Share Market Update

A poor December quarter has driven the local share market to its worst yearly performance since 2011, as the benchmark index hit a two-year low in the final few days of trading for 2018.

The S&P/ASX 200 Index ended the quarter 561.2 points, or 9% (excluding dividends) lower at 5,646.4, its worst quarterly performance since September 2011.The ASX200 Accumulated Index which includes dividends returned negative 3.93% over the quarter.

The ASX/200 peaked at 6,351.77 on 30^th August, then dropped 884.13 point or 14% by 21^st December. January has been positive for the ASX with the market gaining 3.9% for the month.

Three of the major banks led the market fall during the quarter as the bank chiefs faced the Banking Royal Commission and shareholders voted down remuneration reports. ANZ slid 13.2% to $24.46, NAB closed 13.4% lower at $24.07 and Westpac declined 10.3% to $25.04. Commonwealth Bank fared much better, rising 1.4% to $72.39 as it avoided a larger sell-off from the other three during mid-November.

Energy stocks were also hit as the price of oil continued to tumble. Investors had been hoping OPEC’s proposed production cuts would halt the decline in global crude prices but concerns over slowing demand and increased supply in the United States pushed the commodity into a bear market. Woodside Petroleum led the losses on the local market, falling 18.8% to $31.32 during the quarter. Origin Energy slid 21.7% to $6.47. The government also announced strong measures to curb climbing power prices earlier in the quarter, extending the losses in the sector.

It was a poor quarter for global equity markets as economic growth concerns in the US and continued market volatility pushed the Nasdaq into a bear market for the first time since the global financial crisis.

Despite falling more than 6% during 2018 and recording its worst yearly performance since 2011, the Australian share market outperformed most other major equity markets around the globe in 2018, although with a lot of volatility.

ASX/200 Performance – 1 January 2018 to 31 December 2018

Economic Update

Economic Outlook

• Recent data releases have done little to change our outlook for the economy.
• Exports continue to trend upwards, supported by additional mining and LNG capacity coming online, while services exports have been aided by the weaker dollar.
• Business sentiment remains fairly positive, and business investment is expected to support growth through 2019.
• Household spending remains the weak link in the outlook, held back by anaemic household income growth.
• BIS Oxford Economics expects GDP to increase by 2.7% in FY19, before moderating to 2.5% in FY20.
• Global GDP growth is steady at around its trend pace. A key issue for the global economy and financial markets in 2019 will be the degree to which the US Fed and other central banks continue/begin policy tightening. We do not expect central banks in the advanced economies to become notably more aggressive with respect to policy tightening next year.

Interest Rates

• After cutting the cash rate to 1.5% in August 2016, the RBA has held fast for over two years. And although the majority of banks have implemented out-of-cycle increases in their mortgage borrowing rates (to reflect rising funding costs, which are being driven up by monetary tightening in the US and tighter liquidity in some money market segments), mortgage rates remain historically low.

Inflation & Wages

• In line with other developed economies, inflation in Australia has slowed sharply over the last two years. Spare capacity in the economy is limiting domestic price pressures, and subdued inflation globally and squeezed retail margins are dampening import price rises. Falling oil prices will weigh on headline inflation for the next few quarters.
• Australia is experiencing structural shifts in the labour market that are weighing on wage rises, including falling unionisation rates, slower productivity growth and a weakening of the link between price rises and labour market performance. Underlying inflation will remain low until we see a sustained increase in wage inflation.
• Headline and core inflation are expected to remain below or at the bottom of the RBA’s 2-3% target band until the second half of 2020

Exchange Rates

• The AUD has depreciated against the USD this year, falling 7.6% since the end of 2017. This move largely reflects a general strengthening of the USD against all currencies. As a result, the currency has depreciated by less against the broader basket.
• We expect a slight appreciation of the AUD as we move into the second half of 2019 and 2020, as momentum in the US economy slows.

Employment

• Growth in employment has been steady over the past few months. While employment growth has slowed compared to 2017, recent growth has been concentrated in full-time employment, which is a positive sign for household labour income.
• Slack in the labour market remains, but is gradually being absorbed, with the unemployment rate falling to 5%. Wage growth is low, but it is increasing very gradually, and should continue to do so if the unemployment rate remains around its current level.

Fiscal Policy

• Although Treasurer Morrison announced sweeping income tax changes in his budget for FY18/19, the immediate impact on the government’s fiscal position (and the economy) will be limited – the majority of the cuts are pencilled in for FY23 and beyond, and they have yet to be passed through the Upper and Lower houses.
• Strong employment growth last year has given the Treasury an income tax windfall, and they now expect to balance the budget in FY20.

Source: BIS Oxford Economics

Property Market Update

The downturn in Australian housing conditions accelerated through 2018, driven by consistently larger quarter-on-quarter declines in Sydney and Melbourne together with a reprisal in Perth’s rate of decline and slowing conditions across the remaining capital cities and most regional markets. The year finished with national dwelling values down 4.8%, ranging from an 8.9% fall in Sydney values through to a 9.9% rise in values across regional Tasmania.

Most regions of Australia recorded a weaker housing market performance in 2018 relative to 2017. Four of the eight capital cities recorded a decline in dwelling values over the calendar year led by Sydney (-8.9%) and Melbourne (-7.0%), while values were also lower across Perth (-4.7%) and Darwin (-1.5%). The remaining capital cities recorded a rise in values, although conditions weren’t as strong as 2017 with every capital city recording a weakening in the pace of growth or an acceleration in the rate of decline over the year.

Index Results at 31 December 2018

Although Sydney and Melbourne recorded the weakest conditions, the peak to current declines are much less severe relative to Perth and Darwin where values have been falling since mid-2014. Sydney values are now 11.1% lower relative to the July 2017 peak and Melbourne values are down 7.2% since peaking in November 2017. The downturn has been running much longer in Perth and Darwin, resulting in cumulative falls of 15.6% and 24.5% respectively.

At the end of 2018, Sydney values were back to where they were in August 2016, while Melbourne values are back to February 2017 levels. Perth values are back to levels last seen in March 2009 and Darwin dwelling values are at October 2007 levels.

While we do expect further falls of probably 5% – 10% in property values over Sydney and Melbourne (following a 10 year run of growth!) it’s hard to see the doomsday scenarios of a further 40% fall eventuating as predicted by some. For this to happen we would need to see a material about face in labour market conditions, a global shock or a material rise in interest rates – none of which seems to be a likely outcome at the moment.

Labor’s proposed changes to both capital gains tax (CGT) and negative gearing could easily exacerbate this decline and provide ideal buying opportunities for the long term investor.

Rolling Annual Change in Dwelling Values

Government Superannuation Co-Contribution

Money for nothing!

50% guaranteed return on investment, if you meet the following criteria:

• Your total income is equal to or less than the lower threshold of $37,697 for the 2018/2019 financial year;
• 10% of your eligible income must come from employment-related activities, carrying on a business, or a combination of both;
• You were less than 71 years old at the end of the financial year;
• You lodge a tax return; and
• You make personal contributions of $1,000 to your super account.

Then you will receive the maximum co-contribution from the Government of $500 – guaranteed!

So, invest or contribute $1,000 and get $500 that’s a 50% guaranteed return!

If your eligible income is above the lower threshold of $37,697 but below the upper threshold of $52,697 for the 2018/2019 financial year, and you satisfy the above criteria, you will be eligible to a reduced Government Co-Contribution.

This is a great strategy to consider for your kids also (provided they meet the above criteria).

The compounding benefits of making additional contributions early in life definitely pay off when retirement approaches.

Spouse Contributions

Commencing 1 July 2017, the Government has increased access to the low-income spouse tax offset.

This provides up to $540 per annum as a tax offset (or rebate) for the contributing spouse and will apply where the low-income spouse’s assessable income is below $40,000 (increased from the current $10,800).

So, if the higher income earner contributed $3,000 into their spouse’s superannuation fund they receive a $540 tax offset or credit on their annual tax return.

This is a great strategy for couples where one spouse is earning a higher income and can contribute for their spouse to reduce personal taxation, whilst also increasing retirement funds.

Tax Deductions for Personal Superannuation Contributions

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

Note the $25,000 cap also includes your employer compulsory contributions! See example below:

• Salary $60,000
• Employer superannuation contribution at 9.5% = $5,700
• Amount available to contribute under the contribution cap = $19,300 ($25,000 -$5,700)

This strategy could be utilised at the end of each financial year to make a lump sum superannuation contribution from your personal funds if you find yourself under the concessional contribution cap for the year.

This is effectively the same as salary sacrificing each pay cycle through your employer.

This strategy could also be beneficial if a large capital gain is made during a single financial year to reduce your overall tax liability.

This will apply regardless of employment status.

Important Note: You will need to complete the notice of intent to claim a tax deduction form and return it to your superannuation fund. You will then receive acknowledgement from your superannuation fund and this notice is required when you complete your 2019 tax return. If you don’t have the correct paperwork you will not be able to claim the deduction!

As always it is important to ensure your actions are appropriate for your circumstances. Please contact us if you require advice.

Superannuation Contribution Caps

There are limits to the amount you can contribute into superannuation per year. These caps are for the 2018/2019 financial year are as follows:

• Non-Concessional Contribution Cap $100,000
• Concessional Contribution Cap $25,000

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

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

For persons under age 65, there is the ability to contribute three times the non-concessional contribution cap limit in a single year, provided that you do not make further non-concessional contributions in the following two financial years and have a superannuation balance of less than $1.4 million.

