very slightly below zero per cent over 2023. This was a remarkable leap of faith given that the 1.4% of interest rate cuts between June 2019 and November 2020 were a key contributor to the subsequent 3% increase in Australian house prices.

It should have been an obvious thought that changing the single biggest driver of household purchasing power (mortgage rates) would have a material impact on the price of properties.

Furthermore, the bank’s deputy governor, Michele Bullock, last week indicated that rates would keep rising well into next year and a move to smaller increases at the October board meeting was not because the job was almost done.

Ms Bullock said inflation in Australia was still too high, and people “should be in no doubt” rates would continue to rise.

Interest rates need to rise to ensure inflation returns to the 2 to 3 per cent band over time and inflationary expectations remain anchored, she told the Australian Finance Industry Association annual conference in Sydney.

“We still feel there is a path for us here where we can get inflation down, not go into recession, and preserve most of the gains in employment we’ve had.”

Sources: AFR, CoreLogic, RBA

Australia’s reliance on China

In 2007 China displaced Japan as Australia’s largest trading partner. In 2009 it became Australia’s largest export market, and in 2019-2020 we sold A$167.6 billion worth of goods and services to China – 35.3% of our total exports. In comparison Japan, still our second most important market, only took 11.8% of our exports.

On the flip side China supplied us with 21% of our imports worth A$83.4 billion. Our total economy, as measured by GDP, was worth around A$2 trillion at the time, so our two-way China trade made up about 12% of our economic activity. That may not make us totally reliant on China for our economic health, but any major disruption to that trade means Australia will have many billions of dollars less to run our schools and hospitals, pay pensions and wages, and to maintain our high standard of living.

Should we be looking to other markets?

In times of smooth sailing a high dependence on one trading partner may not be a cause of great concern. However there are many events that can disrupt trade, from natural disasters and pandemics to political tensions. In such times having a range of export markets helps to reduce the impact of interruptions to trade with one partner.

Achieving greater diversity of export markets is easier said than done however, particularly when seeking to replace demand from what is the biggest market for many of our goods and services. For example, China takes 100% of the nickel ore, 95% of the timber and 83% of the iron ore that we export. It also takes time to build trust and develop the personal relationships that underpin trade.

Looking at the big picture, China accounts for around 15% of global GDP. That leaves 85% in which to seek out new markets.

When relationships sour

The political and diplomatic relationship between China and Australia might be described as ‘challenging’ at present, with trade being used as a weapon of influence. Still, there’s more to Australia’s economic story than China, and many Australians may not experience much fallout from these trade tensions. They may even benefit from a surfeit of cheaper lobsters! On the other hand, and in the worst case, the farmers, winemakers, coal miners and timber workers who have seen the fruits of their labour hit with huge tariffs or denied entry into China face potentially catastrophic losses. This would place a general drag on the economy, potentially spark a recession and lead to an increase in unemployment.

The importance of trade

Nations engage in trade because it creates wealth. Our iron ore and coal helped to modernise China, build its infrastructure and allow it to make a huge range of manufactured goods, many of which we then import at much lower cost than we could make them for here.

In support of trade, Australia is currently a party to 16 free trade agreements (FTAs), including one with China. Much of the focus of these agreements is to reduce or remove the tariffs that increase the cost of our goods in our export markets, and where possible eliminate other barriers to trade. For example, the China-Australia Free Trade Agreement provides Australian businesses with better access to Chinese markets for legal, education, financial and tourism services, amongst others.

Perhaps the most comprehensive FTA is the Australia-New Zealand Closer Economic Relations Trade Agreement. Aside from eliminating all tariffs between the two countries, it also harmonises food standards, which minimises regulatory red tape, and removes impediments to the movement of skilled workers between the two countries. Unfortunately, as the recipient of just 3.6% of our exports, it will take a lot of New Zealand’s trade to significantly reduce our reliance on China.

Avoiding the FBT Christmas Grinch!

