Business Matters February 2024

Stage 3 personal income tax cuts redesigned

The personal income tax cuts legislated to commence on 1 July 2024 will be realigned and redistributed under a proposal released by the Federal Government.

After much speculation, the Prime Minister has announced that the Government will amend the legislated Stage 3 tax cuts scheduled to commence on 1 July 2024. Relative to the current Stage 3 plan, the proposed redesign will broaden the benefits of the tax cut by focusing on individuals with taxable income below $150,000. If enacted, an additional 2.9 million Australian taxpayers are estimated to take home more in their pay packet from 1 July.

It’s not how Stage 3 of the 5 year plan to restructure the personal income tax system was supposed to work, but a sharp escalation in the cost of living has reshaped community sentiment. As the Prime Minister said, “we are focused on the here and now” and by default, not on long term structural change.

The redesign will increase Government revenues from personal income tax by an estimated $28 billion to 2034-35 as bracket creep takes its toll.

What will change?

The revised tax cuts redistribute the reforms to benefit lower income households that have been disproportionately impacted by cost of living pressures.

Under the proposed redesign, all resident taxpayers with taxable income under $146,486, who would actually have an income tax liability, will receive a larger tax cut compared with the existing Stage 3 plan. For example:

An individual with taxable income of $40,000 will receive a tax cut of $654, in contrast to receiving no tax cut under the current Stage 3 plan (but they are likely to have benefited from the tax cuts at Stage 1 and Stage 2).
An individual with taxable income of $100,000 would receive a tax cut of $2,179, which is $804 more than under the current Stage 3 plan.

However, an individual earning $200,000 will have the benefit of the Stage 3 plan slashed to around half of what was expected from $9,075 to $4,529. There is still a benefit compared with current tax rates, just not as much.

There is additional relief for low-income earners with the Medicare Levy low-income threshold increasing by 7.1% in line with inflation. It is expected that an individual will not start paying the Medicare Levy until their income reaches $26,000 and will not pay the full 2% until $32,500 (for singles).

While the proposed redesign is intended to be broadly revenue neutral compared with the existing budgeted Stage 3 plan, it will cost around $1bn more over the next four years before bracket creep starts to diminish the gains.

It’s not a sure thing yet!

The Government will need to quickly enact amending legislation to make the redesigned Stage 3 tax cuts a reality by 1 July 2024. This will involve garnering the support of the independents or minor parties to secure its passage through Parliament – Parliament sits from 6 February 2024.

How did we get here?

First announced in the 2018-19 Federal Budget, the personal income tax plan was designed to address the very real issue of ‘bracket creep’ – tax rates not keeping pace with growth in wages and increasing the tax paid by individuals over time. The three point plan sought to restructure the personal income tax rates by simplifying the tax thresholds and rates, reducing the tax burden on many individuals and bringing Australia into line with some of our neighbours (i.e., New Zealand’s top marginal tax rate is 39% applying to incomes above $180,000).

The three point plan introduced incremental changes from 1 July 2018 and 1 July 2020, with stage 3 legislated to take effect from 1 July 2024.

What now?

If you have any concerns about the impact of the proposed changes, please call us to discuss.

For tax planning purposes, for those with taxable income of $150,000 or more, the redesigned Stage 3 tax cuts offer less planning opportunity than the current plan. But, any change in the tax rates is an opportunity to review and reset to ensure you are taking advantage of the opportunities available, and not paying more than you need.

More information

Can my SMSF invest in property development?

Australians love property and the lure of a 15% preferential tax rate on income during the accumulation phase, and potentially no tax during retirement, is a strong incentive for many SMSF trustees to dream of large returns from property development. We look at the pros, cons, and problems that often occur.

An SMSF can invest in property development if trustees ensure the investment complies with the rules. And, there are a lot of rules. A key is the sole purpose test. Trustees need to ensure the fund is maintained to provide benefits for retirement, ill health or death. Breaches of this fundamental tenet are serious and include the loss of the fund’s concessional tax treatment and civil and criminal penalties.

By its nature property development is high risk and fund trustees need to ensure that the SMSF is not simply a handy cash-cow for a pipe dream, particularly when the developers are related parties.

There are multiple ways an SMSF can invest in property development if the investment strategy of the fund allows:

Directly developing property
An ungeared unit trust or company (the parties can be related)
Investment in an unrelated entity
A joint venture

Directly developing property from fund assets

An SMSF can purchase land from an unrelated party and develop the property in its own right. Common issues that often arise include:

Acquiring the land from a related party – An SMSF cannot purchase land from a related party (unless it is business real property used wholly and exclusively in a business). This means that the lovely block of land inherited by one of the members, or owned by a family trust, that is perfect for development cannot be purchased by the SMSF.

An SMSF cannot borrow to develop property – An SMSF can borrow money to purchase land using a limited recourse borrowing arrangement but it cannot use a loan to improve the asset. That is, borrowings cannot be used to develop the land. And, where the SMSF has borrowed to purchase land, it cannot change the nature of that asset until the loan has been repaid. That is, no development.

Who will develop the property? – Problems often occur when the property developers are related to the fund members. Whilst it is possible to engage a related party builder to undertake the work, there are strict rules that mean that the work and materials must be acquired at market value. That is, there is no advantage from “mates rates”. If you are using a related party builder, ensure that the paperwork is pristine, any transactions are at market value, and all interactions are documented.

GST might apply – Goods and services tax might apply to the development and the sale of any developed property. If the ATO considers that an SMSF is in the business of developing property or is undertaking a one-off development in a commercial manner then GST could potentially apply.

If your SMSF is not undertaking a property development project in its own right, there are a few ways for an SMSF to invest in property development projects:

Related ungeared trust or company

An ungeared company or trust is often used (under SIS Regulation, section 13.22C) when related parties want to invest in a property development together. The SMSF can invest in a company or trust that is undertaking a property development as long as the company or trust:

Does not lease to a related party (unless business real property)
Does not borrow money or have borrowings (must be ungeared)
Does not conduct a business
Conducts any dealings at arm’s length
And, the assets of the unit trust or company:
- Do not include an interest in another entity (i.e., cannot have shares in a company)
- Do not have a charge over them (i.e., mortgage over any asset)
- Are not purchased from a related party (or was ever an asset of a related party) unless the asset is business real property acquired at market rates.

See section 13.22C for full details.

Profits from the company or trust are then distributed to the SMSF according to its share.

Using the provisions of 13.22C means that the SMSF can invest in property development with a related party without the development being considered an in-house asset. However, if the criteria are not met (at any point), the in-house asset rules apply, and the SMSF might have to sell the units in the trust or shares in the company to return to the maximum 5% in-house asset limit. Generally, this means the sale of the underlying property or a significant restructure.

Problems arise with 13.22C arrangements where the trust or company:

Needs more money to complete the development and borrows money, or issues more units and sells them (is in business)
Accepts a loan from a member of the SMSF
Overdrafts (may be considered loans and breach 13.22C)
Uses a related party builder who either under charges for the work completed or overcharges and strips the profits that should have been returned to the SMSF.

Warning on conducting a business

One of the criteria for the exemption in 13.22C to apply is that the trust or company cannot be conducting a business. This requirement may prevent short-term property developments that are built and sold for profit.

Typically, 13.22C arrangements are used for long term investments where the development enables the creation of an asset that is then leased by the trust or company. This could be commercial premises leased to a related or unrelated party (e.g., premises for a child care centre or manufacturing), or residential premises leased to unrelated parties (e.g., townhouses or small developments).

Unrelated property developments

Investing in unrelated entities for a property development is attractive as there is no limit to how much of the fund’s assets can be invested (subject to the investment strategy and trust deed allowing the investment), and unlike ungeared entities, the entity is able to borrow money/place charge over the assets.

Where related parties are investing in the same entity, there are rules governing the percentage of ownership the SMSF and their related parties can hold. To meet the definition of unrelated entity for in-house asset purposes, the SMSF and their related parties must not own more than 50% of the units available. This is because the SMSF cannot control or hold sufficient influence over the entity and remain an unrelated entity. If the ATO considers the entity is related to the SMSF, then it would become a related party and the investment an in-house asset.

Joint venture arrangements

An SMSF can potentially invest in a joint venture (JV) property development, but the criteria are necessarily strict and there are a range of issues that need to be considered carefully. One of the issues that needs to be considered up-front is determining the substance of the arrangement between the parties, because the term JV can be used to describe a variety of arrangements. The ATO confirms that care must be taken to ensure that arrangements with related parties are true JVs.

Under a JV, the SMSF invests in and has a share of the property being developed (not the entity undertaking the development). Each party bears the costs (time and/or money) of the JV and receives this same proportionate contribution from the returns. If the arrangement is not structured properly then the SMSF’s stake in the JV could be treated as an investment in or loan to a related party and be treated as an in-house asset. For example, this could be the case if the SMSF only provides a capital outlay for the arrangement and has no rights other than a contractual right to a return on the final investment.

It is also necessary to consider whether the arrangement between the parties could be treated as a partnership for tax, GST and legal purposes. For example, this could be the case if the arrangement involves the sharing of income, sale proceeds or profits, rather than sharing the output from the project.

It’s essential to get advice well in advance – tax, legal and financial – before pursuing a JV.

Is your SMSF the best vehicle for property development?

Trustees need to carefully consider any investment decisions and have a sound rationale for the investment.

Any advice on a property development needs to be from a licensed financial adviser. A lawyer should be used for any contracts or agreements between parties. And, compliance assistance from a qualified accountant.

Contractor or employee?

Just because an agreement states that a worker is an independent contractor, this does not mean that they are a contractor for tax and superannuation purposes, new guidance from the ATO warns.

Where there is a written contract, the rights and obligations of the contract need to support that an independent contracting relationship exists. The fact that a contractor has an ABN does not necessarily mean that they have genuinely been engaged as a contractor. The ATO says that “at its core, the distinction between an employee and an independent contractor is that:

an employee serves in the business of an employer, performing their work as a part of that business
an independent contractor provides services to a principal’s business, but the contractor does so in furthering their own business enterprise; they carry out the work as principal of their own business, not part of another.”

Contracts over time

The ATO points out that a contracting agreement at the start of a relationship may not continue to be one over time. For example, if the project the contractor was engaged to complete has finished, but the worker continues working for the company then the classification needs to be revisited.

What happens if there is no contract?

If no contract exists, then it’s important to look at the form and substance of the relationship to come to a reasonable position about whether an employment or contractor relationship exists.

The problem when the evidence doesn’t match what the taxpayer tells the ATO

A recent case before the Administrative Appeals Tribunal (AAT) highlights the importance of ensuring that the evidence supports the tax position you are taking.

The case involves heritage farmland originally purchased for $1.6m that sold 7 years later for $4.25m and the GST debt that the ATO is now pursuing on the sale.

In 2013, the taxpayer purchased Sutton Farms in Western Australia – 1.47 hectares consisting of an uninhabitable homestead, large barn and quarters.

Over the course of 7 years, the taxpayer rezoned the property, obtaining conditional subdivision approval to subdivide the property into four lots with plans for a further subdivision into approximately 15 lots, as well as undertaking sewerage, water and electrical works. The work was supported by a $1m loan from a bank and a further $1.5m from his brother-in-law.

While the property was never used for this purpose, the taxpayer’s stated intention was to use the property as their home, gift the subdivided lots to his daughter and son for use as their own respective residences, and use the last subdivided lot as a memorial dedicated to another child who had passed away.

Without being subdivided, the property was eventually sold at a profit as a single lot in 2020 for $4.25m.

When the ATO audited the transaction and issued an assessment notice for GST on the sale transaction, the taxpayer objected. The taxpayer’s argument was that Sutton Farms was intended to be used as a family home and the subdivision application had no commercial purpose. Therefore, GST should not apply as the sale was not made in the course of an enterprise. However, there were a number of factors and inconsistencies working against the taxpayer’s argument:

Local media articles that outlined the taxpayer’s plan to commercialise the property, “with the plans to lease it out as a restaurant, wine bar or coffee house, turn the barn into an art studio and add 8 – 10 finger jetties in the canal adjacent.”
Statements made to the ATO during the objection stage of the dispute indicating that the taxpayer intended to subdivide the property to sell some of these lots to repay loans owed to the taxpayer’s brother-in-law; and
GST credits were claimed on the original development costs. The taxpayer’s accountant also made representations to the ATO stating that the GST credits were claimed because the intended subdivision and sale of the several lots within the property amounted to an enterprise.

The problem for the taxpayer is that although he did not develop the property in the way he originally intended and ended up selling the property as one lot, through the ownership period he acted as if the project was a commercial venture with a stated commercial outcome.

The importance of objective evidence

Determining the tax treatment of a property transaction can sometimes be a difficult exercise and there are a number of factors that need to be considered. This will often include the intention or purpose of the taxpayer when acquiring a property. However, merely stating your intention isn’t enough, it needs to be supported by objective evidence. This might include loan terms, correspondence with advisers and real estate agents, the way expenses have been accounted for, or the conversation you have with a journalist.

Quote of the month

“…no matter what life throws at you, seek out opportunities to contribute, to participate and to action change….have a crack, and as I like to say, don’t just lean in, leap in.”

Joint Australian of the Year 2024 Richard Scolyer

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.

Business Matters March 2024

The Fringe Benefit Tax traps

The Fringe Benefits Tax year (FBT) ends on 31 March. We explore the problem areas likely to attract the ATO’s attention.

Electric vehicles causing sparks

In late 2022, the Government introduced a concession that enables employers to provide some electric vehicles to employees without incurring the 47% fringe benefits tax (FBT) on private use.

The exemption applies to the use of electric cars, hydrogen fuel cell electric cars or plug-in hybrid electric cars if:

The value of the car is below the luxury car tax (LCT) threshold for fuel efficient vehicles ($89,332 for 2023-24 financial year) at the time it is first sold in a retail sale; and
The car is both first held and used on or after 1 July 2022.

If your business is planning on acquiring an electric vehicle, be aware that from 31 March 2025, the FBT exemption will no longer apply to plug-in hybrid electric vehicles unless the vehicle met the conditions for the exemption before this date and there is already a binding agreement to continue to use the vehicle privately after this date.

The problem areas

The exemption only applies to employees – For the FBT exemption to apply, the vehicle needs to be supplied by the employer to an employee (including under a salary sacrifice agreement). Partners of a partnership and sole traders are not employees and cannot access the exemption personally.

If LCT applies to the car it will never qualify for the FBT exemption. For example, if the EV failed the eligibility criteria in 2022-23 when it was first purchased because it was above the luxury car limit of $84,916, the fact that it resold in 2023-24 for $50,000 does not make it eligible for the exemption on resale. Likewise, if the car was used by anyone (including a previous owner) before 1 July 2022 then it will probably never qualify for the FBT exemption.

Home charging stations are not included in the exemption. The FBT exemption includes associated benefits such as registration, insurance, repairs or maintenance, but it does not include a charging station at the employee’s home. If the employer instals a home charging station at the employee’s home or pays for the cost, then this is a separate fringe benefit.

FBT might not apply but you do the paperwork as if it did. While the FBT exemption on EVs applies to employers, the value of the fringe benefit is still taken into account when working out the reportable fringe benefits of the employee. That is, the value of the benefit is reported on the employee’s income statement. While you don’t pay income tax on reportable fringe benefits, it is used to determine your adjusted taxable income for a range of areas such as the Medicare levy surcharge, private health insurance rebate, employee share scheme reduction, and certain social security payments.

What about the cost of electricity? The ATO’s short-cut method can potentially be applied to calculate reportable fringe benefit amounts and applies a rate of 4.20 cents per kilometre. If you are not using the short-cut method, you need to have a viable method of isolating and calculating the electricity consumption of the car.

The exemption does not apply if the employee directly purchases or leases the EV. If an employee purchases or leases the EV directly, and the employer reimburses them under a salary sacrifice arrangement, the FBT exemption does not apply because this is not a car fringe benefit. However, the exemption can potentially apply to novated lease arrangements if they are structured carefully.

Not all electric vehicles are cars. To qualify for the exemption, the EV needs to be a car – electric bikes and scooters do not count, nor do vehicles designed to carry a load of 1 tonne or more or that carry 9 passengers or more.

The ATO Debt Dilemma

Late last year, thousands of taxpayers and their agents were advised by the Australian Taxation Office (ATO) that they had an outstanding historical tax debt. The only problem was, many had no idea that the tax debt existed.

The ATO can only release a taxpayer from a tax debt in limited situations (e.g., where payment would result in serious hardship). However, sometimes the ATO will decide not to pursue a debt because it isn’t economical to do so. In these cases, the debt is placed “on hold”, but it isn’t extinguished and can be re-raised on the taxpayer’s account at a future time. For example, these debts are often offset against refunds that the taxpayer might be entitled to. However, during COVID, the ATO stopped offsetting debts and these amounts were not deducted.

In 2023, the Australian National Audit Office advised the ATO that excluding debt from being offset was inconsistent with the law, regardless of when the debt arose. And by this stage, the ATO’s collectible debt had increased by 89% over the four years to 30 June 2023.

The response by the ATO was to contact thousands of taxpayers and their agents advising of historical debts that were “on hold” and advising that the debt would be offset against any future refunds. These historical debts were often across many years, some prior to 2017, and ranged from a few cents to thousands of dollars. For many, the notification from the ATO was the first inkling they had of the debt, because debts on hold are not shown in account balances as they have been made “inactive”. In other words, taxpayers were accruing debt but did not know as the debts were effectively invisible because they were noted as “inactive.”

In a recent statement, the ATO said: “The ATO has paused all action in relation to debts placed on hold prior to 2017 whilst we review and develop a pragmatic and sensible way forward that takes into account concerns raised by the community.

It was never our intention to cause frustration or concern. It’s important to us that taxpayers have trust in our tax system and our records.”

For any taxpayer with a debt on hold, it is important to remember that just because the ATO might not be actively pursuing recovery of the debt, this doesn’t mean that it has been extinguished.

Small business tax debt blows out

Out of the $50bn in collectible debt owing to the ATO, two thirds is owed by small business. As of July 2023, the ATO moved back to its “business as usual” debt collection practices. For entities with debts above $100,000 that have not entered into debt repayment terms with the ATO, the debt will be disclosed to credit reporting agencies.

If your business has an outstanding tax debt, it is important to engage with the ATO about this debt. Hoping the problem just goes away will normally make things worse.

How to take advantage of the 1 July super cap increase

From 1 July 2024, the amount you can contribute to super will increase. We show you how to take advantage of the change.

The amount you can contribute to superannuation will increase on 1 July 2024 from $27,500 to $30,000 for concessional super contributions and from $110,000 to $120,000 for non-concessional contributions.

The contribution caps are indexed to wages growth based on the prior year December quarter’s average weekly ordinary times earnings (AWOTE). Growth in wages was large enough to trigger the first increase in the contribution caps in 3 years.

Other areas impacted by indexation include:

The Government super co-contribution – Income threshold
The super guarantee maximum contribution base (the limit for compulsory super guarantee payments)
The tax-free thresholds for redundancy payments
The CGT contribution cap (amount that can be contributed to super following the sale of eligible business assets)

For those with the disposable income to contribute, superannuation can be very attractive with a 15% tax rate on concessional super contributions and potentially tax-free withdrawals when you retire. For business owners who might have had an exceptional year or sold their business, it’s an opportunity to get more into super. However, the timing of contributions will be important to maximise outcomes.

If you know you will have a capital gains tax liability in a particular year, you may be able to use ‘catch up’ contributions to make a larger than usual contribution and use the tax deduction to help offset your capital gain tax bill. But, this strategy will only work if you meet the eligibility criteria to make catch up contributions and you lodge a Notice of intent to claim or vary a deduction for personal super contributions, with your super fund.

Using the bring forward rule

The bring forward rule enables you to bring forward up to 2 years’ worth of future non-concessional contributions into the year you make the contribution – this is assuming your total superannuation balance enables you to make the contribution and you are under age 75.

If you utilise the bring forward rule before 30 June, the maximum that can be contributed is $330,000. However, if you wait to trigger the bring forward until on or after 1 July, then the maximum that can be contributed under this rule is $360,000.

‘Catch up’ contributions

If your super balance is below $500,000 on the prior 30 June, and you want to quickly increase the amount you hold in super, you can utilise any unused concessional super contributions amounts from the last 5 years.

Let’s look at the example of Gary who has only been using $15,000 of his concessional super cap for the last few years. Gary’s super balance at 30 June 2023 was $300,000, so he is well within the limit to make catch up contributions.

Gary could access his $27,500 concessional cap for 2023-24 plus the unused $55,000 from the prior 5 financial years.

If Gary doesn’t access the unused amounts from 2018-19 by 30 June 2024, the $10,000 will no longer be available.

Transfer balance cap unchanged

The general rate for the transfer balance cap (TBC), that limits how much money you can transfer into a tax-free retirement account, will remain at $1.9 million for 2024-25. The TBC is indexed by the December consumer price index (CPI) each year.

Revised stage 3 tax cuts confirmed for 1 July

The revised stage 3 tax cuts have passed Parliament and will come into effect on 1 July 2024.

Before the new tax rates come into effect, check any salary sacrifice agreements to ensure that they will continue to produce the result you are after.

Resident individuals

Non-resident individuals

Working holiday markers

Getting back what you put in: Loans to get a business started

It’s not uncommon for business owners to pour their money into a business to get it up and running and to sustain it until it can survive on its own. A recent case highlights the dangers of taking money out of a company without carefully considering the tax implications.

A case before the Administrate Appeals Tribunal (AAT) was a loss for a taxpayer who blurred the lines between his private expenses and those of his company.

The taxpayer was a shareholder and director of a private company that operated a business. Over a number of years, he made withdrawals and paid personal private expenses out of the company bank account, but the amounts were not recognised as assessable income.

Following an audit, the ATO assessed the withdrawals and payments as either:

Ordinary income assessable to the taxpayer, or
Deemed dividends under Division 7A.

Division 7A contains rules aimed at situations where a private company provides benefits to shareholders or their associates in the form of a loan, payment or by forgiving a debt. If Division 7A is triggered, then the recipient of the benefit is taken to have received a deemed unfranked dividend for tax purposes.

The taxpayer tried to convince the AAT that the withdrawals were repayments of loans originally advanced by him to the company and therefore should not be assessable as ordinary income. Alternatively, he argued that the payments were a loan to him and there was no deemed dividend under Division 7A because the company did not have any “distributable surplus” (a technical concept which limits the deemed dividend under Division 7A).

The AAT found issues with the quality of the taxpayer’s evidence, concluding that he failed to prove that the ATO’s assessment was excessive. This was based on a number of factors, including:

The taxpayer produced a number of different iterations of his financial affairs and tax return.
He could not satisfactorily explain how he was able to fund the original loans to the company, especially given he had declared tax losses in multiple years around the time when the loans were made.

While the taxpayer had tried to explain that some of his loans to the company were sourced originally from borrowings from his brother, the AAT considered this was implausible given the brother’s own tax return showed modest income.

So, how should a contribution from a company owner to get a business up and running be treated? It really depends on the situation, but for small start-ups, the common avenues are:

Structure the contribution you make as a loan to the company, or
Arrange for the company to issue shares, with the amounts paid being treated as share capital.

In making a decision on which is the best approach, it is necessary to consider a range of factors, including commercial issues, the ease of withdrawing funds from the company later and regulatory requirements.

The way you put money into the company also impacts on the options that are available to subsequently withdraw funds from the company. However, the key issue to remember is that if you take funds out of a company then there will probably be some tax implications that need to be carefully managed.

Quote of the month

“Life isn’t about finding yourself. Life is about creating yourself.”

George Bernard Shaw

The Round Up January 2024

From Government

Mid-Year Economic and Fiscal Outlook ups the tax take

The Government has taken the opportunity to announce some new tax-related measures together with the release of its Mid-Year Economic and Fiscal
Outlook on 13 December 2023.

With the aim of providing further incentives for tax debts to be paid on time, the Government is proposing to deny deductions for general interest charge and
shortfall interest charge levied by the ATO. This measure is intended to apply to interest expenses incurred in income years starting on or after 1 July 2025.

Other measures announced in the Mid-Year Economic and Fiscal Outlook include:

An increase to the foreign resident capital gains withholding tax rate from 12.5% to 15% and a reduction of the withholding threshold from $750,000 to nil. The changes are intended to apply to property disposals for contracts entered into from 1 January 2025.
An increase to the foreign investment fees that apply to foreign investors who apply to purchase established dwellings.
An increase to the vacancy fees for foreign investors who have purchased residential dwellings since 9 May 2017.
Tightening the definition of a fuel-efficient vehicle in the luxury car tax rules by reducing the maximum fuel consumption from 7 litres per 100km to 3.5 litres per 100 km from 1 July 2025.

More information

Budget 2023-24 Mid-Year Economic and Fiscal Outlook

Adviser misconduct: Increasing the power of regulators

Treasury has released some additional exposure draft legislation and papers for consultation as part of the Government’s response to recent matters involving tax
adviser misconduct.

While many practitioners would already be aware that the Government has already introduced some measures in response to this matter, this package of proposed reforms is specifically targeted at increasing the power of regulators.

Tax Agent Services (Code of Professional Conduct) Determination 2023

Treasury has released exposure draft materials in relation to the Tax Agent Services (Code of Professional Conduct) Determination 2023. This instrument is
designed to supplement the Code of Professional Conduct that applies to registered tax and BAS agents.

The draft instrument imposes additional professional and ethical obligations with measures targeting the following areas:

Upholding and promoting the ethical standards of the tax profession, which include requirements on practitioners to take reasonable steps to hold other
registered tax agents and BAS agents accountable for compliance with the Code of Professional Conduct.
Requirements to not make false or misleading statements to the ATO or Tax Practitioners Board. This requirement also extends to not making false or
misleading statements to other government agencies where such statements are made in the capacity as a registered tax or BAS agent.
Obligations to take reasonable steps to identify and avoid material conflicts of interest related to dealings with Australian government agencies, including a
requirement to report such conflicts of interest if they arise.
Maintaining confidentiality in dealings with government, including certain restrictions on using that information for personal advantage.
Keeping proper records relating to tax agent services provided to current and former clients with such records to be retained for five years.
Ensuring tax agent services provided on a practitioner’s behalf are performed competently and under appropriate supervision.
Requirements for tax practitioners to have sufficient internal control procedures to ensure they are compliant with the Code of Professional Conduct.
Imposing obligations on tax practitioners to inform clients on matters that are reasonably relevant and material to their decision to engage or continue to
engage the practitioner, including additional obligations to provide information to clients on the Tax Practitioner Board’s public register and complaints process.

Enhancing the Tax Practitioners Board’s sanctions regime

Treasury has also released a consultation paper on proposed changes aimed at providing the Tax Practitioners Board with a stronger and more agile sanctions regime.

Together with recent events, a review conducted around 2019 highlighted gaps in the enforcement tools available to the Tax Practitioners Board. The overall intent is for the Board to be given the ability to impose sanctions that escalate in severity in response to more serious contraventions.

In particular, the consultation paper canvasses the following proposals:

Criminal penalties for practitioners that operate without a registration with the Tax Practitioners Board.
Broader and increased civil penalties in the Tax Agent Services Act 2009.
An infringement notice scheme attached to the civil penalty regime.
A new power to allow the Tax Practitioners Board to enter enforceable voluntary undertakings with tax practitioners.
A new power to allow the Tax Practitioners Board to impose interim and contingent suspensions.

More information

Tax Treaty with Portugal

Australia signed a new tax treaty with Portugal on 30 November 2023, which is the first tax treaty between the two countries.

The tax treaty will come into force after both countries have ratified the treaty and instruments of ratification have been exchanged.

More information

Portugal tax treaty

From the Regulators

Government support payments to help businesses with recent weather events

Many businesses may have been adversely impacted by recent weather events with some receiving government grants and other forms of financial support to assist in their recovery.

While the tax treatment of support payments might not be the immediate priority of impacted businesses, the ATO is reminding taxpayers to consider this when it comes time to lodge tax returns.

The starting point is that government grants paid to businesses are normally taxable.

The main exception is if the specific grant has been made tax-free and certain other conditions are met. While this normally depends on the type of grant received by the business, the ATO has issued a fact sheet Disaster support grants and deductions for business with a list of common non-taxable natural disaster government grants which can assist with this area.

If a business receives a tax-free grant then it is important to remember that it wouldn’t normally be possible to claim deductions for costs that directly relate to obtaining that tax-free grant. This includes any fees paid to assist with the grant application process.

However, receiving a tax-exempt grant shouldn’t impact on the deductions available for other normal business expenses that would have otherwise been incurred, such as wages, rent or utilities. This should be the case even if the grant might be intended to help with those business costs.

More information

Warning for super funds claiming GST credits on personal advice fees

The ATO is warning superannuation funds and investor-directed portfolio service (IDPS) investment platforms of certain arrangements that result in claiming reduced GST credits on fees for personal advice.

In broad terms, the focus is on arrangements that involve an investor or member engaging an adviser to provide them with personal advice in respect of their interest in the fund or platform. Those services are provided under an agreement between that person and the adviser.

While the person subsequently authorises the fund or platform to pay the adviser fees by deducting the fee from their interest in the fund or platforms’ assets, they remain liable if the fund or platform does not pay.

The ATO describes this as an administrative payment arrangement. The fund or platform is not the actual recipient of the advice and as a result, is not eligible to
claim reduced GST credits. Recognising that private binding rulings issued by the ATO in the past may have contributed to reduced GST credits claims, the ATO’s compliance approach is largely prospective. This means that the ATO will generally not devote compliance resources to reviewing reduced GST credits claimed under these arrangements for periods before 1 April 2024.

Funds and platforms engaged in these types of arrangements are still encouraged to review their entitlement to claim reduced GST credits and if unsure, seek advice or a private binding ruling from the ATO.

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Eligibility of super funds and investor-directed portfolio services investment platforms to claim reduced input tax credits on adviser fee

Data matching on the sharing economy

Electronic platforms operating in the sharing economy are being reminded of their obligations to report transactions made through their platform to the ATO under the sharing economy reporting regime.

With the first report due at the end of January 2024, these reporting obligations already apply to transactions from 1 July 2023 onwards for most ride-sourcing and short-term accommodation platforms.

For other impacted sharing economy platforms (such as in areas of asset sharing, food delivery, etc.), they will be required to report transactions from 1 July 2024 onwards.

Practitioners should remind clients engaged in the sharing economy that the ATO is collecting data from electronic platforms and will be matching this with
disclosures in their tax returns and activity statements.

More information

Sharing economy reporting regime

Rulings, Determinations & Guidance

Individuals claiming deductions for financial advice fees

The ATO has released TD 2023/D4 that looks at when deductions can be claimed for fees paid for financial advice. The draft determination focuses on individuals who do not carry on a business and replaces TD 95/60 which was originally issued almost 30 years ago.

First, the ATO considers how the general deduction provisions in section 8-1 ITAA 1997 apply to financial advice fees.

Consistent with the ATO’s original view, ongoing fees for financial advice in relation an existing or ongoing income producing investments should normally be deductible under the general deduction provisions. This would include continuing advice on the suitability or performance of an individual’s income producing
investments that they already own.

On the other hand, deductions typically won’t be available for financial advice fees under the general deduction provisions in the following circumstances:

Fees relating to financial advice on new proposed investments that have yet to be purchased, including advice on whether such investments are suitable for
the individual. These fees are considered either to be capital in nature or preliminary to the actual earning of assessable income (i.e., relate to putting the
income earning investment in place).
Fees for once-off financial advice that can be expected to provide an enduring benefit, such as advice on estate planning or advice on starting a self-managed superannuation fund. The issue is that these fees are normally considered capital in nature.
Financial advice fees that are considered private in nature, such as advice relating to household budgeting.

While this is largely consistent with the previous determination and doesn’t represent a change in the ATO’s position, the new draft determination has been
broadened to also look at when tax (financial) advice fees provided by financial advisers could be deductible under section 25-5.

In broad terms, this section allows someone to claim deductions for fees paid for advice on a Commonwealth taxation law to the extent the advice relates to managing their tax affairs. However, there are some key issues that need to be considered.

First, the advice needs to be provided by a recognised tax adviser, which normally means in this context either a qualified tax relevant provider registered with ASIC or a tax or BAS agent registered with the Tax Practitioners Board.

Second, the advice needs to relate to managing that individual’s tax affairs. The expenditure also can’t be capital expenditure, although expenditure is not capital
expenditure merely because the tax affairs concerned relates to matters of a capital nature.

While the ATO considers that tax affairs include tax (financial) advice provided by a financial adviser under Tax Agent Services Act 2009, the warning is that not all advice provided by a financial adviser will qualify. Advice that won’t qualify includes factual information about a financial product that does not actually involve applying or interpreting tax laws to the individual’s personal circumstances.

The ATO makes the following observations when it comes to claiming deductions for financial advice fees:

Where only part of the financial advice fee is deductible either under section 8-1 or section 25-5, a reasonable apportionment of the fee is required; and
The individual should have sufficient evidence of the expenditure before claiming a deduction. For example, an invoice with the name of the financial
adviser, the amount, an explanation of the advice, the date of when the expense was incurred and the date when the invoice was produced should suffice as
written evidence.

Lastly, while the draft determination does not consider the situation of financial advice fees being paid by a superannuation fund, it is important to be aware that
Treasury recently issued draft legislation for consultation in this area. This draft legislation includes a proposed measure that ensures deductions are available for certain personal advice in relation to members when paid for by their superannuation fund.

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The ATO’s updated guidance on employee / contractor distinction

TR 2023/4 Pay as You Go Withholding – who is an employee?

The ATO has now finalised its ruling TR 2023/4 that explains how to determine whether a worker should be classified as an employee for PAYG withholding
purposes. The ruling focuses on determining whether someone is an employee under the ordinary meaning of the term but doesn’t look at the extended definition
of employee that is used in the context of the superannuation guarantee system.

The principles in the final ruling remain substantially the same as the original draft. The ATO continues to emphasize that whether an individual is an employee is a question of fact to be determined based on an assessment of the entire relationship between the parties.