There are penalties if you exceed the superannuation contribution caps. Please contact our financial planning team if you require advice.

Important Notes

Contributions need to be made correctly with the appropriate paperwork completed. This varies from fund to fund and what type of contribution you are making.

Contributions must be received and cleared in your superannuation account by 30 June 2019.

30 June falls on a Sunday this year so make sure payments are cleared in the superannuation bank account by Friday 28th June 2019.

If you are interested in discussing any of the above strategies or your retirement planning in general, please contact our Financial Planning Team.

Markets

• Market Performance – The ASX200 was up 0.7% for March.
• Sector Performance – The top performing sector for March was the REITs Sector returning 6.2% and the worst performing sector was the Energy Sector coming in at -4.1%.
• Banks – The majority of the big 4 banks fell during the month of March, CBA -4.5%, Westpac -4.0% and ANZ -7.0% all down. The exception was NAB which was up 0.6%.
• Global – The S&P 500 in the US was up 1.5% for March. The Shanghai Composite Index was up 4.6%.

Property

• House Prices – In March housing prices fell 0.7% seeing the national average decline 6.9% over the past year, the worst since the GFC. Sydney prices are down 13.9% from their July 2017 peak and Melbourne prices are down 10.3% from their November 2017 peak. Thousands of home owners (as many as 450,000 properties) in Sydney and Melbourne are left with houses worth less than what they initially paid. Sellers pushed to drop asking prices on ‘fear of not getting out’ (FONGO) before prices fall further.
• Auctions – The last week of March saw auctions fall to 1,667 properties. This is significantly lower than the 3,990 properties that went to auction over the same week last year pre-Easter. Successful auctions are expected to remain below 50% through most of 2019 adding further pressure on the market. Auction clearance rates above 80% were common a few years ago.
• Loans – In January home loans fell 2.1% to the lowest levels seen in 5 years, a 20.6% fall from the prior year with expectations to fall much further. Whilst total lending to investors has fallen nearly 50% in less than 3 years.
• Household Debt: Household debt to disposable income hit record highs up almost 200%. Household wealth has also taken the largest fall since 2011, down 1.3% since last year.
• Rental Yields – Sydney recorded the lowest rental yields at 3.5% over the past 3 months. When expenses are deducted from this, the real yield is much lower.
• Residential Approvals – Residential Building Approvals are down 28.6% on an annualised basis.

Economy

• Interest Rates – UBS continue to expect interest rate cuts this calendar year in July and August.
• Bond Yield – Australia’s 10-year bond yield dropped to historic lows to 1.76% following the inversion of the US yield curve signalling recession fears. When the US has experienced an inverted yield curve in the past, this has resulted in a recession within approximately 18 months. An inverted yield curve occurs when interest rates on 10-year government bonds are paying less than on 3-month contracts – indicating a decline in economic activity going forward.
• GDP – GDP dropped to the weakest level since the GFC to 2.3%. Interestingly GDP per capita has been negative following a boom in population growth of 1.6% from this time last year.
• Exports – Coal supplies an enormous 77% of the national electricity grid in Australia, which is about twice US levels. Fossil fuels represent our largest national export, delivering more than $60 billion in income during the 2017-18 year.
• Car Sales – New car sales have been declining for the past 11 months. Car sales fell approximately 1% in February and are on an accumulated fall of approximately 9-10% from February 2017.
• Employment – The unemployment rate fell to 4.9%, driven by part-time employment growth of 11,900 jobs and a fall in the number of people seeking work. However, full-time jobs fell 7,300 jobs in February. This was below market expectations by 10,400 new job positions. ANZ Job ads continue to fall.
• Exchange Rates – The Australian Dollar was weaker against the US Dollar at $0.710, falling 0.1c throughout March.
• US – US jobs growth weakest since 2017 falling short of estimates, increasing by only 20,000 in February. The 2018 calendar year jobs growth average was 223,000 per month so 20,000 new jobs in the US is a big drop! Unemployment still fell to 3.8%.

Sources: UBS, Westpac, ABS, US BLS, CoreLogic, BIS Oxford Economics, AFR, The Australian

Markets

• Market Performance – The ASX200 was up 5.2%, the strongest month since mid-2016.
• Reporting Season – Cost pressures were the main downside this reporting season making it the weakest reporting season in 4 years. On the upside 21% of ASX 100 companies delivered larger than expected dividends and earnings for 33% of companies beat analyst expectations by 2%.
• Sector Performance – One of the top performing sectors was the Energy Sector at 7.9% and worst performing sector was the Consumer Staples Sector coming in at -1.5%.
• Dividend Payout – Expected total dividend payout for companies will be pushed to a record $84 billion for the end of the 2019 financial year. Proposed changes to franking credits if Labor is elected were a key driver.
• Global – The S&P 500 in the US was up 3.2% for February.

Property

• House Prices – In February housing prices fell 0.7% seeing an annual decline of 6.3%, the worst since March 2009. Sydney and Melbourne prices fell by -1.0% over the month to bring an annual drop of -10.4% and -9.1% respectively.
• Auctions – The last weekend of February saw the highest number of auctions so far this year with 2,293 properties. This is significantly lower than the 3,026 properties going for auction the same time last year. Sales at auctions have collapsed by 50% compared to the prior year.
• Vendor Discounts – Discounts from vendors in Sydney and Melbourne are approximately 7-7.5%, the highest level since 2009.
• Rental Yields – Sydney recorded the lowest rental yields at 3.4% over past three months.
• Residential Approvals – Residential Building Approvals are down 28.6% to 173,000 on an annualised basis which is near 5-year lows.

Economy

• Interest Rates – UBS and Westpac forecast one or two interest rate cuts this calendar year.
• GDP – GDP expectations cut by 0.3% by a below-consensus outlook from UBS to 2.3% for 2019.
• Exports – Australia’s coal earnings set to exceed $67 Billion in 2018/19 to become largest commodity export according to Resource Minister Matt Canavan.
• Credit – Credit conditions tightened on the back of the Royal Commission with accelerating weakness in home prices, sales, approvals, loans and credit growth which are now all near 5-year lows.
• Employment – Employment in January rose a greater than expected 39,000 jobs, whilst the unemployment rate held at 5.0% however is expected to rise. ANZ job ads fell to the worst in 5 years indicating weaker employment growth going forward.
• Exchange Rates – The Australian Dollar weaker against the US Dollar at $0.711, falling 1.9% throughout February.
• US – US President Trump has postponed the initial March 1 tariff increases as a result of “substantial progress” in negotiations with China. US jobs growth surged in January to an incredible 304,000. Unemployment is at 50-year lows in the US.

Sources: UBS, Westpac, ABS, US BLS, CoreLogic, BIS Oxford Economics, AFR

Markets

• Market Performance – The ASX200 was up 3.7% in June moving the Index to new highs.
• Sector Performance – The top performing sector for June was the Materials Sector returning 6.4% and the worst performing sector was the Consumer Discretionary Sector coming in at -1.5%.
• Banks – The big 4 banks all rose during the month of June, CBA 5.4%, ANZ 1.2%, NAB 0.9% and Westpac 3.4% all up.
• Global – The S&P 500 rose strongly, it was up 7.0%. The Shanghai Composite Index rose 2.8%.

Property

• House Prices – In June national housing prices fell -0.2% showing a slower rate of decline. The national average decline was -6.9% over the past twelve months. Sydney recorded its first rise since June 2017, it was up 0.1% and Melbourne was up 0.2%. Sydney and Melbourne prices are down -9.9% and -9.2% for the past year respectively.
• Auctions – The second last weekend of June saw auctions increase to 1,484 properties nationally. This was down from the week prior of 1,505 auctions taking place. The auction clearance rate rising to 60.5% showing improvement compared to this period in the prior year.
• Private Credit – Private Credit Growth has slowed to 3.6%, a 6-year low.
• Rental Yields – Sydney recorded the lowest rental yields at 3.5% and the highest were in Darwin at 6.0% over the past 3 months. When expenses are deducted from this, the real yield is much lower.
• Residential Approvals – Residential Building Approvals continued a 6-year low, down 19.6% on an annualised basis.

Economy

• Interest Rates – The cash rate was cut again on 2 July to a new historic low of 1%. UBS still expect 2 additional cuts by November this year.
• Public Sector Job Growth– The Public Sector has driven employment growth filling 8 out of 10 new jobs over the last year. This amounts to 310,000 new jobs generated by the public sector, compared to the private sector adding only 54,000. The Public Sector now takes up just under 15% of the total population up from 12.5% in 2014.
• Bond Yield – the Australian 10-year Government bond yield closed the month of June at 1.32%, falling to a new record low of 1.26% during the month.
• Car Sales – New car sales fell for the 15^th consecutive month in June to 9.6% on an annual basis.
• Employment – The unemployment rate remained steady at 5.2%. Employment growth rose by 42,300 jobs in May, continuing a strong performance. The participation rate reaching a new all-time high of 66%.
• Exchange Rates – The Australian Dollar rose against the US Dollar at $0.702, rising 0.9c.
• US – US jobs growth increased by 75,000 in May far below expectations. The unemployment rate remained steady at 3.6%. The Morgan Stanley Business Conditions Index (MSBCI) fell by 32 points from May dragging it to a level of 13. The lowest level on record since December 2008.