It’s that time of year again – what to do for the Christmas party for the team, customers, gifts of appreciation for your favourite accountant (just kidding), etc. Here are our top tips for a generous and tax effective Christmas season:

Tax & Christmas

For GST registered businesses (not tax exempt) that are not using the 50-50 split method for meal entertainment.

For your business

What to do for customers?

The most effective way of sharing the Christmas joy with customers is not necessarily the most tax effective. If, for example, you take your client out or entertain them in any way, it’s not tax deductible and you can’t claim back the GST. There are specific rules designed to prevent deductions and GST credits from being claimed when the expenses relate to entertainment, regardless of whether there is an expectation of generating goodwill and increased business sales. Restaurants, a show, golf, and corporate race days all fall into the ‘entertainment’ category.

However, if you send your customer a gift, then the gift is tax deductible as long as there is an expectation that the business will benefit (assuming the gift does not amount to entertainment). Even better, why don’t you deliver the gift yourself for your best customers and personally wish them a Merry Christmas. It will have a much bigger impact even if they are not available and the receptionist tells them you delivered the gift

From a marketing perspective, if your budget is tight, it’s better to focus on the customers you believe deliver the most value to your business rather than spending a small amount on every customer regardless of value. If you are going to invest in Christmas gifts, then make it something people remember and appropriate to your business.

You could also make a donation on behalf of your customers (where your business takes the tax deduction) or for your customers (where they receive the tax deduction). Donations to deductible gift recipients (DGRs) above $2 are often tax deductible and can make an active difference to a cause.

What to do for your team?

Christmas is expensive. Some businesses simply can’t afford to do much because cashflow is too tight. Expectations are high so if you are doing something then it’s best not to exacerbate cashflow problems and take advantage of any tax benefits or concessions you can.

Christmas parties

If you really want to avoid tax on your work Christmas party then host it in the office on a workday. This way, Fringe Benefits Tax (FBT) is unlikely to apply regardless of how much you spend per person.

Also, taxi travel that starts or finishes at an employee’s place of work is exempt from FBT. So, if you have a few team members that need to be loaded into a taxi after over indulging in Christmas cheer, the ride home is exempt from FBT.

If your work Christmas party is out of the office, keep the cost of your celebrations below $300 per person if you want to avoid paying FBT. The downside is that the business cannot claim deductions or GST credits for the expenses if there is no FBT payable in relation to the party.

If the party is held somewhere other than your business premises, then the taxi travel is taken to be a separate benefit from the party itself and any Christmas gifts you have provided. In theory, this means that if the cost of each item per person is below $300 then the gift, party and taxi travel can potentially all be FBT-free. Just remember that the minor benefits exemption requires a number of factors to be considered, including the total value of associated benefits provided across the FBT year.

If entertainment is provided to employees and an FBT exemption applies, you will not be able to claim tax deductions or GST credits for the expenses.

If your business hosts slightly more extravagant parties and goes above the $300 per person minor benefit limit, you will pay FBT but you can also claim a tax deduction and GST credits for the cost of the event. Just bear in mind that deductions are only useful to offset against tax. If your business is paying no or limited amounts of tax, a tax deduction is not going to help offset the cost of the party.

Christmas gifts for staff

$300 is the minor benefit threshold for FBT so anything at or above this level will mean that your Christmas generosity will result in a gift to the Tax Office as well at a rate of 47%. To qualify as a minor benefit, gifts also have to be ad hoc – no monthly gym memberships or giving one person multiple gift vouchers amounting to $300 or more.

Gifts of cash from the business are treated as salary and wages – PAYG withholding is triggered and the amount is subject to the superannuation guarantee.

Aside from the tax issues, think about what will be of value to your team. The most appreciated gift is the one that means something to the individual. Giving a bottle of wine to someone who doesn’t drink, chocolates to a health fanatic, or time off to someone with excess leave, isn’t going to garner much in the way of goodwill. A sincere personal message will often have a greater impact than a standard gift.