In line with more recent High Court decisions in this area, if the worker and engaging entity have committed the terms of the relationship into a written contract, then the analysis needs to be performed with reference to the legal rights and obligations in that written contract.

The key focus is on the terms of the contract, rather than the labels used by the parties to describe the relationship.

Where a contract is not comprehensively committed in writing, the ATO now makes it more clear in the final ruling that the subsequent conduct of the parties can be relevant to work out the contractual terms that have been agreed to by the parties.

In determining whether a worker should be classified as an employee, there are still a range of factors that need to be considered.

The ATO indicates that the key distinction between an employee and an independent contractor is that:

An employee serves in the business of an employer, performing their work as part of that business;
An independent contractor provides services to a principal’s business, but the contractor does so in furthering their own business enterprise; they carry
out the work as principal of their own business, not as part of another.

In addition to whether the worker is serving as part of the engaging entity’s business, it is also important to consider the extent to which the business has a
contractual right to control how, where and when the workers perform their work.

Aside from these two key factors there are a number of other indicators that could be relevant in classifying the worker, including:

The ability to delegate work;
Whether the contract is on a results basis;
Which party provides the tools and equipment;
Risk; and
Generation of goodwill.

Consistent with the draft ruling, the ATO considers that where a worker engages to perform work for a business as a partner of a partnership or through a company or trust then this may indicate an intention by all parties not to create an employment relationship. However, a different conclusion may be reached if a worker uses an interposed entity but is also directly a party to the contract with the engaging entity.

PCG 2023/2 Classifying workers as employees or independent contractors – ATO compliance approach

Together with the tax ruling, the ATO has also now finalised PCG 2023/2 which explains how the ATO will allocate compliance resources when it comes to
classifying a worker as an employee or independent contractor.

The PCG outlines the risk framework that will be used by the ATO for worker classification issues, based on the actions taken by the parties when entering into the arrangement and their subsequent conduct. It is important to recognise that the PCG does not extend to employment law issues, state-based issues or the
income tax affairs of the worker (e.g., whether they are subject to the PSI rules etc).

The PCG sets out four risk categories, which are based on whether certain conditions are met.

While the final PCG remains the same as the draft in many respects, there are some notable updates. This includes:

• Changes to the conditions that determine whether an arrangement falls within a medium-risk zone.
A new condition that has been added for an arrangement to be considered a very-low or low-risk which requires the parties to enter into a comprehensive written agreement that governs their entire relationship.
One of the original conditions for an arrangement to be considered very-low or low risk is that the business has obtained specific advice confirming that the classification is correct. This condition remains, but will only be satisfied if the ATO consider the advice provided is at least reasonably arguable.

More information

Software and intellectual property royalties

The ATO has issued draft ruling TR 2021/D4 which considers when an amount paid under a software arrangement is considered a royalty under domestic tax law and standard international tax treaties.

This draft ruling replaces but also substantially updates the previous draft ruling in this area which was issued in 2021.

If the payments are classified as royalties under domestic tax law or a tax treaty (whichever is relevant), this can trigger non-resident withholding tax obligations for the payer. The classification of a payment as a royalty under domestic tax law can also impact the tax rate and franking rate that applies to companies.

With the focus on software distributors, a key message from the ATO is that many contemporary distribution agreements that involve the electronic distribution of software are likely to involve royalties.

This is because they commonly now involve a software distributor paying for the use of rights that are exclusive to the copyright owner (such as to reproduce the work in a material form, to communicate the work to the public, to make an adaptation of the work, etc.).

This ruling is complex and needs to be reviewed in detail for clients involved in the software industry.

More information

TR 2021/D4

Single or multiple depreciating assets

TR 2024/1 is the ATO’s final ruling on how to determine whether an item is a single depreciating asset or whether its components are separate depreciating assets in their own right.

This issue can often arise in the context of whether the cost of multiple items or components need to be grouped when determining if the asset’s cost is less than a specific instant asset write off threshold. This distinction has become more important again with the expiry of temporary full expensing on 30 June 2023.

The guidance in the final ruling remains substantially unchanged compared with the earlier draft issued in October 2023.

The ATO explains that the following main principles are taken into account in determining whether an item consists of a single asset or multiple depreciating assets:

The depreciating asset will tend to be the item that performs a separate identifiable function, with regard to the purpose or function it serves in the business;
An item may be identified as having a discrete function, and therefore as a depreciating asset, without necessarily being self-contained or used on a
stand-alone basis; The greater the degree of physical or functional integration of an item with other component parts, the more likely the depreciating asset will be the composite larger item;
When the effect of attaching an item to another item (which itself has its own independent function) varies the function or operational performance of that
other item, the attachment is more likely to be a separate depreciating asset; and
When various components are purchased (whether via one or multiple transactions) to function together as a system and are necessarily connected in their
operation, the depreciating asset is usually the system (the composite item).

Importantly, the fact that an item cannot operate on its own and has no commercial utility unless linked or connected to another item does not necessarily prevent it from being a separate depreciating asset. Where the items are designed to be used in a range of settings, in conjunction with a wide range of equipment or systems and are not acquired with other items as part of system, this might indicate they are separate depreciating assets.

More information

TR 2024/1

Offshore intangibles arrangements with related parties

The ATO has finalised its practical compliance guideline PCG 2024/1 which sets out its approach to certain arrangements between international related parties
involving intangible assets, such as intellectual property.

The two main areas of concern for the ATO are:

Migration arrangements where there has been a restructure which impacts on the flow of the benefits from the exploitation of the intangible assets (for example, the transfer of intellectual property to an offshore related party); and
Situations where Australian activities connected with the development, enhancement, maintenance, protection and exploitation of intangible assets are being mischaracterised or not recognised.

The guideline focuses on the application of the transfer pricing provisions and general anti-avoidance rules and provides a method for classifying an arrangement as lower, lower to medium risk, medium or high risk.

The risk rating influences the level of compliance resources that the ATO will dedicate to reviewing the arrangement. The ATO will not dedicate resources to
reviewing or auditing lower risk arrangements, apart from verifying the risk rating is correct.

The risk assessment framework utilises a points-based system to determine the level of risk associated with the arrangement. The ATO provides a number of
examples, explaining the level of risk associated with each arrangement and explains the types of evidence the ATO would expect to review when examining arrangements involving intangibles.

In response to feedback received on the draft PCG, the ATO has now included a white zone to make it clear that it won’t seek to review an arrangement that is
subject to a settlement agreement with the ATO, a court decision or that has previously been subject to an ATO review or audit.

Also, certain arrangements have also now been excluded from the scope of the PCG to make it easier for taxpayers to use the guide.

More information

PCG 2024/1

Arrangements that exploit the R&D tax offset

Two taxpayer alerts have been issued by the ATO which address concerns in relation to certain arrangements that are aimed at exploiting the R&D tax
offset.

The ATO is concerned that these arrangements are being used to either claim a R&D tax offset in situations where it would otherwise not be available or artificially increase the amount of R&D tax offset claimed.

First, TA 2023/4 targets arrangements that involve an existing entity that has historically conducted the group’s research and trading activities. The existing
entity would either not have been entitled to a R&D tax offset (for example, due to not being a company) or would have been entitled to a lower R&D tax offset.

The arrangement is restructured with a new company either set up or repurposed to engage the existing related entity to conduct R&D activities, with the new
company making claims for a refundable R&D tax offset.

While not all the features of these arrangements have been discussed below, some of the key features include:

Apart from engaging the existing related entity to conduct R&D activities, the new company claiming the R&D tax offset conducts limited or no other
activities;
The refundable tax offset is the new company’s only receipt;
The new company lacks the ability to commercial exploit the intellectual property being developed; and
Rather and in substance, the existing related entity retains control of the strategic decisions over the R&D activities and has primary rights to exploit the
outcomes of R&D activities.

The second taxpayer alert TA 2023/5 targets arrangements that broadly involve a foreign entity incorporating a new Australian company to claim R&D offsets. A feature of these arrangements is also that the new Australian company itself has limited ability to commercially exploit the intellectual property being developed.

Primarily, the ATO seems to be concerned that the R&D activities are being done for the benefit of the related foreign entity and as a result, the Australian entity is not entitled to a R&D offset.

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Income tax exempt entities seeking refunds of franking credits

The ATO has issued TA 2023/3 which discusses certain arrangements that involve income tax exempt entities seeking refunds of franking credits when they receive franked distributions that are satisfied with property other than cash (e.g., shares).

The focus is on situations where terms and conditions are imposed as part of receiving the franked distributions which restrict the sale or disposal of the property (e.g., shares) by the income tax exempt entity.

The ATO’s concern is that the income tax exempt entity has not received immediate custody and control of the property (e.g., shares), which then means that it is not entitled to a refund of franking credits attached to the distribution.

More information

TA 2023/3

Cases

Sale of heritage farmland subject to GST despite an intention to live on the property

In Lance and Commissioner of Taxation [2024] AATA 11 the AAT concluded that the sale of heritage farmland was subject to GST on the basis that the sale was made in the course of an enterprise carried on by the taxpayer. This conclusion was reached despite the AAT accepting that the taxpayer intended to live in the
property at some stage.

The facts of this case are broadly summarised as follows:

The taxpayer purchased the Sutton Farms property for approximately $1.6 million around December 2013.
Sutton Farms had heritage features and was originally zoned ‘Tourist’. The property consisted of a homestead, large barn and quarters situated on a land comprising of 1.47 hectares but the buildings were not habitable.
Over the course of the following seven years, the taxpayer undertook a number of activities relating to the property that ultimately increased the value of the farmland.
The activities included rezoning the property and obtaining conditional subdivision approval to subdivide the property into four lots with plans for a further subdivision into approximately 15 lots, as well as undertaking sewerage, water and electrical works.
The taxpayer borrowed $1 million from the bank and $1.5 million from his brother-in-law to fund the original purchase and subsequent activities.
While the property was never used for this purpose, the taxpayer’s stated intention was to use the property as their home, gift some of the subdivided lots to their daughter and son for use as their own respective residences and use the last subdivided lot as a memorial dedicated to another child that had passed away.
Without being subdivided, the property was eventually sold at a profit as a single lot around November 2020 for $4.25 million.

The taxpayer’s main argument was that Sutton Farms was intended to be used as a family home and the subdivision had no commercial purpose. As a result, the taxpayer sought to argue that the sale of Sutton Farms did not occur in the course of an enterprise and therefore should not be subject to GST.

However, the AAT found inconsistencies with the taxpayer’s statements including from:

Media articles published during that time which suggested the taxpayer had an intention to commercialise the property (e.g., develop restaurants, café, undertake residential development, develop tourist accommodation, etc);
Statements made to the ATO during the objection stage of the dispute indicating that the taxpayer intended to subdivide the property to sell some of these lots to repay loans owed to the taxpayer’s brother-in-law; and
Representations from the taxpayer’s accountant that GST credits on the original development costs were claimed because the intended subdivision and sale of the several lots within the property amounted to an enterprise.

While acknowledging the taxpayer might not carry on a business of property development, the AAT found that their activities still amounted to an enterprise. This was on the basis that the sale of Sutton Farms was not the mere realisation of an asset, but the transaction had the appearance or characteristics of a business activity or otherwise was an isolated commercial transaction undertaken with the intention to make a profit.

Interestingly, the AAT accepted that the taxpayer did have an intention to live on Sutton Farms at some stage, but this was insufficient because it found the
taxpayer also had the intention to subdivide and sell some of the lots (e.g., to finance the development, repay his brother-in-law). This was notwithstanding the property was not subdivided and ultimately sold as a single lot.

Also, the AAT concluded that the sale of Sutton Farms couldn’t qualify for input taxed treatment on sale on basis that it was classified as residential premises
because none of the buildings on the property were capable of being occupied.

While in some cases properties sold with minimal development activities won’t be subject to GST because this involves input taxed existing residential premises, this AAT decision still has potential flow-on implications, especially for income tax purposes.

This AAT decision demonstrates that careful consideration is required for those looking to argue that the sale of a property should be taxed on capital account, especially when they have mixed intentions that include living in the property and improving the property to ultimately sell it at a profit. If the property is sold in a transaction that has the appearance or characteristics of a business activity or is an isolated transaction with the intention to make a profit (rather than the mere realisation of a capital asset) for GST purposes, this also makes it difficult to argue that the property is held solely on capital account through the entire ownership period.

Like the recent Bowerman case, the issue with this is that taxpayers can then potentially lose the ability to access the 50% general discount, as well as other CGT
concessions including the main residence exemption.

More information

Lance and Commissioner of Taxation [2024] AATA 11

Settlement payment classified as an ETP

The Federal Court in Stark v Commissioner of Taxation [2023] FCA 1523 considered the tax treatment of a settlement payment received by a taxpayer from his
previous employer. The Court ultimately held that the payment should be classified as an employment termination payment (ETP) for tax purposes.

In brief, the taxpayer’s previous employer was alleged to have deceptively induced the taxpayer with an offer of employment that was unstable such that the taxpayer’s position was ultimately terminated. This offer was claimed to have led the taxpayer to abandon another offer of prospective employment with a different employer at the time and destroyed his earning capacity.

The taxpayer sought payment for damages in relation to a breach of employment contract and also for misleading and deceptive conduct. The parties ultimately settled the dispute, with the taxpayer receiving a settlement payment. The key issue considered by the Federal Court was whether the settlement payment made to the taxpayer should be classified as an ETP, a genuine redundancy payment or a capital payment received in respect of personal injury.

If it was classified as the latter, the amount would be tax-free under a specific CGT exemption in section 118- 37 ITAA 1997.

First, the Federal Court concluded that the payment was not a capital payment in respect of personal injury.

This was largely on the basis that the settlement payment was made without any admission of liability or acknowledgement or finding of injury, so there was no more than just an allegation that an injury was suffered.

Also, the Federal Court also concluded the settlement payment could not been a genuine redundancy. This is because while the taxpayer’s original role might have disappeared, it seemed that the taxpayer subsequently performed another role until he was terminated after a disagreement with his supervisor.

Instead, the Federal Court found that the settlement payment was made in consequence of the termination of the taxpayer’s employment and as a result, taxable
as an ETP.

More information

Stark v Commissioner of Taxation [2023] FCA 152

Legislation

Parliament sits again from 6 Feb 2024

30% tax on super earnings on balances above $3 million

Following the release of a discussion paper and draft legislation for consultation, the Government has now introduced legislation to impose an overall 30% tax on
future superannuation fund earnings on member balances over $3 million.

This is proposed to commence from 1 July 2025.

Currently, superannuation fund income is generally taxed at either 15% or 10% on gains on capital assets that have been held by the fund for more than 12 months.

In broad terms, the legislation introduces an additional tax of 15% on superannuation earnings, but only for those individuals with a total superannuation balance (TSB) over $3 million at the end of a financial year.

It is important to note that this additional 15% tax can apply to unrealised gains, which means a tax liability could arise where the value of fund assets increases,
even if the assets are retained. Currently, unrealised gains that represent changes in the fund’s asset value (that is, gains on paper) are not taxed.

Individuals will have the choice of paying this additional tax personally or from their superannuation fund. As with Division 293 tax, the ATO will perform the calculation for this additional 15% tax.

More information

Market Wrap January 2024

Markets

Local:

Australian equities marked their 3rd straight month of gains during January, as the S&P/ASX 200 Total Return index rose 1.19%, setting a new all-time high in the process.

Global:

The S&P 500 continued to rise albeit at a slower rate in January 2024, rising by 1.68% following a 4.42% rise in December 2023.

The Dow Jones Industrial Average rose 1.22% for the month and was up 11.92% for the one-year period.

The Stoxx Europe 600 Index also rose by 2.7% over the month.

Gold:

The spot price for Gold continued its trend above the $2,000 USD mark to finish the month at $2,053.25 USD per oz.

Iron Ore:

Iron Ore price continued to trend upward, finishing January 2024 at $135.82 USD/Mt.

Oil:

Brent Oil price has remained steady in recent times, closing out January 2024 at $81.71 USD/bbl.

Property

Housing:

Australia’s housing upswing continued through the first month of 2024 with CoreLogic’s national Home Value Index (HVI) rising 0.4% in January. Up from the 0.3% increases seen in November and December, this marks the 12th straight month of value rises.

Beneath the headline result, housing market performance remains diverse around the country. Three capitals recorded a subtle decline over the month (Melbourne -0.1%, Hobart -0.7% and Canberra -0.2%), while Perth, Adelaide and Brisbane values continued to rise at the monthly rate of 1% or more.

Economy

Interest Rates:

The Reserve Bank of Australia left the cash rate on hold at 4.35%. The RBA has maintained its tightening bias, saying “further increase in interest rates cannot be ruled out”.

Retail Sales:

Australian retail turnover fell 2.7% in December 2023. This follows a revised rise of 1.6% in November 2023 and a fall of 0.2% in October 2023. Revisions to seasonally adjusted data are larger than usual this month, reflecting improvements in the data as the evolving seasonal pattern becomes clearer.

Bond Yields:

Australia’s 10-year government bond yield rose to around 4.1%, rebounding from one-month lows.

Yields on 10-year U.S. Treasuries dipped below 4% at the end of January, nearly 1% lower than where they stood in October.

Bitcoin:

The average closing price for Bitcoin (BTC) in January was $42,919.61. It was up 0.7% for the month.

Exchange Rate:

The Aussie dollar continued to remain steady at the start of 2024 against the American dollar, at $0.657, and against the Euro at $0.608.

Inflation:

Australia: The monthly Consumer Price Index (CPI) indicator rose 0.6% in the December 2023 quarter. Over the twelve months to the December 2023 quarter, the CPI rose 4.1%.

USA: The annual inflation rate for the United States was 3.4% for the 12 months ending December 2023, compared to the previous rate of 3.1%

EU: The inflation rate in the Euro Area went down to 2.8% year-on-year in January 2024 from 2.9% in the previous month, in line with market expectations. Meanwhile, the core rate, which excludes volatile food and energy prices, continued to ease to 3.3%, above forecasts of 3.2% but still reaching its lowest level since March 2022.

Consumer Confidence:

The Westpac Melbourne Institute Consumer Sentiment Index declined 1.3% to 81 in January from 82.1 in December. For consumers, the new year looks to have picked up where the old one left off: cost of living and high interest rates continuing to dominate and sentiment bumping around deeply pessimistic levels. The latest January read is in the bottom 7% of all observations since the survey was first run in the mid-1970s. More pessimistic starts to the year have only been seen during the deep recession of the early 1990s.

Employment:

Australia: The seasonally adjusted unemployment rate remained at 3.8% in December 2023. The participation rate also remained at 67%, with the number of employed people increasing to 14,246,000.

USA: Total nonfarm payroll employment rose by 353,000 in January, and the unemployment rate remained at 3.7%. Job gains occurred in professional and business services, health care, retail trade, and social assistance. Employment declined in the mining, quarrying, and oil and gas extraction industry.

Purchasing Managers Index:

The headline seasonally adjusted Judo Bank Australia Manufacturing PMI posted 50.1 in January, up from 47.6 in December, signaling that manufacturing sector conditions remained broadly unchanged at the start of 2024 after deteriorating in the preceding ten months. Results above 50 points indicate expansion, with higher results indicating a faster rate of expansion.

US Services PMI:

The S&P Global US Services PMI surged to a 7-month high of 52.9 in January 2024, surpassing market expectations of 51, preliminary estimates showed. Improved demand conditions were associated with increased client referrals and reports of customers depleting their buffer stocks. However, there was a marginal decline in new export orders.

US Global Manufacturing PMI:

The seasonally adjusted S&P Global US Manufacturing Purchasing Managers’ Index (PMI) posted 50.7 in January, up from 47.9 in December and slightly higher than the earlier released ‘flash’ estimates of 50.3. The latest upturn ended a two-month sequence of decline and signaled the strongest improvement in operating conditions since September 2022.

Adviser Numbers:

Adviser numbers are off to a good start for 2024 with double-digit gains for the first two weeks of the year.

Wealth Data research to 11 January shows a net positive of 15 advisers joining this year to bring the total number to 15,643. However, estimated data for 2023 shows the number of adviser losses during 2023 was 173 advisers.

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

Comments

Australian Economic Outlook for 2024

Australia’s economic outlook for 2024 is likely to be a tale of (roughly) two halves. The first half will likely see monetary policy continuing to bite, while the second half could bring monetary easing, tax cuts, stronger real wage growth, and improved sentiment. However, this narrative is riddled with uncertainty and risks particularly due to the delicate global economic outlook.

Monetary policy in advanced economies continues to present two-sided risks. Easing policy too soon could lead to a resurgence in inflation. Holding interest rates at an elevated level for too long could cure the disease but kill the patient. An added complication is that while most major central banks have maintained a ‘higher-for-longer’ approach to interest rates, financial markets expect cuts to be earlier and quicker than central banks have indicated. The easy miles in the battle against inflation seem to have been run; the final laps are likely to be the hardest.

Protracted conflicts and heightened tensions across the global economy could cause a renewal of supply-side issues. The most recent, and potentially most significant, flashpoint is in the Red Sea. Almost 12% of global trade flows through these waters, but unrest has forced container ships and oil tankers heading to ports in Europe and the United States to reroute around the Cape of Good Hope. While shippings costs and delivery times have increased sharply, oil prices have not spiked. Yet, an escalation of tensions in the Middle East could filter through to energy prices. Other global flashpoints, including the protracted war in Ukraine and tensions across the Taiwan Strait, present risks to the outlook.

China’s economic woes and growing opacity is another cause for concern. A debt-burdened property sector remains at the heart of the country’s economic challenges. Any further spillover to the shadow banking system could catalyse a vicious debt-deflation cycle that weighs on the global economy and Australia.

Additionally, countries that collectively represent 60% of global GDP are set to hold elections in 2024. This includes a presidential election in the United States. Any sharp political pivots may influence future opportunities for Australia, particularly in the green economy.

In Australia, domestic risks are also on the cards. In particular, consumer spending is likely to remain under pressure in the first half of 2024. Real household disposable income per capita has fallen for two years, the household savings ratio has dropped to 1.1%, and pandemic-era excess savings have been drawn down. Additionally, Australia’s relatively high share of outstanding mortgages with variable interest rates makes the economy more sensitive to monetary policy. A ‘higher-for-longer’ approach to interest rates in Australia carries an elevated degree of risk against this backdrop.

Additionally, rapid population growth due to record net overseas migration, a critical tailwind to growth in 2023, is likely to provide less support in 2024. Yet, the housing crisis that it unveiled could get worse before it gets better. Australia has among the lowest housing stock per adult when compared to other developed countries. This is unlikely to improve in the short-term. Low vacancy rates and elevated rental costs are expected to weigh on the economy.

The end of 2024 could still prove to be better than the beginning, but it’s an outlook fraught with risk.

Sources: AFR, Deloitte Access Economics

Unlocking the Potential of Aged Pension and Superannuation Benefits

The Australian Aged Pension scheme provides a wonderful safety net for those with limited assets in retirement, although many remain confused by how their age pension entitlements differ from so called superannuation income streams.

The Federal Government provides an income for all Australians who reach pension paying age, currently set at age 67, who can prove they are an Australian resident and can also pass the income and asset tests or means test.

If you are part of a couple who own a home, you can qualify for a full age pension of $42,988 a year; if excluding your home, your other assets, including super, total less than $451,500 and can qualify for an ever-reducing part-pension, until your assets reach $1,003,000 a year.

The income test allows a couple to earn up to $9,360 a year from investments and still receive the full age pension, and up to $95,336 a year and receive a partial pension. In assessing your income, Services Australia applies a complex formula called ‘deeming’.

The deeming rules assume you earn at least 0.25% a year on the first $100,200 in assets for a couple and then assume you are earning at least 2.25% a year on your remaining assets. You must pass both tests to receive a pension and Services Australia will use the test that leads to the lowest entitlement.

In addition to the income from investment assets, you can also receive income from genuine employment of up to $7,800 a year under the Work Bonus scheme and still receive a full pension. This was temporarily increased to $11,800 a year between December 1, 2022 and December 31, 2023.

The rates and limits vary depending on whether you are a homeowner or not and whether you are part of a couple. Superannuation is included as part of the assets and income test, although superannuation can provide income support in addition to the aged pension.

So, superannuation sits alongside the age pension scheme, effectively topping up the pension or other income older Australians receive as they move into retirement. It is not subject to any limitations or qualifying factors.

Under age 60 you are able to access your super when you retire or if you access a transition to retirement pension as long as you have reached your preservation age – this depends on when you are born.

Between 60-64 you can access your super when you retire, when you leave a job or if you open a transition to retirement income account while you’re still working (limits apply).

After 65 you are able to access your super with no restrictions, even if you have not retired yet.

This can significantly benefit older Australians as it means that they can effectively start a private pension to top up their age pension entitlements. For many, this makes the difference between living from one pension payday to the next, to having a bit of spare cash to help them get by.

The asset and income tests provide generous limits for older Australians to qualify for the age pension, with most of the so-called loopholes for effectively ‘hiding assets’ from Services Australia having been closed or significantly reduced.

Importantly, the family home is excluded from the asset test, meaning a potential age pension recipient can have millions of dollars tied up in their own home and still qualify for the full age pension, depending on the size of their remaining assets.

For couples with a significant age difference, it is also possible to effectively move assets from the older partner into the younger partner’s superannuation account, where it won’t be included in the asset test.

As long as the younger partner is under Age Pension age themselves, and their superannuation account is still in accumulation mode or can still receive contributions, the assets held within that account will not be included by Services Australia when assessing the couple’s overall assets.

It is important to remember that when moving funds from one partner to another, you can contribute up to $110,000 in one financial year as a non-concessional contribution and $330,000 as a non-concessional contribution in any three financial year period under the “three-year bring forward” rule.

With some simple planning, it is possible to contribute up to $440,000 from one partner to a younger partner in a relatively short timeframe and so reduce the assets included in the age pension asset test accordingly.

These rules, though, are extremely complex and are best utilised under the guidance of a qualified financial planner to ensure you make the right decisions and avoid any costly mistakes.

Market Wrap February 2024

Markets

Local:

The ASX200 index had a slight gain over February rising by 0.79%.

Global:

The S&P 500 was up 5.3% in February with a 2^nd straight quarter of Y/Y growth.

The Dow Jones Industrial Average was also up 2.5% over the month.

The STOXX 600 has risen nearly 4% so far this year, after a near 13% jump in 2023 on growing bets of imminent rate cuts.

Gold:

The price of gold traded at $2,047.71 USD per ounce, as of 29^th February. That’s down 0.90% from the beginning of the year.

Iron Ore:

Iron Ore price continued to fall after another sluggish month in February to finish at $117.50 USD/Mt.

Oil:

Brent Oil price has continued to remain steady in recent times, closing out February 2024 at $81.91 USD/bbl.

Property

Housing:

Housing values posted a broad-based rise in February with CoreLogic’s national Home Value Index (HVI) up 0.6% in February.

The 20 basis point acceleration from the 0.4% increase seen in January was the strongest monthly gain since October last year. Each of the capital cities and rest-of-state regions recorded a lift in values over the month, except Hobart where the market fell -0.3%.

“Housing values have been more than resilient in the face of high interest rates and cost of living pressures,” CoreLogic’s research director, Tim Lawless, said. “The ongoing rise in housing values reflects a persistent imbalance between supply and demand which varies in magnitude across our cities and regions.”

Economy

Interest Rates:

Australians will need to wait to find out how their interest rates might change in March. The RBA has historically delivered news about interest rates on the first Tuesday of each month (except January), but central bankers will meet just eight times this year, meaning the next meeting is on March 18. Fewer meetings will bring the RBA in line with how other central banks operate, as the US Fed and the Bank of England also only meet eight times a year.

Retail Sales:

Australian retail turnover rose 1.1% (seasonally adjusted) in January 2024, this follows a fall of 2.1% in December 2023 and a rise of 1.5% in November 2023. Ben Dorber, ABS head of retail statistics, said: “The rebound in January follows a sharp fall in December when consumers pulled back on spending after taking advantage of Black Friday sales in November. Retail turnover is now back at a similar level to September 2023.

Bond Yields:

Australia’s 10-year government bond yield was subdued around 4.1% as investors digested softer-than-expected domestic inflation figures.

The yield on the US 10-year government bond sat at 4.25% at the end of February 2024.

Digital Currencies:

After a flat January, Bitcoin and Ethereum logged respective gains of 45.9% and 44.2% in February, spurred by ETF inflows and ahead of March’s Bitcoin halving event.

Exchange Rate:

The Aussie dollar barely moved in February against both the American dollar at $0.652, and the Euro at $0.602.

Inflation:

Australia: The monthly Consumer Price Index (CPI) indicator rose 3.4% in the 12 months to January 2024. The most significant contributors to the January annual increase were Housing (+4.6%), Food and non-alcoholic beverages (+4.4%), Alcohol and tobacco (+6.7%) and Insurance and financial services (+8.2%). Partially offsetting the annual increase is Recreation and culture (-1.7%) primarily due to Holiday travel and accommodation (-7.1%).

USA: The consumer price index, a key inflation gauge, rose 3.1% in January relative to a year earlier, down from 3.4% in December. Inflation has fallen significantly from its pandemic-era peak 9.1%, in June 2022. Around that time, the average consumer’s paycheck wasn’t keeping up with fast-rising prices. Their so-called “real earnings” — earnings after accounting for inflation — were negative for more than two years.

EU: Euro area annual inflation is expected to be 2.6% in February 2024, down from 2.8% in January according to a flash estimate from Eurostat. Looking at the main components of euro area inflation, food, alcohol & tobacco is expected to have the highest annual rate in February (4.0%, compared with 5.6% in January), followed by services (3.9%, compared with 4.0% in January), non-energy industrial goods (1.6%, compared with 2.0% in January) and energy (-3.7%, compared with -6.1% in January).

Consumer Confidence:

The Westpac Melbourne Institute Consumer Sentiment Index rose 6.2% to 86 in February, from 81 in January. This is the biggest monthly gain since April last year, when the RBA paused its rapid series of interest rate rises and takes the Index to its highest level since June 2022.

Employment:

Australia: The seasonally adjusted unemployment rate stood at 4.1% in January 2024, slightly higher than the December 2023 reading of 3.8%. The participation rate decreased to 66.8% from 67% in the same period.

Purchasing Managers Index:

The Judo Bank Australia Manufacturing PMI for February 2024 was revised higher to 47.8 from the preliminary figure of 47.7, indicating a continued slowdown in the sector following a one-off rebound in January. Output, new orders, and employment reached cyclical lows, signifying a soft phase in the manufacturing industry at the outset of 2024. Results above 50 points indicate expansion, with higher results indicating a faster rate of expansion.

US Services PMI:

The S&P Global US Services PMI eased to 51.3 in February of 2024 from 52.5 in the earlier month, missing market expectations of 52, according to preliminary estimates. Albeit at a slower pace, the result pointed to 13 consecutive months of expansion in the US private services sector, pointing to some resilience from the Federal Reserve’s prolonged restrictive policy.

US Global Manufacturing PMI:

The S&P Global US Manufacturing PMI was revised upward to 52.2 in February 2024, surpassing a preliminary estimate of 51.5 and January’s 50.7. This latest reading indicated the swiftest expansion in the country’s manufacturing sector since July 2022, with output rising the most since May 2022 and total new orders growing at the strongest pace in 21 months.

Adviser Numbers:

Current adviser numbers sit at 15,644, the net change for the 2024 calendar year is +30, with the net change for the financial YTD sitting at +87.

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

Comments

Is Nvidia the Best Stock on the Market?

Nvidia (NVDA) has done it again. For the third straight quarterly period, the company blew past management’s own revenue guidance by more than $2 billion. The technology company is the clear leader in advancing the many uses of artificial intelligence (AI).

For Nvidia’s fiscal 2024 fourth quarter ended Jan. 28, the company reported sales of $22.1 billion. That’s an increase of 265% versus the same period a year ago, and well above the prior guidance of $20 billion.

Last year marked an explosion in sales for the data centre segment that includes advanced AI chips. Three of Nvidia’s four business segments increased revenue year over year in its fourth quarter, with automotive being the only laggard. But the data centre segment is the focus right now. Data centre revenue was more than 400% higher than the prior year period.

The company believes that escalation will continue as management believes total sales will be about $24 billion in the current quarter. These are also high margin products. In its full fiscal year 2024, gross profit margin expanded to almost 73% compared to just 57% in fiscal 2023. That’s expected to continue to rise to more than 76% in the current fiscal 2025 first quarter.

The stock hit a record high of $746.11/share in February 2024 and is currently trading near $682 in the premarket. The stock is prone to big moves both up and down after reporting earnings.

Nvidia price to earnings (P/E) ratio is 80, which is around 3.5x the S&P 500 and somewhat “normal” for big cap tech growth stocks. The company has managed to grow its earnings and revenue by triple digits in each of the past two quarters on a year-over-year basis. Looking forward, the company is expected to enjoy some wild growth over the next few years. On an annual basis, earnings are expected to grow from $3.34/share in 2023 to $11.45 in 2024, to $20.03 in 2025! That makes Nvidia one of the fastest growing mega cap stocks in the market! Elsewhere, the return on equity (ROE) has grown from the low 30’s a few quarters ago to over 84% in the most recent quarter.

The Tech Stock Boom

For years, Meta Platforms (META), Amazon (AMZN), Apple (AAPL), Netflix (NFLX) and Alphabet (GOOGL) were consistently among the highest-growth stocks in the market—they were collectively known by the acronym FAANG.

Unfortunately, FAANG stocks have lost their bite in recent times, and several of them have even changed their names. Market commentators and tech investors have coined a new acronym for the top five mega-cap tech stocks: MAMAA.

Apple, Microsoft, Alphabet and Amazon represent the four largest S&P 500 components by market cap, and each stock has a market cap of more than $1 trillion

The five MAMAA stocks have a combined market cap of more than $6.6 trillion. As of September 2022, the S&P 500’s total market cap was about $30.1 trillion, meaning these five stocks alone accounted for nearly 22% of the entire index’s weighting.