Comment

Beyond Meat an American company and producer of plant-based meat substitutes, is currently valued at 54 times its annual turnover and hasn’t made a profit to date. This euphoria at a time when the markets have soared in value, and the economy is showing signs of slowing growth and heightened international risks given China and US trade negotiations. Such valuations remind us of the Dot.com days of 2001 which did not end well for investors. The Nasdaq dropped approximately 75%!

Sources: UBS, Westpac, ABS, US BLS, CoreLogic, BIS Oxford Economics

Markets

• Market Performance – The ASX200 recorded an all-time high during the month to 6,875, slightly over its 2007 level of 6,873, up 2.9% in July.
• Sector Performance – The top performing sector for July was the Consumer Staples Sector returning 9.8% and the worst performing sector was the Materials Sector coming in at 1.0%.
• Banks – Out of the big 4 banks during the month of July, NAB and Westpac rose 6.7% and 1.0% respectively and the remainder fell, CBA -0.6% and ANZ -1.1%.
• Global – All three major US indexes reached record highs during the month of July; the S&P 500 at 3014, Dow Jones at 27,332 and the NASDAQ at 8,244. The Shanghai Composite Index fell -1.6%.

Property

• House Prices – In July national housing prices rose 0.04%, showing signs of a market recovery with prices rising for the second month in a row. The national average decline was -6.4% over the past twelve months. Sydney was up 0.2% and Melbourne was up 0.2%. Sydney and Melbourne prices are down -9.0% and -8.2% for the past year respectively but showing recovery.
• Home Ownership – There are currently fewer home owners than 20 years ago. Home ownership has fallen from 70% in the 1998 financial year to 66% in the 2018 financial year. The proportion of home owners with no mortgage has also fallen to 30% down from 40% in 1997-98.
• Auctions – The last weekend of July saw auctions fall to 1,115 properties nationally on a preliminary basis. The preliminary auction clearance rate rising to 71.2%.
• Rental Yields – Sydney recorded the lowest rental yields at 3.4% and the highest were in Darwin at 5.9% over the past 3 months. When expenses are deducted from this, the real yield is much lower.
• Residential Approvals – Residential Building Approvals continued a 6-year low, down 25.6% on an annualised basis.

Economy

• Interest Rates – Following the interest rate being cut to a record low of 1.0%, UBS expect the RBA to further cut rates in both October 2019 and February 2020.
• Inflation – Inflation rose higher than expected 0.6% in the June quarter, lifting the annual Consumer Price Index to 1.6%. Remember the March quarter was 0.0%.
• Minimum Wage – It was reported in July that Australia has the world’s highest minimum wage, affording Australians more purchasing power than minimum wage employees anywhere else in the world.
• Bond Yield – The Australian 10-year Government bond yield closed the month of July down further at 1.20%, the lowest level on record.
• Employment – Both the unemployment rate and participation rate remained unchanged at 5.2% and 66% respectively. Employment growth rose by only 500 jobs in June. However, employment growth remained strong at 2.4% on an annual basis.
• Exchange Rates – The Australian Dollar fell against the US Dollar to $0.689, falling 1.3c.
• US – US jobs growth increased by 224,000 in June. The unemployment rate rose slightly to 3.7%.

Comment

Nouriel Roubini is the Professor of Economics at New York University’s Stern School of Business (New York). He recently warned investors about crypto currencies stating, “crypto land has become an unregulated casino where unchecked criminality runs riot”.

Roubini states that most countries have regulations around Anti Money Laundering (AML) and Know Your Client (KYC) provisions, as well as the fact that money-servicing activities must be licensed and that securities be registered to prevent tax evasion and illicit activity.

Crypto currencies operate outside these regulations completely and “are the preserve of terrorist, gangsters and other criminals”.

Sources: UBS, Westpac, ABS, US BLS, CoreLogic, BIS Oxford Economics.

Introduction

After some turbulent years in politics for both the major parties, and despite the economic success of the current Government, the bookmakers are predicting that the Labor party will win the next Federal election.

Over the last 18 months, the Labor party has been quite vocal in its desire for tax reform with many of these reforms aimed squarely at what it calls the “upper end of town” and catching many of the “lower and middle end of town” in the process, the very same people they say they are trying to help “get ahead in life”. Many of these policies will affect you, our client base and we thought prior to the election we should bring you up to speed on the changes that will come our way should the bookmakers be correct.

Please note that none of these policy announcements are yet law and, depending on the makeup of our next Government and Senate, may not become law. We also note, because they are policy announcements, the fine details of the policies will not be known until draft legislation is released. Given the Labor party under Bill Shorten has been quite vocal in being absolutely committed to its promises, should they win the election, we expect the majority of these policies to be legislated.

Investment Policies

Changes to taxes around investment income are some of the most publicised of the policies announced by the Labor party and for many of you will have the most significant impact.

Franking Credits

The proposed changes to the refundability of franking credits are the most controversial of the Labor party’s policy announcements and there has been much discussion surrounding them in the media. The changes are targeted at self-funded retirees and self-managed superannuation funds (SMSFs), or as the Labor party want you to think – the “upper end of town”.

There are several exclusions for charities and not-for-profits as well as a limited exclusion for pensioners and SMSFs. We refer to the exclusion for pensioners and SMSFs as being limited as it is a misconception being perpetuated by the media that this exclusion will apply to all SMSFs with members in receipt of the age pension. As the policy announcement currently stands this exclusion will only apply to those SMSFs with members that were in receipt of a means-tested government pension as at 28 March 2018. Should you reach age pension age after this date, then the exclusion will not apply and your SMSF will not be entitled to a refund of franking credits.

There are also many grey areas with this policy and how the limitation of franking credit refunds will interact with other areas of tax law.

Negative Gearing

Another well publicised policy is the abolition of “negative gearing”. Negative gearing occurs when an investment is purchased using a loan and the interest and other expenses associated with the investment exceed the income earned from the investment in a particular income year. This loss is then available to be offset against other income earned by the taxpayer such as salary and wages, interest, and business income. It is most commonly associated with rental properties however it is also a common strategy for investors when purchasing shares or other securities.

The Labor party want to restrict taxpayers’ ability to offset the loss from negatively geared investments against other income. The loss will be quarantined and offset against future investment income. The policy announcement however, does not contain the detail around how this quarantining will work – will the losses be quarantined from salary and wages income only? Will the losses be quarantined to a particular investment class or asset – for example will you be able to offset your rental property losses against income from other investments such as dividends or interest? Or if you have two rental properties and one is geared, will you be able to offset the losses from property 1 against the profits from property 2, or will the losses from property 1 be quarantined until such time as the property makes a profit?

The Labor party have indicated that investments in new residential property will be excluded from this policy. They have also indicated that the policy will not apply retrospectively, so investors of existing negatively geared properties should continue to be able to offset the loss against other income.

The Labor party’s intent behind this policy is aimed at housing affordability and helping to “level the playing field for first home buyers competing with investors”. However, combined with the slump in the property market and the proposed changes to the Capital Gains Tax discount (see next section) many economists are concerned about the impact this policy may have on property prices. This impact is further compounded by the high levels of debt incurred to purchase properties when the market was booming that may not meet loan-to-value ratios should the property market slump further.

The policy is intended to apply from 1 January 2020.

Capital Gains Tax

Another policy change from 1 January 2020 is the Labor party’s proposed changes to the Capital Gains Tax (CGT) discount for individuals. Currently where CGT assets have been held for more than 12 months, the individual is entitled to a discount of 50%. The Labor party is proposing to reduce the discount to 25% for any assets acquired after 1 January 2020. The current 50% discount will continue to apply for assets acquired before 1 January 2020.

The discount for superannuation funds remains unchanged at a discount of one third.

Whilst no detail has been released, there have been indications that small business assets will be exempt from this policy change.

Superannuation Policies

In the early 2000’s successive Howard Governments created a generous superannuation system that was tax free in retirement and aimed at reducing the reliance on the Age Pension. With the fall in Government revenues since the Global Financial Crisis, subsequent Governments have introduced a raft of policies clawing back the generosity of the Howard Government and shifting the superannuation system from being an alternative to the Age Pension to one of supplementing the Age Pension. For someone wanting to fully self-fund their retirement it is more likely that they will have to bear an increasing tax burden as the Labor party is proposing to tighten the superannuation system further.

Superannuation Contributions

Currently an individual may make a non-concessional contribution of $100,000 p.a. subject to age restrictions and the $1.6 million cap on superannuation fund balances. In addition, if you are under the age of 65 you may access the bring-forward rule and, subject to the $1.6 million cap, combine up to three years of contributions caps to make contributions of up to $300,000 over a fixed three-year period.

The Labor party is proposing to reduce the annual cap to $75,000 and the bring-forward cap to $225,000 which will severely hamper the ability of individuals to transfer money into superannuation.

These types of contributions are commonly used by individuals nearing retirement to make catch up contributions at a point in time when it is common to have a higher disposable income. Common sources of funds are from the sale of investments, inheritances, redundancy payments, savings from finally having paid off the mortgage etc. The reduction in the cap will limit the ability to make large contributions to super and leave more money outside of the superannuation system and subject to higher individual tax rates.