Missed the director ID deadline? Now what?

If you missed the 30 November 2022 deadline for obtaining a Director ID, the Australian Business Registry Services have stated that they will not take action against directors that apply for their ID by 14 December 2022.

If you are required to but have not yet applied for your ID, you should seek an extension immediately to avoid fines and penalties applying (https://www.abrs.gov.au/sites/default/files/2021-10/Application_for_an_extension_of_time_to_apply_for_a_director_ID.pdf), or contact the ABRS on 13 62 50 (+61 2 6216 3440 outside of Australia).

What do the ‘Secure Jobs, Better Pay’ reforms mean?

The Government’s ‘Secure Jobs, Better Pay’ legislation passed Parliament on
2 December 2022. We explore the issues.

The Fair Work Legislation Amendment (Secure Jobs, Better Pay) Bill 2022 passed Parliament on 2 December 2020. The legislation is extensive and brings into effect a series of changes and obligations that will impact on many workplaces.

The Bill also addresses many of the complexities of the enterprise bargaining process by streamlining the initiation and approval process. For example, to initiate bargaining to replace an existing single-employer agreement, unions and representatives no longer need a majority work determination and instead can make the request to initiate bargaining in writing to the employer.

Fact sheets on key elements of the ‘Secure Jobs, Better Pay’ legislation will be available on the Department of Employment and Workplace Relations website. Please seek advice from a professional industrial relations specialist if your business is impacted.

Fixed term contracts limited to 2 years

Employers are prohibited from entering into fixed-term employment contracts with employees for a period of longer than two years (in total across all contracts). The prohibition also prevents a fixed term contract being extended or renewed more than once for roles that are substantially the same or similar. Some exclusions exist such as for casuals, apprentices or trainees, high income workers ($162k pa), work covering peak periods of demand, where the work is performed by a specialist engaged for a specific and identifiable task, or where the modern award or FWA allows for longer fixed term contracts.

Employers will need to provide employees with a Fixed Term Contract Information Statement (to be drafted by the Fair Work Ombudsman) before or as soon as practicable after entering into a fixed term contract.

From 1 January 2023, the maximum penalty for contravening the 2 year limitation is $82,500 for a body corporate and $16,500 for an individual.

If your workplace has existing fixed term contracts in place, it will be important to review the operation of these to ensure compliance with the new laws.

Gender equality and addressing the pay gap

The concept of gender equality is now included as an object in the Fair Work Act. Previously, to grant an Equal Remuneration Order (ERO) the Fair Work Commission (FWC) assessed claims utilising a comparable male group (male comparator). The legislation removes this requirement opening the way for historical gender based undervaluation to be taken into account and for the FWC to issue a ERO on that basis. That is, female dominated industries may be undervalued generally not specifically compared to men working in that industry or sector. The FWC is no longer required to find that there is gender-based discrimination in order to establish that work has been undervalued. And, the FWC will be able to initiate an ERO on its own volition without a claim being made.

Pay secrecy banned

Prohibits pay secrecy clauses in contracts or other agreements and renders existing clauses invalid.

Employees are not compelled to disclose their remuneration and conditions but have a positive right to do so.

Flexible work requests strengthened

Provides stronger access to flexible working arrangements by enabling employees to seek arbitration before the FWC to contest employer decisions or where the employer has not responded to a request for flexible work conditions within the required 21 days.

If an employer refuses a request for flexible work conditions, the requirements for refusal have been expanded so that employers must discuss requests with the employee and genuinely try and reach agreement prior to refusing an employee’s request. Now, to refuse a request the employer must have:

• Discussed the request with the employee; and
• Genuinely tried to reach an agreement with the employee about making changes to the employee’s working arrangements that would accommodate the employee’s circumstances; and
• the employer and employee have been unable to reach agreement;
• the employer has had regard to the consequences of the refusal for the employee; and
• the refusal is based on reasonable business grounds.