The newly dubbed magnificent 7 which includes the AI giant Nvidia dominates the NASDAQ index with the combined market cap weighting sitting at nearly 50%.

The ‘magnificent’ run seen by these stocks saw a return of 106% in 2023, doubling the Nasdaq 100’s nearly 54% gain and significantly outperforming the S&P 500’s 24% gain over the same period.

The Magnificent 7 of 2023 have now become 2024’s Magnificent 3: Nvidia, Meta and Amazon. Of these, Nvidia’s saw a stellar start to the year as shares have gained nearly 60% YTD due to the GPU leader’s beat-and-raise quarters.

If these cycle leaders start underperforming, it usually marks the start of a trend change. The M7 stocks have undoubtedly led this bull run since 2023. We are now looking for what will lead the market next, and more importantly, when.

Sources: AFR, Forbes, Statista

The Reformed Stage 3 Tax Cuts – How do They Really Affect Us?

The stage three tax cuts are the third phase of changes to income taxation legislated by the Morrison government in 2019, with support from the then opposition Labor party (despite its reservations).

The tax cuts framed by the former Coalition government were mainly designed to offset the impact of ‘bracket creep’, when rising incomes push workers into the next tax bracket, forcing them to pay a higher proportion of income tax despite no change to their real income due to inflationary pressures.

Changes to the Stage 3 Tax Cuts

While the overall cost of stage-three remains the same, the Albanese government has scaled back tax cuts for those on higher incomes in favour of low and middle-income earners.

The biggest change compared to the original plan is that the 37% tax rate is retained, albeit with a higher upper limit of $190,000. In return, the two lowest brackets at which tax is paid have also been reduced.

The decision is seen as controversial and politically-risky for the government because Labor had pledged to keep the legislated tax cuts unchanged ahead of the 2022 election and had reiterated its commitment since.

However, after announcing the U-turn, Albanese argued he was willing to break a key election promise, based on the changed economic reality confronting many Australians at the start of 2024 and that the changes will deliver cost-of-living relief for low and middle-income earners.

Australia’s inflation eased to 4.1% in the December quarter after peaking around 8% in 2022. Most recently, monthly CPI is now at 3.4% for the year to January 2024, according to the latest ABS data.

The government said the original tax-cuts plan was designed five years ago, before the pandemic, as well as prior to the global inflation spike and interest rate increases that have resulted in economic uncertainty and the spectre of recession.

The Opposing View

The article by Paul Kelly in the Australian (Now for the personal income tax explosion) highlights many of the problems the tax cuts will and have already created for many Australians. We have highlighted a few of the important takes below.

The 2023 Intergenerational Report, prepared by Treasury, stated that personal income tax will boom from contributing a record 50.5% of total tax receipts in 2022-23 to reach 58.4% in 2062-63. That trajectory reveals the power of the trend.
The IGR report, looking at the next 10 years, said personal income taxes equated with 11.7% of GDP in 2022-23 but are projected to increase to 13.5% within the decade – a hefty lift in a relatively short time. The political time bomb is ticking.
Our excessive reliance on personal income tax is colliding with demography and nothing will halt the march of demography, with the IGR saying the personal income tax base will “continue to narrow in line with the projected decline in workforce participation”. There are now four people working for every person over the age of 65 years and this will fall to 2.7 people at 2060.
Comparing data from the national accounts and looking at the two-year period (September quarter 2021 to September quarter 2023), Judo Bank chief economic adviser Warren Hogan said: “Income taxes have been a bigger drain on household disposable income than have interest payments.”
Hogan’s analysis shows income tax paid by households rose from $65.1bn in September 2021 to a whopping $91bn two years later, an astonishing increase that drives the budget bottom line recovery and derives from bracket creep, high migration and a strong labour market. The real surge has come in the last 12 months, from $73.7bn to $91bn, September to September 2023. By comparison, mortgage interest payments increased from $11.2bn to $29.7bn across the same September quarters comparison, 2021 to 2023. While in percentage terms the mortgage payment increase is higher, the dollar value of the increase in income tax is far larger. Hogan said: “There has been a misconception that this was all the fault of the Reserve Bank and that has suited the government”.
Bracket creep has had a bigger impact on middle-income Australia than the RBA’s interest rate rises. “There will be arguments that bracket creep is not the only factor driving higher income taxes – promotions and a growing labour force – but I think this is clutching at straws. At the moment we have an excessive reliance on income tax, on personal income tax in particular, and an extreme reliance on the top 20 per cent of income earners. “Labor’s tax revamp will invite truckloads more analysis of the flaws in our tax system”.
One answer is to index the rate scale; but the politicians hate that idea. They prefer what we do now – periodically cut taxes, cynically brag about making people better off, but merely preside over increasing the personal income tax burden, and hope upon hope to avert the big smash inherent in a system that needs large-scale reform.

Whether you agree or disagree with the viewpoints highlighted above, the question of whether our current tax system is really fit for purpose is ambiguous to say the least. This is an area that will continue to be debated and may struggle to change as long as short-termism in party politics continues.

Sources: AFR, The Australian, Forbes

Business Matters April 2024

Warning on SMSF asset valuations

The ATO has issued a warning to trustees of SMSFs about sloppy valuation practices.

ATO data analysis has revealed that over 16,500 self managed superannuation funds (SMSFs) have reported assets as having the same value for three consecutive years. With many of these assets residential or commercial Australian property, you can forgive the ATO for being incredulous.

For trustees of SMSFs, where asset values are consistently reported at the same value, it’s likely your SMSF will be flagged for closer scrutiny by the ATO.

The value of assets in your SMSF impacts on member balances and by default, can impact the amount you can contribute, ability to segregate assets for exempt current pension income, the work test exemption and access to catch-up concessional contributions. And, as we move closer to the implementation of the Division 296 $3m superannuation tax, valuations will be very important for anyone with a member balance close to or in excess of $3m.

If the asset is an in-house asset, for example a related unit trust, then an accurate valuation is essential to ensure the fund remains within the 5% in-house asset limit. If the value of in-house assets rises above 5% of total assets, the asset/s need to be sold to bring the limit back below 5%.

Valuing at market value

Each year, the assets of your SMSF must be valued at ‘market value’ and evidence provided to your auditor. Broadly, market value is the amount that a willing buyer of the asset could reasonably be expected pay to acquire the asset from a willing seller assuming that the buyer and seller are dealing at arm’s length, and everyone acts knowledgeably and prudentially. It’s a common sense test that looks at the value you could reasonably expect to achieve for an asset.

If your SMSF holds collectible and personal use assets like artwork, jewellery, motor vehicles etc., a valuation must be performed by a qualified independent valuer on disposal. This does not necessarily mean that an independent valuation needs to be completed every year but at least every three years would be prudent. If you are not utilising an independent valuer, you will still need to make an active assessment based on market conditions. For example, if you hold artwork and the artist who created your investment artwork died, has this changed the value? Are the primary and secondary markets for the artwork transacting at a higher value? Leaving the value of the asset at its acquisition price calls into question the rationale for acquiring the asset within the fund in the first place. If the asset is unlikely to add any value to your retirement savings, then should it be held in your SMSF when you could achieve a higher rate of return elsewhere?

In most cases, the ATO require trustees to value an asset based on “objective and supportable data”. This means that you should document the asset being valued, a rational explanation for the valuation, and the method in which you arrived at it.

Valuing real property

Commercial and residential real estate does not need to be valued by an independent valuer. But, if there have been significant changes to the property, the market, or the property is unique or difficult to value, it is a good idea to have a written independent valuation from a valuer or estate agent undertaken (their report should also document the valuation method and list comparable properties).

If you are completing the valuation yourself, ensure that you document the time period the valuation applies to and the characteristics that contribute to the valuation. For example, a 10 year old brick four bedroom property on 640m² of land in what suburb and any features that make it more or less attractive to a buyer, for example proximity to transport. And, you should access credible sales data either on similar properties in the same suburb that have sold recently or from a property data service. More than one source of data is recommended.

The estimates on a lot of online property sales sites are general in nature and not reliable for a valuation of a specific property. The average price change for the suburb however could be used as supporting evidence of your valuation.

For commercial property, net income yields are required to support the valuation. Where the tenants are related parties, for example your business leases a commercial property owned by your SMSF, you will need evidence that a comparative commercial rent is being paid and the rent is keeping pace with the market.

Valuing unlisted companies and unlisted trust investments

Valuing unlisted companies and unlisted investments can be difficult. The financials alone are not enough. But, if your SMSF invested in an unlisted company or shares in a unit trust, then there is an expectation that the trustees made the decision to make the initial acquisition based on the value of the asset, its potential for capital growth and income generation. That is, if you assessed the market value going into the investment, then it should not be a stretch to value the asset each year.

The difficulty for many investors is that in unlisted companies or trusts, the initial investment was broadly equivalent to the cash requirements of the activity being undertaken.

Generally, the starting point is the value of the assets in the entity and/or the consideration paid for the shares/units. For widely held shares or units, this is the entry and exit price.

Where property is the only asset, then the valuation principles for valuing real property are likely to apply.

Where there is no reliable data or market

We’ve seen a few scenarios where the assets purchased or created by the SMSF have no equal or there is no market – the true extent of the value will only really be known when the asset is realised. These unusual items default to either a professional valuation or a viable market assessment. This might be a derivative of the purchase price or data from a related market.

Valuations and the impending Division 296 tax on super earnings

The value of assets will be particularly important for those with super balances close to or above the $3m threshold for the impending Division 296 tax on fund earnings. Because the tax will measure asset values and tax the growth in earnings above the $3m threshold, accurate valuations will be important to ensure that the fund does not pay tax when it does not need to, and to reduce the likelihood of anomalies artificially inflating tax payable.

Budget 2024-25

The 2024-25 Federal Budget is the third for the Albanese Government and consistent with previous years, the primary themes are expected to be the cost of living and the economic shift to net zero.

According to election guru Antony Green, the window for the next election starts on Saturday, 3 August 2024, “the first possible date for an election if writs are issued on 1 July. The election window will stay open until mid-May 2025, the last date being 17 or 24 May.” No doubt, the Government will have the election in mind when it presents the Budget on 14 May at 7.30pm AEST.

Stage 3 tax cuts

The redesigned stage 3 tax cuts have been passed by Parliament and will apply from 1 July 2024. The amendments broadened the benefits of the tax cut by focusing on individuals with taxable income below $150,000.

Investment incentives for small business

It remains to be seen whether an increased instant asset write-off threshold will apply to smaller businesses in the 2024-25 income year. The increased threshold to $20,000 announced in the 2023-24 Budget still has not passed Parliament (the Senate increased the threshold to $30,000). If the intent of this measure is to encourage investment, it is essential that legislation enabling these measures is passed by Parliament in a reasonable time to give business operators the certainty they need to commit to any additional investment spending.

Energy bill relief

The Prime Minister has hinted at another round of energy bill relief to ease cost of living pressures for low-income households and small business. The measure is subject to support from State and Territory governments.

Look out for our analysis on how the 2024-25 Federal Budget will impact you, your business, and your superannuation.

The assault on professional services

The ATO has signalled that it is willing to pursue professional services firms who divert profits to avoid tax.

Two new cases before the Administrative Appeals Tribunal demonstrate how serious the Australian Taxation Office (ATO) is about making sure professional services firms – lawyers, accountants, architects, medical practices, engineers, architects etc., – are appropriately taxed.

In both cases, the ATO pursued the practices using Part IVA. Part IVA is an area of the income tax law that enables the Tax Commissioner to attack schemes or arrangements undertaken to obtain a tax benefit, enabling him to cancel any benefit derived by the scheme. That is, you could have a legally viable structure in place but if the only purpose of that structure is to reduce tax, then the Commissioner can use Part IVA to remove the tax benefit. And, if Part IVA applies, you may end up with an additional tax liability as well as an administrative penalty of either 25% or 50% of the tax shortfall amount.

Broadly, the cases involved a solicitor who controlled a number of practice trusts that derived profits through marketing and facilitating tax planning arrangements.

While the arrangement in each case was complex and involved a large number of steps, the practice trusts ensured their business profits weren’t subject to tax by essentially making trust distributions on paper through a series of trusts and ultimately to either a company that had existing tax losses, or a tax-exempt entity. However, the real funds relating to the trust distribution (less a commission paid for the use of these entities) were ultimately received by the solicitor or their associated entities in the form of a loan.

Professional practices have been in the ATO spotlight for many years now for the way they distribute profits. Back in 2021, the ATO finalised its guidance on the allocation of professional firm profits, putting in place a series of risk ratings and gateway tests. These two cases however demonstrate the ATO’s willingness to pursue the issue in the courts using the Commissioner’s powers in Part IVA.

For professional services firms, it’s important to be aware that there are several ways in which the ATO can potentially challenge arrangements involving the distribution of profits from a professional practice. For example:

If a trading entity derives personal services income that mainly relates to the skills and efforts of a particular individual, the ATO has certain expectations around ensuring the profits are assessed to the individual performing the work.
If a trading entity doesn’t derive personal services income but income from a business structure involving a professional practice, the ATO has set out its compliance approach to targeting arrangements that don’t result in a reasonable level of profit being taxed in the hands of the individual practitioners.
If a trust makes paper distributions to loss entities to ‘soak up’ deductions or losses, there are integrity rules in section 100A, another area of tax law under intense scrutiny, that need to be considered.

Non-compete clauses and worker restraints under review

A new issues paper from Treasury’s Competition Review questions whether non-competes and other restraints are limiting job opportunities and movement.

A recent Australian Bureau of Statistics (ABS) survey found that 46.9% of businesses surveyed used some kind of restraint clause, including for workers in non-executive roles. The survey also found 20.8% of businesses use non-compete clauses for at least some of their staff and 68.2% for more than three-quarters of their employees.

Over the last 30 years, Australia has seen a decline in job mobility. Australia is not alone in this and other advanced economies have experienced the same issue. While restraint clauses are not the only factor contributing to the decline – an ageing population and a rise in post-pandemic market concentration in some industries has also contributed, it is specifically the role of restraints that is the focus of the Competition Review issues paper (submissions close 31 May 2024).

From an economic perspective, declining job mobility impacts wage growth and innovation as restraints prevent access to skilled workers within the economy. Productivity is a key concern as Australia’s productivity has declined in the last 20 years.

The review states that, “The direct consequence of a non-compete clause is that it hinders competition among businesses: it disincentivises workers from leaving their current job, creating a barrier to the entry of new businesses and the expansion of existing businesses.”

For business however, this is the point – restricting the knowledge developed by a worker during their employment from benefiting a competitor, limiting the likelihood of a ‘mass exodus’ of key workers from the business to a competitor, preventing clients from employing key workers, and protecting the value of the business by preventing employees from walking away with customers that were hard won, at a cost, by the business.

However, the impact of restraints appears to be a psychological deterrent given that most are not contested. Of the 115 matters relating to restraints of trade between 2020 and 2023 dealt with by Legal Aid NSW, only one business commenced proceedings in court against a former worker. And, a further study indicates that where employers seek legal redress in the courts, they are more likely than not to fail.

The international trend is to either ban restraints for workers under a certain income level and time limit restraints for higher paid workers, or to limit the duration of restraints generally but specify a level of compensation to the worker for the restraint period.

How much is my business worth?

For many small business owners, their business is their largest asset and for many, one that is expected to help fund their retirement. But what is your business really worth and what sets a high value business apart?

Every business owner is naturally curious about just how much their business is worth. However, for every business that sells at an attractive price, there are others that struggle to sell, let alone fetch a premium. The question is, what makes a difference?

When you come to sell a business the first question is, what are you selling? In most cases, this is fixtures and fittings, plant and equipment, stock on hand, and the goodwill of the business. Generally, a buyer won’t want to purchase your liabilities or your business structure, nor will they want to collect your outstanding debtors. Most business sales become a sale of business assets.

These assets are relatively easy to value with the exception of the goodwill. The value of plant and equipment and trading stock can generally be agreed. The tension tends to be around the value of the goodwill because goodwill is made up of many intangible assets that can’t be readily quantified.

We can all agree that there is value in these assets but the question is, how much? Goodwill is basically the value of the future free cashflow of the business. Based on how your business is structured, it is the value of the profits the business can generate in the future. This is what a buyer is prepared to pay for.

If a buyer has a reasonable certainty of profits and free cashflow in the future, then this is worth something. By comparison, a start-up business will have a higher level of risk and no certainty that profits can be generated. In general, a new business may need to trade for a number of years at a loss before it can establish itself and generate profits. Goodwill is what you are prepared to pay to avoid the risk and the ‘time to establish’ factor.

So, what influences business value and what will people pay for?

A history of profits, profits, and more profits
Returns on capital invested (better than 30%)
Strong growth and growth prospects
Brand name and value
A business not dependent on the owners
A strong, verifiable customer list
Monopoly income – exclusive territories
A sustainable competitive advantage
Good systems and procedures

It is possible to get a price that is widely different from the norm. Unique businesses, unique circumstances, and unique opportunities can always produce ‘an out of the box’ price. If you can build something unique, then you may achieve a price beyond normal expectations. At the end of the day however, the market will set the price.

If you are planning on selling your business, identify who your buyers might be. There could be a purchaser who is prepared to pay a large premium to own your business because of the accretive value or because it is pivotal to their growth strategy.

And, even if you are not thinking about selling your business, the reality is that one day you will. If you build your business with this in mind, then you should look to do the things that will grow your business value from year to year.

Quote of the month

“Experience is one thing you can’t get for nothing.”

Oscar Wilde

Market Wrap March 2024

Markets

Local:

The ASX200 index had a solid gain over March rising by 3.27%.

Global:

The S&P 500 continued to record historic gains rising 3.2% in March 2024, taking the Q1 2024 return to 10.6%.

The Dow Jones Industrial Average rose again in March 2024 to finish the month up by 2.2%.

Gold:

From the beginning of the year to March 22, 2024, the price of gold rose from $2,066.32 per troy ounce to $2,174.65, representing a 5.24% increase.

Iron Ore:

Iron ore prices have taken a nosedive, plummeting nearly 5% and inching towards the $US110/Mt threshold, as China’s demand disappoints, leaving the market grappling with hefty inventories.

Oil:

In March of 2024, price of Brent crude oil was $85.41 USD/bbl, while the price was $83.48 USD/bbl in February of 2024. Over the last twelve months the price has risen 8.9%.

Property

Housing:

CoreLogic’s national Home Value Index (HVI) rose 0.6% in March on par with February’s increase, taking the current upswing in housing values through its 14th straight month of growth.

Since declining -7.5% between April 2022 and January 2023, the national HVI has increased 10.2%, or, in dollar terms, by approximately $71,832, rising to new record highs each month since November last year.

Every capital city except Darwin (-0.2%) recorded a rise in dwelling values over the month, although CoreLogic’s research director, Tim Lawless, notes the monthly gains continue to be punctuated by diversity.

“At one end of the scale we have Perth’s housing market where values were up 1.9% over the month, followed by Adelaide and Brisbane with 1.4% and 1.1% growth. The remaining capitals are showing much lower rates of change, although Melbourne is the only capital city to record a negative quarterly movement, down -0.2% over the first three months of the year.”

Economy

Interest Rates:

The Reserve Bank (RBA) has decided to leave the cash rate unchanged at its most recent board meeting, held on 19^th March 2024, holding the cash rate at 4.35%.

Retail Sales:

Australian retail turnover rose 0.3% (seasonally adjusted) in February 2024. This followed a rise of 1.1% in January 2024 and a fall of 2.1% in December 2023. Ben Dorber, ABS head of retail statistics, said: “Seven sold-out Taylor Swift concerts in Sydney and Melbourne boosted retail spending this month, with over 600,000 Swifties flocking to these events.

Bond Yields:

Australia’s 10-year government bond yield remained steady over the month of March to finish at 4.06%.

The yield on the US 10-year government bond dipped slightly from its February result to finish the month at 4.20% down from its 4.25% reading the month prior.

Bitcoin:

The crypto market experienced significant volatility in the past month, with BTC surging to a record-breaking high of nearly $74K, followed by a rapid downturn to a low of $60K within days.

Exchange Rate:

The Aussie dollar remained level over March against the American dollar, at $0.653, and against the Euro at $0.604.

Inflation:

Australia: The monthly CPI indicator rose 3.4% in the 12 months to February, following a 3.4% rise in the 12 months to January. The annual movement for the monthly CPI indicator excluding volatile items and holiday travel was 3.9% in February, down from the rise of 4.1% in January.

USA: The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.4% in February on a seasonally adjusted basis, after rising 0.3% in January. Over the last 12 months, the all items index increased 3.2% before seasonal adjustment.

EU: The euro area annual inflation rate was 2.6% in February 2024, down from 2.8% in January. A year earlier, the rate was 8.5%. European Union annual inflation was 2.8% in February 2024, down from 3.1% in January. A year earlier, the rate was 9.9%.

Consumer Confidence:

The Westpac Melbourne Institute Consumer Sentiment Index declined 1.8% to 84.4 in March, from 86 in February. Last month we saw some promising signs that the consumer gloom that has dominated over the last two years might finally be starting to lift. The March survey update shows that progress continues to be slow at best. Consumers are still deeply pessimistic and becoming more concerned about the economy’s near-term outlook.

Employment:

Australia: The seasonally adjusted unemployment rate fell to 3.7% in February (although, in trend terms, it has remained at 3.8% for 6 consecutive months), while the participation rate increased by 0.1 percentage points over the month, to 66.7% (down from its record high of 67.0% in November 2023).

USA: Total nonfarm payroll employment rose by 303,000 in March, and the unemployment rate changed a little at 3.8%, Job gains occurred in health care, government, and construction.

Purchasing Managers Index:

The headline seasonally adjusted Judo Bank Australia Manufacturing Purchasing Manager’s Index™ (PMI) posted 47.3 in March, down from 47.8 in February. This signaled a second successive monthly deterioration in manufacturing sector conditions. Although moderate, the rate of contraction was the most pronounced since May 2020.

US Services PMI:

The S&P Global US Services PMI fell to a three-month low of 51.7 in March 2024 from 52.3 in February, slightly below forecasts of 52, and reflecting a loss of momentum in the service sector, according to preliminary estimates. New business growth softened and new business from abroad declined while employment increased.

US Global Manufacturing PMI:

The seasonally adjusted S&P Global US Manufacturing Purchasing Managers’ Index™ (PMI®) was above the 50.0 no-change mark for the third successive month in March, thereby signaling a further monthly strengthening in the health of the sector. That said, at 51.9 the index was down from 52.2 in February, pointing to a slightly less pronounced improvement at the end of the opening quarter of the year.

Adviser Numbers:

The current number of advisers is sitting at 15,620 with a net change of +4 for calendar 2024 YTD.

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

Comments

How Bad Can The Housing Crisis Get?

The supply of new homes will crash to the lowest level in over a decade by 2026, worsening housing and rental affordability, and leaving the federal government far short of its goal to build 1.2 million homes by mid-2029.

Across capital cities, 79,000 new homes will be finished in 2026, a drop of 26% compared with last year due to planning bottlenecks, labour shortages and soaring material costs.

Based on its forecasts, the industry will need to double its capacity and build an “eye-watering” 300,000 homes between 2026 and 2029 to meet the 1.2 million target.

Westpac chief economist Luci Ellis said the weakness in building construction had nothing to do with zoning and building approvals but was due to a “large backlog of properties that have been approved that are yet to be completed”. “There are a range of issues in the production and cost of production of housing at the moment, including the demand from other parts of the construction sector,” Dr Ellis said.

Barrenjoey chief economist Jo Masters said the 1.2 million target was “aspirational. We’ve never been able to build that many homes, and clearly at the moment, we’ve still got blockages in some parts of the construction process, whether that’s cost of input materials, or labour, or the right skills, or just being able to get the job done.”

Achieving a target of 1.2 million homes would require high rates of apartment construction, Ms Masters said. “And we know that apartments have a longer construction and lead time, so the timeframe to build in that segment of the market is longer.”

Federal Housing Minister Julie Collins said the government was working with states and territories to help meet the “ambitious national target” of building 1.2 million homes by July 2029. She cited a $3 billion new homes bonus, $500 million housing support program, $10 billion Housing Australia Future Fund, and new incentives to boost the supply of rental housing.

In NSW, the state government plans to increase density and height limits by up to 30% for developments where 15% of the floor area is set aside for affordable housing. It is also pushing to boost supply in the inner city with more terraces, semis and walk-up flats.

This fall in new home completions comes after a record 737,000 migrants arrived over 2022-23, contributing to a record net gain of 518,000 people – heaping more pressure on the housing system. Rents hit a fresh high of $614 a week in February 2024 as the national residential vacancy rate fell to 1%, according to SQM Research.

“This report is the clear evidence that the government needs to focus more on boosting development-ready land supply if it is to have any hope of achieving its ambition to permanently ease housing affordability and improve dwelling delivery,” UDIA national president Col Dutton said.

Jarden chief economist Carlos Cacho estimated the government would fall about 230,000 dwellings short of the 1.2 million homes target. “Labour has now become the biggest issue. That’s partly because there’s so much public and non-public non-residential spending.”

Over calendar year 2023, greenfield lot releases fell in every major market except for Perth, which is experiencing a resurgence after a decade of stagnation.

In Greater Melbourne, which accounts for 35% of the national land market, new lot releases fell 50% to just under 9000, while Sydney slumped 35% to just under 6000 and south-east Queensland fell 15% to just over 8600.

However, despite national lot sales falling 28% to 30,444, capital city lot prices rose by an average of 4.8% nationally. A 400sq m Sydney lot now costs $641,000, while a Melbourne lot costs $394,000.

Richard Temlett, head of research at Charter Keck Cramer, said it would take a lot more than interest rate cuts to facilitate the build-to-sell and build-to-rent markets. “Interest rates need to be cut by at least the middle of the year and several incentives need to be introduced immediately to stimulate the BTS and BTR apartment markets,” and “The federal migration program needs to be changed and tailored to attract key skilled workers into the Australian construction sector.”

Sources: AFR, SQM Research, Statista

Business Matters May 2024

Company money crackdown

The ATO is cracking down on business owners who take money or use company resources for themselves.

It’s common for business owners to utilise company resources for their personal use. The business is often such a part of their life that the line distinguishing ‘the business’ from their life can be blurred.

While there are tax laws preventing individuals accessing profits or assets of the company in a tax-free manner, mistakes are being made and the Australian Taxation Office (ATO) has had enough.

The ATO has launched a new education campaign to raise awareness of these common problems and the serious tax consequences that can arise.

What the tax law requires

Division 7A is an area of the tax law aimed at situations where a private company provides benefits to shareholders or their associates in the form of a loan, payment or by forgiving a debt. It can also apply where a trust has allocated income to a private company but has not actually paid it, and the trust has provided a payment or benefit to the company’s shareholder or their associate.

Division 7A was introduced to prevent shareholders accessing company profits or assets without paying the appropriate tax. If triggered, the recipient of the benefit is taken to have received a deemed unfranked dividend for tax purposes and taxed at their marginal tax rate. This unfavourable tax outcome can be prevented by:

Paying back the amount before the company tax return is due (this is often done by way of a set-off arrangement involving franked dividends); or
Putting in place a complying loan agreement between the borrower and the company with minimum annual repayments at the benchmark interest rate.

The problem areas

Division 7A is not a new area of the tax law; it has been in place since 1997. Despite this, common problems are occurring. These include:

Incorrect accounting for the use of company assets by shareholders and their associates. Often, the amounts are not recognised;
Loans made without complying loan agreements;
Reborrowing from the private company to make repayments on Division 7A loans;
The wrong interest rate applied to Division 7A loans (there is a set rate that must be used).

Like life, managing the tax consequences of benefits provided to shareholders and their associates can get messy quickly. Avoiding problems can often come down to a few simple steps:

Don’t pay private expenses from a company account;
Keep proper records for your company that record and explain all transactions, including payments to and receipts from associated trusts and shareholders and their associates; and
If the company lends money to shareholders or their associates, make sure it’s on the basis of a written agreement with terms that ensure it’s treated as a complying loan – so the full loan amount isn’t treated as an unfranked dividend.

There are strict deadlines for managing Division 7A problems. For example, if the borrower is planning to repay the loan in full or put a complying loan agreement in place, this needs to be done before the earlier of the due date and actual lodgement date of the company’s tax return for the year the loan was made.

Should you be the ‘bank of Mum & Dad’?

The great wealth transfer from the baby boomer generation has begun and home ownership is the catalyst.

The average price of a home in NSW is $1,184,500, the highest in the country. Canberra is next at $948,500, followed by Victoria at $895,000, with the Northern Territory the lowest at $489,200¹. With the target cash rate expected to remain steady at a 12 year high of 4.35% over 2024, the pressure is on parents and family to help the younger generation become homeowners.

Over the last 15 years, home ownership has fallen from 70% to 67% of the population. Over time, declining home ownership will increase the wealth gap in Australia as for many, home ownership is a significant factor in wealth accumulation. According to the Actuaries Institute, wealth inequality is significantly higher now than in the 1980s, with the wealthiest 20% of households currently having six times the disposable income of the lowest 20%².

The Domain’s First Home Buyer Report 2024 estimates the time for a couple aged between 25 and 34 to save a 20% deposit for an entry level home to be 6 years and 8 months in Sydney, and 5 years and 5 months in Melbourne (the Australian average is 4 years and 9 months). In that time, they are begrudgingly paying rent (or staying with Mum and Dad).

So, should you help your children buy a home? If they can, many parents would prefer to assist their children when they need it most, rather than benefiting from an inheritance later in life. However, it’s essential that any support does not risk your financial security, and that means looking at what support you can afford to provide.

The downside of cash gifts

A cash gift towards a deposit or mortgage is a simple and effective method of helping a family member. However, there are a few downsides:

Where the gift forms all or a significant portion of the deposit, lenders may want to ensure that the loan is serviceable and may require verification of the source of the funds to ensure the amount is not a loan and does not require repayment (i.e., a gift letter).
In the event of a divorce or separation, the gift may not overtly benefit your child, and instead form part of the property pool to be divided.

For income tax purposes, gifts from a family member out of natural love and affection are not normally taxed.

The ‘bank of Mum & Dad’

If you provide a loan to your child to purchase a home, it’s essential that the terms of the loan are documented, preferably by a lawyer.

There are many ways to structure the loan depending on what you’re trying to achieve. For example, the loan might mimic a bank loan with interest and regular payments, require repayment when the property is sold or ownership changes, and/or managed by your estate in the event of your death (treated as an asset of the estate, offset against the child’s share of the estate, or forgiven).

There is a lot to think about before lending large amounts of money; what should happen in a divorce, if your child remortgages the property, if you die, if your child dies, if the relationship becomes acrimonious, etc. As always, hope for the best but plan for the worst.

Providing security to lenders

A family guarantee can be used to support a loan in part or in full. For example, with some lenders you can use your security to contribute towards your child’s deposit to avoid lender’s mortgage insurance (which ranges between 1% to 5% of the loan).

When you act as a guarantor for a loan, you provide equity (cash or often your family home) as security. In the event your child defaults, you are responsible for the amount guaranteed. If you have secured your child’s loan against your home and you do not have the cashflow or capacity to repay the loan, your home will be sold.

If you are contemplating acting as guarantor for your child, you need to look at the impact on your finances and planning first. Your retirement should not be sacrificed to your child’s aspirations. And, where you have more than one child, look at equalising the impact of the assistance you provide in your estate.

Co-ownership

There are two potential structures for buying property with your children:

Joint tenants – the property is split evenly and in the event of your death, the property passes to the other owner(s) regardless of your will.
Tenant-in-common – the more popular option as it allows for proportions other than 50:50 (i.e., 70:30). If you die, your share is distributed according to your will.

Regardless of ownership structure, if the property is mortgaged and the other party defaults on the loan, the loan might become your responsibility. It is vital to consider this before loan arrangements are entered into.

It’s also essential to have a written agreement in place that defines how the co-ownership will work. For example, what happens if your circumstances change and you need to cash out? What if your children want to sell and you don’t? Will the property be valued at market value by an independent valuer if one party wants to buy the other one out? It’s not uncommon for children to assume that they will only need to pay the original purchase price to buy your share with no recognition of tax, stamp duty or interest. And, what happens in the event of death or dispute?

If you are not living in the home as your primary residence, then it is likely that capital gains tax (CGT) will apply to any increase in the market value of the property on disposal of your share (not the price you choose to sell it for). And, you will not benefit from the main residence exemption. In these situations, it is essential to keep records of all costs incurred in relation to the property to maximise the CGT cost base of the property and reduce any capital gain on disposal.

Utilising a family trust

A more complex option is to purchase a property in a family trust where you or a related company acts as trustee. This strategy is often used for asset protection purposes. Typically, at some point in the future, you would pass control of the trust to your child and it might be possible to do this without triggering material CGT or stamp duty liabilities, although this would need to be checked. On the eventual sale of the property, CGT will apply to any increase in value of the property and the main residence exemption cannot be used to reduce the tax liability, even if the child was living in the home.

Be wary of state tax issues. For example, in some states, owning property through a trust will mean that the tax-free land threshold will not apply, increasing any land tax liability. Also, if the trust has any foreign beneficiaries, this could result in higher rates of stamp duty.

Reduced or rent free property

Buying a house and allowing your child to live in the house rent-free or at a reduced rent enables you to put a roof over their heads but adds no value to your child’s ability to secure a loan or utilise the equity of the property to build their own wealth.

If you intend to treat the property your child is living in as an investment property and claim a full deduction for expenses relating to the property, then rent needs to be paid at market rates. If rent is below market rates, the ATO may deny or reduce deductions for losses and outgoings depending on the discount provided. Any rental income received is assessable to you. In addition, CGT will be payable on any gain when the property is sold, or ownership is transferred.

If the intention is to provide this property to your child in your estate, ensure your will is properly documented to support this intent.

¹ABS, Housing Census

² Not a Level Playing Field, Actuaries Institute

Do your kids really want to take over your business?

Generational succession – handing your business across to your kids or family – sounds simple enough but, many families end up in a dispute right at the point when the parents, business, and children are most vulnerable. It’s important that generational succession is managed as closely and diligently as if you were selling your business to a stranger to avoid misunderstandings and disputes.