Tax Deductible Superannuation Contributions

Until recently, it was only the self-employed or those whose main source of income was from investments that could make a personal superannuation contribution (subject to the concessional contribution cap of $25,000) and claim a deduction for it in their personal tax return. For salary and wage earners, they were reliant on their employer offering a salary sacrifice arrangement, and many do not, to make additional deductible contributions to their superannuation fund. In the 2017 budget the Liberal/National party evened up the playing field by allowing all individuals to make deductions in their personal tax returns for superannuation contributions.

The Labor party proposes to remove this concession and revert to the previous rules which only allowed an individual to claim a deduction for personal contributions if less than 10% of their total adjustable income came from employment sources.

Catch-up Concessional Contributions

In the 2017 budget, the Liberal/National party introduced the concept of Catch-up Concessional Contributions for individuals with low superannuation balances. This concession applies to individuals with superannuation balances of less than $500,000. Under the concession, individuals could carry forward up to five years of their unused Concessional Contribution caps (a maximum of $25,000 p.a.).

The Labor party proposes to abolish these changes as they considered the changes an advantage to higher income earners.

Superannuation Guarantee Changes

There are three main changes the Labor party is proposing to make in relation to the Superannuation Guarantee:

1. Phasing out of the $450 threshold. Currently superannuation guarantee is only required to be paid in respect of wages earned where the employee has earned more than $450 in the month. The Labor party proposes to phase this out by reducing the threshold by $100 each financial year between 2020 and 2024. This is a positive change and is targeted at boosting the retirement incomes of low income earners.
2. Superannuation Guarantee is currently not required to be paid in relation to amounts received under the Federal Government’s paid parental leave scheme. It is commonly known that women’s superannuation balances are significantly smaller than men’s by the time they reach retirement age and that a contributing factor to this is the time women spend out of the workforce as the primary carer to babies and young children. This change will help boost the retirement income of women.
3. Both the Labor and Liberal/National parties are committed to increasing the base rate of Superannuation Guarantee from 9.5% to 12%. The rate is currently set to increase from the 2021/22 financial year by 0.5% per year until it reaches 12% in the 2025/26 financial year. The Labor party has expressed a desire to increase the superannuation rate as soon as practicable.

Limited Recourse Borrowing

Currently there are limited circumstances where an SMSF can borrow to acquire a single asset, such as residential investment properties. The borrowing arrangement by which the SMSF can borrow is called a Limited Recourse Borrowing Arrangement (LRBA). According to the Labor Party, since 2007 the number of SMSFs using LRBAs has increased by over 800% and is contributing to crowding out first home buyers.

The Labor party intend prohibit an SMSF to borrow under these arrangements for the purposes of investing in residential property, with the changes to occur prospectively. The Labor party’s view behind this policy is that by removing the ability to borrow, they will limit the number of SMSFs that can acquire residential property which in turn will assist to even the playing field for first home buyers.

Age Pension Age

Both the Labor and Liberal/National parties are committed to increasing the Age Pension age from 65 to 67 by 1 July 2023. The current Liberal/National government was forced to abandon its plans to increase the Age Pension age to 70 and the Labor party will not pursue a further increase to the Age Pension age.

Business & General Changes

Targeting high income earners

The Labor party have two policies that are targeting high income earners:

1. Re-introducing the budget repair levy for those earning over $180,000. This will effectively increase the highest marginal tax rate from 45% (47% including the Medicare Levy) to 47% (49% including the Medicare Levy).
2. Reducing the Division 293 high-income super contribution threshold. Currently individuals whose adjusted taxable income exceeds $250,000 pay an additional 15% on concessional superannuation contributions. The Labor party proposes to decrease this threshold to an adjusted taxable income of $200,000.

A cap on tax deductions for managing your tax affairs

The Labor party is proposing to limit the amount a taxpayer can claim for managing their tax affairs to $3,000 p.a. which would indicate that the Labor party is trying to curtail those who make inappropriate claims and in particular, the very upper end of town, as Mr Shorten’s 2017 budget reply speech referred to a number of Australians earning more than $1 million that have paid no tax because they used “clever tax lawyers” and the deductions paid to their “accountants” averaged over $1 million.

The ATO have come out in defence of these type of large claims, indicating that ordinarily when a taxpayer is making a claim of that magnitude it is generally comprised of a large amount of general interest charges that has arisen due to a settlement arrangement with the ATO in relation to a tax debt that exceeded $1 million.

As the law currently stands, all taxpayers regardless of the amount or type of income they earn are permitted to claim the costs associated with managing their tax affairs. These costs include, but are not limited to, fees paid to tax agents for preparation of tax returns and activity statements, to tax agents/lawyers for advice as well as representation at the tax tribunal or in court on tax related charges and for interest on loans used to pay tax debts.

It is unclear whether the Labor party’s policy will include an exemption for businesses, but the policy is clearly targeted at individuals, partnerships, trusts and superannuation funds.

The services provided by these deductible costs are a vital part of our tax system. Our tax laws are complex, and without this advice many individuals and businesses cannot make informed decisions and may inadvertently breach many sections of the law and or be unable to calculate the appropriate amount of tax to pay. On the flip side, the ATO also relies on tax agents and lawyers to provide these services to maintain the integrity of the tax system which in turn helps keep Federal funding required by the ATO to a minimum.

Taxation of Trusts

Discretionary trusts are commonly used as a structure for businesses and investments due to the higher level of asset protection they allow. They also have the added benefit of allowing taxpayers the flexibility of distributing income to a variety of individuals or other entities. As the trusts are not taxed themselves, but rather the individual or entity to whom the income has been distributed, the income is then taxed at the marginal tax rate of the individual or entity. This flexibility provides an obvious ability for tax groups to structure their tax affairs to take advantage of the marginal tax rates of the lower earning members.

Clearly there are some taxpayers out there who have abused the generosity of these laws, and reform of the taxation of trusts has long been on the agenda of both the accounting industry and the ATO. However, instead of undertaking a broad tax reform of the taxation of trusts, the Labor party is proposing to introduce a minimum tax rate of 30% on all distributions to beneficiaries over the age of 18.

This is another policy announcement the Labor party has made that has little detail to accompany it. We know that there will be exclusions for special disability trusts, deceased estates, fixed trusts and charitable trusts, but not the detail. Nor have the Labor party indicated whether businesses operating via a discretionary trust will be provided with a mechanism to allow for a restructure with no tax disadvantage.

Investment Guarantee

There currently exists for small-medium businesses with a turnover of less than $10 million the ability to claim an upfront deduction for capital expenditure where the total amount per item is less than the instant asset write-off threshold. The instant asset write-off threshold is legislated each year, and for the last couple of years has been set at $20,000 p.a. The Labor party proposes to permanently set this at $20,000 p.a. whereas the Liberal/National party have proposed a $25,000 cap to be reviewed each year.

Business Dealings and Tax Havens

We all know tax havens exist, and they have been used extensively by large corporations and high net wealth individuals to minimise the amount of tax they pay. There is currently an International Agenda to increase the transparency of tax havens as well as ensure that multi-national companies and High Net Wealth Individuals pay their fare share of tax to the countries in which they have earned their profits.

The Labor party are aiming to introduce several measures aimed at minimising the use of Tax Havens and increasing the transparency of such use within the Australian corporate environment.

The first of these measures is to deny a tax deduction for any work- or business-related travel to known tax havens. Whilst no detail is available, it is presumed that this will apply regardless of whether it is travel for legitimate business purposes, for example, to negotiate an export contract.

The second measure is to include changes to the Corporations Act 2001 by making it mandatory for companies to report to shareholders if the company is undertaking any business in a tax haven.

Introduction

On Tuesday 2 April 2019, the Treasurer, Josh Frydenberg, released the Government’s 2019-20 Budget featuring a forecast return to surplus, accelerated income tax cuts and a range of measures centred on election-friendly promises. We outline the key announcements in the Budget for your information.

It’s important to remember that the Budget announcements are still only proposals at this stage. Each of the proposals must be passed by Parliament before they’re legislated.

Personal Income Tax Cuts

The Government has announced it will extend the personal income tax cuts that were announced in last year’s Federal Budget. This is proposed to be achieved as follows:

• From 1 July 2018 to 30 June 2022 – increase the Low and Middle Income Tax Offset (LMITO) from a maximum of $530 to $1,080 ($2,160 for dual income families). The LMITO (which is in addition to the Low Income Tax Offset) will be received after individuals lodge their tax return for the relevant income years.
• From 1 July 2022 – the upper threshold for the 19% tax bracket will increase from $41,000 to $45,000, and the LITO maximum amount will increase from $645 to $700. The increased LITO will be withdrawn at a rate of 5 cents per dollar between taxable incomes of $37,500 and $45,000. LITO will then be withdrawn at a rate of 1.5 cents per dollar between taxable incomes of $45,000 and $66,667.

From 1 July 2024, the 32.5% marginal tax rate will be reduced to 30%. The 37% tax bracket will also be abolished as per the Government’s already legislated plan. The proposed marginal tax rates and thresholds are as follows:

Tax – Small Business

Small Businesses Tax Cuts

The government is fast-tracking planned tax cuts for small and medium businesses by five years. The tax rate will come down from 27.5% to 26% next year and 25% starting in 2021.