The provisions also expand the circumstances in which an employee may request a flexible working arrangement, for example where they, or a member of their immediate family or household, experiences family or domestic violence.

Accountability for sexual harassment in the workplace

The amendments introduce stronger provisions to prevent sexual harassment and a new dispute resolution framework. Employers may be vicariously liable for acts of their employees or agents unless they can prove they took all reasonable steps to prevent sexual harassment. The amendments build on the Respect@Work report and the Anti-Discrimination and Human Rights Legislation Amendment (Respect at Work) Bill 2022 that passed Parliament in late November 2022. Broadly, the amendments:

• Apply to workers, prospective workers and persons conducting businesses or undertakings; and
• Create a new dispute resolution function for the FWC that enables people who experience sexual harassment in the workplace to initiate civil proceedings if the FWC is unable to resolve the dispute.

Anti-discrimination

Adds special attributes to the FWA to specifically prevent discrimination on the grounds of breastfeeding, gender identity and intersex status.

Aligning pay rates in job advertising with the FWA

Prohibits employers covered by the FWA from advertising jobs at a rate of pay that contravenes the FWA or a fair work instrument. For piecework, any periodic rate of pay to which the pieceworker is entitled needs to be included. The measure addresses concerns raised by the Migrant Workers’ Taskforce and the Senate Unlawful Underpayments Inquiry.

Multi-employer enterprise bargaining

The reforms make it easier for unions/applicants to negotiate pay deals across similar workplaces with common interests creating two new pathways for multi-employer agreements, supported bargaining, and single-interest. The FWC will need to authorise the multi-employer bargaining before it commences.

Supported bargaining for low paid industries

Applies to low-paid industries and is intended to support those who have difficulty negotiating at a single enterprise level – e.g., aged care, disability care, and early childhood education and care. The Minister will have authority to declare an industry or occupation eligible for supported multi-employer bargaining (MEB) and the FWC will decide if it is appropriate for the parties to bargain together. The employer does not have to give their consent to be included.

Employers cannot negotiate a separate agreement once they are included in supported multi-employer bargaining – they need to apply to the FWC to be removed from the supported bargaining authorisation.

Single interest multi-employer bargaining

Single interest multi-employer bargaining draws together employers with “common interests”. These may include geographical location, regulatory regime, and the nature of the enterprise and the terms and conditions of employment. It’s a very broad test.

Unless the employer consents, the FWC will not authorise multi-employer bargaining where it applies to a business with fewer than 20 employees. For businesses with less than 50 employees, to be excluded, the employer needs to prove that they are not a common interest employer or its operations and business activities are not reasonably comparable with the other employers.

For the FWC to authorise single interest multi-employer bargaining, the applicant will need to prove that they have the majority support of the relevant employees.

‘Zombie’ enterprise agreements

A Productivity Commission report found that 56% of employees covered by an enterprise agreement are on an expired agreement, or ‘zombie agreement’. Prior to the reforms, pre 2009 enterprise agreements could operate past their expiry date unless they were replaced with new agreements or terminated by the FWC. As these ‘zombie agreements’ remained fully enforceable, despite being expired, the terms of the agreement were often out of sync with modern awards. The Government notes one zombie agreement terminated in January 2022 saw employees $5 per hour on Saturdays, $10 per hour on Sundays and $24+ per hour on public holidays, worse off than the relevant modern award. The ‘Secure Pay, Better Pay’ reforms generally sunset these zombie agreements.

Important: This article is for information only. If your workplace is likely to be impacted by the amendments, please ensure you seek professional assistance from an industrial relations specialist. We are not specialists and cannot assist with the application of industrial law, awards, or applicable pay rates.

Quote of the month

“When you’re at the end of your rope, tie a knot and hold on.”

Former US President Theodore “Teddy” Roosevelt

The material and contents provided in this publication are informative in nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone. If expert assistance is required, professional advice should be obtained.