If you are looking to hand your business to your children or relatives, there are a few key issues to think about:

Capability and willingness of the next generation – do your kids really want the business?

There needs to be a realistic assessment of whether or not the business can continue successfully after the transition. In some cases, the exiting generation will pursue generational succession either as a means of keeping the business in the family, perpetuating their legacy, or to provide a stable business future for the next generation. All of these are reasonable objectives, however, they only work where there is capability and willingness.

The alternative scenario can also exist where generational succession is pursued by the younger generation. In some cases, it’s seen as their birth right. In these cases, the willingness will exist but this does not automatically translate to capability.

Capital transfer – how much money needs to be taken out of the business during the transition?

What level of capital do the current business owners, generally the parents exiting the business, need to extract from business at the time of the transition? The higher the level of capital needed, the greater the pressure that will be placed on the business and the equity stakeholders.

In most cases, the incoming generation will not have sufficient capital to buy out the exiting generation. This will require the vendors to maintain a continuing investment in the business or for the business to take on an increased level of debt.

In many cases, the exiting generation will want to maintain a level of equity investment. This might be a means of retaining an interest in the business or alternatively staging their transition. In either case, it is important to map the capital transition both from a business and shareholder perspective. This needs to be documented and signed off firstly from the business’s perspective and then by both generational groups. No generational transition should be undertaken without a clear and agreed capital program.

Income needs – ensuring remuneration is on commercial terms

In many SMEs, the owners arrange their remuneration from the business to meet their needs rather than being reasonable compensation for the roles undertaken. This can result in the business either paying too much or too little.

Under a generational succession, there should be an increased level of formality around compensation to directors and shareholders. Compensation should be matched to roles and where performance incentives exist these should be clearly structured.

Operating and management control

Once the capability and capital assessments have been completed, it is important to look at the transition of control. This can be a very sensitive area. It’s essential to establish and agree in advance how operating and management control will be maintained and transitioned.

The plan for operating and management control should be documented and signed off by all parties with either timelines for time driven succession or milestones for event-focussed transitions.

Transition timeframes and expectations

Generational succession is often a process rather than an event and achieved over an extended period of time. The critical issue is to identify and ensure that all parties have a common understanding and acceptance of the time period over which the transition will take place. This should be included in the documented succession plan.

The need for greater formality and management structure

Generational succession often requires a greater level of formality in the management and decision making process. This formality should achieve a separation of function between management, the Board, and shareholders.

Often in an SME business, these roles merge and there are no clear dividing lines or boundaries. Roles, responsibilities, and clear key performance indicators (KPIs) for management should be agreed and documented.

Need assistance? We can work with you to successfully transition your business.

Accessing money in your SMSF

The ATO has made a call to professional accountants to help identify and manage illegal early access to superannuation by members of self-managed superannuation funds (SMSFs).

In general, access to your super is only possible if:

You retire and turn 60; or
You turn 65 (regardless of whether you’re working).

Early access to superannuation is only possible in very limited circumstances such as terminal illness, permanent incapacity, and severe financial hardship and there are very strict protocols to follow before any amounts are paid out.

One of the benefits of an SMSF is the control that it provides to members. The flip side of full control is the temptation to dip into the super account and approve transfers without proper controls.

There are two common ways illegal early access occurs:

When the trustees (or their business) are in financial distress and they use the superannuation account for a short-term loan; or
A promoter offers access through a scheme – often getting people to establish the SMSF and roll over their superannuation into the SMSF.

Illegal access to the SMSF’s account or assets is not difficult to identify and generally will be picked up by your auditor. Where illegal access has occurred, not only is it likely that your retirement savings have been lost or impaired, but you are likely to face additional tax, penalties and interest, and be disqualified as a trustee. In addition, your name will be published online.

One of the signs that there is a problem is when SMSF annual returns are not lodged on time or at all so ensure you are up to date with your SMSF compliance.

Quote of the month

“Success is a journey, not a destination. The doing is often more important than the outcome.”

Professional Tennis Player, Arthur Ashe

Market Wrap April 2024

Markets

Local:

The ASX200 index fell in April by -2.94%.

Global:

The S&P 500 fell -4.1% in its first monthly decline of 2024.

The NASDAQ also sank -4.4% in April 2024.

The Dow Jones Industrial Average tumbled -4.9%.

The Russell 2000 was one of the worst performers in April, plummeting -7%.

The pan-European STOXX® Europe600 dropped -0.8%.

Gold:

The spot price for Gold continued to trend higher, finishing the month at US $2290.71 per ounce.

Iron Ore:

Iron Ore price remained steady over April 2024 to finish the month at US $110.91 /Mt

Oil:

Brent Oil Prices stabilized in April finishing the month at US $87.25 /bbl, against a backdrop of easing tensions between Israel and Iran, anticipated delays in US rate cuts, and the potential for a cease-fire in the Middle East.

Property

Housing:

Australian home values continued to trend higher in April with CoreLogic’s national Home Value Index (HVI) rising 0.6%.

This was on par with the pace of gains recorded in both February and March, with the month-on-month rise adding approximately $4,720 to the national median dwelling value.

April’s increase takes the current growth cycle into its 15th month, with housing values up 11.1% or approximately $78,000 since the trough in January last year.

Economy

Interest Rates:

The Reserve Bank of Australia has kept the official interest rate on hold at 4.35% but indicates in its latest economic forecasts that rates will need to stay higher for longer to curb stubbornly high inflation.

Retail Sales:

Retail sales in Australia dropped by 0.4% MoM in March 2024, missing market estimates of a 0.2% growth, which was also a downwardly revised figure for February. It was the first decline in retail trade since last December as turnover fell in all industries.

Bond Yields:

Australia’s 10-year government bond yield rose slightly in April, to end the month at 4.25%.

The yield on the US 10-year government bond also rose in April, ending the month at 4.70%.

Bitcoin:

Over April, the cryptocurrency market has been notably volatile, with Bitcoin’s price dropping to as low as $60K. This downturn affected many altcoins, resulting in significant losses in value across the board. Despite these fluctuations, Bitcoin showcased its resilience by steadily regaining its value over time. This recovery underscores the inherent volatility of the digital asset sector, demonstrating the rapid pace at which market conditions can shift and stabilize within this dynamic environment.

Exchange Rate:

The Aussie dollar continued to remain level over April against the American dollar, at $0.653, and against the Euro at $0.610.

Inflation:

Australia: The consumer price index for the first three months of 2024 was 3.6% higher than a year earlier, slowing from the 4.1% annual pace in the December quarter. Economists had tipped CPI growth would drop to 3.5%. The March quarterly inflation rate was 1%, compared with the 0.6% pace in the December quarter. Economists had tipped it would rise to 0.8%.

USA: The consumer price index, a key inflation gauge, rose 3.5% in March, higher than expectations and marking an acceleration for inflation. Shelter and energy costs drove the increase. Energy rose 1.1% after increasing 2.3% in February, while shelter costs were higher by 0.4% on the month and up 5.7% from a year ago.

EU: Euro area annual inflation is expected to be 2.4% in April 2024, stable compared with March 2024. Looking at the main components of euro area inflation, services is expected to have the highest annual rate in April (3.7%, compared with 4.0% in March), followed by food, alcohol & tobacco (2.8%, compared with 2.6% in March), non-energy industrial goods (0.9%, compared with 1.1% in March) and energy (-0.6%, compared with -1.8% in March).

Consumer Confidence:

The Westpac Melbourne Institute Consumer Sentiment Index declined 2.4% to 82.4 in April, from 84.4 in March. The pessimism that has dominated the consumer mood for nearly two years now is still showing few signs of lifting. The latest Index read is well below the ‘neutral’ level of 100, meaning pessimists outnumber optimists by over 15ppts. It is also in line with the average recorded over the last 24 months, marking an extended period of bleak sentiment reads by historical standards.

Employment:

Australia: Australia’s seasonally adjusted unemployment rate ticked higher to 3.8% in March 2024 from February’s five-month low of 3.7% but below market forecasts of 3.9%. The number of unemployed individuals increased by 20.6 thousand to 569.9 thousand, with those seeking full-time jobs rising by 19.3 thousand to 371.3 thousand and those looking for part-time jobs adding by 1.3 thousand to 198.6 thousand.

USA: Total nonfarm payroll employment increased by 175,000 in April, and the unemployment rate changed little at 3.9%. Job gains occurred in health care, in social assistance, and in transportation and warehousing.

Purchasing Managers Index:

The Judo Bank Flash Australia Manufacturing PMI rose to 49.6 in April, up from 47.3 a month earlier, according to final estimates. It was the third consecutive monthly deterioration in manufacturing sector conditions, albeit at a marginal pace, the lowest in the current sequence. Incoming new orders for goods continued to contract, attributed to subdued market conditions and the impact of elevated interest rates. Results above 50 points indicate expansion, with higher results indicating a faster rate of expansion.

US Services PMI:

The seasonally adjusted S&P Global US Services PMI fell for the third month running in April to 51.3 from 51.7 in March. The index pointed to a modest monthly increase in business activity, and one that was the slowest since last November.

US Global Manufacturing PMI:

The seasonally adjusted S&P Global US Manufacturing PMI posted in line with the 50.0 no-change mark in April to point to stable business conditions at the start of the second quarter. The reading was down from 51.9 in March and signaled an end to a three-month sequence of improving operating conditions.

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

Comments

Australian Housing Market Update

Australian home values continued to trend higher in April with CoreLogic’s national Home Value Index rising 0.6%. The CoreLogic Daily Home Value Index (HVI) aims to measure daily movements in the value of Australian housing markets. Rather than relying solely on transacted sale prices to provide a measure of housing market conditions, the CoreLogic Daily Home Value Index is based on a ‘hedonic’ methodology which includes the attributes of properties that are transacting as part of the analysis.

This rise was on par with the pace of gains recorded in both February and March, with the month-on-month rise adding approximately $4,720 to the national median dwelling value.

April’s increase takes the current growth cycle into its 15th month, with housing values up 11.1% or approximately $78,000 since the trough in January last year. What makes this current price surge unusual is that it has occurred without the assistance of any cash rate reduction.

The mid-sized capital cities continue to lead the pace of growth. Perth remains at the top of the growth charts with a 2.0% rise in April, followed by Adelaide at 1.3% and Brisbane at 0.9%.The monthly change in Sydney values (+0.4%) has held reasonably firm around the 0.4% mark each of the past three months, while Melbourne’s market (-0.1%) has broadly stabilised after recording a subtle -0.8% dip over the three months to January.

Rate hikes, cost of living pressures and worsening housing affordability are all factors that would contribute to a theory of softer housing conditions since mid-last year. However, an undersupply of housing relative to demand continues to keep upwards pressure on home values despite these headwinds.

The diversity in housing value outcomes can be explained by significant differences in factors like housing affordability, demand-side pressures from population growth and shortcomings in housing supply. Focusing on the extreme growth conditions in Perth, despite such a rapid pace of capital gains, housing values remain relatively affordable compared with the larger capital cities. Housing remains in short supply and purchasing demand is still high due to interstate and overseas migration rates that are well above average.

The likelihood of rate cuts should provide support for decent house price growth in 2025. Growth is likely to be strongest in the markets that have seen the lowest growth over the past couple of years (Melbourne, Hobart, Canberra and Darwin).

We really do live in interesting times.

Sources: AFR, BOQ, CoreLogic

The Choppy US Inflation Numbers

The US Labour Department has recently reported that the CPI has risen 3.5% year-over-year in March 2024. This is up from a 3.2% year-over-year gain in February and above the 3.4% growth economists were expecting. On a monthly basis, the CPI was up 0.4% compared to February, above economist estimates of a 0.3% gain.

The CPI reading is the latest indicator that inflation may be stickier than anticipated in 2024, and investors are debating how much longer the Federal Reserve will need to maintain interest rates at 22-year highs to get inflation under control. Stock markets also reacted negatively to the news, dropping sharply after strong gains since the beginning of the year.

CPI growth hit a peak of 9.1% in 2022, but it trended lower at a somewhat steady pace in the first half of 2023. However, in late 2023 and early 2024, CPI inflation readings have been choppy and unpredictable.

Core inflation, which excludes volatile food and energy prices, was up 0.4% on a monthly basis in March and 3.8% from a year ago.

Other key metrics include:

Food prices were up 0.1% month-over-month and up 2.2% compared to a year ago.

Energy prices were up 1.1% on a monthly basis and 2.1% over the past 12 months.

Shelter prices were up 0.4% compared to February and 5.7% over the past 12 months.

The latest CPI numbers come after the Labor Department reported the U.S. economy added 303,000 jobs in March, well above economist expectations of 200,000 new jobs. The Labor Department also reported U.S. wages were up 4.1% year-over-year in March, but rising prices are preventing many Americans from getting more mileage out of their growing pay checks.

The Federal Reserve is navigating a difficult balancing act of maintaining tight monetary policies to bring down inflation without triggering a U.S. recession. Rising interest rates increase borrowing costs for companies and consumers, weighing on economic activity.

So far, the U.S. labour market has been solid, but the New York Fed’s recession probability model suggests there’s still a 58.3% chance of a U.S. recession within the next 12 months.

Federal Reserve officials have repeatedly emphasized the dangers of cutting interest rates too soon and triggering a potentially disastrous rebound in inflation. The hot labour market has seemingly underscored the need for the Federal Open Market Committee, (FOMC) the branch of the federal reserve system that determines the direction of monetary policy in the US, to proceed with caution. In fact, Federal Reserve Vice Chairman Roger Ferguson recently said he sees a 10% to 15% chance of no rate cuts at all in 2024.

Fortunately, the stock market is not putting much pressure on the Fed to cut rates. Despite interest rates weighing on corporate earnings, the S&P 500 made several new all-time highs in the first quarter of 2024.

Analysts project S&P 500 companies will report 3.2% earnings growth for the first quarter of 2024 as earnings season kicks off in the coming days. The utilities and technology sectors are expected to report the highest earnings growth in the quarter, while the materials and energy sectors are expected to report the largest earnings declines.

Fed chairman Jerome Powell has stressed that the central bank’s policymakers need more confidence that inflation is steadily slowing to the Fed’s 2% target.

The Australian economy is highly correlated to the US economy and will often be a precursor to how the markets react back home. I’m sure the RBA will be keeping a keen eye on the figures coming out on the US and will act accordingly over the next 6-12 months in line with the economic data being released in Australia. We are still walking on an economic tightrope and only time will tell if we have got current policy decisions correct and if a soft landing back to our 2-3% target range is achievable.

Sources: AFR, BLS, Forbes

Market Wrap May 2024

Markets

Local:

The ASX200 had a slight gain in May rising 0.92%.

Global:

The S&P 500 advanced 5% in May.

The Dow Jones Industrial Average rose 2.6% in May.

The NASDAQ also surged 7%.

The Stoxx Europe 600 Index rose 3.5% over May. With the 12 month return sitting at 18.6%.

Gold:

The spot price for Gold continued to trend higher, finishing May at US $2,327 per ounce.

Iron Ore:

Iron Ore price increased over the month to finish May at US $117.52 /Mt.

Oil:

Brent Oil price came down slightly in May to end the month at US $81.11 /bbl.

Property

CoreLogic’s Home Value Index rose 0.8% in May, the 16th consecutive month of growth and the largest monthly gain since October last year.

The mid-sized capitals continued to lead the pace of growth, with Perth home values up 2.0% in May, Adelaide rising 1.8% and Brisbane up 1.4%. In dollar terms, it’s the equivalent of the median dwelling value rising by more than $12,000 month-to-month in each city.

The remaining capital cities recorded milder conditions, ranging from a 0.6% lift in Sydney values to a monthly decline of -0.5% in Hobart and a -0.3% fall in Darwin.

Economy

Interest Rates:

With the decision to only meet 8 times a year rather than the previous 12, the next board meeting will not occur till the 18^thof June. The Interest rate is currently sitting at 4.35%.

Retail Sales:

Australian retail turnover rose 0.1% in April 2024. This followed a 0.4% fall in March 2024 and a 0.2% rise in February 2024.

Ben Dorber, ABS head of retail statistics, said: “Underlying retail spending continues to be weak with a small rise in turnover in April not enough to make up for a fall in March. Since the start of 2024, trend retail turnover has been flat as cautious consumers reduce their discretionary spending.”

Bond Yields:

Australia’s 10-year government bond yield stabilized above 4.2% after sliding to two-week lows earlier in the month as domestic economic data proved less disappointing than markets feared.

The yield on the US 10-year government bond fell slightly over May, finishing the month at 4.51%.

Bitcoin:

Bitcoin price closed May 2024 at US $67,520, reflecting a 19% growth performance during the month, however recent swings in the BTC derivatives market suggest a major leg-up towards $75,000 could follow in June 2024.

Exchange Rate:

The Aussie dollar rose slightly over May against both the American dollar at $0.664 and the Euro at $0.613.

Inflation:

Australia: The monthly Consumer Price Index (CPI) indicator rose 3.6 per cent in the 12 months to April 2024. The most significant contributors to the April annual rise were Alcohol and tobacco (+6.5%), Housing (+4.9%), Food and non-alcoholic beverages (+3.8), and Transport (+4.2%).

USA: The annual inflation rate for the United States was 3.4% for the 12 months ending April, compared to the previous rate of 3.5%.

EU: Eurozone inflation rose to 2.6% year on year, from 2.4% in April. Core inflation, which shows prices without energy and food costs, also accelerated to 2.9%, from 2.7% in April.

Consumer Confidence:

The Westpac Melbourne Institute Consumer Sentiment Index dipped 0.3% to 82.2 in May, from 82.4 in April. Renewed cost-of-living pressures and inflation concerns have more than offset what looks to have been a relatively well received Federal Budget. Consumer sentiment remains deeply pessimistic. While expectations improved a touch in May, this was overshadowed by a further deterioration in current conditions and fears that persistently high inflation may require further interest rate rises. Importantly, the sentiment level and mix, and responses to additional questions about July’s tax cuts point to continued spending restraint by consumers heading into the second half of the year.

Employment:

Australia: The headline unemployment rate rose to 4.1% in April, up 0.2 percentage points from March. The number of people counted as officially unemployed increased by 30,300 last month, while the number of employed people increased by 38,500.

USA: Total nonfarm payroll employment increased by 272,000 in May, and the unemployment rate changed little at 4.0%. Employment continued to trend up in several industries, led by health care; government; leisure and hospitality; and professional, scientific, and technical services.

Purchasing Managers Index:

The headline seasonally adjusted Judo Bank Australia Manufacturing Purchasing Manager’s Index (PMI) posted 49.7 in May, up from 49.6 in April. This indicated a fourth successive monthly deterioration in manufacturing sector conditions, but at the softest pace in the current sequence. Results above 50 points indicate expansion, with higher results indicating a faster rate of expansion.

US Services PMI:

The S&P Global US Services PMI surged to 54.8 in May of 2024 from 51.3 in the previous month, well above market expectations of 51.3, according to preliminary figures. The result reflected the sharpest expansion in the US private services sector in one year, adding to signs of resilience of the US economy to the prolonged period of higher interest rates.

US Global Manufacturing PMI:

The seasonally adjusted S&P Global US Manufacturing Purchasing Managers’ Index™ (PMI®) rose to 51.3 in May, after having posted in line with the 50.0 no-change mark in April. The reading signaled a modest improvement in the health of the manufacturing sector, the fourth in the past five months.

Adviser Numbers:

The net change of advisers in May is +19, with the current number of advisers sitting at 15,630.

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

Comments

Business Insolvencies reaching record highs

In a clear sign of economic distress, Australia is now seeing a surge in business insolvencies, with approximately 1,100 insolvencies in March alone – the highest monthly figure since 2015.

In the March quarter, around 2,600 businesses entered an insolvency process, 41% higher than the same quarter last year. The insolvency data for the nine-month period from 1 July 2023 to 31 March 2024, shows an increase in the number of Australian companies failing. During the period, 7,742 companies entered external administration, a 36.2% increase on the previous corresponding nine-month period ending 31 March 2023.

The Australian Securities and Investments Commission (ASIC) predicts that by the end of the financial year, the number of companies entering external administration will likely exceed 10,000 – a level not seen since 2012-13, in the aftermath of the Global Financial Crisis.

One of the key factors contributing to this surge in insolvencies is the Australian Taxation Office (ATO) pursuing debts that were previously put on hold during the COVID-19 pandemic. According to the ATO, collectable debt rose 89% in the four years to June 2023. This has particularly impacted small businesses, as they account for approximately 65% of the total debt owed to the ATO (around $33 billion).

But more strictly enforced debt collection is coming at a time of tough economic conditions. High interest rates and cost-of-living pressures have weakened consumer spending, particularly in more discretionary components of spending. According to ASIC, the construction and accommodation & food services sectors represent the largest proportion of company failures, making up approximately 27.7% and 15.2% respectively.

The continued lift in insolvencies since 2021 highlights the difficult conditions many businesses are facing at present.

Sources: ASIC, Deloitte Access Economics

Is AI Empowering Australian Business?

In May, Deloitte Access Economics released its Generative AI report: Australia this week. The latest research findings are based on a survey of nearly 12,000 Asia Pacific residents, including nearly 1,300 Australian students and employees.

GenAI use among Australian employees continues to grow rapidly. In the past 12 months, the report finds that GenAI use in Australian workplaces has increased from 32% to 38% of all employees – a 20% increase in users in less than one year.

Employees have also changed how they are using GenAI applications, moving from an experimentation phase to systematically using tools in their day-to-day work. In the past 12 months, 64% of GenAI users have increased the amount they engage with the technology and 20% have more than doubled their use. Employees are also utilising GenAI more frequently and for a greater number of tasks, including creating written content, generating ideas, and conducting research.

And GenAI users are experiencing large improvements in their productivity, performance and wellbeing. According to the report GenAI has:

Increased the speed at which users can complete tasks (75% of users agreed)
Advanced their ability to generate new ideas (70%)
Improved the nature of their work and/or study (64%), reflecting that Gen AI allows users to automate repetitive tasks and focus on engaging projects.

However, there are still anxieties when it comes to the technology. Australian employees are now more concerned than ever about the GenAI risks, and in the last 12 months, the percentage of employees alarmed about GenAI making factual errors has increased from 73% to 87%. Other major concerns in 2024 include the misuse of sensitive information at (89%) and copyright infringement at (84%).

Australia is lagging behind other markets in the Asia-Pacific region. Australia has the second lowest share of GenAI usage of Asia Pacific locations surveyed, at 54% compared to a regional average of 67%. In fact, developing countries have a 30% higher share of GenAI users than more developed countries, reflecting that they have generally younger populations and so more “digitally native” people as a share of the percentage of their labour forces.

When it comes to disruption, GenAI is expected to impact professional and managerial roles more than any other. So developed countries, like Australia (where these roles make up 39% of the total workforce), have a significant opportunity to utilise the technology to harness the productivity impact of Gen AI.

Sources: AFR, Deloitte Access Economics

The information in this document is general advice only. Before acting on any of the general advice you should consider if it is appropriate for you based on your personal circumstances. Level One Financial Advisers Pty Ltd AFSL 280061.

Business Matters June 2024

The essential 30 June guide

The end of the financial year is fast approaching. We outline the areas at risk of increased ATO scrutiny and the opportunities to maximise your deductions.

For you

Opportunities

Take advantage of the 1 July 2024 tax cuts by bringing forward your deductible expenses into 2023-24. Prepay your deductible expenses where possible, make any deductible superannuation contributions, and plan any philanthropic gifts to utilise the higher tax rate.

Bolstering superannuation

If growing your superannuation is a strategy you are pursuing, and your total superannuation balance allows it, you could make a one-off deductible contribution to your superannuation if you have not used your $27,500 cap. This cap includes superannuation guarantee paid by your employer, amounts you have salary sacrificed into super, and any amounts you have contributed personally that will be claimed as a tax deduction.

And, if your superannuation balance on 30 June 2023 was below $500,000 you might be able to access any unused concessional cap amounts from the last five years in 2023-24 as a personal contribution. For example, if you were $8,000 under the cap in each of the last 5 years, you could contribute an additional $40,000 and take the tax deduction in this financial year at the higher personal tax rate.

To make a deductible contribution to your superannuation, you need to be aged under 75, lodge a notice of intent to claim a deduction in the approved form (check with your superannuation fund), and get an acknowledgement from your fund before you lodge your tax return. For those aged between 67 and 75, you can only make a personal contribution to super if you meet the work test (i.e., work at least 40 hours during a consecutive 30-day period in the income year, although some special exemptions might apply).

And, if your spouse’s assessable income is less than $37,000 and you both meet the eligibility criteria, you could contribute to their superannuation and claim a $540 tax offset.

If you are likely to face a tax bill this year, for example, you made a capital gain on shares or property you sold, then making a larger personal superannuation contribution might help to offset the tax you owe.

Charitable donations

When you donate money (or sometimes property) to a registered deductible gift recipient (DGR), you can claim amounts over $2 as a tax deduction. The more tax you pay, the more valuable the tax deductible donation is to you. For example, a $10,000 donation to a DGR can create a $3,250 deduction for someone earning up to $120,000 but $4,500 to someone earning $180,000 or more (excluding Medicare levy).

To be deductible, the donation must be a gift and not in exchange for something. Special rules apply for amounts relating to charity auctions and fundraising events run by a DGR.

Philanthropic giving can be undertaken in a number of different ways. Rather than providing gifts to a specific charity, it might be worth exploring the option of giving to a public ancillary fund or setting up a private ancillary fund. Donations made to these funds can often qualify for an immediate deduction, with the fund then investing and managing the money over time. The fund generally needs to distribute a certain portion of its net assets to DGRs each year.

Investment property owners

If you do not have one already, a depreciation schedule is a report that helps you calculate deductions for the natural wear and tear over time on your investment property. Depending on your property, it might help to maximise your deductions.

Risks

Work from home expenses

Working from home is a normal part of life for many workers, and while you can’t claim the cost of your morning coffee, biscuits or toilet paper (seriously, people have tried), you can claim certain additional expenses you incur. But, work from home expenses are an area of ATO scrutiny.

There are two methods of claiming your work from home expenses; the short-cut method, and the actual method.

The short-cut method allows you to claim a fixed 67c rate for every hour you work from home. This covers your energy expenses (electricity and gas), internet expenses, mobile and home phone expenses, and stationery and computer consumables such as ink and paper. To use this method, it’s essential that you keep a record of the actual days and times you work from home because the ATO has stated that they will not accept estimates.

The alternative is to claim the actual expenses you have incurred on top of your normal running costs for working from home. You will need copies of your expenses, and your diary for at least 4 continuous weeks that represents your typical work pattern.

Landlords beware

If you own an investment property, a key concept to understand is that you can only claim a deduction for expenses you incurred in the course of earning income. That is, the property needs to be rented or genuinely available for rent to claim the expenses.

Sounds obvious but taxpayers claiming investment property expenses when the property was being used by family or friends, taken off the market for some reason or listed for an unreasonable rental rate, is a major focus for the ATO, particularly if your property is in a holiday hotspot.

There are a series of issues the ATO is actively pursuing this tax season. These include:

Refinancing and redrawing loans – you can normally claim interest on the amount borrowed for the rental property as a deduction. However, where any part of the loan relates to personal expenses, or where part of the loan has been refinanced to free up cash for your personal needs (school fees, holidays etc.,), then the loan expenses need to be apportioned and only that portion that relates to the rental property can be claimed. The ATO matches data from financial institutions to identify taxpayers who are claiming more than they should for interest expenses.
The difference between repairs and maintenance and capital improvements. While repairs and maintenance can often be claimed immediately, a deduction for capital works is generally spread over a number of years. Repairs and maintenance expenses must relate directly to the wear and tear resulting from the property being rented out and generally involve restoring the property back to its previous state, for example, replacing damaged palings of a fence. You cannot claim repairs required when you first purchased the property. Capital works however, such as structural improvements to the property, are normally deducted at 2.5% of the construction cost for 40 years from the date construction was completed. Where you replace an entire asset, like a hot water system, this is a depreciating asset and the deduction is claimed over time (different rates and time periods apply to different assets).
Co-owned property – rental income and expenses must normally be claimed according to your legal interest in the property. Joint tenant owners must claim 50% of the expenses and income, and tenants in common according to their legal ownership percentage. It does not matter who actually paid for the expenses.

Gig economy income

It’s essential that any income (including money, appearance fees, and ‘gifts’) earned from platforms such as Airbnb, Stayz, Uber, OnlyFans, youtube, etc., is declared in your tax return.

The tax rules consider that you have earned the income “as soon as it is applied or dealt with in any way on your behalf or as you direct”. If you are a content creator for example, this is when your account is credited, not when you direct the money to be paid to your personal or business account. Squirrelling it away from the ATO in your platform account won’t protect you from paying tax on it.

Since 1 July 2023, the platforms delivering ride-sourcing, taxi travel, and short-term accommodation (under 90 days), have been required to report transactions made through their platform to the ATO under the sharing economy reporting regime. This is the first year that the ATO will have the income tax returns of taxpayers to match to this data.

All other sharing economy platforms will be required to start reporting from 1 July 2024. If you have income you have not declared, do it now before the ATO discover it and apply penalties and interest.

For your business

Opportunities

Bonus deductions

There are a series of bonus deductions available to small business in 2023-24, these include the instant asset write-off, energy incentive, and the skills and training boost.

Announced in the 2023-24 Federal Budget, the increase to the instant asset write-off threshold enables small businesses with an aggregated turnover of less than $10 million to immediately deduct the full cost of eligible depreciating assets costing less than $20,000. In the 2024-25 Federal Budget, the Government extended this measure to 30 June 2025.

Without these measures, the instant asset write-off threshold would be $1,000.

However, legislation to enact the 2023-24 measure has not passed Parliament following a disagreement between the House of Representatives and the Senate about the amount of the threshold, and whether the measure should apply to medium businesses as well (up to $50m).

Similarly, the $20,000 energy incentive that provides an additional 20% deduction on the cost of eligible depreciating assets or improvements to existing depreciating assets that support electrification and more efficient use of energy in 2023-24, is not yet law.

Assuming both measures pass Parliament by 30 June 2024, any assets need to be first used or installed ready for use, or the improvement costs incurred, between 1 July 2023 and 30 June 2024 to be written off in 2023-24.

What is certain is the bonus 20% deduction for eligible expenditure for external training provided to your employees. The ‘skills and training boost’ is available to businesses with an aggregated annual turnover of less than $50 million. To claim the boost, the training needs to have been provided by a registered training provider and registered and paid for between 29 March 2022 and 30 June 2024. Typically, this is vocational training to learn a trade or courses that count towards a qualification rather than professional development.

Write-off bad debts

Your customer definitely not going to pay you? If all attempts have failed, the debt can be written off by 30 June. Ensure you document the bad debt on your debtor’s ledger or with a minute.

Obsolete plant & equipment

If your business has obsolete plant and equipment sitting on your depreciation schedule, instead of depreciating a small amount each year, scrap it and write it off before 30 June.

For companies

If it makes sense to do so, bring forward tax deductions by committing to directors’ fees and employee bonuses (by resolution), and paying June quarter super contributions in June.

Risks

Tax debt and not meeting reporting obligations

Failing to lodge returns is a huge ‘red flag’ for the ATO that something is wrong in the business. Not lodging a tax return will not stop the debt escalating because the ATO has the power to simply issue an assessment of what they think your business owes. If your business is having trouble meeting its tax or reporting obligations, we can assist by working with the ATO on your behalf.

Professional firm profits

For professional services firms – architects, lawyers, accountants, etc., – the ATO is actively reviewing how profits flow through to the professionals involved, looking to see whether structures are in place to divert income to reduce the tax they would be expected to pay. Where professionals are not appropriately rewarded for the services they provide to the business, or they receive a reward which is substantially less than the value of those services, the ATO is likely to take action.

Need support or have questions? Talk to us today about maximising your outcomes and reducing your risks.

ATO fires warning shot on trust distributions

The ATO has warned that it is looking closely at how trusts distribute income and to who.

The way in which trusts distribute income has come under intense scrutiny in recent years. Trust distribution arrangements need to be carefully considered by trustees before taking steps to appoint or distribute income to beneficiaries.

What does your trust deed say?

An area of concern is that trustees are not considering the trust deed before income is appointed. The answer to what the trust can do, and who it can allocate income to and how, is normally in the trust deed. This should be your first point of call.

Review your deed

Conduct a review of the trust deed and any amendments to ensure trustees are making decisions consistent with the terms of the deed;
Check the trust vesting date. The trust deed will specify what happens when the trust vests. If the trust vests, the trustees might be directed to distribute the income and property of the trust to particular beneficiaries. The trustee may no longer have the discretion to decide who to appoint income or capital to;
Check who the intended beneficiaries are, and also keep in mind that some beneficiaries might have different entitlements to income and capital under the trust deed;
Timing and requirements for resolutions – Check the deed for any conditions and requirements for trustee resolutions, including the need to have the resolution in writing and the timing of when it’s required to be made. For example, the deed might require trustees to take certain actions before 30 June;
If you are looking to stream capital gains or franked distributions to certain beneficiaries, check the trust deed doesn’t prevent this and the streaming requirements have been met.

Family trust and interposed entity elections

A family trust election helps wrap the workings of the trust around a specific individual’s family group. These elections can help protect trust losses, company losses, and franking credits but can also cause significant tax problems if they are used incorrectly.

An interposed entity election makes an entity a member of the family group of an individual.

Where these elections are in place, it is essential that trustees understand the implications before making any decisions on distributions. Distributions of trust income outside the specified individual’s family group will trigger family trust distribution tax at penalty rates.

Who receives the benefit?

The ATO is also on the lookout for arrangements where amounts are allocated or appointed to beneficiaries, but they don’t receive the real financial benefit of the distribution. If the arrangement has the effect of reducing the overall tax paid on the income of the trust, then this will normally increase the level of risk involved and attract the ATO’s attention.