Fast-tracking the tax cuts will benefit around 970,000 companies that employ around 5.2 million workers.

Increase and Expand Access to the Instant Asset Write-off

Effective 2 April 2019 to 30 June 2020

Effective 2 April 2019 to 30 June 2020 the Government is proposing to increase and expand access to the instant asset write-off from Budget night until 30 June 2020. These changes are in addition to a measure announced on 29 January 2019 that is currently before Parliament and is yet to be legislated.

The Government announced two changes in the Budget:

• increasing the instant asset write-off threshold from the proposed $25,000 to $30,000 for small businesses (with aggregated annual turnover of less than $10 million)
• expanding the instant asset write-off measure to medium sized businesses with aggregated annual turnover of $10 million or more, but less than $50 million.

This means both small businesses and medium sized businesses can immediately deduct purchases of eligible assets costing less than $30,000 that are first used, or installed ready for use, from Budget night to 30 June 2020. Medium sized businesses must also acquire these assets after Budget night to be eligible as they have previously not had access to the instant asset write-off.

The $30,000 threshold applies on a per asset basis. This means eligible businesses can instantly write off multiple assets.

Arrangement prior to Budget night (2 April 2019)

Prior to Budget night, the Government had legislated to extend the existing $20,000 instant asset write-off for small businesses (with aggregated annual turnover of less than $10 million) to 30 June 2019.

On 29 January 2019, the Government made a further announcement to increase the instant asset write-off threshold for small businesses from $20,000 to $25,000 from 29 January 2019 to 30 June 2020. A Bill containing this measure is currently before Parliament and is yet to be legislated.

These changes interact with the changes announced as part of last night’s Budget. This means that, when both measures are legislated, the below instant write-off thresholds apply to small businesses:

Superannuation

No work test for voluntary contributions extended to age 66

Effective 1 July 2020 the Government will amend the superannuation contribution rules to allow people aged 65 and 66 to make voluntary contributions to superannuation without meeting the work test. This will align the work test with the qualifying age for Age Pension (scheduled to reach 67 from 1 July 2023).

Under current legislation, for a client aged 65-74 to be eligible to a make a voluntary superannuation contribution they must have already satisfied the work test during the financial year the contribution is made. The work test is satisfied where a client has been gainfully employed 40 hours in a period of 30 consecutive days during the financial year. Alternatively, from 1 July 2019 clients may instead satisfy the work test exemption to make voluntary contributions.

Voluntary contributions are all contributions other than employer contributions required under Super Guarantee law or an industrial award or agreement (ie. mandated employer contributions). Voluntary contributions that require the work test to be satisfied include:

• personal after tax (non-concessional) or tax-deductible (concessional) contributions
• voluntary employer contributions (e.g. salary sacrifice that is not counted towards the employer’s SG obligations)
• spouse contributions made by the member’s spouse on their behalf.

Bring-forward rule extended to age 66

Effective 1 July 2020 people age under 67 at any time during a financial year (e.g. 65 and 66 year old’s) will be able to trigger the non-concessional bring-forward rule.

Currently, clients must be under age 65 at any time during a financial year to trigger the bring-forward rule. The bring forward rule allows client to make up to three years’ worth of non-concessional contributions, which are capped at $100,000 a year, to their superannuation fund in a single year.

Spouse contributions extended to age 74 effective 1 July 2020

Currently, to be eligible to make a spouse contribution, the receiving spouse must be under age 70 at the time of the contribution and must meet the work test if they are between age 65 to 69.

Under the proposed changes, spouse contributions can be made where the receiving spouse is under age 75. In addition, where the receiving spouse is age 65 or 66 they no longer need to meet a work test. A receiving spouse will need to meet the work test from age 67.

Protecting Your Super Package –Putting Members’ Interests First

Effective 1 October 2019 the Government has introduced a Bill to give effect to contentious elements of the Protecting Your Super measures which were excised from the original Bill (which has already been legislated).

These measures have been introduced in the Treasury Laws Amendment (Putting Members’ Interests First) Bill 2019.

In summary, this Bill proposes to prohibit trustees from offering insurance on an opt-out basis for:

• new members under the age of 25 who open an account on or after 1 October 2019, and
• members with balances less than $6,000. These measures are proposed to commence on 1 October 2019 if successfully legislated.

Social Security

Energy Assistance Payment

Effective by 30 June 2019 social security pension recipients will receive a one-off Energy Assistance Payment by the end of the current financial year.

The payment will be $75 for singles and $125 for couples combined and will be exempt from income tax.

People who are Australian residents and eligible for the following payments as at 2 April 2019 will automatically receive the payment – Age Pension, Disability Support Pension, Carer Payment and Parenting Payment Single. Also, recipients of the following payments from the Department of Veterans Affairs will be eligible -Service Pension, Income Support Supplement, disability payments, War Widow(er)s Pension, and permanent impairment payments under the Military Rehabilitation and Compensation Act 2004 (including dependent partners) and the Safety, Rehabilitation and Compensation Act 1988.

Reporting Employment Income -Single Touch Payroll

Effective by 1 July 2020 the reporting of employment income for social security purposes will be automated through Single Touch Payroll (STP).

Under the current system, income support recipients who are employed are required to calculate and report their earnings on a fortnightly basis.

Under the proposed changes, employment income will be reported through an expansion of STP data-sharing arrangements to include the Department of Human Services, for recipients with employers utilising STP.

The Government states this measure will assist income support recipients by reducing the likelihood of receiving an overpayment of income support payments.

The Government will achieve savings of $2.1 billion over five years through more accurate reporting of employment income.

Other Spending Incentives

Infrastructure Spending

The government has increased its infrastructure investment to $100 billion, with fast rail planned to connect Melbourne to Geelong.

It will also investigate the feasibility of fast rail connecting Sydney to Newcastle, to Wollongong and to Parkes (via Bathurst and Orange), Melbourne to Albury, to Shepparton or Traralgon and Brisbane to Moreton Bay and the Sunshine Coast or to the Gold Coast.

In NSW, hundreds of millions will be allocated to the M1 Pacific Motorway, the Princes Highway and Western Sydney Rail.

Struggling Farmers

There’s a lot of cash for regional areas, particularly farmers who are struggling with drought and floods.

A total of $6.3 billion is committed to helping them. That includes relatively large initiatives, such as $200 million to increase access to income support, and smaller ones, such as a $2.5 million increase in funding to support farmers’ mental health and wellbeing.

And to safeguard against future droughts and floods, the government is spending $3.9 billion to create an Emergency Response Fund, which will provide a stable source of money to prepare for and react to natural disasters.

Health

There’s lots of money going towards health and mental health including $308.9 million for improving the accessibility of services like x-rays and ultrasounds.

Out-of-pocket costs for these scans will also be reduced and the costs of some medications will also be reduced.

Five drugs have been amended or added to the Pharmaceutical Benefits Scheme (PBS) and two lifesaving drugs used to treat Hereditary Tyrosinaemia Type-1 and Batten Disease will be available for free.

A grants program to improve outcomes for Australians living with chronic disease will be established, there’s money for diabetes research, and the government has a $5 billion Medical Research Fund to go towards clinical trials and other research.

When it comes to mental health, about $229.9 million over seven years will be provided. This will help fund the trial of eight mental health centres.

About $6.1 million will be provided for the establishment of Grace’s Place, a residential trauma recovery centre for children, and $5 million for a purpose-built Repatriation General Hospital in Adelaide to help people with eating disorders.

Another $263.3 will be provided from 2018/19 to improve access to youth mental health services.

Markets

• Market Performance – The ASX200 rose 1.8% in September.
• Sector Performance – The top performing sector for September was the Energy Sector returning 4.7% and the worst performing sector was the Communication Services Sector coming in at -2.9%.
• Banks – All big 4 banks rose strongly during the month of September, CBA 2.3%, Westpac 5.0%, ANZ 6.7% and NAB 8.6%.
• Global – The S&P 500 rose 1.9% in September. The Shanghai Composite Index also rose 0.66%.

Property

• House Prices –Sydney was up 1.7% and Melbourne was up 1.7%. The national average decline was -3.9% over the past twelve months.
• Household DTI – The household Debt-to-Income ratio has spiked to a world record high of approximately 201%.
• Rental Yields – Sydney recorded the lowest rental yields at 3.2% and the highest were in Darwin at 6.0% over the past 3 months. When expenses are deducted from this, the real yield is much lower.
• Residential Approvals – Residential Building Approvals dropped to 154,000 which represents a decline of -21.5% on an annualised basis.

Economy

• Gross Domestic Product – GDP growth in the second quarter to 30 September was up 0.5% drawing annual GDP Growth to 1.4%. The weakest growth rate since the Global Financial Crisis.
• Interest Rates – The RBA has cut interest rates to record 0.75% on 1 October 2019. UBS expect the RBA to further cut rates by another 0.25% this calendar year.
• Bond Yield – The Australian 10-year Government bond yield held below 1.0% during the month of September at 0.96%.
• Consumer Confidence Index – According to the Westpac Melbourne Institute the Consumer Confidence Index has dropped -1.7% over September.
• Exports – Australia’s export share to China has grown to a record 38% ($117 billion) of total annual exports. This percentage of total exports is more than any other country.
• Employment – Employment increased by 34,700 jobs in August. The unemployment rate increased to 5.3%. The participation rate ticked up slightly to 66.2%. Employment growth remained strong at 2.5% on an annual basis – now entirely driven by the public sector having a total share of 15.1% of total employment.
• Exchange Rates – The Australian Dollar remained unchanged against the US Dollar at $0.674.
• US – US jobs growth increased by 130,000 in August. The unemployment rate remained unchanged at 3.7%. The Federal reserve cut interest rates for the second time this calendar year to 1.75%.

Comment

The Institute of Supply Management in the US publishes a monthly index number or “PMI” which represents the level of purchasing managers orders in manufacturing in the US.

If the Index is above 50 it means purchasing managers orders in manufacturing are growing and reflects an expanding economy.

If the Index is below 50 it means the economy is contracting. Leading economists, advisers, politicians and business people watch this Index keenly as it is a very reliable monitor of what is happening in the economy.

In August 2019 the PMI Index was 49.1. This caused concern. Expectations were that in September it would bounce to 50.1.

Instead September saw it drop to 47.8.

This represents one of the biggest falls in the Index in a month ever and the lowest recorded PMI Index since the GFC in 2009.

Not surprisingly the US share market has reacted badly to the news further fanning the flames of a possible global economic slowdown or recession.

Sources: UBS, Westpac, ABS, US BLS, CoreLogic, BIS Oxford Economics.

Markets

• Market Performance – The ASX200 hit an 11-year high of 6,386 during the month and was up 2.4% for April.
• Sector Performance – The top performing sector for April was the Consumer Staples Sector returning 7.3% and the worst performing sector was the REITS Sector coming in at -2.6%.
• Banks – The majority of the big 4 banks rose during the month of April, CBA 5.0%, Westpac 4.0% and ANZ 3.8% all up. The exception was NAB which was down 0.2%.
• Global – The S&P 500 in the US recorded an all-time high closing the month at 2,946, it was up 4.0% for April. The Shanghai Composite Index fell -1.07%.

Property

• House Prices – In April housing prices fell 0.5% seeing the national average decline 7.2% over the past twelve months, now worse than the GFC. Sydney prices are down 14.6% from their July 2017 peak and Melbourne prices are down 10.9% from their November 2017 peak at 30/04/19. The national median time to sell your property has largely increased from 43 to 60 days.
• Auctions – The Easter period of April saw auctions fall to 394 properties nationally. This was significantly down from the week prior of 2,276 auctions taking place.
• Credit – Private credit growth was the slowest in over 5 years to 3.9% for the past 12 months, moving up 0.3% over the month of March.
• Rental Yields – Sydney recorded the lowest rental yields at 3.5% and the highest were in Darwin at 6.0% over the past 3 months. When expenses are deducted from this, the real yield is much lower.
• Residential Approvals – Residential Building Approvals are down 12.5% on an annualised basis.

Economy

• Inflation – CPI for the 3 months to 31/03/19 was zero. This brings CPI for the 12 months to 1.3% at 31/03/19.
• Interest Rates – UBS continue to expect interest rate cuts this calendar year in July and August. Macquarie Bank also has recently made calls for interest rates to be cut.
• Net Exports – Australia’s trade balance reached its highest level on record of 4.8bn in February.
• Employment – The unemployment rate rose to 5.0%, driven by a 0.1% increase in the participation rate to 65.7%. Employment rose 25,700 jobs in March. This growth was supported by a strong rise of 48,300 full-time jobs and a decline of 22,600 in part-time employment.
• Exchange Rates – The Australian Dollar was weaker against the US Dollar at $0.704, falling 0.7c.
• Mortgage Delinquencies – ANZ CEO Shayne Elliott reveals Australian Home Loan 90+ Day Delinquencies definitely trending upwards.
• US – US jobs growth bounced back from February, increasing by 177,000 in March (Feb was only 33,000 – revised). Unemployment remained unchanged at 3.8%.

Sources: UBS, Westpac, ABS, US BLS, CoreLogic, BIS Oxford Economics, AFR, The Australian

Markets

• Market Performance – The ASX200 rose 3.3% in November.
• Sector Performance – The top performing sector for November was the IT Sector returning 11.0% and the worst performing sector was the Financials Sector coming in at -2.0%.
• Banks – The majority of the big 4 banks fell heavily during the month of November, Westpac -13.1%, NAB -9.5% and ANZ -9.5 all down. The exception was CBA which was up 2.8%.
• Global – The S&P 500 rose 3.6% in November. The Shanghai Composite Index fell -1.95%.

Property

• House Prices – National housing prices rose, up 1.5% in November. Sydney was up 2.3% and Melbourne was up 2.3%. The national average showed slight increase of 0.1% over the past twelve months.
• Auctions – The last week of November saw auction volumes rising to 2,612 properties nationally. The auction clearance rate rose to 68.5%.
• Rental Yields – Sydney recorded the lowest rental yields at 3.1% and the highest were in Darwin at 5.9% over the past 3 months. When expenses are deducted from this, the real yield is much lower.
• Residential Approvals – October Residential Building Approvals were lower at 157,000 compared to September at 168,000. This represents a 23.6% decline from a year ago.

Economy

• Interest Rates – UBS and Westpac’s Bill Evans expects two rate cuts early next year in 2020.
• Bond Yield – The Australian 10-year Government bond yield fell slightly during the month of November to 1.04%.
• Consumer Confidence Index – According to the Westpac Melbourne Institute the Consumer Confidence Index recovered to 4.5% over November.
• Employment – Employment fell by 19,000 jobs in October. The unemployment rate increased to 5.3%. The participation rate fell slightly to 66.0%. Employment growth slowed to 2.0% on an annual basis, the worst since April 2017.
• Exchange Rates – The Australian Dollar fell against the US Dollar to $0.676.
• US – US jobs growth increased by 128,000 in October. The unemployment rate rose slightly to 3.6%.
• PMI – The Manufacturing Purchasing Managers’ Index dropped slightly lower at 48.1 in November compared with 48.3 in October.

Comment

November was a good month for equity markets as both the local and US markets reached new highs.

Signs of tentative stabilisation in global growth were welcomed by the markets but it is still too soon to sound the all clear on how global growth will evolve as we move into 2020.

Having said that, markets are currently pricing in a recovery in global growth as opposed to a slowdown at this stage.

The US and China trade dispute will no doubt have a significant impact on this, and Trump will be looking to finalise some type of agreement before the next US election in November 2020.

On another note, the world is clearly changing at a rapid rate.

In November Mercedes Benz sold more cars in Australia than Holden.

Holden sold 2668 vehicles whereby Mercedes sold 3407 vehicles. Total sales of new vehicles for November amounted to 84,708.

This is down 9.8% from the number of sales in November 2018 and marks the 20^th consecutive month of declining sales.

A clear sign our economy is struggling despite 3 recent interest rate cuts and the likelihood of more to come.

Sources: UBS, Westpac, ABS, US BLS, CoreLogic, BIS Oxford Economics.

Employee Wages: Year End Procedures

Are You Reporting Through Single Touch Payroll?

For those employers who have already made the move to reporting through Single Touch Payroll
(STP) you no longer need to:

• Provide a PAYG Payment Summary to your employees
• Lodge an annual PAYG Payment Summary Report to the ATO

You will need to make a finalisation declaration through your STP enabled software. The finalisation
declaration needs to be made by 31 July.

Please note, if you commenced STP payroll mid-year and one or more of your employees ceased working for you prior to commencing STP you may need to prepare and lodge PAYG Payment Summaries and an annual report for these employees only. Your other employees will need to have their information lodged via the finalisation statement. As each of the payroll software providers handle this differently you will need to contact your software provider directly, or this office for assistance.

If you have any questions in relation to the end of year procedures with STP do not hesitate to contact this office. Lisa McCabe is our resident STP expert and will be able to assist you to find a solution.

What to Tell Your Employees

• The ATO will generate an Income Statement from the information reported through STP.
• This Income Statement will be available via their myGov account.
• The ATO will send the employee a notification when their Income Statement is available.
• If the employee uses a Tax Agent to lodge their return, their Tax Agent will have access to the Income Statement via the Tax Agent Portal
• Alternatively, the employee can call the ATO on 13 28 61 and the ATO will provide the information to the employee.

If your employees have any further questions, please direct them to the ATO’s factsheet by clicking here.

https://www.ato.gov.au/business/single-touch-payroll/single-touch-payroll-for-employees/

For employees that do not have a myGov account, they should go to https://my.gov.au click on the create account button and follow the instructions to set up their myGov account. They will need an email address to do this. The ATO has an instructional video that can be found at the following link:

https://www.ato.gov.au/Business/Single-Touch-Payroll/Single-Touch-Payroll-for-employees/Setting-up-your-myGov-account/

All Other Employers

For all employers yet to commence using STP you will still need to prepare and provide a PAYG Payment Summary to your employees by 14 July 2019. You will then need to lodge a PAYG Payment Summary Report to the ATO by 14 August 2019.

PAYG Payment Summaries can be lodged electronically if you use software to process your payroll. Some providers will allow you to lodge directly from their software to the ATO, whilst others require you to upload a file via either the Business Portal or via the Tax Agent Portal.