Increased reporting on tax returns

Changes have been made to capture more information on the tax return about how trusts distribute income. These include:

Trust tax return – four new capital gains tax labels have been added. This information should be provided to beneficiaries to match what is reported in their returns.
Beneficiaries – all beneficiaries of trust income will be required to lodge a new trust income schedule. This schedule should align to your distributions as set out in the trust’s statement of distribution.

Trusts can be an excellent vehicle for many reasons including the flexibility to determine how income is distributed. The cost of that flexibility is strong controls and compliance.

The ATO is increasingly strident about how trusts are distributing income, and the tax impact of those distributions. It’s important for trustees to get it right because if trust distributions are found to be invalid, the tax ramifications can be significant.

5 million+ struggle with mortgage payments

New nationwide research released by ASIC’s Moneysmart reveals that 47% of Australian adults with debt, the equivalent of 5.8 million people, have struggled to make repayments in the last 12 months.

Alarmingly, the research revealed that more than half surveyed, said they are not aware that they are entitled to ask their bank or lender for financial hardship assistance and just one in five said they had ever sought financial hardship assistance. Around 30% also stated that they would not seek a hardship assistance arrangement from their bank or lender and instead sell assets or get a second job rather than talking to their bank.

What’s changing on 1 July 2024?

Here’s a summary of the key changes coming into effect on 1 July 2024:

Tax cuts reduce personal income tax rates and change the thresholds.
Superannuation guarantee increases from 11% to 11.5% – check the impact on any salary package arrangements.
Superannuation caps increase from $27,500 to $30,000 for concessional super contributions and from $110,000 to $120,000 for non-concessional contributions.
Luxury car tax threshold increases to $91,387 for fuel-efficient vehicles and $80,567 for all others.
Car limit for depreciation increases to $69,674.
$300 energy relief credit for households comes into effect (credited automatically quarterly).

For business

$325 energy relief credit for small business commences (for small businesses that meet the relevant State or Territory definition of a ‘small customer’).
$20k instant asset write-off extended to 30 June 2025 (subject to the passage of legislation).

Quote of the month

“Nothing in life is to be feared, it is only to be understood. Now is the time to understand more, so that we may fear less.”

Marie Curie, Physicist, chemist, Nobel Prize laureate

Business Matters July 2024

What’s ahead for 2024-25?

Will 2024-25 be another year of volatility or a return to stability?

Personal tax & super

As you would be aware (at least we hope so after a $40m public education campaign), the personal income tax cuts came into effect on 1 July 2024. At the same time, the superannuation guarantee (SG) rate increased by 0.5% to 11.5%.

For employers, it’s critically important to ensure that your payroll system, and all interactions with it, like salary sacrifice agreements, are assessed and updated. Your PAYG withholding will also be impacted.

While we are on the topic of obligations, the ATO have recently warned employers to be vigilant about their super guarantee obligations:

Are you paying super guarantee to the right people? The definition of an employee for SG purposes is broad and, in some cases, extends beyond typical classifications. Temporary residents, backpackers, and some company directors working in the business, family members working in the business, and some contractors must be paid SG. Check your classifications are correct for SG purposes.
Check the fund details are correct for the employee and the employee’s tax file number has been provided to the super fund. It’s the employer’s obligation to ensure that SG for the employee is directed to the correct super fund account.
Ensure SG is paid into the employee’s fund by the quarterly due date (next SG payments are due by 28 July). If your business misses the deadline, the super guarantee charge applies (even if you pay the outstanding amount quickly after the deadline). The SG charge (SGC) is particularly painful for employers because it is comprised of the outstanding SG, 10% interest p.a. from the start of the quarter, and an administration fee. And, unlike normal SG contributions, SGC amounts are not deductible.

Wages

On 1 July 2024, the national minimum wage increased by 3.75% ($24.10 per hour, or $915.90 per week). The increase applies from the first full pay period starting on or after 1 July 2024. Traditionally, there is no correlation between an increase in minimum wages and inflation.

Annual wage growth in the private sector fell slightly to 4.1% in the March quarter 2024 from 4.2% in December 2023 – the first fall since September quarter 2020, suggesting that wages growth is starting to even out.

Interest rates and cost of living

Reserve Bank of Australia (RBA) Governor Michelle Bullock has stated on several occasions that inflation, not interest rates, are at the heart of cost of living pressures. Interest rates are the RBA’s “blunt instrument” to bring inflation under control. With inflation easing more slowly than anticipated, the RBA is not ruling anything out because the path of interest rates is determined by the actions required to bring inflation to target.

Inflation has reduced from its peak of 7.8% in December 2022 to 3.6% in the March quarter, but increased again in May to 4% dampening expectations of an interest rate reprieve.

Business confidence

The latest NAB business survey is not happy reading with business confidence falling back into negative territory in May as conditions continued to gradually soften. Having experienced eight consecutive months of forward order declines, businesses are understandably circumspect over the outlook. GDP grew marginally in the March quarter and consumption per capita continued to decline.

However, labour market conditions are strong with unemployment at 4% for May.

Treasury forecasts that economic growth (GDP) will marginally improve to 2% in 2024-25. Not exciting but credible.

Migration & labour

Always a controversial topic. Post pandemic, Australia’s migration levels surged with the return of international students, working holiday makers, and an influx of temporary skilled labour to meet shortages.

In the year ending 30 June 2023, overseas migration contributed a net gain of 518,000 people to Australia’s population – the largest net overseas migration estimate since records began.

The 2024-25 Federal Budget estimates that net migration will fall to 260,000. While demand pressures from migration have been well publicised, particularly on housing, the positive impact was the impact on supply. Post COVID, Australia faced crippling labour shortages that impeded the return and growth of supply.

From 1 January 2025, student visa numbers will be capped, and according to the University of Melbourne Deputy Vice-Chancellor Professor Michael Wesley, student visa grants are already down 34% in March 2024 compared to the same time in 2023.

The Government’s focus is on skilled migration. Employer sponsored places will rise by 7,175, however skilled independent visas will reduce by 13,475.

The minimum salary requirement to sponsor an employee (Temporary Skilled Migration Income Threshold) will also increase to $73,150 on 1 July 2024.

What now?

Businesses fail (or fail to thrive) for a myriad of reasons, but the precursor is often a failure to understand what is occurring within the business and what to monitor. Strategically, managers need to be on top of their numbers to identify and manage problems before they get out of hand. If you do not know what the key drivers of your business are, then it’s time to find out (we can help you with that).

A lack of profit will erode your business, but not enough cash will kill it stone dead. Businesses often fail because they don’t manage their cash position. Plan, track, and measure your cashflow. This not only means closely monitoring your debtor collections and inventory but also running a rolling three month cashflow position. This should provide an early warning of any brewing problems.

Cash flows, operating budgets, cost control and debt management all need to be part of your business management. The more in control you are the lower your risk position.

Many small businesses also tend to absorb increasing costs. Putting up your prices during difficult times is not an act of social betrayal. If the cost of doing business has increased, you should flow these through unless you are comfortable making less for the same amount of effort, or you are in an industry that is so price sensitive you have no choice but to follow the lead of larger businesses.

$20k instant asset write-off passes Parliament

Legislation increasing the instant asset write-off threshold from $1,000 to $20,000 for the 2024 income year passed Parliament just 5 days prior to the end of the financial year.

Purchases of depreciable assets with a cost of less than $20,000 that a small business makes between 1 July 2023 and 30 June 2024 can potentially be written-off in the year of purchase. It’s a major cashflow advantage because the tax deduction can be taken in the year of purchase instead of over a number of years.

To be eligible, the asset must be first used, or installed ready for use, for a taxable purpose between 1 July 2023 and 30 June 2024. For example, you cannot simply have a receipt for an industrial fridge, it must have been delivered and installed to be able to claim the write-off in 2024.

The write-off threshold applies per asset, so a small business entity can potentially deduct the full cost of multiple assets across the 2024 year as long as the cost of each asset is less than $20,000. A Bill to extend the instant asset write-off threshold increase to 30 June 2025 is currently before Parliament.

Is your family home really tax free?

The main residence exemption exempts your family home from capital gains tax (CGT) when you dispose of it. But, like all things involving tax, it’s never that simple.

As the character of Darryl Kerrigan in The Castle said, “it’s not a house. It’s a home,” and the Australian Taxation Office’s (ATO) interpretation of a main residence is not fundamentally different. A home is generally considered to be your main residence if:

It’s where you and your family live
Your personal belongings have been moved into the dwelling
It is where your mail is delivered
It’s your address on the electoral roll
You have connected services such as telephone, gas and electricity (in your name); and
It is your intention for the home to be your main residence.

The length of time you have lived in the home is important, but there are no hard and fast rules. Your intention takes precedence over time spent as every situation is different.

When does the main residence exemption apply?

In general, CGT applies to the sale of your home unless you have an exemption, partial exemption, or you can 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 (see Can the main residence apply if you move out?).; and
You did not use your home to produce any income (see Partial exemption below), and
The land your home is on is 2 hectares or less. If your home is on more than 2 hectares, for example on farmland, the exemption can apply to the home and up to 2 hectares of adjacent land.

Partial exemption

If you have used your home to produce income, you won’t normally be able to claim the full main residence exemption, but you might be able to claim a partial exemption.

Common scenarios impacting your main residence exemption include:

Running a business from home (working from home is ok), and
Renting the home or part of the home.

In these scenarios, from the time you started to use the home to generate income, that part of the home is likely to be subject to CGT. And, a word of caution here, as of 1 July 2023, platforms such as Airbnb must report all transactions to the ATO every 6 months. This data will be used to match against the income reported on income tax returns.

Foreign residents and changing residency

Foreign residents cannot access the main residence exemption even if they were a resident for part of the time they owned the property.

If you are a non-resident at the time you enter into the contract to sell the property, you are unlikely to be able to access the main residence exemption. 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.

Can the main residence apply if you move out?

You might have heard about the ‘absence rule’. This rule allows you to continue to treat your home as your main residence for tax purposes:

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

When you apply 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 2020 and rented out your home while you were away. Then, you came back to Australia in 2023 and moved back into your house. Then in early 2024, 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 again, but later stop living there. 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.

Timing

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 buy a new home but haven’t yet sold your old home, you can treat both properties as your main residence for up to six months without impacting your eligibility to the main residence exemption. This applies if the old home was your main residence for a continuous period of 3 months in the 12 months before you disposed of it and you did not use your old home to produce income in any part of that 12 months when it was not 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.

Can a couple have a main residence each?

Let’s say you and your spouse each own homes that you have separately established as your main residences.

The rules don’t 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 your 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.

What happens in a divorce?

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.

The main residence exemption looks simple enough but it can become complex quickly. You will need more than a ‘vibe’ to work with the exemption. In the words of the character of Dennis Denuto in The Castle, “it’s the vibe of it. It’s the constitution. It’s Mabo. It’s justice. It’s law. It’s the vibe and ah, no that’s it. It’s the vibe. I rest my case.”

Earned an income from the sharing economy?

It’s essential that any income earned from sharing economy platforms such as Airbnb, Stayz, Uber, etc., is declared in your tax return.

Since 1 July 2023, the platforms delivering ride-sourcing, taxi travel, and short-term accommodation (under 90 days), have been required to report transactions made through their platform to the ATO under the sharing economy reporting regime. 2023-24 is the first year that the ATO will have the income tax returns of taxpayers to match to this data.

All other sharing economy platforms will be required to start reporting from 1 July 2024.

This reporting regime, combined with the ATO’s data matching programs, mean that if income is not declared, it’s likely you will receive a “please explain” request from the regulator.

Quote of the month

“It seemed as though he had a fundamental belief that the merit of his argument depended on the strength of his feelings about the matter, and since he always felt uncontrollably passionate about everything, then clearly he was always right.”
John Cleese, actor, comedian, author, producer

Market Wrap June 2024

Markets

Local:

The ASX 200 index gained 1.0% in June.

Global:

The S&P 500 posted seven new closing highs throughout June to finish 3.6% higher.

The Dow Jones Industrial Average gained 1.2%.

The tech-heavy Nasdaq 100 jumped 6.3% in June and posted another record high during the month.

The pan-European STOXX® Europe 600 index fell 1.1% over the month, but its YTD return is still positive at 9.4%.

Gold:

The spot price for Gold finished the month at $2,327 per ounce, no change from the month prior.

Iron Ore:

Iron Ore price fell by negative 9.37% in June to finish the month at US $107 /Mt.

Oil:

Brent Oil price rose slightly over June to end the month at US $86.76 /bbl.

Property

Housing:

CoreLogic’s national Home Value Index (HVI) increased a further 0.7% in June, taking growth to 8.0% across FY2023-24. This is the equivalent of a $59,000 increase to the median dwelling value in Australia, which is now $794,000. The annual rise was in stark contrast to the FY2022-23 when CoreLogic’s national index was down -2.0%. In that year, annual growth was weighed down by a -7.5% drop in values in the nine months following May 2022, when the cash rate target started to rise.

Despite the strong annual gain, the trend growth rate has eased since the highs of mid-2023 when the quarterly rate of change peaked at 3.3%. The most recent June quarter saw dwelling values rise by 1.8%, which is roughly in line with the March quarter (1.9%) and December quarter last year (1.8%).

Economy

Interest Rates:

The RBA has left interest rates on hold at a 12-year high of 4.35% for the fifth time in a row at its June 2024 meeting. The Board has reiterated that all options are still on the table in its fight against inflation.

Retail Sales:

Australian retail turnover rose 0.6% in May 2024. This followed a 0.1% rise in April 2024 and a 0.4% fall in March 2024. Robert Ewing, ABS head of business statistics, said: “Retail turnover was boosted this month by watchful shoppers taking advantage of early end-of-financial year promotions and sales events.

Bond Yields:

Australian 10-year yields decreased by 10 basis points over June to 4.31%.

The yield on the US 10-year government bond continued its downward trend to finish the month at 4.36%.

Bitcoin:

Bitcoin prices struggled through June to finish the month at $61,829, this is a fall of negative 9.23% from the month prior.

Exchange Rates:

The Aussie dollar continued to remain steady in June against the American dollar, at $0.662, and the Euro at $0.620.

Inflation:

Australia: Australia’s monthly inflation rate increased to its highest level in 2024 in the latest indication that the Reserve Bank won’t be cutting interest rates soon and might yet hike again. Consumer prices rose 4% in May from a year earlier and are up from the 3.6% pace recorded for April.

USA: Inflation in the US eased in May, with headline consumer prices recording zero growth, pushing the annual rate down to 3.3% from 3.4%. Core inflation – which excludes food and energy costs – rose just 0.2% in May, taking the annual rate down to 3.4% from 3.6%.

EU: In June 2024, inflation in the euro area rose by 2.5% compared to the same month in 2023. Thus, the rate slowed down compared to May, when it was 2.6%.

Consumer Confidence:

The Westpac–Melbourne Institute Consumer Sentiment Index rose 1.7% to 83.6 in June from 82.2 in May. Despite the improvement, consumer sentiment remains below its March level and still firmly in deeply pessimistic territory. The survey detail suggests positives from fiscal support measures are being negated by increased concerns about inflation and the outlook for interest rates.

Employment:

Australia: Australia’s seasonally adjusted unemployment rate inched down to 4.0% in May 2024 from April’s three-month high of 4.1%, matching market forecasts. The number of unemployed individuals fell by 9.2 thousand to 598.9 thousand, which is still nearly 110 thousand fewer than before the pandemic.

USA: Total nonfarm payroll employment increased by 206,000 in June, and the unemployment rate changed little at 4.1%. Job gains occurred in government, health care, social assistance, and construction.

Purchasing Managers Index:

The Judo Bank Australia Manufacturing PMI dropped to 47.2 in June 2024 from 49.7 in May, marking the fifth consecutive monthly deterioration in manufacturing sector conditions and at the fastest pace since May 2020. Results above 50 points indicate expansion, with higher results indicating a faster rate of expansion.

US Services PMI:

The seasonally adjusted S&P Global US Services PMI® increased for the second consecutive month in June, posting 55.3 following a reading of 54.8 in May. Activity in the sector has now risen in each of the past 17 months, with the latest expansion, the most pronounced since April 2022.

US Global Manufacturing PMI:

The seasonally adjusted S&P Global US Manufacturing PMI® ticked up to a three-month high of 51.6 in June from 51.3 in May. The index signaled a modest monthly improvement in business conditions.

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

Comments

The Rocky Road for Retailers

The year has begun with a fizzle rather than a bang. Real spending decreased by 0.4% over the March quarter of 2024, reversing much of the Black Friday gains.

Indeed, retail has been subdued for some time now. In per capita terms, real retail turnover has not grown in quarterly terms for seven straight quarters since June 2022. Retail sales volumes per capita fell 1.0% over the March quarter and are now 3.6% lower than a year ago – reflecting just how much an average consumer has had to pull back on spending. It has also fed into rising business insolvencies in retail and hospitality.

Keeping spending at bay has been persistently high levels of price growth seen in essential spending outside of retail (rents, insurance, utilities) causing consumers to cut back on spending on discretionary retail.

The latest monthly Retail Trade figures released recently continue to show the sombre story with nominal retail turnover only increasing by 0.1% over the month of April. Additionally, Real GDP growth slowed over the March quarter, increasing by just 0.1% over the quarter, and just 1.1% over the past year. And while household consumption was a little stronger, growing by 0.4% over the March quarter, most of the growth was attributable to spending on services.

The immediate road ahead is looking rocky, particularly as unemployment rises further. But there is also some sunshine – real wage growth, stage 3 tax cuts and interest rate cuts (eventually) are expected to spur consumer spending later in 2024 and into 2025. Throwing a spanner in the works is the slowdown in population growth working through – mostly as the post-COVID catch-up runs its course. With per capita spending stagnating or contracting for the last seven consecutive quarters, more moderate population growth risks are dampening the retail recovery.

The Fair Work Commission’s decisions on the 3rd of June to increase the minimum and award wages by 3.75% are something of a double-edged sword for the retail sector. On the one hand this will provide a modest further boost to real wage growth for consumers, supporting the economy’s capacity to spend. On the other hand, the increase is higher than the retail sector was suggesting, and will place some businesses under further financial pressure, at a time when retail and hospitality insolvencies are already rising.

Despite the uncertainties ahead, real retail turnover is expected to increase from 0.0% in calendar 2024 to 2.3% in 2025. Household goods turnover should pick up more with better economic conditions and with an uplift in national building activity, supported by the Government’s ambitious housing targets. The additional dollars from tax cuts later this year may bump up spending at cafes, restaurants and takeaway in the September and December quarters.

Sources: ABS Retail Trade, AFR, Deloitte Access Economics

The Forward View – NAB

Economic Overview – What do the big banks think.

NAB’s overall view of the economy is largely unchanged – with growth tracking through a very weak period and the expectation that the labour market will soften further through 2024. They continue to expect inflation to moderate – though this process has not been smooth – and the RBA to have the scope to begin easing rates later in the year. With GDP growth rebounding somewhat in H2, unemployment stabilising at around 4.5% and inflation returning to the target band by late 2025 they continue to see a relatively soft landing.
Indeed, GDP grew just 0.1% q/q in Q1, to be up 1.1% y/y. This was in line with NAB’s forecasts but, in the detail, the picture has changed somewhat with revised estimates of overseas travel leaving household consumption growth looking stronger at 1.3% y/y. The softness in the quarter came largely from private investment – especially construction – with offsetting movements in trade and inventories.
Higher frequency indicators, including business conditions in the NAB Monthly Business Survey, suggest growth will likely be no better in Q2. They continue to expect a pickup in activity in the second half of the year with easing inflation and tax cuts supporting households. On balance their year-ended growth forecast is now marginally lower at 1.3% for 2024, with growth still likely to return to trend rates around 2.25% beyond that.
Despite the slowing in growth, the labour market has remained resilient with strong employment growth seeing the unemployment rate at 4.0% in May. We continue to expect further gradual easing in the labour market, with the unemployment rate rising to around 4.5% by end-2024. This is consistent with further easing in the pace of wage growth.
The question remains how long rates will need to remain at their current restrictive level to see inflation back into the target range. NAB still see a first cut in November, but the exact timing is heavily data dependent. Underlying inflation remains around 4.0% y/y and the data flow from here will be critical – especially the Q2 CPI out in late July. So too will be the assumed kick in growth in H2 2024.

Sources: NAB – The Forward View

Business Matters August 2024

When is a gift not a gift?

The Tax Commissioner has successfully argued that more than $1.6m deposited in a couple’s bank account was assessable income, not a gift or a loan from friends.

The case of Rusanova and Commissioner of Taxation is enough for a telemovie. The plot features an Australian resident Russian couple ‘gifted’ over $1.6m in unexplained bank deposits, over $67,000 in interest, the Russian father-in-law seafood exporter, a series of Australian companies, and the generous friend loaning money in $20,000 tranches.

The crux of the case before the Federal Court is whether you can prove to the Australian Tax Office (ATO) that unexplained deposits should be treated as gifts or loans and what happens when the Tax Commissioner thinks otherwise? If the Commissioner suspects the deposits are income, he can issue a default tax assessment and decide what tax should be paid. The burden of proof is then on the taxpayer to prove the Tax Commissioner wrong.

The unexplained deposits

Between 2012 and 2016, an Australian resident husband and wife had an estimated $1,636,000 deposited into their bank accounts. The ATO became curious when neither spouse had lodged tax returns in the mistaken belief that they had not earned any income.

The money deposited, they said, was a gift from the wife’s father and therefore not assessable income. Curiously, there were no records produced to support the deposits and not a single text or email notifying that money had been remitted, or acknowledging its receipt.

In addition, a friend of the couple deposited money into the husband’s account including a series of $20,000 transactions over about a week. These, the friend said, were interest-free loans with no agreed terms but an expectation that they would be repaid. The friend could not remember how he was requested to make the loans and there were no loan documents, emails, or texts disclosed to support the loans. Around the same time as the loans were being advanced, there was evidence of the husband ‘repaying’ amounts in excess of what had been lent. In addition, documents show the husband transferred a Porsche Cayenne to his friend in Russia, said to be repayment of the loan.

Compounding the issue were the four directorships of Australian companies held by the husband, none of which had lodged tax returns. One of the companies was a seafood wholesaler, distributing the product of his father-in-law’s American registered Russian export company. The dedicated son-in-law stated that he was merely trying to develop his father-in-law’s business during 2010 and 2016, without remuneration.

Contesting the Tax Commissioner

In 2017, a covert tax audit utilised entries in the couple’s bank accounts to assess their income tax liability and the ATO issued a default assessment based on the unexplained deposits and expenses. The couple objected to the assessment and this objection was partly allowed. A second assessment was then issued to which the couple again objected before the Administrative Appeals Tribunal (AAT) on the grounds that the assessment was excessive.

Can the Tax Commissioner really decide how much tax you should pay?

The Tax Commissioner has the power to issue a ‘default assessment’ for the amount he believes is owing from overdue tax returns or activity statements. The assessment is the amount the ATO believes is owing, not what has been declared.

The problem with a default assessment is not just the Tax Commissioner deciding how much tax you should pay, it is the potential addition of an administrative penalty of 75% of the tax-related liability for each default assessment issued. This penalty may be increased to 95% of the tax-related liability in certain circumstances for taxpayers who have a pattern of non-compliance.

But, here is the problem for the couple. While genuine gifts of money are not taxable, the burden is on the taxpayer to prove that the gift is truly a gift, if the ATO asks. The AAT held that, “absent any reliable evidence…, there is no proper basis to make any findings as to whether the deposits constitute part of the applicants’ taxable income or not.”

The Tax Commissioner can rely on a “deficiency of proof”.

The couple’s stance that the deposits were either gifts from the father or loans from a friend were rejected by the AAT. This is despite an affidavit and evidence from the wife’s father stating that the amounts transferred to them were gifts. The couple did not demonstrate what their income actually was to prove the Tax Commissioner’s assessment was unreasonable, and they could not substantiate that the gifts were indeed gifts from a very generous father.

The Federal Court dismissed the couple’s appeal with costs, leaving the Tax Commissioner’s default tax assessment and penalties in place.

Avoiding the gift tax trap

A gift of money or assets from an individual is generally not taxed if the gift is given voluntarily, nothing is expected in return, and the gift giver does not materially benefit.

However, there are some circumstances where tax might apply.

Gifts from a foreign trust

If you are a tax resident of Australia and the beneficiary of a foreign trust, it’s possible that at least some of the amounts paid to you (or applied for your benefit) will need to be declared in your tax return. This applies even if you were not the direct beneficiary of the foreign trust, for example, a family member received money from a foreign trust and then gifted it to you. This applies to cash, loans, land, shares, etc.

Inheritances

Money or property you inherit from a deceased estate is often not taxed. However, there are circumstances where capital gain tax (CGT) might apply when you dispose of an asset you inherited. For example, if you inherit your parents’ house, CGT generally does not apply if:

The property was their main residence; and
Your parents are Australian residents for tax purposes; and
You sell the property within 2 years.

However, CGT is likely to apply if for example:

You sell your parents former main residence more than 2 years after you inherit it; or
The property you inherit was not your parents’ main residence; or
Your parents were not Australian tax residents at the time of their death.

Managing the tax consequences of an inheritance can become complex quickly. Please contact us for assistance when planning your estate to maximise the outcome for your beneficiaries, or managing the tax implications of an inheritance. These issues are often not taken into account if you are drafting or updating a will.

Gifting an asset does not avoid tax

Donating or gifting an asset does not avoid CGT. If you receive nothing or less than the market value of the asset, the market value substitution rule 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 when calculating any CGT liability.

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 CGT liability. It does not matter that Mum & Dad did not receive any money for the land. Mum & Dad might have a CGT bill for land they gifted with nothing in return.

Donations of cryptocurrency might also trigger CGT. 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.

Divorce, you, and your business

Breaking up is hard to do. Beyond the emotional and financial turmoil divorce creates, there are a number of issues that need to be resolved.

What happens when there is a family company?

For couples that have assets tied up in a company, the tax consequences of any settlements paid from the company will need to be assessed. Settlements paid out by a corporate entity can sometimes be treated as taxable dividends and taxed at the relevant spouse’s marginal tax rate.

If you are receiving assets from a corporate entity as part of a property settlement, it’s essential that you understand the tax implications prior to settlement or a sizeable portion of the settlement could go to the ATO.

For business owners, outside of the tax and financial issues, it’s important to not lose focus on what’s important to keep the business running efficiently.

What happens to your superannuation in a divorce?

A spouse’s interest in superannuation is a marital asset and can be split as part of the breakdown agreement. It’s important to be aware however that superannuation cannot be paid directly to a spouse unless the spouse is eligible to receive superannuation (they have met a condition of release) but it can be rolled over into the spouse’s fund until they are eligible to receive it. Laws exist to prevent taxes such as CGT being triggered when superannuation assets are transferred. This is particularly important where your superannuation fund holds property.

A Court order or Superannuation Agreement is required to give effect to the agreed split in the SMSF assets or to execute a rollover eligible for the CGT rollover concession.

If you have an SMSF and both spouses are members, it’s important to get advice to make sure that all of the appropriate administrative issues are taken care of. Where a divorce is not amicable, it’s important to keep in mind that the SMSF trustee is required under law to act in the best interests of the fund and its beneficiaries. Anything less and the fund members may seek compensation for loss or damage.

Can you protect both parties from divorce?

In a divorce, assets are split based on a multitude of factors such as earning capacity, maintenance of children, and the assets held pre-marriage. Many couples don’t go through their marriage with an equal view of how assets and income should be attributed until something goes wrong. If there is a disparity between the income levels of each spouse, there are a lot of benefits to the household in general of evening out how income flows through to the family. If your partner earns less than you, there is a very real financial benefit to topping up their super as superannuation has preferential tax rates. The same goes for taxable income. If you can even out income coming into the household, it spreads the tax burden. Good planning can make a difference.

The changes to how tax practitioners work with clients

The Government has amended the legislation guiding registered tax practitioners to include compulsory reporting of material uncorrected errors to the Tax Commissioner.

The Government has legislated a series of changes to the Tax Agents Services Act 2009 that place additional requirements on registered tax practitioners and how they interact with clients.

The reforms are in response to the recommendations of a Senate enquiry into the actions of accounting group PwC and the consulting industry in Australia generally. The enquiry was sparked when a now former PwC Partner shared confidential information from Treasury consultations and through his engagement with the Board of Taxation. Despite having signed multiple confidentiality agreements, the Partner intentionally shared this confidential information with PwC partners and others in Australia and overseas, seeking to assist existing and potential new clients avoid some proposed anti-avoidance tax laws. The Senate enquiry estimates that the scandal put at risk $180 million in tax revenue per annum and generated new income of at least $2.5 million for the first tranche of PwC’s services assisting clients to “sidestep the new laws”.

Among other issues, the scandal revealed a series of flaws and deficiencies within the regulation of tax practitioner services, the investigative powers of the Tax Practitioners Board (TPB), and the ability of Government departments to share information.

While many of the resulting legislative reforms impact consulting services to Government, we are now obligated to advise clients of: how to check the currency of our registration as tax practitioners; how to access the complaints process for registered practitioners; and, our obligation to report material uncorrected errors and omissions to the Tax Commissioner.

Tax practitioner registration

The TPB registers and regulates tax practitioners in Australia. Only licensed practitioners can provide tax or BAS services to you. You can check the public register here: https://www.tpb.gov.au/public-register

Level One Taxation & Business Advisors’ registration number is 72740004.

Managing complaints

We are committed to providing quality services to you. If we fall short of your expectations and you would like to make a complaint, in the first instance, please contact Doug Tarrant.

If your matter is not resolved to your satisfaction, you have the right to make a complaint to the TPB: https://www.tpb.gov.au/complaints.

Correcting errors and omissions

We are prohibited from making a statement to the Tax Commissioner or other government agency that we know, or ought to know, is false, incorrect or misleading, or incorrect or misleading by omission.

If we become aware that a statement made to the Tax Commissioner is materially incorrect, we are obligated to either:

Correct it, if we made the misstatement; or
If the misstatement was made by you, advise you that it needs to be corrected.

If the misstatement is not corrected, we are obligated to report this to the Tax Commissioner.

Concerned?

If you have any concerns about the changes, please contact Doug Tarrant on (02) 4227 6744.

The rise in business bankruptcy

ASIC’s annual insolvency data shows corporate business failure is up 39% compared to last financial year. The industries with the highest representation were construction, accommodation and food services at the top of the list.

Restructuring appointments grew by over 200% in 2023-24. Small business restructuring allows eligible companies – those whose liabilities do not exceed $1 million plus other criteria – to retain control of its business while it develops a plan to restructure its affairs. This is done with the assistance of a restructuring practitioner with a view to entering into a restructuring plan with creditors.

Of the 573 companies that entered restructuring after 1 January 2021 and had completed their restructuring plan by 30 June 2024, 89.4% remain registered, 5.4% have gone into liquidation, and 5.2% were deregistered as at 30 June 2024.

In the latest statement from the Reserve Bank of Australia, Michelle Bullock stated that, “…there’s also some signs that the business sector is under a bit of pressure, that the business outlook isn’t as rosy as it was.” Productivity is also lagging. Strategically, managers need to be on top of their numbers to identify and manage problems before they get out of hand. If you do not know what the key drivers of your business are – the things that make the difference between doing well and going under – then it’s time to find out.

A business becomes insolvent when it can’t pay its debts when they fall due.

The top three reasons why companies fail are:

Poor strategic management
Inadequate cashflow or high cash use
Trading losses

It’s easy to miss the warning signs and rely on optimism that things will get better if you can just get past a slump. The common problem areas are:

Significant below budget performance.
Substantial increases in fixed costs without an increase in revenues – Fixed costs are costs that you incur irrespective of your business activity level. When fixed costs go up, they have a direct impact on your profitability. If your fixed costs are increasing, such as leasing more space, hiring more people, buying more plant and equipment, but there is no measurable increase in your turnover and gross profit, it might tip you over.
Falling gross profit margins – Your gross profit margin is the margin between your sales, minus cost of goods sold. Every dollar you lose in gross profit is a dollar off your bottom line.
Funding your business primarily from debt rather than equity finance.
Falling sales – If sales are falling, it is going to have a ripple through effect on your business, reducing profit contribution and inhibiting growth.
Delaying payment to creditors – Your sales are good but you don’t seem to have enough cash in the business to pay your creditors on time.
Spending in excess of cashflow – Trying to pay today’s expenses with tomorrow’s income.
Poor financial reporting systems – Driving your business with a blindfold over your eyes!
Growing too quickly – You’re making more sales than your business can sustain.
Substantial bad debts or ‘dead’ stock – Customers who won’t pay their accounts and stock that you can’t sell.

Quote of the month

“Only the guy who isn’t rowing has time to rock the boat”.

Jean-Paul Sartre, Philosopher

Market Wrap July 2024

Markets

Local:

The ASX 200 had its best month of the year in July, finishing up 4% to set a new record high at 8,092.

Global:

The S&P 500 advanced 1.2%.

The Dow Jones Industrial Average rose 4.5% higher in July.

The NASDAQ slipped 0.7%.

The FTSE 100 had a solid gain over July to finish the month 2.52% higher.

Gold:

The spot price for Gold had a strong rise over July to finish the month at US $2,445 /oz.

Iron Ore:

Iron Ore prices fell again in July to finish the month at US $105.94 /Mt.

Oil:

Brent Oil prices fell in July, ending the month at US $80.84 /bbl.

Property

Housing:

CoreLogic’s national Home Value Index (HVI) rose 0.5% in July, the 18th consecutive monthly increase nationally – a figure on par with the 0.5% increase recorded in June. Following a -7.5% decline recorded between May 22 and Jan 23, the national HVI has gained 13.5% and values have consistently pushed to new record highs since November last year.

However, while the headline growth rate remains positive, it is clear momentum is leaving the cycle and conditions are becoming more diverse.

Three capitals recorded a decline in values over the past three months. Melbourne led the decline with a -0.9% fall, alongside a -0.8% and -0.3% reduction in Hobart and Darwin values respectively. The rolling quarterly pace of growth has slowed markedly in Sydney to 1.1%, a fraction of the 5.0% quarterly gain recorded at the same time last year. These dynamics are weighing on growth in national home values, which are up 1.7% in the past three months compared to the 3.2% increase seen this time last year.