If you do not use payroll software, then you will need to lodge and prepare paper forms. These can be ordered online via the following link: https://iorder.com.au/publication/main.aspx

Instant Asset Write Off

During the last 12 months, there has been multiple changes increasing the Instant Asset Write Off threshold that may impact on whether small businesses can claim an immediate deduction or depreciate asset purchases over several years.

Relevant Thresholds

The relevant thresholds, and the dates they apply to for the current and subsequent financial year are detailed in the table below:

Unless legislated otherwise, from 1 July 2020 the Instant Asset Write Off threshold will revert to $1,000 per asset.

Date of Acquisition vs Date Asset is Ready to Use

The relevant date when working out the threshold you are entitled to is not necessarily the date you purchased the asset, but the date that the asset was first installed and ready to use.

Costs to Include

The threshold is applied per asset and is applied to the GST exclusive cost of the asset.

The cost of the asset also includes all costs incurred to bring the asset to its present condition and location, such as stamp duty, freight/delivery charges and modification costs.

Example

A business is replacing 3 of its fleet of motor vehicles in June 2019. The cost of 2 of the new vehicles from the car yard is $26,999 including GST with the remaining vehicle costing $29,999 including GST. The business will then spend another $3,300 per vehicle including GST on modifications and sign-writing. The vehicles are paid for in full on June 2019 and will be delivered and ready to use once the sign-writing and modifications are completed in July 2019.

Despite paying for the vehicles in June 2019 (the 2018/19 financial year), as all the vehicles were delivered and ready to use in July 2019, the business will claim any Instant Asset Write Off in the 2019/2020 financial year.

The $30,000 threshold will be assessed against each individual vehicle purchased as they were installed and ready for use after 2 April 2019.

An immediate deduction for the total cost of vehicles 1-2 will be able to be claimed in 2019/20. For vehicle 3 as the total GST exclusive cost including modifications exceeds the $30,000 threshold this will need to be depreciated over several years.

2019-20 Minimum Wage

On 30 May 2019 the Fair Work Commission announced a 3% increase to minimum wages.

The new national minimum wage has been increased to $740.80 per week or $19.49 per hour (previously $719.20 per week or $18.93 per hour).

The increase applies to base rates of pay from the first full pay period starting on or after 1 July 2019.

The Fair Work Ombudsman will release in the coming weeks the updated pay tools and pay guides that include the minimum pay rates for full-time, part-time and casual employees in an award along with the various monetary allowances and most frequently used penalty rates for each classification.

For full details of the decision, click on the link below.

https://www.fwc.gov.au/awards-agreements/minimum-wages-conditions/annual-wage-reviews/annual-wage-review-2018-19

Performance Management

There are many factors that help a business succeed and whilst most of these will vary from business to business there is one factor that is common to all businesses: employee performance. Businesses with happy, motivated employees, performing at their best are more likely to succeed than businesses with disgruntled, unmotivated staff who are underperforming.

To effectively monitor and manage employee performance it is important to have a Performance Management System in place. Best practice would dictate that this system should be a written Performance Management Policy that outlines how underperformance will be managed and the possible consequences of underperformance.

A written policy will ensure that it is clear to employees what will happen if they fail to live up to their responsibilities as well as protect the business (provided the policy has been followed) in the case of a disgruntled employee feeling victimised and or seeking an unfair dismissal claim. The Fair Work Commission will always take into consideration the opportunities you have provided the employee to discuss and improve their performance when assessing an unfair dismissal case.

Underperforming Employees

Where an employee is underperforming it is important to monitor and communicate the underperformance to the employee. In communicating the underperformance to the employee consider the following:

• The communication should be private. Embarrassing the employee in front of their peers will make the employee feel victimised and less likely to follow management’s direction to improve their performance.
• Be clear to the employee about what the issues are and listen to the employee. You need to work together to provide a strategy to rectify the underperformance.
• Is a witness required? Consider whether management and/or the employee require a witness in any of the meetings. A witness will provide assurance to all parties that the meeting occurred, the content of the meeting and the agreed outcomes of the meeting.
• Document the meeting and the agreed outcomes.

When assessing the underperformance of the employee consider your role in their performance. Have you:

• Provided adequate training opportunities?
• Provided the necessary resources to complete the job? This may be physical materials or hours or support staff hours.
• Provided the necessary tools?

Once an employee is warned about poor performance, it is important to have regular follow up meetings. This provides an opportunity to discuss the progress and determine if there is any other help or support required by the employee. As an employer it also allows you to keep track and make a timely decision on whether the employee’s performance has improved or whether the employee’s employment should be terminated.

Performing Employees

All too often we focus on the underperforming employees, however it is also important to monitor and manage your performing employees to ensure they continue their employment with the business. It is often not the monetary compensation that will keep an employee long term, although competitive remuneration always helps. Other factors that play a large part in the retention of quality employees include the provision of:

• Training and professional development
• Career pathways and progression
• An open and trusting workplace culture
• Recognition and reward of a great job, achievements and length of service
• Open lines of communication let staff know they are a part of the team and they matter to the business.

Markets

• Market Performance – The ASX200 soared to an 11-year high to 6,451, up 1.7% for the month following the surprise Coalition election win.
• Sector Performance – The top performing sector for May was the Telecommunications Sector returning 7.3% and the worst performing sector was the Consumer Staples Sector coming in at -4.2%.
• Banks – The majority of the big 4 banks rose during the month of May, CBA 5.4%, ANZ 2.5% and NAB 4.5% all up. The exception was Westpac which was down 0.3.
• Global – The S&P 500 in the US fell sharply on escalating trade war tensions, it was down 6.6% for May wiping out $4 trillion in value. The Shanghai Composite Index fell -5.8%.

Property

• House Prices – In May housing prices fell 0.4% showing a slower rate of decline. The national average decline was 7.3% over the past twelve months. Sydney prices are down 14.9% from their July 2017 peak and Melbourne prices are down 11.1% from their November 2017 peak at 30/05/19.
• Auctions – The last weekend of May saw auctions increase to 1654 properties nationally. This was down from the week prior of 2,055 auctions taking place. The preliminary auction clearance rate rising to 61.5% being the highest weighted average result in the past twelve months.
• Credit – Private credit growth slowed to a 6 year low to 3.7% for the past 12 months, dropping 0.2% over the month of April.
• Loans – In March, home loans fell 3.2% to the lowest levels seen in 6 years, an 18.4% fall from the prior year.
• Rental Yields – Sydney recorded the lowest rental yields at 3.5% and the highest were in Darwin at 6.0% over the past 3 months. When expenses are deducted from this, the real yield is much lower.
• Residential Approvals – Residential Building Approvals have slumped to a 6-year low, down 24.2% on an annualised basis.

Economy

• GDP – GDP failed to meet expectations growing by only 0.4% in the March quarter, 1.6% on an annual basis, the slowest rate since 2009. GDP per person has extended into its third negative quarter on a per capita recession.
• Interest Rates – The RBA has cut the cash rate for the first time in over 2 years from 1.5% to a record low level of 1.25% with expectations to fall further this calendar year in August.
• Wage Growth – Wage Growth remained unchanged at 2.3% into the March quarter.
• Minimum Wage – The FairWork Commission announced a rise in the minimum wage from July 2019 by 3.0% on an annual basis. The new minimum wage is $740.80 gross per week.
• Car Sales – Car Sales fell in April to their worst since 2011 to 8.9% on an annual basis.
• Serviceability Rate – APRA removed the 7.25% serviceability floor that has applied to new finance applications and replaced it with a 2.5% buffer above borrowing rates which will increase borrowing capacity significantly and ease the recent credit crunch.
• Employment – The unemployment rate rose to 5.2%, driven by a 0.1% increase in the participation rate to 65.8%, a new record high. Actual employment rose by 28,400 jobs in April well above market expectations. This growth was supported by a rise of 34,700 part-time jobs and a decline of 6,300 full-time positions. ANZ job ads hit a 6-year low to be down 14.9% on an annual basis.
• Exchange Rates – The Australian Dollar was weaker against the US Dollar at $0.693, falling 1.1c.
• US – US jobs growth increased by 263,000 in April. The unemployment rate declined to 3.6%. Trade war tensions have escalated as President Trump announced a rise in tariffs from 10% to 25% levied on $200 billion of Chinese goods. In addition to announcing a 5% tariff on imported goods from Mexico to deter illegal immigration.

Comment

The head of the world’s largest fund manager Blackrock recently stated that we are at risk of a “melt-up”. Obviously, a meltdown is where we get a correction or crash. What he was referring to was the fact that with world growth slowing and already low interest rates globally – that if central banks lower rates further to support the economy we could see share markets rally further from what are, mostly 10 year plus highs in many major markets including ours here in Australia.

Sources: UBS, Westpac, ABS, US BLS, CoreLogic, BIS Oxford Economics

Important Changes to Superannuation & Insurance

New laws designed to help people consolidate their superannuation accounts could result in people losing their insurance cover, unless they contact their Super fund.

The laws, which take effect from 1 July, will mean that life and disability insurances held within your superannuation fund will lapse if your superannuation account has been inactive for 16 months (nil contributions being paid into the fund). Inactive accounts with less than $6,000 may also require a contribution to be made before 28 June 2019.

Most people with superannuation have insurance cover attached to their superannuation account. If you have joined a fund through your employment, you will usually have automatic cover put in place once the fund receives Superannuation Guarantee contributions from your employer. If you have had any health issues in the past this may be the only insurance that you are ever able to obtain and hence its very important that you take action.

The easiest way to know if you’re affected is to open and read any letters, emails or SMS messages you receive from your super fund. If you haven’t received any communication, but think you should have, reach out to your fund – they may have been trying to contact you at an old address. If you think you might be affected by the changes, or if you are unsure, it is recommended that you contact your superannuation fund and “opt in” to the new scheme.

If you have any questions please contact Joanne Douglas on 02 4227 6744.

Markets

• Market Performance – The ASX200 experienced its worse month since December, falling -2.4% in August affected by US and China Trade war escalation and company earnings results.
• Sector Performance – The top performing sector for July was the Health Care Sector returning 3.6% and the worst performing sector was the Materials Sector coming in at -7.5%.
• Banks – All big 4 banks fell heavily during the month of August, Westpac -1.5%, CBA -3.9%, NAB -4.0% and ANZ -4.2%.
• Global – The S&P 500 fell -1.6% in August. The Shanghai Composite Index fell -1.58%.

Property

• House Prices – In August national housing prices rose 0.8%. Sydney was up 1.6% and Melbourne was up 1.4%. The national average decline was -6.4% over the past twelve months. Sydney and Melbourne prices are down -6.9% and -6.2% for the past year respectively but showing recovery.
• Home Sales – Home sales have collapsed. The number of home sales in the last 12 months has fallen to near the lowest in 23 years.
• Rental Yields – Sydney recorded the lowest rental yields at 3.4% and the highest were in Darwin at 5.9% remaining unchanged over the past 3 months. When expenses are deducted from this, the real yield is much lower.
• Residential Approvals – Residential Building Approvals extended its 6-year low, of 155,000 which represents a decline of -28.5% on an annualised basis.

Economy

• Gross Domestic Product – GDP growth for the year to June 30 was a weak 1.4%. This is the lowest since the GFC over a decade ago.
• Interest Rates – No further interest rate cuts were announced in August. UBS expect the RBA to further cut rates in both October 2019 and February 2020.
• Bond Yield – The Australian 10-year Government bond yield fell below 1.0% during the month of August for the first time on record to 0.89%.
• Consumer Confidence Index – According to the Westpac Melbourne Institute the Consumer Confidence Index has bounced up 3.6% following a hold on interest rate cuts.
• Current Account – Australia has recorded its first current account surplus in 44 years following strong growth in commodity shipments and prices.
• Commodities – Gold prices have surged to a new high of $2,320 per ounce on the back of lower yields and trade uncertainty.
• Employment – Employment increased by 41,100 jobs in July. The unemployment rate remained unchanged at 5.2% and the participation rate ticked up slightly to 66.1%. Employment growth remained strong at 2.6% on an annual basis.
• Exchange Rates –The Australian Dollar has fallen against the US Dollar to a 10-year low to $0.674, falling 1.6c.
• US – US jobs growth increased by 164,000 in July. The unemployment rate remained unchanged at 3.7%.

Comment

Interest Rates are falling globally, the US Federal Government cut interest rates in July by 0.25% to 2.25% and are expected to cut the interest rate again in September by another 0.25%.

German 10-year Government bonds are currently yielding a negative 0.71%, while Swiss 50-year Government bonds are also yielding negative 0.414%. Trade tariffs imposed between China and the US is spreading economic, market and political instability across the globe.

On the 5^th of August, Chinese authorities allowed their domestic currency to fall against the US dollar. 1 US Dollar fell to below 7 Chinese Yuan for the first time since the Global Financial Crisis. This appears to be a direct retaliation against the US as both countries battle for economic superiority.

In Australia, the RBA cut interest rates twice in June and July by 0.25% to a record low of 1.00% with 2 further interest rate cuts expected in the next 6 months. Australia’s current yield curve is flat at around 1.00% for the next 20 years. This reinforces the concept that interest rates in Australia will be lower for longer, perhaps a lot, lot longer.

This will impact business confidence, asset prices, inflation, exchange rates, wages and most economic norms we have accepted over the past decades.\

Sources: UBS, Westpac, ABS, US BLS, CoreLogic, BIS Oxford Economics

Markets

• Market Performance – The ASX200 fell -0.4% in October.
• Sector Performance – The top performing sector for October was the Healthcare Sector returning 7.6% and the worst performing sector was the IT Sector coming in at -3.9%.
• Banks – All big 4 banks fell heavily during the month of October, CBA -2.7%, NAB -3.7%, Westpac -4.8% and ANZ -6.2%.
• Global – The S&P 500 rose 2.2% in October. The Shanghai Composite Index also rose 0.82%.

Property

• House Prices – National housing prices rose strongly, up 1.2% in October, the fastest since 2015. Sydney was up 1.7% and Melbourne was up 2.3%. The national average decline was -2.3% over the past twelve months.
• Auctions – The last week of October saw auction volumes reach their highest level this calendar year, rising to 2,622 properties nationally. The auction clearance rate rose to 75.1%.
• Rental Yields – Sydney recorded the lowest rental yields at 3.2% and the highest were in Darwin at 5.8% over the past 3 months. When expenses are deducted from this, the real yield is much lower.
• Residential Approvals – September Residential Building Approvals were higher at 168,000 compared to August at 154,000. This still represents a 19% decline from a year ago.

Economy

• Inflation – CPI still low at 0.5% for the September third quarter and 1.7% on an annual basis.
• Interest Rates – The RBA cut interest rates to 0.75%. UBS expect the RBA to further cut rates by another 0.25% in December.
• Bond Yield – The Australian 10-year Government bond yield was lifted during the month of October to 1.15%.
• Consumer Confidence Index – According to the Westpac Melbourne Institute the Consumer Confidence Index has dropped -5.5% over October.
• Employment – Employment increased by 14,700 jobs in September. The unemployment rate increased to 5.2%. The participation rate fell slightly to 66.1% but maintaining a historically high level. Employment growth remained unchanged at 2.5% on an annual basis.
• Exchange Rates – The Australian Dollar rose against the US Dollar to $0.689.
• US – US jobs growth increased by 136,000 in September. US employment growth has slowed from last years’ pace. The unemployment rate declined to 3.5%. The Federal Reserve cut interest rates by 0.25% to 1.5% for a third consecutive meeting this calendar year.
• PMI – The Manufacturing Purchasing Managers’ Index was slightly higher at 48.3 in October compared with 47.8 in September. Although indicating towards expansion, this is still below the required reading of 50.

Comment

IPO’s Scrapped

With equity markets at 12 year highs here and in the US, we are seeing more Initial Public Offerings (IPO’s) failing to proceed.

Local finance company Latitude’s $3.2 billion float was scrapped after the initial asking price went from $2.20 to $2.60 and then to $1.78 on the day the float was to proceed.

Nervous investors were spooked by the high valuation and pulled the pin scuttling the IPO.

In the US, the We Company (We Work’s parent), was also due for an IPO in recent months. Having been valued at US $47 Billion earlier in the year when Softbank invested in the start-up the IPO was not supported by investors who were having difficulty supporting the company at a US $10 billion valuation.

Also, in the US Uber Technologies and Lyft which did go public with an IPO earlier in the year, have had their share prices slashed as investors became concerned with rising losses.

These issues all suggest we are in the late stages of a bull market but with low interest rates around the globe, no one knows how much further the markets will run.

Did You Know:

In 2019, Australia hosted 229,136 Chinese students who were studying here with 121,723 from India.

The CFMEU backed hot weather policy has been rolled out in Queensland whereby construction workers stop work when the temperatures hit 28°C and the humidity is 75%.

It was reported in The Australian that a traffic controller working on Brisbane’s Queen’s Wharf project will earn approximately $194,000 if they work 10 hours overtime a week plus allowances that can be up to $20,000 per annum. Workers are also entitled to 10 days paid family violence leave, 26 rostered days off plus 12% superannuation.

A few years ago, a South African firm bought local retailer David Jones. Over the past 2 years, they have booked losses of $1.2 billion. The company’s CEO was quoted as saying in relation to the acquisition “we paid too much”.

Sources: UBS, Westpac, ABS, US BLS, CoreLogic, BIS Oxford Economics.

It’s tax time again

Another financial year has passed and your 2019 Income Tax Return is now due. As with previous years, we have prepared this summary with the aim of making this annual event as efficient for you as possible.

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

To view our summary please click through to here.

Beware 2% Surcharge Land Tax May Apply

Do you own residential property in NSW via a trust or company structure? Then you need to consider whether the Foreign Person’s Land Tax Surcharge may apply to your residential property. Now before you think “I’m Australian, this doesn’t apply to me” for the purposes of this surcharge the definition of a foreign person is not limited to individuals but also extends to family trusts, unit trusts and companies.

The Foreign Person’s Land Tax Surcharge is 2% surcharge payable in addition to any Land Tax you are liable for in NSW. Foreign Persons Land Tax Surcharge applies when a ‘foreign person’ has an ownership interest in residential land in NSW or could potentially receive a dividend or distribution from a company or family trust . As Land Tax in NSW is assessed at 31 December each year, we urge you to act as soon as possible to avoid the surcharge being assessed at 31 December 2019.

Please click here for more details.

If you would like to discuss this please feel free to contact our office on 4227 6744.