Economy

Interest Rates:

The Reserve Bank of Australia left the cash rate on hold at a 12-year high of 4.35% as widely predicted by the market and economists. The central bank has lifted interest rates 13 times since 2022 to tame inflation that has remained stubbornly above the RBA’s 2% – 3% target.

The Bank of England joined the European Central Bank and the Bank of Canada in easing policy and the US Federal Reserve is expected to follow in September.

Retail Sales:

Retail sales in Australia increased by 0.5% mom in June 2024 and rose 2.9% compared with the same period 12 months prior.

Bond Yields:

Australia’s 10-year government bond yield ended the month at 4.12% down from the previous month at 4.31%.

The yield on the US 10-year government bond continued its downward trend to finish the month at 4.09%.

Bitcoin:

Bitcoin fell below $65,000 after the US Federal Reserve announced it would keep interest rates unchanged. However, with markets now anticipating rate cuts in the upcoming Federal Reserve meeting in September, the outlook for a Bitcoin rally by the end of the year has strengthened.

Exchange Rate:

The Aussie dollar fell against the American dollar to finish July at $0.649 and fell against the Euro to finish at $0.599.

Inflation:

Australia: Quarterly consumer price inflation rose by 1.0% in the June quarter 2024, resulting in an annualised inflation rate of 3.8%. This marks the first lift in annual inflation since the December 2022 quarter. The monthly CPI indicator grew at 3.8% in June 2024 compared to 4.0% in May.

USA: The Consumer Price Index for All Urban Consumers (CPI-U) declined 0.1% on a seasonally adjusted basis, after being unchanged in May, the U.S. Bureau of Labor Statistics reported. Over the last 12 months, the all items index increased 3.0 % before seasonal adjustment.

EU: Euro area annual inflation is expected to be 2.6% in July 2024, up from 2.5% in June according to a flash estimate from Eurostat. Looking at the main components of euro area inflation, services are expected to have the highest annual rate in July (4.0%, compared with 4.1% in June), followed by food, alcohol & tobacco (2.3%, compared with 2.4% in June).

Consumer Confidence:

The Westpac–Melbourne Institute Consumer Sentiment Index dipped 1.1% to 82.7 in July from 83.6 in June. Sentiment remains stuck in the same deeply pessimistic range that has dominated for two years now. The July update shows that fears of persistent inflation and further interest rate rises are again weighing more heavily on the consumer mood, offsetting any boost from the arrival of the ‘stage 3’ tax cuts and other fiscal support measures. While these measures came into effect from July 1, many consumers would not have seen any cash flow impacts so far given that payment cycles – for both incomes and for the electricity and rent expenses set to receive more cost of living support – are often fortnightly or monthly.

Employment:

Australia: Australia’s seasonally adjusted unemployment rate remained at 4.0% in June 2024.

USA: The unemployment rate rose to 4.3% in July, and nonfarm payroll employment edged up by 114,000. Employment continued to trend up in health care, in construction, and in transportation and warehousing, while information lost jobs.

Purchasing Managers Index:

The headline seasonally adjusted Judo Bank Australia Manufacturing Purchasing Manager’s Index (PMI) posted 47.5 in July, up from 47.2 in June. This indicated a sixth successive monthly deterioration in manufacturing sector conditions, albeit at a slightly slower pace than in June. Results above 50 points indicate expansion, with higher results indicating a faster rate of expansion.

US Services PMI:

The S&P Global US Services PMI was revised lower to 55 in July 2024 from a preliminary of 56, compared to 55.3 in June. The reading continued to point to a marked expansion in the services sector, although the rate of growth eased slightly.

US Global Manufacturing PMI:

The seasonally adjusted S&P Global US Manufacturing Purchasing Managers’ Index™ (PMI®) fell to 49.6 in July from 51.6 in June, below the 50.0 no-change mark for the first time in seven months and signalling a slight deterioration in the health of the manufacturing sector.

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

Comments

The carnage in the EV industry is only just getting started..

‘Bloodbath’ is used too often in business journalism. But it may be the only word to describe the state of the Western EV industry

The opinion piece from The Telegraph London’s Matthew Lynn highlights the many problems facing the electric vehicle industry. We have surmised his main points below.

Profits at the German auto giant Mercedes plunged in July as sales of its slick new range of electric vehicles went into freefall.

Porsche abandoned its sales targets for battery-powered cars amid waning demand from customers. Ford is losing nearly $US50,000 ($A76,000) on every EV it sells, while Tesla’s profits dropped 45%. Meanwhile, battery manufacturers such as Germany’s Varta are getting wiped out.

It has become clear that the EV industry is on the brink of collapse. Hundreds of billions of euros, dollars and pounds have been pumped into this industry by political leaders and the subsidy junkies that surround them – and it is surely time they were held to account for the vast quantities of taxpayer cash that has been wasted.

There is too much capacity in the industry, with companies over-investing in too many factories and distribution centres. Demand for the end product has started to crumble, with consumers increasingly nervous over what may become obsolete technology. Insurance and maintenance costs are proving far higher than expected for many, once the vehicles are actually on the road.

In 2019, France’s President Macron grandly announced a Franco-German plan to dominate battery production, with €700 million ($A1.1 billion) invested by France and another €1 billion in Germany.

The EU proudly boasts that €80 billion has been invested in the “EV value chain” as part of its Green New Deal, but when the books are finally opened it is unlikely they will be good.

The situation is even worse in the US. The Biden administration recently awarded nearly $US2 billion in grants to help restart or expand EV manufacturing and assembly sites across eight states.

It has offered tens of billions in subsidies of more than $US7,000 per vehicle sold, and even more in building the infrastructure, including one $US7.5 billion scheme to install chargers that ended up with only seven actually built (which works out at more than $US1 billion each for what is basically just a plug).

Even in the UK, where the political class was largely too incompetent to back any projects, money was poured into the ill-fated Britishvolt project, and it remains to be seen how much is finally given to India’s Tata for its new EV battery factory in Somerset.

Economists have long warned that net zero provides a golden opportunity for waste and rent-seeking. But some elites chose not to listen. We should start holding them accountable. Lobbyists argued for the subsidies, civil servants supported them, and finance ministers enthusiastically virtue signalled with other people’s money.

But too much investment creates overcapacity. Markets are better at deciding which technologies work than politicians, and if there is a genuine demand for a product then no one has to receive a grant to manufacture it, since the potential profits to be made will be incentive enough.

The carnage in the EV industry is only just getting started, and already it has cost billions.

Sources: AFR, The Telegraph

How tight is the labour market still?

The RBA’s communication on the outlook for monetary policy has focused on a ‘narrow path’ where inflation declines but unemployment doesn’t increase too much. The policy trade-off for the RBA is that it needs more labour market slack (i.e., higher unemployment) to slow wages growth and so inflation. Ever since the RBA adopted inflation targeting in 1993 it has set monetary policy with employment outcomes at the heart of decision making. The RBA’s focus on employment in the currency cycle is nothing new. It’s business as usual.

Labour force participation is at its highest level ever, driven by surging women’s employment. Casual work is at its lowest rate in a decade, and unemployment is at its lowest sustained levels in half a century.

While this strong labour market has underpinned Australia’s recovery from the disruptions of the pandemic, it has been challenging for employers.

Businesses have struggled to fill roles, as unfilled vacancies doubled to their normal levels. Job turnover has increased as employees exploit a buyer’s market for new opportunities. And wages have exploded, growing at their fastest rate since the mining boom.

Unemployment has been very low since the pandemic – consistently below 4.0%. This was due to a combination of strong employment generation associated with pandemic recovery, alongside labour shortages caused by a lack of migration due to closed borders throughout 2020 and 2021.

However it can be seen that the labour market it starting to turn, with some economists backing the unemployment rate to hit 4.5% by December 2024. Data from Seek (the job advertisement company) has shown that applicants per job ad are up by 67.7% over the year, attributed largely to the increased competitiveness within the labour market as a result of higher advertised salaries. Mix this in with higher interest rates within the economy putting increased economic pressure on Australians, a gradual easing should be around the corner.

The pandemic introduced considerable volatility within the labour market but the distinct relationship between labour spare capacity and wage growth has reemerged. Other critical factors remain for inflation to reach its target of 2.5%, especially if productivity and inflation expectations manage to remain anchored, but this is in no way guaranteed. The labour market appears on track, but all eyes will continue to remain on inflation levels.

Sources: ABS, AFR, AI Group, Challenger Group

Market Wrap August 2024

Markets

Local:

The ASX200 index had a slight gain of 0.47% over August.

Global:

The S&P 500 rose 2.4% in August.

The Dow Jones Industrial Average advanced 2%.

The Nasdaq Composite added 0.7%.

The one laggard was the small-cap Russell 2000 index which, after surging 10.2% in July, retreated 1.5% in August.

The Stoxx Europe 600 Index added 1.6%.

Gold:

Gold reached an all-time high of US $2531.70 /oz in August of 2024.

Iron Ore:

Iron ore price first declined and then traded within the range of $100-120/Mt during much of the first half of CY24.

Oil:

Brent Oil price continued its decline in August reaching US $76.93 /bbl.

Property

Housing:

CoreLogic’s September Home Value Index (HVI) increased 0.5% in the month of August, representing the 19th consecutive month of increase in home values. However, the pace of growth is showing clear signs of slowing with the quarterly increase in national home values (1.3%) now less than half the rate of growth in the same three month period of 2023 (2.7%).

Capital growth across the cities remains diverse. Monthly gains were led by a 2.0% increase in Perth, followed by strong rises of 1.4% in Adelaide and 1.1% in Brisbane. Monthly growth in Sydney was a mild 0.3%. Four capital cities saw a monthly decline in home values, led by a -0.4% dip in Canberra, -0.2% in Melbourne and Darwin, and a mild -0.1% fall in Hobart.

Economy

Interest Rates:

At its last meeting in August the Reserve Bank of Australia left the cash rate on hold at a 12-year high of 4.35% as widely predicted by the market and economists. The central bank has lifted interest rates 13 times since 2022 to tame inflation that has remained stubbornly above the RBA’s 2% – 3% target. The next board meeting is not until 24^th September 2024.

Retail Sales:

Retail sales in Australia were unchanged in July 2024 and rose 2.3% compared with the same period 12 months prior.

Bond Yields:

Australia’s 10-year Government bond yield is currently 3.97%, as of 30 August 2024.

US 10-year Government bond yield fell slightly in August to finish the month at 3.91%.

Bitcoin:

Bitcoin (BTC) price again reached an all-time high in 2024, as values exceeded over 73,000 USD in March 2024. That particular price hike was connected to the approval of Bitcoin ETFs in the United States. The price of Bitcoin is expected to be more volatile in the coming months and will be highly correlated to the outcome of the US presidential election.

Exchange Rate:

The Aussie dollar recovered slightly in August against the American dollar, at $0.681, and gained slightly against the Euro at $0.614.

Inflation:

USA: The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.2% on a seasonally adjusted basis, after declining 0.1% in June. Over the last 12 months, the all items index increased 2.9%

EU: Eurozone annual inflation fell to 2.2% in August 2024, yet core inflation, driven by persistent services costs, remains stubborn, the ECB’s Isabel Schnabel urges caution regarding potential rate cuts.

Consumer Confidence:

The Westpac–Melbourne Institute Consumer Sentiment Index rose 2.8% to 85 in August from 82.7 in July. Consumers breathed a small sigh of relief in August as the RBA Board left interest rates unchanged and the support coming from tax cuts and other fiscal measures became more apparent. That said, the Index remains at weak levels by historical standards, stuck in the 78–86 range that has prevailed for over two years now. The survey detail shows that cost of living and rate rise concerns are still weighing heavily.

Employment:

Australia: The seasonally adjusted unemployment rate rose 0.1 percentage point to 4.2% in July. Kate Lamb, ABS head of labour statistics said: “The unemployment rate rose to 4.2%in July, with the number of unemployed growing by 24,000 people and employed by around 58,000. This combined increase lifted the participation rate to a record high of 67.1%.

USA: Total nonfarm payroll employment increased by 142,000 in August, and the unemployment rate changed little at 4.2%. Job gains occurred in construction and health care.

Purchasing Managers Index:

The Judo Bank Australia Manufacturing PMI rose to 48.5 in August 2024 from 47.5 in July, remaining contractionary for the seventh consecutive month, although at the softest pace since May. The latest figure was also revised slightly lower from an initial reading of 48.7. Incoming new orders and production remained in contraction, though export orders expanded at the fastest pace in nearly two years. Results above 50 points indicate expansion, with higher results indicating a faster rate of expansion.

US Services PMI:

The seasonally adjusted S&P Global US Services PMI® Business Activity Index rose to 55.7 in August from 55.0 in July, signaling a marked monthly increase in service sector output, and one that was the most pronounced since March 2022. Activity has now risen in each of the past 19 months.

US Global Manufacturing PMI:

The seasonally adjusted S&P Global US Manufacturing Purchasing Managers’ Index™ (PMI®) posted 47.9 in August, down from 49.6 in July. The latest reading was the lowest since last December and signaled a second consecutive month of deteriorating manufacturing sector conditions.

Adviser Numbers:

According to Adviser Ratings’ Q2 2024 Musical Chairs Report, the latest quarter saw more than four advisers exit for every new entrant, noting a 1% decline in the total adviser population, despite 95 new entrants, landing at a total of 15,415 at the end of the quarter.

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

Comments

Are we hiding the real inflation threat?

Economists and business leaders say state and federal governments have not done enough to help the Reserve Bank get inflation under control, warning households will only get genuine cost of living relief when interest rates come down.

Headline inflation fell to 3.5% in July as government energy rebates caused temporarily smaller electricity bills, but analysts said the figures would not be enough for the RBA to bring forward interest rate cuts amid broader strength in underlying price pressures.

State and federal government rebates caused electricity prices to fall by 6.4% in July, the Australian Bureau of Statistics reported. Without the rebates, electricity bills would have increased by 0.9%, suggesting government subsidies took 0.2 percentage points off headline inflation.

Headline inflation is expected to fall sharply again in August as more consumers receive $300 federal government energy bill credits, potentially sending headline inflation below 3% and back into the RBA’s target band. However, the RBA expects inflation to shoot higher to 3.7% in December next year when the subsidies end.

The latest ABS figures show underlying price pressures remain uncomfortably strong, underscoring the RBA’s concern about the persistence of high inflation.

“The distortions caused by the extension of the electricity subsidies is also fooling no-one, least of all the RBA,” Beta shares chief economist David Bassanese said.

RBA governor Michele Bullock has effectively ruled out cutting the cash rate from 4.35% this year given the ongoing strength of domestically generated inflationary pressures, particularly in the housing market. Rents increased 6.9% in the year to July, while the cost of building a new home grew by 5%.

EY’s Ms Murphy said subsidies could potentially lower consumers’ inflation expectations, which would be beneficial for the RBA, but they may also put extra cash in people’s pockets, which in turn could be harmful for inflation.

Unlike its global counterparts, the RBA is likely a long way from feeling confident in reaching its inflation target within a reasonable timeframe.

Sources: AFR, ABS, Deloitte

World Competitive Rankings 2024

The International Institute for Management Development (IMD) have published their World Competitiveness Rankings for 2024. This list analyses and ranks the capability of 67 countries to create and maintain an environment which sustains the competitiveness of enterprises. A country’s competitiveness is assessed based on four criteria: economic performance, government efficiency, business efficiency and infrastructure.

Australia placed 13th in the rankings this year, up from 19th in 2023, and our highest ranking since 2011. This is still lower than our performance from 2002 to 2011 – during which time we were consistently ranked among the top 10 countries – but Australia’s business competitiveness is improving from a COVID-era trough.

Of the four criteria, economic performance generally tends to be Australia’s strongest performing indicator, and in 2024 Australia ranked 5th on our terms of trade, 8th for real GDP growth, and 14th for long-term growth in employment. Australia’s strong commodity exports underpinned our high terms of trade, but other export-related indicators performed poorly, including our trade to GDP ratio (59th) and high concentration of export partners (58th). Inflationary pressures also remain a cause for concern, with Australia ranked 42nd when assessing the cost-of-living index. Australia’s central bank may be one of the last in the developed world to move to cutting interest rates, given current stubborn inflation pressures.

Business efficiency is still a weak point, with Australia placing 22nd overall. Though credit availability is good (ranked 7th) and corporate debt does not impair businesses (ranked 8th), Australia’s entrepreneurship and workforce productivity are poor, as we placed 61st and 48th respectively. The lack of productivity growth has lengthened Australia’s cost of living crisis, with wage growth failing to offset continuing price growth.

Australia’s infrastructure performance remains steady, ranked 18th in 2024, up from 20th in 2023. Strong public investment is evident in rankings for environmental agreements (1st), university education (7th), life expectancy (8th) and universal health coverage (9th). But we still have low internet bandwidth speeds (50th), poor communications technology (45th) and lacklustre investment in telecommunications (40th) – a result hardly befitting the legacy of the country responsible for inventing WiFi. Australia was also ranked 49th for renewable energy, and 47th for our energy infrastructure, both key areas to tackle as part of the green energy transition.

Australia needs to address housing affordability, and ensure dwelling construction keeps up with our population growth. There is also a need to lift productivity growth to improve living standards and place some downward pressure on prices while successfully navigating a clean energy transition remains.

Sources: CEDA, Deloitte, IMD

Business Matters October 2024

Payday super: the details

‘Payday super’ will overhaul the way in which superannuation guarantee is administered. We look at the first details and the impending obligations on employers.

From 1 July 2026, employers will be obligated to pay superannuation guarantee (SG) on behalf of their employees on the same day as salary and wages instead of the current quarterly payment sequence.

The rationale is that speeding up the payment sequence for SG will not only help reduce the estimated $3.4 billion gap between what is owed to employees and what has been paid, but will also improve outcomes for employees – the Government estimates that a 25‑year‑old median income earner currently receiving super quarterly and wages fortnightly could be around 1.5% better off at retirement.

Announced in the 2023-24 Federal Budget, payday super is not yet law. However, given the structural changes required to administer the new law, Treasury has released a fact sheet to help employers better understand the implications of the impending change.

How will payday super work?

Under payday super, the due date for SG payments will be seven days from when an ordinary times earning* payment is made. That is, employers have seven days from an employee’s payday for their SG to be received by their super fund. The only exceptions are for new employees whose due date will be after their first two weeks of employment, and for small and irregular payments that occur outside the employee’s ordinary pay cycle.

Over the last few years, employers have moved to single touch payroll (STP) reporting for employee salary and wages. It is expected that payday super will fold into the existing electronic systems and some changes will be made to STP to collect ordinary times earning data.

The impact for some employers however will not be the compliance cost of administering the regular SG payments, but the cashflow. Employers will not be holding what will be 12% of their payroll until 28 days after the end of the quarter, but instead paying this amount out on the employee’s payday. The upside is that where an employer has either fallen behind or not paying SG, particularly when the business is insolvent, the damage is contained.

What happens if SG is paid late?

The penalties for underpaying or not paying SG are deliberately punitive and this approach will continue under payday super.

Currently, a super guarantee charge (SGC) applies to late SG payments – comprised of the employee’s superannuation guarantee shortfall amount, interest of 10% per annum from the start of the quarter the SG payment was due, and an administration fee of $20 for each employee with a shortfall per quarter. And, unlike normal superannuation guarantee contributions, SGC amounts are not deductible to the employer, even when the liability has been satisfied.

Under payday super, employees are fully compensated for delays in receiving SG amounts and larger penalties apply for employers that repeatedly fail to comply with their obligations. If you make a payment late, the SGC is made up of:

As you can see, if the proposed SGC becomes law, late SG payments can spiral out of control quickly. This will be a particular issue for employers that pay employees less than their entitlements over time, or have misclassified employees as contractors and have an outstanding SG obligation.

But, unlike the current SGC, the new SGC will be tax deductible (excluding penalties and interest that accrue if the SG charge amount is not paid within 28 days).

Payday super is not yet law. We will keep you up to date as change occurs and work with you to get it right once the details have been confirmed.

*Ordinary time earnings are the gross amount your employees earn for their ordinary hours of work including over-award payments, commissions, shift loading, annual leave loading and some allowances and bonuses.

The ban on genetic test insurance discrimination

The ability for life insurers to discriminate based on adverse predictive genetic test results will be banned under a new Government proposal.

Predictive genetic tests detect gene variants associated with heritable disorders that appear after birth, often later in life, but are not clinically detectable at the time of testing.

To overcome concerns about discrimination by life insurers, the Government has announced a total ban on predictive genetic testing.

Life insurance and genetic testing

Voluntary insurance, including life insurance is individually underwritten and ‘risk-rated’. The cost of premiums is proportionate to the unique risks of the person seeking the cover. Most of us would be familiar with the questions about family history, personal medical history and habits.

As life insurance is a guaranteed renewable product, once a policy has been underwritten and commenced, the life insurer cannot change or cancel a person’s cover, provided they pay all future premiums when due – premium prices will change across a risk pool, for example based on age. This is why it’s important to carefully assess changing life insurance policies if health issues or conditions have arisen since you put the original policy in place.

In 2019, Australia’s life insurance industry introduced a partial moratorium on the requirement to disclose genetic test results. The moratorium, which is in place for life insurance applications received from 1 July 2019, prevents genetic results being used for certain types of insurance cover below certain thresholds. However, using APRA data, when compared to the average sum insured, the moratorium coverage thresholds are well below par:

Genetic test discrimination

Despite the moratorium, there is evidence that people are not undertaking genetic tests or participating in scientific research because of concerns about obtaining affordable life insurance. And, discrimination still exists.

The Australian Genetics and Life Insurance Moratorium: Monitoring the Effectiveness and Response Report by Monash University found that of the consumers surveyed who had undertaken a genetic test, 35% reported difficulties obtaining life insurance including insurers rejecting life insurance applications, financial advisers advising participants that their applications would be rejected, and insurers placing conditions on insurance policies or charging higher premiums. Alarmingly, a 43 year old woman with a BRCA2 variant and no personal history of cancer, was denied life cover outright despite having her ovaries and fallopian tubes removed, and regular intensive breast imaging.

The Government response

The Government has stepped in and announced a total ban on the use of genetic testing in life insurance underwriting. The ban will be subject to a 5 year review. However, the Government has not introduced legislation enabling the reforms nor has it announced the date that the ban will take effect.

And, the total ban impacts predictive genetic testing only – it does not cover clinical diagnostic genetic testing to confirm a suspected condition based on signs or symptoms.

A global issue

Australia is not the first country to grapple with the issue of adapting to the increase in available genetic data.

In the UK, insurers cannot use predictive genetic test results unless the result is favourable, or the result has been given to the insurer (voluntarily or accidently). Huntington’s disease is a specific exception for life cover worth more than £500,000.

Canada’s Genetic Non-Discrimination Act prohibits any entity (including insurers) from requesting or using genetic test results. The exception is for individuals to voluntarily disclosure a test result showing they do not have a genetic change that runs in the family.

In the USA, the Genetic Information Nondiscrimination Act (GINA), prevents genetic test results being used in health insurance and employment contexts but not life insurance. The US state of Florida however introduced a law prohibiting life insurers from using predictive genetic test results in underwriting.

More women using ‘downsizer’ contributions to boost super

If you are aged 55 years or older, the downsizer contribution rules enable you to contribute up to $300,000 from the proceeds of the sale of your home to your superannuation fund (eligibility criteria applies).

In 2023-24, over 57% of people making a ‘downsizer’ contribution to super were women. And, the average value of the contribution was marginally higher at $262,000 versus $259,000 contributed by men.

The most likely age someone makes a downsizer contribution is between 65 and 69. From age 65, a downsizer contribution can be withdrawn from super if your circumstances change, even if you are still working. Those aged 55 to 64 generally won’t have access to these funds until they are at least 60 and retired.

Downsizer contributions are excluded from the existing upper age test, work test, and the total super balance rules (but the amount that can be moved to a retirement pension is limited by your transfer balance cap).

For couples, both members of a couple can take advantage of the concession for the same home. That is, if you or your spouse meet the other criteria, both of you can contribute up to $300,000 ($600,000 per couple). This is the case even if one of you did not have an ownership interest in the property that was sold (assuming they meet the other criteria).

To be eligible to make a downsizer contribution you do not have to buy another home once you have sold your existing home, and you are not required to buy a smaller home – you could buy a larger and more expensive one and make a downsizer contribution if you have access to other funds.

Please contact us if you would like the facts about downsizer contributions, or speak to your financial adviser for advice on your personal scenario.

01 Succession: the series

Each month we’ll bring you a new perspective on transferring property. Be it estate planning, managing an inheritance, or the various forms of business succession. This month, we look at the tax consequences of inheriting property.

Beyond the difficult task of dividing up your assets and determining who should get what, it’s essential to look at the tax consequences of how your assets will flow through to your beneficiaries.

When assets pass from a deceased individual to a beneficiary of the estate, the tax impact will generally depend on the nature of the asset and the tax characteristics of the beneficiary, such as their residency status.

Inheriting cash

When cash passes from a deceased individual to their estate and then to a beneficiary, generally, there should not be any direct tax issues to deal with, assuming that the cash is denominated in AUD.

Inheriting assets

Death is a taxing event. When a change of ownership of an asset occurs, generally, a capital gains tax event (CGT) is triggered. However, the tax rules provide some relief from CGT when someone dies. The basic rule is that a capital gain or loss triggered by a death is disregarded unless the asset is transferred to one of the following:

An exempt entity (although there are some exceptions to this where the entity is a charity with deductible gift recipient status);
The trustee of a complying superannuation fund; or
A foreign entity and the asset is not classified as taxable Australian property.

The exemption applies if the asset passes to the deceased’s legal personal representative (i.e., executor) or to a beneficiary of the estate, which is not one of the entities listed above.

Once the asset has been transferred to the beneficiary, the beneficiary will need to manage the tax impact when they sell the asset.

Inheriting shares

Let’s assume you inherit an ASX listed share portfolio under your mother’s will. The tax outcome will depend on whether your mother was an Australian resident for tax purposes when she died, and whether the shares were acquired by your mother before or after 20 September 1985 (i.e., pre-CGT or post-CGT).

If your mother was an Australian resident for tax purposes when she died, and the shares were acquired post-CGT, then the cost base of the shares is normally based on the original purchase price. That is, the tax rules treat the inherited shares as if you purchased them. For example, if your mother purchased BHP shares for $17.82 on 2 January 1997, when you sell the shares, the gain is calculated based on your mother’s purchase price of $17.82.

If your mother was a resident of Australia when she died, and the shares were acquired pre-CGT, then the cost base of the shares is normally reset to their market value at the date of death. That is, if your mother passed away on 1 October 2024, the share price at close was $45.96. If you subsequently sold the shares in three years, the gain or loss is calculated using this value.

If your mother was a non-resident when she died, then the cost base of the shares is normally based on their market value at the date of death.

But it’s not all about the tax. Managing shares in your will can be difficult as prices and allocations change over time, and the companies you are invested in evolve. A portfolio that was once worth a small amount 20 years ago, might be worth significantly more when you die.

Inheriting property

Let’s assume you inherit an Australian residential property from your father under his will. For certain tax purposes, you are taken to have acquired the property at the date of his death.

The general rule is that the executor and/or beneficiaries of the estate inherit the cost base and reduced cost base of the CGT assets (the house) owned by the deceased just before their death, but this isn’t always the case, especially when it comes to pre-CGT properties and a property that was the main residence of the deceased individual just before they died.

Special rules exist that enable some beneficiaries or estates to access a full or partial main residence exemption on the inherited property. If the house was your father’s main residence before he died, he did not use the home to produce income (did not rent it out or use it as a place of business) and he was a resident of Australia for tax purposes, then a full CGT exemption might be available to the executor or beneficiary if either (or both) of the following conditions are met:

The house is disposed of within two years of the date of 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.

For example, if the house was your father’s main residence and was eligible for the full main residence exemption when he died, if you sell the house within the 2 year period, no CGT will apply. However, if you sell the house 10 years later, the CGT impact will depend on how the property has been used since the date of your father’s death.

An extension to the two year period can apply in limited certain circumstances, for example when the will is contested or is complex.

If your father did not live in the property just before he died, it still might be possible to apply the full exemption if your father chose to continue treating the home as his main residence under the ‘absence rule’. For example, if he was living in a retirement village for a few years but maintained the property as his main residence for CGT purposes (even if it was rented out).

If your father was not an Australian resident for tax purposes when he died, the cost base for CGT purposes will normally be based on the purchase price paid by your father if he acquired it post-CGT.

Inheriting foreign property

If you are an Australian resident who has inherited a foreign property or asset from an individual who was a non-resident just before they died, the cost base is normally taken to be the market value at the time of death. For example, if you inherited a house from your uncle in the UK, the cost base is likely to be the value of the house at the date of his death.

If a taxable gain arises on sale, then it is necessary to consider whether the CGT discount can apply, but the discount will sometimes be less than 50%. If the gain is also taxed overseas, then a tax offset can sometimes apply to reduce the amount of tax payable in Australia.

Managing an inheritance can become complex. For assistance with estate planning, or to understand the tax implications of an inheritance, please contact us.

Quote of the month

“Success is stumbling from failure to failure with no loss of enthusiasm.”

Winston Churchill

Business Matters September 2024

It wasn’t me: the tax fraud scam

You login to your myGov account to find that your activity statements for the last 12 months have been amended and GST credits of $100k issued. But it wasn’t you. And you certainly didn’t get a $100k refund in your bank account. What happens now?

In what is rapidly becoming the most common tax scam, myGov accounts are being accessed for their rich source of personal data, bank accounts changed, and personal data used to generate up to hundreds of thousands in fraudulent refunds. For all intents and purposes, it is you, or at least that’s what it seems. And, the worst part is, you probably gave the scammers access to your account.

But it’s not just activity statements. Any myGov linked service that has the capacity to issue refunds or payments is being targeted. Scammers are using the amendment periods available in the tax law to adjust existing data and trigger refunds on personal income tax, goods and services tax (GST), and through variations to pay as you go (PAYG) instalments. In some cases, the level of sophistication and knowledge of how Australia’s tax and social security system operates is next level.

Once the scammers have access to your myGov account, there is a lot of damage they can do.

So, how does this happen and why is it so pervasive? Humans are often the weakest link.

Common scams utilise emails (78.9% of reported tax related scams in the last 12 months) or SMS (18.4% of reported scams) that mimic communication you might normally expect to see. The lines of attack used by tax related scammers are commonly:

Fake warnings about attempted attacks on your account (and requiring you to click on the link and confirm your details);
Opportunistic baiting where some form of reward is flagged, like a tax refund, that you need to click on the link to confirm and access; and
Mimicking common administrative notifications from the Australian Taxation Office (ATO) like a new message accessible from a link.

Approximately 75% of all email scams reported to the ATO to March 2024 were linked to a fake myGov sign in page.

How to spot a fake

Often the first sign that something is amiss is alerts about activity on your myGov account or a change in details – which might seem a little ironic if the way in which scammers got into your account in the first place is via these very same messages. But, there are ways to spot a fake:

The ATO, Centrelink and MyGov don’t use hyperlinks in messages. If you receive a message with a link, it’s a fake.
The ATO will not use QR codes as a method for you to access your account.
The ATO will never ask for your tax file number (TFN), bank account details or your myGov login details over social media. Some scammers have used fake social media accounts mimicking the ATO and other Government agencies. When a query comes in, they respond by asking for information to verify it’s you. The ATO will never slide into your DMs. ATO Assistant Commissioner Tim Loh said, “it’s like giving your house keys to a stranger and watching them change your locks.”
The ATO do not use pre-recorded messages to alert you to outstanding tax debt. The ATO will not cancel your TFN. Some scammers suggest that your TFN has been cancelled or suspended due to criminal activity or money laundering and then tell you to either pay a fee to correct it, or transfer your money to a ‘safe’ bank account to protect you against your corrupted TFN.
The ATO will not initiate a conference call between you and your tax agent and someone from a law enforcement agency. In one case, the taxpayer was told that the caller was from the ATO and a person from her accounting firm was on the call as well to represent her and work through a problem. The ATO caller and the tax agent were fake. Just hang up and call our office if you are ever concerned. The ATO will never initiate a conference call of this type.
The ATO will also not ask you to reconfirm your details because of security updates to myGov. The link, when activated, takes you to a fake myGov web page that can look very convincing.

In general, you should always log into your myGov account directly to check on any details alerted in messages rather than clicking on links. This way, you know that you are not being redirected to somewhere you should not be.

And, don’t log into your myGov account on free wifi networks. Ever.

Who is getting scammed?

There is a pervasive view that older, technology challenged individuals are the most at risk. And while this might be the case generally, scamming is impacting all age groups.

The ATO says that the demographic who most reported providing personal information to scammers was 25 to 34 year olds. And, the younger generation are more likely to fall for investment scams. According to the AFP-led Joint Policing Cybercrime Coordination Centre (JPC3), people under the age of 50 are overtaking older Australians as the most reported victims of investment scams. Australians reported losing $382 million to investment scams in the 2023-24 financial year. Nearly half (47%) of the investment scam losses involved cryptocurrency.

Other scams

Scammers are in the business of scamming and they will use every trick and opportunity to part you from your money.

Investment scams.

Pig butchering. Pig butchering is a tactic where scammers devote weeks or months to building a close relationship with their victims on social media or messaging apps, before encouraging them to invest in the share market, cryptocurrency, or foreign currency exchanges. Victims think they are trading on legitimate platforms, but the money is siphoned into an account owned by the scammers, who created fake platforms that look identical to well-known trading and cryptocurrency sites. Scammers will show fake returns on these platforms to convince victims to invest more money. Once they have extracted as much money as possible, the scammers disappear with all the invested funds.

Deepfakes. Deepfakes are lifelike impersonations of real people created by artificial intelligence technologies. Scammers create video ads, images and news articles of celebrities and other trusted public figures to promote fake investment schemes, which can appear on social media feeds or be sent by scammers through messaging apps. Unusual pauses, odd pitches, or facial movement not matching their speaking tone are often giveaways but increasingly, the fakes are difficult to spot.

Invoice scams

The names and details of legitimate businesses are used to issue fake invoices with the money transferred to the scammer’s account. These scams are often tied to cyber breachers where hackers have accessed your systems and have identified your suppliers.

Bank scams

There has been a lot in the media of late about people receiving phone calls purporting to be from their bank, advising them there is a problem with their account, and then walking them through a resolution that involves transferring all their money into a ‘safe’ scammers account. Victims commonly state that they believed the scammer because of the level of personal information they relayed.

Your bank will never send an email or text message asking for any account or financial details, this includes updating your address or log in details for phone, mobile or internet banking.

A CHOICE survey found that four out of five of the victims of banking scams in their report said their banks did nothing to flag a scam before they transferred their money to the perpetrator.

The Australian Banking Association have stated that, if not already, banks will introduce warnings and payment delays by the end of 2024. And, in addition to other measures, they will limit payments to high-risk channels such as crypto platforms.

What to do if you have been scammed

myGov

If you have downloaded a fake myGov app, have given your details to a scammer, or clicked on a link from an email, text message or scanned a QR Code, contact Services Australia Scams and Identify Theft Helpdesk on 1800 941 126, or get help with a scam here.

Tax scams

Before acting on any instructions, please contact us and we will verify the information for you.

If you have already acted, contact the ATO to verify or report a scam on 1800 008 540.

The Government use external agency recoveriescorp for debt collection but we will advise you if you have a tax debt outstanding.

Property and ‘lifestyle’ assets in the spotlight

Own an investment property or an expensive lifestyle asset like a boat or aircraft? The ATO are looking closely at these assets to see if what has been declared in tax returns matches up.

The Australian Taxation Office (ATO) has initiated two data matching programs impacting investment property owners and those lucky enough to hold expensive lifestyle assets.

Investment property

What investment property owners declare and claim in their personal income tax returns is a constant focus for the ATO. Coming off the back of data matching programs reviewing residential investment property loan data, and landlord insurance, the ATO have initiated a new program capturing data from property management software from the 2018-19 financial year through to 2025-26. Data collected will include:

Property owner identification details such as names, addresses, phone numbers, dates of birth, email addresses, business name and ABNs, if applicable;
Details of the property itself – property address, date property first available for rent, property manager name and contact details, property manager ABN, property manager licence number, property owner or landlord bank details; and
Property transaction details – period start and end dates, transaction type, description and amounts, ingoings and outgoings, and rental property account balances.

While the ATO commit to specific data matching campaigns, since 1 July 2016, they have also collected data from state and territory governments who are required to report transfers of real property to the ATO each quarter.

This latest data matching program ramps up the ATO’s focus on landlords, specifically targeting those who fail to lodge rental property schedules when required, omit or incorrectly report rental property income and deductions, and who omit or incorrectly report capital gains tax (CGT) details.

Lifestyle assets

Data from insurance providers is being used to identify and cross reference the ownership of expensive lifestyle assets. Included in the mix are:

Caravans and motorhomes valued at $65,000 or over;
Motor vehicles including cars & trucks and motorcycles valued at $65,000 or over;
Thoroughbred horses valued at $65,000 or over;
Fine art valued at $100,000 per item or over;
Marine vessels valued at $100,000 or over; and
Aircraft valued at $150,000 or over.

The data collected is substantial including the personal details of the policy holder, the policy details including purchase price and identification details, and primary use, among other factors.

The ATO is looking for those accumulating or improving assets and not reporting these in their income tax return, disposing of assets and not declaring the income and/or capital gains, incorrectly claiming GST credits, and importantly, omitted or incorrect fringe benefits tax (FBT) reporting where the assets are held by a business but used personally.

Is the RBA to blame? The economic state of play

The politicians have weighed in on the Reserve Bank of Australia’s economic policy and their reticence to reduce interest rates in the face of community pressure. We look at what the numbers are really showing.

Treasurer Jim Chalmers has stated that global uncertainty and rate rises are “smashing the economy”.

Former Treasurer Wayne Swan weighed in and told Channel 9 that the RBA was, “putting economic dogma over rational economic decision making, hammering households, hammering Mums and Dads with higher interest rates, causing a collapse in spending and driving the economy backwards” and that the RBA was, “simply punching itself in the face.”

Australian mortgage holders and renters have had no relief from interest rates following 13 successive interest rate rises to the official cash rate since May 2022.

The Reserve Bank’s position and the flow through effects
The Reserve Bank of Australia (RBA) Board opted to maintain the official cash rates at 4.35% at its September Board meeting. The rationale is that inflation remains persistently high and has been for the last 11 quarters. The consumer price index (CPI) rose 3.9% over the year to the June quarter and remains above the RBA’s target range of 2-3%.

But, it is not persistently high inflation that is causing the politicians to weigh in. RBA Governor Michele Bullock has warned that “it is premature to be thinking about rate cuts” and “the Board does not expect that it will be in a position to cut rates in the near term.”

The Australian Bureau of Statistics (ABS) June Quarter National Accounts paint a bleak picture of the Australian economy. Per capita GDP fell for the sixth consecutive quarter by -0.4% to -1.5%. The longest consecutive period of extended weakness ever recorded.

Household spending weakest since COVID Delta
Household spending fell by -0.2% in the quarter, the weakest growth rate since the Delta-variant lockdown affected September quarter 2021.

Discretionary spending – travel and hospitality impacted most
The ABS says that we spent less on discretionary items (-1.1%), particularly for events and travel. It will come as no surprise that spending on hotels, cafes and restaurants was down 1.5%. Spending on food also fell -0.1% as households looked to reduce grocery bills.

Household savings lowest since 2006
The savings ratio remains low. Households saved only 0.9% of their income over the year. This was the lowest rate of annual saving since 2006-07. Net savings reduce when household income grows slower than household spending.

Economic growth from Government spending
The Australian economy did grow by 0.2%, the eleventh consecutive quarter of growth but the growth rate was unimpressive. The ABS says that, “the weak growth reflects subdued household demand, which detracted 0.1 percentage points from GDP growth while government consumption contributed 0.3 percentage points, the same contribution to growth as previous quarter.”

Government spending increased by 1.4% over the quarter. Commonwealth social assistance benefits to households led the rise, with continued strength in expenditure on national programs providing health services. State and local government expenditure also rose with increased employee expenses across most states and territories.

The RBA’s position on interest rates
The RBA is on a narrow path. It’s trying to bring inflation back to target within a reasonable timeframe while preserving the gains in the labour market over the last few years. The RBA expects to reach this target range by the end of 2025.

Through 2022 and 2023, most components of the CPI basket were growing faster than usual (the CPI is literally a basket of 87 types of expenditure across 11 groups such as household spending, education and transport.) Over the last 18 months, the price of goods has come down as supply disruptions like COVID-19 and the war in Ukraine have eased, and are now growing close to the historical average.

The key problem areas are housing costs and services. In housing, the growth is from increased construction costs and strong increases in rent. For services, while discretionary spending is down, as we can see from the June National Accounts, inflation in this category remains high at 5.3% to the June quarter. Wage increases and lower productivity, combined with the increased costs of doing business (electricity, insurance, logistics, rent etc) are all impacting.

The RBA is keen to point out that inflation causes hardship for the most vulnerable in our community. Lower income households tend to allocate more of their spending towards essentials, including food, utility bills and rent. Higher income households tend to spend more on owner-occupied housing as well as discretionary items such as consumer durables.

Younger households and lower income households have been particularly affected by cost-of-living pressures.

$81.5m payroll tax win for Uber

Multinational ride-sharing system Uber has successfully contested six Revenue NSW payroll tax assessments totalling over $81.5 million. The assessments were issued on the basis that Uber drivers were employees and therefore payroll tax was payable.

The Payroll Tax Act 2007 (NSW) imposes the tax on all taxable wages paid or payable by an employer. The Act also extends to contractors by capturing payments made “by a person who, during a financial year, supplies services to another person under a contract (relevant contract) under which the first person (designated person) has supplied to the designated person the services of persons for or in relation to the performance of work.”

So, are Uber drivers employees? The New South Wales Supreme Court says no. Among the reasons is that, “amounts paid or payable by Uber to the drivers or partners were not for or in relation to the performance of work …and are not taken to be wages paid or payable.”

The payroll tax assessments were revoked.

Uber is a special case because of its method of operation. Businesses working with contractors need to be vigilant that they have assessed the relationship with their contractors correctly.

Quote of the month

“Do the best you can until you know better. Then when you know better, do better.”

Maya Angelou, American memoirist, poet, and civil rights activist

Market Wrap October 2024

Markets

Local:

The ASX200 index had a retraction in October, falling 1.31% for the month.

Global:

The S&P 500 fell 0.9% in October.

The Dow Jones Industrial Average lost 1.3%.

The Nasdaq Composite slipped 0.5%.

The Russell 2000 index also lost 1.4%.

The pan-European STOXX® Europe 600 lost 3.2% after disappointing earnings figures from tech companies.

Gold:

Gold continued its 2024 run, adding another 4% in October, bringing its price per ounce in US Dollars to $2,734.20 as of October 31st 2024.

Iron Ore:

The average monthly iron ore price increased by 9.2% to US $101.4 per/Mt in October 2024.

Oil:

Crude oil prices dipped slightly in October as brent sank by 0.7% to US $71.87 per/bl.

Property

Housing:

CoreLogic’s national Home Value Index (HVI) recorded a 0.3% rise in October, the 21st month of growth since the cycle commenced in February last year.

The subtle positive movement was supported by the mid-sized capitals, led by Perth with a 1.4% rise over the month, offsetting declines in Darwin (-1.0%), Canberra (-0.3%), Melbourne (-0.2%) and Sydney (-0.1%), as well as regional Victoria (-0.2%).

As the market continues to cool, annual growth in national home values has continued to ease, reducing to 6.0% over the 12 months ending October, down from a recent peak annual growth rate of 9.7% in February.

Economy

Interest Rates:

The Reserve Bank has left its key interest rate unchanged for its eighth meeting in a row as it awaits more evidence that inflation will soon return to its preferred target range. The RBA board ended its two-day meeting in November by keeping its cash rate at 4.35%, a move widely expected by economists and financial markets. The board only considered the option of leaving the interest rate unchanged, matching the approach it took at its September meeting.

Retail Sales:

In September 2024, retail sales in Australia increased 0.1% month-on-month, which was below the market’s forecast of 0.3%. This was a slowdown from the previous month’s 0.7% growth.

Bond Yields:

October saw a sell-off in global government debt markets, with yields on 10-year benchmark notes increasing across the board. The month’s biggest mover was the Australian 10-year government bond, whose mid-yield rose by 54 basis points to 4.51% from 3.97% in September.

The US 10-year Government bond yield rose well over October to finish the month at 4.28% as speculation over the US presidential election continued.

Bitcoin:

The price of Bitcoin topped $70,000 for the first time since June, reaching $72,342.62 as of October 31st and gaining 10.2% in the month.

Exchange Rate:

The Aussie dollar remained steady in October against the American dollar at $0.67, and the Euro at $0.605.

Inflation:

Australia: The annual inflation rate dropped to 2.8% in Q3 2024 from 3.8% in Q2, steeper than market expectations of 2.9%. It was the lowest reading since Q1 2021, with goods inflation sharply slowing (1.4% vs 3.2% in Q2), mainly due to declines in electricity and fuel prices amid the continued impact of Energy Bill Relief Fund rebates.

USA: The annual inflation rate for the United States was 2.4% for the 12 months ending September, compared to the previous rate increase of 2.5%.

EU: The euro area annual inflation rate was 1.7% in September 2024, down from 2.2% in August. A year earlier, the rate was 4.3%. European Union annual inflation was 2.1% in September 2024, down from 2.4% in August. A year earlier, the rate was 4.9%.

Consumer Confidence:

The Westpac–Melbourne Institute Consumer Sentiment Index rose 6.2% to 89.8 in October from 84.6 in September. This is the most promising update we have seen over the cycle to date. While pessimism still dominates, the October consumer sentiment read is the best since the RBA interest rate tightening phase began two and a half years ago. Expectations have been buoyed by interest rate cuts abroad and more promising signs that inflation is moderating locally. Consumers are no longer fearful that the RBA could take interest rates higher. However, responses around family finances suggest progress on cost-of-living pressures – the main source of negative sentiment reads overall – is still slow.

Employment:

Australia: As of September 2024, Australia’s unemployment rate was 4.1%. This was a steady rate for the second month in a row.

USA: Total nonfarm payroll employment was essentially unchanged in October (+12,000), and the unemployment rate was unchanged at 4.1%. Employment continued to trend up in health care and government. Temporary help services lost jobs and employment declined in manufacturing due to strike activity.

Purchasing Managers Index:

The Judo Bank Australia Manufacturing PMI registered at 47.3 in October, an increase from 46.7 in September, marking the ninth consecutive month of declining manufacturing conditions. New orders fell sharply, extending the contraction to nearly two years, while export orders decreased more significantly due to reduced demand from key markets. Production also declined but at a slower pace than in September, with manufacturers clearing outstanding work at the fastest rate since May 2016. Results above 50 points indicate expansion, with higher results indicating a faster rate of expansion.

US Services PMI:

The S&P Global US Services PMI was revised slightly lower to 55 in October 2024 from a preliminary of 55.3 and compared to 55.2 in September. The reading showed US service providers continued to expand their business activity at a marked although slightly slower rate.

US Global Manufacturing PMI:

The seasonally adjusted S&P Global US Manufacturing Purchasing Managers’ Index™ (PMI®) posted 48.5 in October, up from 47.3 in September but below the 50.0 no-change mark for a fourth consecutive month. The latest reading indicated that business conditions deteriorated modestly, albeit to the least extent since July. New orders decreased for the fourth month running in October, and at a solid pace. Respondents indicated that uncertainty around the Presidential Election had been a common cause of a drop in new orders as customers hesitated before committing to new projects.

Adviser Numbers:

According to Wealth Data analysis, there was a net loss of 11 advisers in the week ending 24 October 2024, with total adviser numbers now standing at 15,512.

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

Comments

Feb rate cut hopes soften after September employment figures

Australia’s period of falling unemployment came to an end in early 2019 when the jobless rate hit a low of 4.9%. It then averaged around 5.2% through to March 2020, bouncing around in a range from 5.1% to 5.3%. Leading indicators such as ANZ-Indeed’s Job Ads survey and NAB’s capacity utilisation estimate suggested the unemployment rate would rise in the June 2020 quarter and it did so, sharply. The jobless rate peaked in July 2020 but fell below 7% a month later and then trended lower through 2021 and 2022.

The latest Labour force figures have now been released and they indicate the number of people employed in Australia according to ABS definitions increased by 64,100 in September. The result was greater than the 22,300 rise which had been generally expected and up from August’s downwardly-revised increase of 42,600.

“After having slowed gradually over the past two years, employment growth looks to have stabilised at a robust level,” said Westpac economist Ryan Wells. “On a three-month average basis, employment is tracking 2.9% per year, a similar pace to what was seen at the turn of the year.”

Expectations regarding rate cuts in the next twelve months softened, with a February 2025 rate cut now less likely. Cash futures contracts implied an average of 4.31% in November, 4.25% in December and 4.23% in February 2025. September 2025 contracts implied 3.67%, 67bps less than the current cash rate.

“The strength in employment does present a degree of tension with the ongoing soft pace of GDP growth,” noted ANZ Head of Australian Economics Adam Boyton. “While hours worked had been running softer than employment growth, hours worked is now recorded as being up 2.4% year on year. That implies either a pick-up in GDP growth in the September quarter or a continuation of Australia’s weak productivity performance.

The participation rate hit a new series-high of 67.2% as the total available workforce increased by 54,900 to 15.137 million. The number of unemployed persons decreased by 9,200 to 615,700 but the unemployment rate remained steady at 4.1% after rounding and revisions.

More attention has been paid to the underemployment rate in recent years, which is the number of people in work but who wish to work more hours than they do currently. September’s underemployment rate declined from 6.5% to 6.3%, 0.4 percentage points above this cycle’s low.

Sources: ANZ, YieldReport, NAB

Are Residential Construction Costs Holding us Back?

The Q3 2024 national Cordell Construction Cost Index (CCCI), which tracks the cost to build a typical new dwelling, is up from a 0.5% rise over the June quarter and is the strongest quarterly increase seen from the three months since December 2022 hitting 1.9%.

The 12 months ending September saw costs rise 3.2%, up from 2.6% over the 12 months to June, although down from this time last year at 4.0%.

CoreLogic Economist Kaytlin Ezzy said the data would likely put additional pressure on the Federal Government’s target of 1.2 million new homes.

“With the official start date for the Government’s target for 1.2 million new well-located homes over five years kicking off in July, the recent re-acceleration of the CCCI could put additional pressure on an already difficult-to-achieve goal.”

“Over the year to June, approximately 176,000 dwellings were completed, -26.6% below the 240,000 annually needed to fulfil the target.”

“While 250,000 homes remain within the construction pipeline nationally, the sluggish flow of new dwelling approvals suggests a shortfall of projects once the backlog is worked through.”

In August, national monthly dwelling approvals came in -17.9% below the decade average and -30.0% under the 20,000-a-month target needed to achieve the Government’s goal.

On a state-by-state basis, the quarterly change in CCCI was highest in Queensland, recording the largest quarterly increase in construction costs (1.1%), accelerating from the 0.3% lift seen over the June quarter.

New South Wales and Western Australia saw construction costs rise 1.0%, in line with the national growth rate, while Victoria and South Australia tied for the smallest quarterly increase, both up 0.8% over the quarter.

CoreLogic Construction Cost Estimation Manager John Bennett said building materials costs had stabilised, with minimum increases and decreases being recorded for the quarter.

He said categories such as timber products, building permit and application costs, plant hire and rainwater products demonstrated little movement for the quarter, while masonry, cement sheet products, joinery, plumbing material (mainly copper) and general waste disposal all showed slight increases. “This quarter has shown no standout specific trends in the market for construction cost materials. We fully expect this to continue for the coming months,” Mr Bennett said.

The latest Consumer Price Index (CPI) data from the Australian Bureau of Statistics (ABS) showed the CPI rose a further 1.0% over the June quarter, following a 1.0% rise over the March quarter.

The ABS noted that new dwelling purchases by owner-occupiers rose by 1.1% as builders continued to pass on higher labour and building material costs to buyers.
They also noted stronger rises in Perth and Adelaide new dwelling prices over the June quarter, reflecting higher demand for new homes in these cities, as well as high labour and material costs.

Commenting on the data, Ms Ezzy added: “Residential building costs make up the largest share of the housing component of the consumer price index.”

She added, “As a forward indicator, the recent re-acceleration in the CCCI is concerning for the new homes component of the CPI, as the two series are highly correlated. This may partially offset the impact of slowing rent growth on housing inflation”

Additionally, the increase will be unwelcome news for builders, who are still working to repair profit margins. Although the latest quarterly rise aligns with the pre-Covid decade average (1.0%), overall construction costs have surged 29.5%, putting significant pressure on the feasibility of many projects.

Sources: ABS, CoreLogic

Market Wrap September 2024

Markets

Local:

The ASX200 index had a strong gain of 2.97% over September.

Global:

The S&P 500 rose 2.1% in September to continue a solid 2024.

The Dow Jones Industrial Average advanced 2%.

The Nasdaq Composite added 2.8%.

The Russel 2000 was once again the laggard only improving by 0.7% in September.

The pan-European STOXX® Europe 600 lost 0.3%,

dragged lower by its largest constituent, Novo Nordisk.

Gold:

The price of Gold surged 5.9% in September and set another new all-time high after breaking through $2,500 in August, ending the month at $2,661.90 /oz.

Iron Ore:

Iron ore price continued its decline over CY24, finishing September at US $94 /mt

Oil:

Brent also set a YTD low in September before rebounding in the back half of the month to US $74.95 as of September 23rd. Lower oil prices translated into lower gas prices, with the average price of gas falling by 11 cents in the month to US $3.30 per gallon as of September 30th.

Property

Housing:

The CoreLogic Home Value Index rose 0.5% in September, annual price growth moderated to 6.7%yr, down from a peak of 10.9%yr in Feb.

Performances continue to diverge across capital city markets, prices slipping in Melbourne, rising slowly in Sydney but still rising strongly in Perth, Adelaide and Brisbane.

Across ‘hot’ markets, lower tiers and units are outperforming, suggesting stretched affordability and a low on-market supply is seeing buyers move down the price curve.

Across ‘cold’ markets, prices in top tier segments have underperformed, with these cities also showing more balance between demand and ‘on-market’ supply.

Economy

Interest Rates:

The RBA ended its September two-day board meeting by keeping its cash rate at 4.35%, the level it has remained since November 2023. The decision was as economists had expected. Inflation, the bank said in a statement, was “above target and is proving persistent”, and that bringing it back to within its 2%-3% target range was its “highest priority”.

Retail Sales:

Retail sales in Australia rose 0.7% month-on-month in August 2024. Up by 3.1% since August 2023.

Bond Yields:

Australia’s 10-year Government bond yield is currently 4.00%. As of 30 September 2024.

US 10-year Government bond yield remained steady in September to finish the month at 3.81%.

Bitcoin:

Rate cuts by the Fed and other national central banks helped drive cryptocurrencies higher in September, bucking an unfavorable seasonal trend. The price of Bitcoin surged to $65,663.69 in September, a rise of 11% in a month where the largest digital asset has declined by 5.9% on average over the last decade.

Exchange Rate:

The Aussie dollar fell slightly in September against both the American dollar, at $0.677, and the Euro at $0.609.

Inflation:

Australia: The monthly Consumer Price Index (CPI) indicator rose 2.7% in the 12 months to August 2024. Michelle Marquardt, ABS head of prices statistics, said: “Annual inflation was 2.7% in August, down from 3.5% in July, and is the lowest reading since August 2021.”

USA: The US inflation ticked lower for the fifth straight month, down to 2.53% in August; core inflation inched slightly higher to 3.20%, marking just the 2nd month out of the last 17 in which core inflation increased.

EU: The euro area annual inflation rate was 1.7% in September 2024, down from 2.2% in August. A year earlier, the rate was 4.3%. European Union annual inflation was 2.1% in September 2024, down from 2.4% in August. A year earlier, the rate was 4.9%.

Consumer Confidence:

The Westpac-Melbourne Institute Consumer Sentiment Index fell 0.5% to a reading of 84.6 in September 2024, down from 85 in August. According to Westpac, the ‘pessimism that has dominated for over two years now is still showing no signs of lifting’, although there are signs of a shift in focus. Cost-of-living pressures are becoming a little less intense and fears of further interest rate increases have eased, even as consumers have become more concerned about where the economy may be headed and the risk of unemployment.

Employment:

Australia: in September 2024: the unemployment rate remained at 4.1%. The participation rate increased to 67.2%. With employment increasing to 14,514,300 people.

USA: Total nonfarm payroll employment increased by 254,000 in September, and the unemployment rate changed little at 4.1%. Employment continued to trend up in food services and drinking places, health care, government, social assistance, and construction.

Purchasing Managers Index:

The headline seasonally adjusted Judo Bank Australia Manufacturing Purchasing Manager’s Index™ (PMI) posted 46.7 in September, down from 48.5 in August. This indicated an eighth successive monthly deterioration of manufacturing conditions and to the most pronounced degree since May 2020. Results above 50 points indicate expansion, with higher results indicating a faster rate of expansion.

US Services PMI:

The seasonally adjusted S&P Global US Services PMI® Business Activity Index posted 55.2 in September, down from 55.7 in August but still signaling a marked monthly increase in service sector output at the end of the third quarter, and one that was among the strongest in the past two-and-a-half years.

US Global Manufacturing PMI:

The seasonally adjusted S&P Global US Manufacturing Purchasing Managers’ Index™ (PMI®) remained below the 50.0 no-change mark in September, dipping to 47.3 from 47.9 in August. The index signaled a third consecutive monthly worsening in the health of the sector, and one that was the most pronounced since June 2023.

Adviser Numbers:

IFA has stated that between 1 July to 30 September 2024, there was a net rise of 159 advisers in the three-month period, an improvement from 108 in Q3 last year. This quarter’s growth was underpinned by the 201 new entrants who joined, compared with 131 in the same period last year.

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

Comments

Australia’s population surge eases: The focus must shift to productivity

A recent ABS data release re-confirms Australia’s population surge has passed its peak – even though migration will likely take a little longer than expected to return to ‘normal’ levels. In annual terms, lower arrivals a

nd higher departures saw net overseas migration take a step back for the second straight quarter, and the natural increase (births less deaths) remains at its near lowest level on record. All things considered; the national population grew by 2.3% in the year to the March quarter of 2024 – still very strong by historical standards.

Even with a deceleration, net overseas migration continues to play a key role in supporting population growth, accounting for more than 80% of Australia’s total population increase in the year to the March quarter of 2024. The ongoing strength in migration has helped to officially close Australia’s pandemic population gap.

Leading indicators suggest that net overseas migration has remained strong into 2024. On average since the start of the year, monthly net permanent and long-term arrivals sit at approximately twice the pre-pandemic average. But that is unlikely to last; following two and a half years of uninterrupted gains, the number of temporary visa holders in Australia fell in the June quarter of 2024, with a further leveling off expected as the Government’s Migration Strategy starts to weigh on temporary migration.

The strength of migration has given businesses access to young and (in many cases) skilled workers to fill job vacancies. Indeed, Australia’s working-age population is trending towards 1.2 million people above the level seen before the onset of the pandemic. That is a key reason why employment growth has remained resilient in the face of slowing economic growth. A growing population is being absorbed by the labour market, with the employment to population ratio sitting just a touch off its record peak.

Overall, population growth has been a boon to the Australian economy – helping to fight off a recession as cost-of-living pressures weigh on household spending. But the benefits have not come without challenges. Indeed, over the past two years, migration has often been blamed for causing Australia’s housing and infrastructure shortages.

It can be easy to forget the root cause of the nation’s housing problem which has been a problem for many years – supply is failing to keep up with rising demand. Housing commencements have not kept up with the increase in households and fall short of addressing the structural undersupply in the market. This situation is made worse by high construction costs, labour shortages, and waves of business insolvencies.

On a related note, elevated population growth is putting continued pressure on transport, utilities, health, and education infrastructure across Australia – all of which rely heavily on public spending.

Migration has now passed its peak, meaning the key driver of the Australian economy will need to shift away from population growth and towards productivity growth. Current weakness in productivity growth follows a decades-long lack of economic reform that has discouraged the competition and dynamism needed in the private sector, which has become effectively dormant in Australia. As population growth wanes, the productivity agenda will be increasingly critical for Australia’s prosperity.

Sources: CEDA, Deloitte

Economic Outlook – NAB (The Forward View)

The big 4 banks will often try to predict economic outcomes that will impact us as consumers, we have summarised sum of the main points from NAB’s article The Forward View below.

Recent data continues to show the economy experiencing a period of weak growth – with private sector activity impacted by the soft consumer. The Q2 national accounts showed modest growth of 0.2% q/q (1.0% y/y) – led by the public sector, with household consumption falling slightly and business and dwelling investment making little contribution.
The NAB Monthly Business survey for August suggests that momentum has seen little improvement in Q3, with business conditions below average and confidence in negative territory. That said, capacity utilisation remains elevated, consistent with the view that aggregate demand and supply in the economy are yet to fully come into balance.
Overall, our forecasts are largely unchanged in terms of growth, the labour market and inflation.
Feeding through the Q2 National accounts data and slightly lowering our outlook for consumption sees GDP growth of 1.0% this year, 2.2% in 2025 and 2.3% in 2026.
Our assessment of the labour market is that it continues to cool, even though trend employment growth has remained very strong over recent months. This has been reflected in a gradual rise in the unemployment rate, which we expect to continue over the next 6 months. The unemployment rate is expected to reach 4.5% by end 2024 and remain there through 2025 but importantly employment growth is expected to remain positive.
Our inflation profile is unchanged. We see trimmed-mean inflation falling to 3.5% by end 2024 and back into the top of half of the RBA’s target band by end 2025.
On rates, our view is also unchanged, where we expect the RBA to remain on hold until May 2025. However, the recent data flow skews the risk around our call to February. We still expect the RBA to cut rates by around 125pbs over a year or so once the cutting phase begins, taking the cash rate back to around neutral at 3.1%
Overall, our forecasts still imply a soft landing for the economy and a gradual easing of the cash rate back towards neutral. This contrasts with some other advanced economies, including NZ, where growth has slowed more, and the labour market has loosened more significantly.

Sources: NAB

Business Matters November 2024

What makes or breaks Christmas?

The cost of living has eased over the past year but consumers are still under pressure. For business, planning is the key to managing Christmas volatility.

The countdown to Christmas is on and we’re in the midst of a headlong rush to maximise any remaining opportunities before the Christmas lull. Busy period or not, Christmas causes a period of dislocation and volatility for most businesses. The result is that it is not ‘business as usual’ and for many, volatility can create problems.

Added to this dislocation are cost of living pressures impacting consumers. Employee households are the hardest hit experiencing mortgage cost fuelled increases – spiked by the rollover of fixed rate loans to higher variable rate loans. While there has been some relief from energy subsidies and a reduction in fuel prices, underlying inflation remains persistently above the RBA’s target rate. Services inflation – the cost of your rent, insurance, your hairdresser, etc. – is sitting at around 5%. With the Reserve Bank of Australia (RBA) Board keeping rates on hold for now and hinting that it will be some time yet before they are comfortable reducing rates, consumers want a reason to spend based on value for money. The irony is that if we all spend up big, which a recent Roy Morgan poll suggests we are, there is a risk this elevated spending will further delay rate cuts. But, while we might spend more, some of this increase is simply to compensate for inflation – we need to spend more to buy at the same level as previous years.

The discounting trend

Consumers expect a bargain and can generally find one. If you choose to discount stock (or the market forces you to), it’s essential to know your profit margins to determine what you can afford to give away. A business with a 20% gross profit margin that offers a 15% discount, needs a 300% increase in sales volume simply to maintain the same position. Worst case scenario is that a business trades below its breakeven point and generates losses.

Increased sales from discounting can be great if you know your numbers, have excess or older stock that needs to be moved, generates demand, or drives new customers to you.

Also think about how you create value; it does not always have to be a direct discount on a product. Packaging might be a better option than a straight discount where you can increase sales of multiple items, even better if you can combine higher demand with lower demand stock. Quantity discounts, value added are also options.

The Christmas cost hangover

Costs tend to go up over Christmas. More staff, lower efficiency, downtime from non-trading days, increased promotional costs, all mean that the cost of doing business increases. It’s great to get into the Christmas spirit as long as you don’t end up with a New Year hangover. Cost control is important.

Many businesses also bring in casual staff. It’s essential that you pay staff at the correct rates and meet your Superannuation Guarantee obligations.

Check the pay calculator to make sure you have it right.

New Year cashflow crunch

The New Year often leads into a quieter trading and tighter cashflow period. The March quarter is often the toughest cashflow quarter of the year. You will need a cash buffer. Don’t over commit yourself in the run up to the end of the year and start the new Year with a problem.

Take a lesson from Scrooge

If you work with account customers, start your debtor follow up early. If your customers are under cashflow pressure, the Christmas period will only exacerbate it. The creditors that chase debt hard and early will get paid first. Don’t be the last supplier on the list; the bucket might be empty by then.

Christmas is a great time of year. Just don’t get caught up in the rush and forget about the basics.

Trading stock headaches

If business activity spikes over the Christmas period and you sell goods, then there is a temptation to increase stock levels. That makes sense as long as you don’t go too far. Too much stock post the Christmas period and you will either be carrying product that is out of season, or you will have too much cash tied up in trading stock. Try to work with suppliers that can supply on short notice.

Managing your trading stock is not just about managing cost. If your customers are in your store but can’t find what they need, have an online option available in store to take the sale.

When overseas workers are Australian employees

The Fair Work Commission has determined that a Philippines based “independent contractor” was an employee unfairly dismissed by her Australian employer.

Like us, you are probably curious how a foreign national living in the Philippines, who had an ‘independent contractors’ agreement with an Australian company, could be classified as an Australian employee by the Fair Work Commission?

The recent case of Ms Joanna Pascua v Doessel Group Pty Ltd highlights just some of the issues Australian businesses face when working with overseas contractors and staff.

What underpinned the Fair Work decision?

Ms Pascua worked under contract as a legal assistant, investigating credit claims on clients’ behalf, for a specialist credit repair legal firm based in Queensland between 21 July 2022 until 20 March 2024. She worked from home in the Philippines, using her own computer, a firm email address and a PBX phone system that gave the appearance that she was calling from the legal office.

The contract described the relationship as one of an independent contractor, with the standard clauses that the firm will not be liable for any other benefits or remuneration other than what was specified and that the firm was not liable for taxes, worker’s compensation, unemployment insurance, employer’s liability, social security or other entitlements. Ms Pascua also bore a liability in the event that something went awry with her work.

For her work, Ms Pascua was paid “AUD$18 per hour Salary all inclusive as a Full Time Employee,” capped at 8 hours per day, 5 days per week, excluding breaks. While working with the firm, Ms Pascua used a firm supplied pro forma invoice to bill 83 weekly invoices at the full hours allowable and 28 other invoices for lesser amounts when she worked less than 40 hours in the week.

For the first 12 months of her time with the legal firm she was supervised by a solicitor. Within 12 months, her work was unsupervised, and in the last 7 months of the relationship, she was the only person conducting investigative work.

Underpinning the Fair Work Commission’s decision were the recent High Court cases that changed the way in which disputes over the nature of employment relationships are determined (CFMMEU v. Personnel Contracting Pty Ltd and ZG Operations Pty Ltd and Jamsek). Whereas once the courts looked at the substance of the overall arrangement (let’s call it the ‘if it walks like a duck and talks like a duck, then it’s a duck’ principal), now greater weight is given to the contract, with reference to the rights and duties created by that contract.

To determine this case, the FWC stepped through the contract clause by clause to evaluate whether it suggested an employment or independent contractor relationship, and looked at how these clauses were brought into effect.

In this case, on weight, the FWC determined Ms Pascua was an employee because the contract indicated that Ms Pascua was required to perform work “in the business of another”, instead of for her own enterprise. The contract suggested that:

Despite being described as a paralegal, she did not appear to be working in a distinct profession, trade or distinct calling. Her contract outlined administrative tasks and ad hoc duties.
The contract did not enable her to assign the work to another.
While there were daily targets in the contract – a result that she was expected to achieve – these tasks referenced weekly requirements and often could be carried over, suggesting ongoing work.
There was a level of control exerted by the legal firm over how Ms Pascua performed her work that suggests she was not running her own enterprise – the PBX phone system, the email address, the level of direction in the tasks to be performed in the daily instruction she received.
Despite being invoiced by Ms Pascua, the hourly rate described in the contract was that of a full-time employee, and the invoices were to be forwarded weekly for the previous week’s work. The FWC also noted that the most likely rate for Ms Pascua as an employee would be $30.95 per hour (the casual rate for level 2 legal clerical work). To this, the FWC noted that genuine independent contractors would normally specify a fee that was greater, not less, than the minimum wage.

The FWC found that the description of the arrangement as that of independent contractor belied the actual nature of the contract.

When it came to the clauses excluding matters such as the payment of income tax, workers compensation, annual and personal leave relied on by the legal firm as confirmation of an independent contractor arrangement, the FWC referred to the Deliveroo Australia Pty Ltd v Diego Franco case and others. That is, the FWC considers, “the statements in the contract about meeting the obligations consequent upon the labelling of the arrangement as one of independent contractor to have little weight in determining the true nature of the relationship.”

The new definition of employee and employer

In August 2024, a new definition of what is an employee and employer came into effect in the Fair Work Act. This new definition extends the High Court’s decision in CFMMEU v. Personnel Contracting Pty Ltd and ZG Operations Pty Ltd and Jamsek to rely on the nature of the contract between the parties, not just what the contract says. The intent of the legislative change appears to be to ensure that clever drafting of a contract alone will not be sufficient to define an independent contractor arrangement.

The Fair Work Act now requires that the true relationship between the parties is, “determined by ascertaining the real substance, practical reality and true nature of the relationship between the individual and the person.” The totality of the relationship needs to be considered including how the contract is performed in practice.

What does this decision mean for employers?

The FWC’s decision in Ms Joanna Pascua v Doessel Group Pty Ltd highlights how cautious employers should be about the nature of employment relationships. Just because you label an arrangement as that of an independent contractor, does not mean it is. And if you get it wrong, beyond the industrial relations impact, you might be liable for the tax, payroll tax and workers compensation payments that should have been made.

What makes this decision unusual is how an international employment arrangement can be drawn into the national workplace system. Regardless of the geographic location of an employee, if your business is an Australian national system employer (bound by the Fair Work Act), and the individual is deemed to be an employee, the same rights and obligations may apply to that employee as to other employees located in Australia.

While not addressed in this case, the FWC also referred to the minimum wage for a paralegal performing work such as that undertaken by Ms Pascua. While not applicable to this case, from 1 January 2025, wage theft will become a criminal offence – where an employer is required to pay an amount to an employee but intentionally underpays. For international employees where rates might be significantly different to Australian expectations, it is more important than ever to ensure you have characterised the employment relationship correctly.

Tax obligations and international workers

We’re often asked about the implications of working with overseas, non-resident workers who are working for a resident Australian company.

Let’s say you want to engage the services of a non-resident individual.

Contractor or employee?

The first step is to ensure that the arrangement is correctly classified. As we have seen from the Ms Joanna Pascua v Doessel Group Pty Ltd case, this really depends on the specific situation. From a tax perspective, the ATO has outlined their guidance in Employee or independent contractor, but you might need specific advice if you are uncertain.

Implications of an employment relationship

If the worker is classified as an employee and they are a non-resident for Australian tax purposes, then they should only be taxed in Australia on income that has an Australian source. However, you need to check whether a double tax agreement (DTA) could impact on the outcome – Australia has around 45 bilateral DTAs. For example, if the employee was a resident of say the Philippines, then Article 15 of the double tax agreement (DTA) between Australia and the Philippines generally prevents Australia from taxing the employment income unless the work is performed in Australia.

Pay as you go (PAYG) withholding should not generally apply if the worker is a non-resident employee and is only deriving foreign sourced income. Generally, PAYG does not need to be withheld under the PAYGW rules from a payment of salary / wages to someone if the payments are not taxed in Australia.

Superannuation guarantee should not apply if all the work is performed overseas, and the worker is a non-resident.

It will be important to get specialist advice in the employee’s country of residency to determine whether there are any obligations that need to be satisfied under local tax or super systems (e.g., withholding, superannuation or superannuation like contributions, etc).

Tax implications of independent contractors

If the worker is classified as a genuine independent contractor (or they are working through a trust or company) and they are a non-resident, then they should only be taxed in Australia on Australian sourced income. Using the same example, if the contractor is a resident of the Philippines, then Article 7 of the DTA would generally prevent Australia from taxing their business profits or income unless they relate to a permanent establishment that the contractor has in Australia (see Will a foreign worker mean your business is carrying on a business overseas? below).

PAYG withholding should not apply as long as:

The contractor provides an ABN; or
A DTA prevents the income from being taxed in Australia; or
The contractor does not carry on an enterprise in Australia. If the contractor performs all their work overseas, they don’t have any physical presence or employees in Australia, then it might be possible to argue that they don’t carry on an enterprise in Australia. The company could ask the contractor to complete a statement by supplier.

Payments to foreign contractors might need to be reported to the ATO on the taxable payment annual report (TPAR) if your business provides building and construction, cleaning, courier and road freight, IT or security, investigation or surveillance services.

Will a foreign worker mean your business is carrying on a business overseas?

By having foreign workers, there is a risk that the business will be considered to be carrying on a business through a permanent establishment in the relevant foreign country. This could potentially expose an Australian business to tax in the foreign country on some of its business profits.

A permanent establishment is generally defined in Australia’s double tax agreements as being a fixed place of business through which the business of the enterprise is carried on in whole or part. Each DTA is a unique document which means that the definition of permanent establishment might be different depending on which foreign country you are dealing with.

This area can become complex very quickly and it is a good idea to get advice to ensure that you have certainty about your obligations.

Are student loans too big?

Australian voters tend to reject US style education favouring more egalitarian systems where income does not determine access.

In the US, average student debt is USD $37,693 (public and private debt) taking an average of 20 years for individuals to repay. But, students often have a gap not fulfilled by loans.

For Australian domestic students, the cost of completing a bachelor degree is generally between $20,000 and $45,000, excluding some of the higher value courses. HECS-HELP loans are available for eligible students to cover the cost of tuition up to $121,844 for most degrees, and $174,998 for higher value degrees like medicine. The average higher education student debt in Australia is around $27,000 and on average takes just over 8 years to repay. Close to 3 million Australians have a student loan debt with debt totalling over $81 bn. Over 7 million have loans above $100,000.

Currently, student loans start to be paid back when an individual’s income reaches $54,435, with a repayment rate that scales according to income ranging from 0% to 10% when income reaches $159,664.

The Government has announced a series of changes to HECS-HELP including:

Indexation rate calculation change to the lower of consumer price index (CPI) or wage price index (WPI) – currently CPI. Intended to be backdated to student loans on 1 June 2023, effectively removing the 7.1% spike that occurred in 2023.
Increased minimum repayment threshold to $67,000 in 2025-26. The repayments will also be calculated on the income above the new $67,000 threshold rather than total annual income.
20% loan reduction for all study and training support loans before 1 June 2025 (around $16bn).

These changes are subject to the passage of legislation and are not yet law.

Quote of the month

“We cannot solve our problems with the same thinking we used when we created them.”

Albert Einstein

Maket Wrap November 2024

Markets

Local:

The ASX200 index had a strong gain of 3.79% over November.

Global:

The S&P 500 advanced 5.9%.

The Dow Jones Industrial Average surged 7.7%

The Nasdaq Composite added 6.3%

The biggest winner for the month was the small-cap Russell 2000 index, which surged 11.0% over November.

The Stoxx Europe 600 Index added 1.2%.

Gold:

The price of gold took a breather from its historic run, shedding 3% in November and ending the month at a price of $2,651.10 per ounce in US Dollars.

Iron Ore:

Iron ore price continued its push higher as it ended November at US $105.31 per/Mt.

Oil:

Brent crude oil rose 1.4% in November to US $74.27 per barrel as of November 25th.

Property

Housing:

CoreLogic’s national Home Value Index (HVI) rose by just 0.1% in the last month of spring, the weakest Australia-wide result since January 2023.

This marks the 22nd straight month of growth, but it could be close to the last in this cycle.

“The downturn is gathering momentum in Melbourne and Sydney,” said Tim Lawless, CoreLogic’s research director. “While the mid-sized capitals, which have dominated the growth cycle of late, are also losing steam.”

Melbourne, where housing values have fallen over ten of the past twelve months, recorded a -0.4% fall over the month, taking values -2.3% lower over the past year.

For Sydney, August likely marked the peak of the cycle, with values flattening in September and falling -0.2% in October and November.

Economy

Interest Rates:

Retail Sales:

Retail sales throughout the month of October were up 3.4% year-on-year according to the latest data from the Australian Bureau of Statistics (ABS). Retail turnover rose 0.6% in October. This comes after growth of 0.1% in September 2024 and 0.7% in August 2024.

Bond Yields:

Australia’s 10-year Government bond yield dipped slightly in November to finish the month at 4.37%.

US 10-year Government bond yield fell slightly in November to finish the month at 4.18%

Cryptocurrencies:

Cryptocurrency prices soared in November. The price of Bitcoin jumped 34.7% in November to $97,453.25 and came close to the key $100,000 threshold. Ethereum advanced 35.4% in November to $3,598.19. These significant single-month gains helped propel Bitcoin and Ethereum’s year-to-date totals. Bitcoin is now 130.8% higher on the year, and Ethereum is up 56.8% in 2024.

Exchange Rate:

The Aussie dollar remained steady in November against both the American dollar, at $0.652, and the Euro at $0.617.

Inflation:

Australia: The monthly Consumer Price Index (CPI) indicator rose 2.1% in the 12 months to October 2024, according to the latest data from the Australian Bureau of Statistics (ABS). Michelle Marquardt, ABS head of prices statistics, said: “Annual inflation was steady at 2.1% in October and remains the lowest annual inflation since July 2021.” The top contributors to the annual movement at the group level were Food and non-alcoholic beverages (+3.3%), Recreation and culture (+4.3%), and Alcohol and tobacco (+6.0%).

USA: The consumer price index increased 0.2% in October, taking the 12-month inflation rate up to 2.6%. Both numbers were in line with expectations. The core CPI accelerated 0.3% for the month and was at 3.3% annually, also meeting forecasts.

EU: Euro area annual inflation is expected to be 2.0% in October 2024, up from 1.7% in September according to a flash estimate from Eurostat. Looking at the main components of euro area inflation, services are expected to have the highest annual rate in October (3.9%, stable compared with September), followed by food, alcohol & tobacco (2.9%, compared with 2.4% in September), non-energy industrial goods (0.5%, compared with 0.4% in September) and energy (-4.6%, compared with -6.1% in September).

Consumer Confidence:

The Westpac–Melbourne Institute Consumer Sentiment Index rose 5.3% to 94.6 in November from 89.8 in October. The consumer recovery gained more traction through October-November, but the survey detail suggests some of this momentum has been checked by renewed uncertainty following the US election.

Employment:

Australia: In trend terms, in October 2024: The unemployment rate remained at 4.1%, the participation rate increased to 67.2% and employment increased to 14,541,200.

USA: Total nonfarm payroll employment rose by 227,000 in November, and the unemployment rate changed little at 4.2%. Employment trended up in health care, leisure and hospitality, government, and social assistance. Retail trade lost jobs.

Purchasing Managers Index:

The Judo Bank Australia Manufacturing PMI rose to a six-month high of 49.4 in November 2024, as expected, from October’s 47.3. While production and new orders, including exports, continued to decline, the rates of contraction eased. Business sentiment improved significantly, reaching the highest optimism level since January 2023, which spurred employment growth for the first time in six months. Despite rising optimism, firms remained cautious, reducing inventories and buying activity due to subdued demand. Results above 50 points indicate expansion, with higher results indicating a faster rate of expansion.

US Services PMI:

The S&P Global US Services PMI rose to 57 in November of 2024 from 55 in the previous month, well above market expectations of 55.2, to mark the sharpest expansion in the US services sector activity since March of 2022. The reading extended the strong momentum for the sector despite the prolonged period of restrictive rates by the Federal Reserve, adding leeway for the central bank to hold off on jeopardizing its fight against stubborn inflation.

US Global Manufacturing PMI:

The seasonally adjusted S&P Global US Manufacturing Purchasing Managers’ Index™ (PMI®) remained below the 50.0 no-change mark in November, but at 49.7 pointed to only a marginal worsening in the health of the sector during the month. The reading was up from 48.5 in October and the highest in the current five-month sequence of deteriorating business conditions.

Sources: ABS, AFR, AWE, BLS, CoreLogic, Eurostat, IFA, Macquarie MWM Research, RBA, TradingEconomics, UBS, Wealth Data.

Comments

House Prices Trending Down in Sydney

House prices are now falling across two out of every five Sydney suburbs, a five-fold increase from a year ago, and the highest level in 20 months.

The share of Melbourne suburbs where house values dropped in the past three months also blew out to 76.3%, six times higher than last year.

Tim Lawless, CoreLogic’s research director, said the downturn was becoming more widespread as stock levels rose, borrowing capacity shrank and affordability worsened.

“We’re now seeing a fairly broad-based, but so far, mild downturn,” he said. “Sydney is still in the early phase of the downswing, so we’ll probably see more suburbs where house prices drop in the coming months.”

Sydney home values fell by 0.1% last month, the first monthly decline in almost two years, while Melbourne dipped by 0.2% as the housing outlook dimmed.

Louis Christopher, SQM Research managing director, said house prices in both cities were on track to fall further in the coming months.

“Auction clearance rates are now falling in Sydney, well beyond the seasonal weakness, and we’re seeing a marked increase in distressed selling across Melbourne,” he said.

“There are now 1117 total distressed listings in Melbourne as of November 6, which is the highest level since we started tracking in 2020.

“In the past year distressed selling surged by 28.4%, which tells me there are more property owners that are struggling financially, as confirmed by the rising default rates,” Mr Christopher said.

Moody’s Ratings analysis showed mortgage delinquency rates increased across the country over the year to May. Melbourne emerged as the epicentre of arrears. The portion of mortgage defaults across the city increased by 0.73 of a percentage point to 2.54%, just behind Hobart, which posted a 1.3 percentage point rise in arrears to 2.68%.

Melbourne dominated the top 20 suburbs with the highest mortgage default rates. Fourteen suburbs posted delinquency rates as high as 5.37%. By contrast, many suburbs with the lowest default rates were in Brisbane and Sydney.

What is still to come?

Sydney and Melbourne housing prices could fall by 5% in 2025, driven lower by a glut of listings, unaffordable prices and high interest rates, the latest Housing Boom and Bust report by SQM Research predicts.

Property prices in Canberra and Hobart are also predicted to drop by up to 6% and 3% respectively.

SQM Research managing director Louis Christopher said the bulk of the forecast price falls would occur in the first half of next year before interest rate cuts, which are expected by the June 2025 quarter.

“Current interest rate settings are biting the community more in these cities which, on our measurements, are in overvalued territory and/or are experiencing slower economic growth compared to the cities and states that have enjoyed good economic growth,” he said.

“However, once interest rate cuts do occur, we are expecting a speedy bounce in demand for Sydney and Melbourne in particular, which both are still experiencing underlying housing shortage relative to the strong population growth rates.

Paul Bloxham, HSBC’s chief economist said the risk of the Reserve Bank not cutting interest rates has increased.

“On a core basis, the economy is still operating a bit beyond its full capacity, and the very slow decline in inflation means the RBA really can’t consider cutting interest rates anytime soon.”

“The job market is still at, or slightly beyond full employment and does not appear to be loosening further at this stage.

“If it turns out the job market is not loosening further, then rate cuts may not happen at all. At the moment, we think there is a 25% chance that interest rates don’t get cut at all in 2025.”

Oxford Economics senior economist Maree Kilroy said while interest rate cuts could be delayed until June next year, they would be deeper than what the market was predicting.

“We’re expecting the RBA to slash the cash rate by a total of 1.25 percentage points to bring it back to neutral settings,” she said.

“This will improve mortgage affordability and help price growth in the following year.”

Sources: AFR, CoreLogic, SQM

US Election – Implications for Australia

Donald Trump has been elected the 47th President of the United States. The Republican Party has won control of the Senate and is on-track to maintain or expand a majority in the House of Representatives.

There is a risk that some of president-elect Trump’s policy proposals have an adverse effect on the US economy and on the global economy.

The most significant policy proposals outlined by the Trump campaign relate to higher import tariffs, corporate and personal income tax cuts, immigration, climate change and energy, and foreign policy.

In the immediate aftermath of the election, US stock prices have risen, the US dollar has strengthened and yields on 10-year Treasuries have climbed. Economic growth in the US economy could accelerate in the short term on the back of greater certainty, rising confidence, and proposed deregulation and tax cuts.

However, several factors may potentially slow US economic growth in the medium to long term. These include higher government debt, increased trade frictions, labour market shortages, higher inflation, and general uncertainty.

Donald Trump has proposed a universal tariff of 20% on all imports into the US, and a tariff of at least 60% on goods imported from China. If implemented as proposed, the average US tariff rate will increase sharply (see Chart 1). Higher tariffs, which could become a reality as early as the second quarter of 2025, are likely to weigh on US producers and consumers by increasing prices and slowing domestic demand. Weaker demand for imports is expected to strengthen the US dollar.

Trump has also proposed extending corporate and individual tax cuts due to expire in 2025, alongside further cuts for US manufacturers. Tax cuts would be a powerful short term economic stimulant but are also likely to add to US federal government debt. Higher national debt is expected to slow economic growth in the medium to long term by crowding-out private investment, limiting further public investment, and by putting long-term upward pressure on taxes.

Trump’s campaign also proposed the deportation of millions of undocumented immigrants, a withdrawal from The Paris Agreement (for a second time), and trimming incentives that encourage the green transition. All these proposals may be highly disruptive to the US economy which may become more susceptible to the risks of climate change and economic shocks.

What does this mean for Australia’s economy?

The implications for Australia are likely to be through trade and exchange rate channels.

A third of Australia’s exports go to China, and a US-imposed 60% tariff on Chinese goods could exacerbate a structural slowdown there. Slower growth in China is likely to weigh on economic growth in Australia. Subdued demand for iron ore and other raw materials may lead to a deterioration of Australia’s terms of trade.

Tariffs, expansionary fiscal policy, and deregulation will push US interest rates up and strengthen the US dollar relative to the Australian dollar in the short term. A weaker terms of trade via lower prices for key Australian commodities such as iron ore would add to downward pressure on the Australian dollar.

The impact of Trump’s presidency on inflation and short-term interest rates in Australia remains uncertain. A weaker Australian dollar and an inflationary impulse from the US is likely to be counterbalanced by a deflationary impulse from China. Long-term Australian interest rates may be pushed up by higher yields on US 10-year Treasuries, but this is also likely to be counterbalanced by expectations for slower growth.

Much will depend upon how policy proposals are enacted in the US. However, one thing is for sure: uncertainty and volatility are likely to be key words while discussing the global economy in 2025.

Sources: Deloitte, U.S. International Trade Commission

Business Matters December 2024

Tax and tinsel Q&As

Can you avoid giving the Australian Tax Office a gift this Christmas?

The top Christmas party questions

What can I do to make the staff Christmas party tax deductible or tax-free?

Not have one? Ok, seriously, it’s likely that you will pay tax one way or another; it’s just a question of how. If you structure your celebrations to avoid fringe benefits tax (FBT), then you normally can’t claim a tax deduction for the expense or goods and services tax (GST) credits.

No FBT

If you host your Christmas party in the office on a working day, then FBT is unlikely to apply to the food and drink. Taxi travel that starts or finishes at an employee’s place of work is also exempt from FBT – helpful if you have a few team members that need to be loaded into a taxi after overindulging in Christmas cheer.

If you host your Christmas party outside of the office and keep the cost per head under $300 (the FBT minor benefit limit) then FBT often won’t apply to the cost of entertaining your employees.

But, if you do not incur FBT, you cannot claim GST credits or a tax deduction for the Christmas party expense.

Tax deductible

If your business hosts slightly more extravagant parties away from the business premises and the cost 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.

Are the costs of client gifts deductible?

It depends on the gift and why you’re giving it. If you send a client a gift, the gift is tax deductible if you have an expectation that the business will benefit; it’s marketing. While this seems like a mercenary way to look at Christmas giving, it is the business giving the gift, not you personally. This assumes that the gift is not a gift of entertainment like golf, or restaurants, which would not be deductible.

What about gifts for staff? Are they tax deductible?

The key to Christmas presents for your team is to keep the gift spontaneous, ad hoc, and from a tax perspective, below the $300 FBT minor benefit limit. So, no ongoing gym memberships or giving the same person several of the same gift that adds up to $300 or more unless you want to give a gift to the ATO at the same time. But, you can give gifts at different times throughout the year without triggering FBT as these are counted separately for the minor benefit limit.

A cash bonus will be treated as income in much the same way as salary and wages.

I like to catch up with clients for lunch or a drink (or two) at Christmas. These expenses are deductible, right?

Regardless of whether it’s for Christmas or at any other time of the year, the cost of entertaining your clients – food, drink or other entertainment – is not deductible. The ATO is keen to ensure that taxpayers are not picking up part of the cost of your long lunches or special events while you’re bonding with clients.

Merry Christmas

We want to take this opportunity to wish you and your family a safe and happy Christmas.

It’s been an eventful and busy year. Let’s hope 2025 is a year of stability and peace.

We will look forward to working with you again in 2025 and making it the best possible year for you.

We wish you and your family the warmest of Christmas wishes.

Office closure

Our office will be closed for Christmas from 20th December 2024 and will reopen on 6th January 2025.

What’s ahead in 2025?

The last few years have been a rollercoaster ride of instability. 2025 holds hope, but not a guarantee, of greater stability and certainty. We explore some of the key changes and challenges.

An election

Welcome to political advertising slipping into your social media, voicemail, and television viewing – most likely with messages from the opposition asking if you are better off, and from the incumbents telling you all the reasons why you are.

The 2025-26 Federal Budget has been brought forward to 25 March 2025. This suggests an election will be held in either March or May 2025 but no later than 17 May 2025.

Legislation in limbo

The Senate pushed through 32 Bills on the final sitting day of parliament for 2024 including seven of direct relevance to business and to the financial interests of some Australians. However, two key announcements remain in limbo:

$3m tax on earnings in a superannuation fund
The proposed Division 296 tax, which imposes a 30% tax rate on future earnings for superannuation balances above $3 million, is proposed to commence from 1 July 2025. The Bill enabling the new tax is stalled in the Senate. It’s unlikely that this tax will pass parliament prior to the election; at which point, the Bill lapses. It then becomes a question of whether the elected Government chooses to rectify the concept or let it fade into oblivion as a bad idea.

$20,000 instant asset write-off for small business
In the 2024-25 Federal Budget, the government announced the extension of the $20,000 instant asset write-off threshold for small business for a further year to 2024-25. The concession enables businesses with an aggregated turnover of less than $10 million to immediately deduct the full cost of eligible depreciating assets costing less than $20,000. Without this measure, the threshold returns to $1,000. This concession was removed by amendment from the enabling legislation at the last minute in the final sitting of Parliament of 2024. The removal of this measure is unfortunate, as once again, SMEs now have no confidence about the tax treatment of investments in assets that they might be looking to make, or have made, in the current financial year.

Tax & super changes

Foreign resident capital gains withholding changes on sale of property

One of the Bills pushed through Parliament at the end of 2024 changes how capital gains withholding applies to foreign residents from 1 January 2025.

Currently, residents selling taxable Australian property must provide a clearance certificate to the purchaser at or before settlement to avoid having 12.5% withheld from a property sale where the value of the property is $750,000 or more. If applicable, the withholding is then made available as a credit against any tax liability. The vendor only receives any refund due after their next income tax return is processed at tax time.

From 1 January 2025 however, the threshold will be removed and the withholding rate increased so that:

The withholding is increased from 12.5% to 15%; and
The withholding applies to the sale of all Australian land and buildings by foreign residents, regardless of the value of the assets.

The reforms apply to acquisitions made on or after 1 January 2025.

Superannuation rate increases to 12%

The Superannuation Guarantee (SG) rate will rise from 11.5% to 12% on 1 July 2025 – the final legislated increase.

Super on Paid Parental Leave

From 1 July 2025, superannuation will be paid on Paid Parental Leave payments. Eligible parents will receive an additional payment based on the superannuation guarantee (i.e. 12% of their PPL payments), as a contribution to their superannuation fund.

Interest rates

At the last Reserve Bank Board (RBA) meeting, RBA governor Michele Bullock recognised the easing of headline inflation from 5.4% to 2.8% over the year to September 2024 but suggested that the economy still has some way to go before inflation is sustainably within the 2% to 3% target range. The RBA appears wary of volatility and wants to see inflation sustainably trending down before making any move. Commbank is predicting a February 2025 rate cut, ANZ and Westpac May 2025, and NAB June 2025.

Cost of living pressures

The National Accounts released in early December took economists by surprise with living standards growing by a mere 0.2% in the September quarter – the expectation was much higher. Discretionary spending only increased by 0.1%.

The personal income tax cuts that came into effect from 1 July 2024 helped households, as did energy subsidies, but the impact is still working its way through the system. At the same time, mortgage costs continue to rise as past increases continue to impact.

Through the year, Australia’s economy grew 0.8%, the lowest rate since the COVID-19 affected December quarter 2020. Economic activity in the Australian economy right now is heavily dependent on Government spending.

Slow and steady is the expectation for 2025.

The ‘Trump effect’

President-elect Trump will recite his oath of office on 20 January 2025. The Trump administration will hold the presidency, Senate and the House.

For Australia, the question is the likely impact of some of President-elect Trump’s stated policy objectives including the imposition of tariffs. On social media, Trump has said:

“…as one of my many first Executive Orders, I will sign all necessary documents to charge Mexico and Canada a 25% Tariff on ALL products coming into the United States, and its ridiculous Open Borders.”
“…we will be charging China an additional 10% Tariff, above any additional Tariffs, on all of their many products coming into the United States of America.” This in response to claims that China is responsible for massive amounts of drugs, in particular Fentanyl being sent into the US.

The issue for Australia is the secondary impact of a trade war. China is Australia’s largest two-way trading partner, accounting for 26% of our goods and services trade with the world in 2023. A slowdown in the Chinese economy impacts Australia and the region generally.

An immediate impact of the idea of a trade war has been the decline of the AUD/USD, currently sitting at around 64c.

Fuel efficient cars

New standards for vehicle manufacturers come into effect from 1 January 2025. Vehicle manufacturers will have a set average CO₂ target for all new cars they produce, which they must meet or beat. The target will be reduced over time and car companies must provide more choices of fuel-efficient, low or zero emissions vehicles.

Suppliers can still sell any type of vehicle they choose but with more fuel-efficient models offsetting any less efficient models. If suppliers meet or beat their target, they’ll receive credits. If they don’t, they will have two years to either trade credits with a different supplier, or generate credits themselves, before a penalty becomes payable.

Wage theft criminalised

As of 1 January 2025, the intentional underpayment of workers will be criminalised.

Employers will commit an offence if:

they’re required to pay an amount to an employee (such as wages), or on behalf of or for the benefit of an employee (such as superannuation) under the Fair Work Act, or an industrial instrument; and
they intentionally engage in conduct that results in their failure to pay those amounts to or for the employee on or before the day they’re due to be paid.

Employers convicted of wage theft face fines of up to 3 times the amount of the underpayment and $7.825 million.

Phasing out cheques

The Government has announced a transition plan to phase out the use of cheques. Under the plan, cheques will stop being issued by 30 June 2028 and stop being accepted on 30 September 2029.

The use of cheques has declined dramatically over the last 10 years, declining by around 90%. In response, banks have stopped issuing chequebooks to new customers. However, financial institutions have a legislated requirement to accept cheques until the Government no longer requires them to do so.

Danish banks stopped accepting cheques in 2017 and New Zealand’s banks in 2021.

Cheques out but cash remains king

While Australians have moved to digital payment methods, the Government has been careful to maintain cash as a payment method.

Around 1.5 million Australians use cash to make more than 80% of their in‑person payments. Cash also provides an easily accessible back‑up to digital payments in times of natural disaster or digital outage.

According to the most recent data, up to 94% of businesses continue to accept cash.

The Government has stated that they will mandate that businesses must accept cash when selling essential items, with appropriate exemptions for small businesses.

Currently, businesses don’t have to accept cash – business can specify the terms and conditions that they will supply goods and services.

The issue of card surcharges often comes up when a business adds a surcharge rather than recognising this cost of doing business in their pricing. A business can charge a surcharge for paying by card, but the surcharge must not be more than what it costs the business to use that payment type.

Tax deduction denied for signature basketball shoe R&D

The Federal Court has denied a sports company’s appeal to claim research & development incentives for the creation of an Australian signature basketball shoe.

The Movie Air highlighted the importance of the signature Air Jordan shoe to Nike. While expected to sell around $3 million worth of shoes by its fourth year, the signature shoe eclipsed expectations raking in $126 million in its first year. Nike sold 1.5 million in the first six weeks following clever marketing suggesting that the colourful shoes were in breach of the NBA regulations.

Nike’s recent fourth quarter results to 31 May 2024 show the Jordan brand worth $7 billion, and the bright spot in the company’s results with a 6% sales gain.

In Australia, Peak Australia created the Delly1. Peak worked with Australian Olympian and NBA Champion, Matthew Dellavedova, on the final shoe design. Dellavedova has stated in interviews that he had, “…a whole lot of involvement with the shoe… I wanted a low-cut shoe that was light and close to the ground because I need to guard all these quick guards that are tough to defend over here [in the NBA]. They [Peak] did a great job with that, and as we went through the process of me testing it we just made minor adjustment.”

But did the process undertaken to create the Delly1 meet the requirements to access research and development (R&D) concessions?

Accessing R&D concessions

The R&D tax incentive program encourages research and development that companies might not otherwise undertake. The incentive offers a tax offset which is calculated with reference to qualifying R&D expenditure. The rate of the tax offset and whether it is refundable or non-refundable depends on the company’s situation.

To access the incentive, R&D activities have to be “core” or “supporting.”

Active Sports Management Pty Ltd lodged applications with Industry Innovation and Science Australia (IISA), to register activities relating to the development of a customised basketball shoe (Delly1) as “core R&D activities.” A core activity is one that can’t be determined in advance, can only be determined by systematic progression through scientific principles and experimentation, and is conducted for the purpose of generating new knowledge.

Unfortunately for Active Sports Management, the ATO, Administrative Appeals Tribunal, and now the Federal Court did not see the development of Delly1 as core R&D.

The claim was denied on the basis that the outcome did not appear to have technical or scientific uncertainty, just subjective views.

Quote of the month

“If you haven’t got any charity in your heart, you have the worst kind of heart trouble.”

Bob Hope, Comedian

Article Archive

Business Matters February 2024

Stage 3 personal income tax cuts redesigned

What will change?

It’s not a sure thing yet!

How did we get here?

What now?

Can my SMSF invest in property development?

Directly developing property from fund assets

Related ungeared trust or company

Unrelated property developments

Joint venture arrangements

Is your SMSF the best vehicle for property development?

Contractor or employee?

The problem when the evidence doesn’t match what the taxpayer tells the ATO

The importance of objective evidence

Quote of the month

Business Matters March 2024

The Fringe Benefit Tax traps

Electric vehicles causing sparks

The problem areas

Other FBT problem areas

The ATO Debt Dilemma

Small business tax debt blows out

How to take advantage of the 1 July super cap increase

Using the bring forward rule

‘Catch up’ contributions

Transfer balance cap unchanged

Revised stage 3 tax cuts confirmed for 1 July

Getting back what you put in: Loans to get a business started

Quote of the month

The Round Up January 2024

From Government

Mid-Year Economic and Fiscal Outlook ups the tax take

Adviser misconduct: Increasing the power of regulators

Tax Agent Services (Code of Professional Conduct) Determination 2023

Enhancing the Tax Practitioners Board’s sanctions regime

Tax Treaty with Portugal

From the Regulators

Government support payments to help businesses with recent weather events

Warning for super funds claiming GST credits on personal advice fees

Data matching on the sharing economy

Rulings, Determinations & Guidance

Individuals claiming deductions for financial advice fees

The ATO’s updated guidance on employee / contractor distinction

Software and intellectual property royalties

Single or multiple depreciating assets

Offshore intangibles arrangements with related parties

Arrangements that exploit the R&D tax offset

Income tax exempt entities seeking refunds of franking credits

Cases

Sale of heritage farmland subject to GST despite an intention to live on the property

Settlement payment classified as an ETP

Legislation

30% tax on super earnings on balances above $3 million

Market Wrap January 2024

Markets

Property

Economy

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

Comments

Australian Economic Outlook for 2024

Sources: AFR, Deloitte Access Economics

Unlocking the Potential of Aged Pension and Superannuation Benefits

Market Wrap February 2024

Markets

Property

Economy

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

Comments

Is Nvidia the Best Stock on the Market?

Sources: AFR, Forbes, Statista

The Reformed Stage 3 Tax Cuts – How do They Really Affect Us?

Sources: AFR, The Australian, Forbes

Business Matters April 2024

Warning on SMSF asset valuations

Valuing at market value

Valuing real property

Valuing unlisted companies and unlisted trust investments

Where there is no reliable data or market