How good is ChatGPT at tax?

Not being paranoid or anything but we were curious about the skills of the latest innovation to take the world by storm, ChatGPT, and its ability to work with the Australian tax system.

Let’s start by saying that we were impressed. Not so much by ChatGPT’s ability to work with the complexities of the tax system, but for its tone and approach. The outcome from our testing, including the example below, is that you might end up with some general comments that are reasonably accurate, but you’re unlikely to get an answer that can be relied on. And with most technical commentary tied up in personal advice rather than on the web where ChatGPT can explore it, it is unlikely that we will get there any time soon.

Here are the results of our test question and our commentary (ChatGPT’s response is in italics).

Question: How much capital gains tax does an Australian resident pay on an investment property with a worked example.

ChatGPT: An Australian resident pays capital gains tax (CGT) on the profit made from selling an investment property. The CGT is calculated by subtracting the cost of the property (purchase price plus any costs associated with acquiring and owning the property) from the sale price.

For example, let’s say an Australian resident purchased an investment property for $500,000 and spent $50,000 on costs associated with acquiring and owning the property (such as legal fees, stamp duty, and repairs). The total cost of the property is $550,000.

The accountant: Let’s stop there and take stock. There are some tricks and traps that need to be considered when working out an asset’s cost base.

While repair costs in some cases can form part of a property’s cost base, this is not always the case. The situation is often different where the asset being sold is an investment property that has been rented to tenants. When a landlord repairs damage that occurs while the property is rented to a tenant, this will often be deductible to the landlord at the time the repair costs are incurred. Because deductions are available for these repair costs, they should not also be included in the property’s cost base.

There are also other adjustments that need to be considered. In the context of investment properties, it will often be necessary to make adjustments to the cost base to take into account capital works deductions. Landlords can often claim capital works deductions when an investment property is used to derive assessable rental income. The property’s cost base should then be reduced by capital works deductions that have been or could be claimed by the landlord (although there is an exception to this if the property was acquired before 13 May 1997 and the cost of improvements was incurred by 30 June 1999).

The longer the period of ownership, the more likely that capital works deductions and repair costs can end up being quite significant and have a material impact on the capital gain calculation.

ChatGPT: After several years, the resident decides to sell the property for $700,000. The profit made from the sale is $700,000 – $550,000 = $150,000. The CGT rate in Australia is currently at 45% and the resident will pay 45% of the $150,000 profit, which is $67,500.

The accountant: Let’s take a closer look at that calculation. There is no CGT rate of 45% that applies specifically to capital gains. Net capital gains form part of an individual taxpayer’s assessable income. This figure is then used to calculate the individual’s taxable income for the relevant income year. If there is a positive taxable income figure, then we apply the individual’s marginal tax rates.

One way of explaining this is that a higher taxable income normally results in a higher tax bracket and a higher rate of tax. In other words, the tax rate that applies to an individual’s net capital gains is impacted by the individual’s other income or losses (if any).

Also, while the highest marginal tax rate for individuals is currently 45 per cents for each dollar of taxable income above $180,000, Australian residents are also normally subject to the Medicare levy of 2%. This should be considered and factored in.

ChatGPT: It’s worth noting that there are certain exemptions and reductions that can be applied to the CGT calculation, such as the main residence exemption and the small business CGT concessions.

The accountant: If only tax was that simple! There are certain exemptions and reductions that can apply to capital gains. While the answer mentions the main residence exemption and the small business CGT concessions, these concessions do not normally apply to the sale of an investment property.

For the main residence exemption (or partial main residence exemption) to be available, one of the key conditions is that property would need to have been established and used as the individual’s main residence. The exemption is unlikely to be available if the property has been used solely as an investment property to derive assessable rental income, although if the property was inherited then the position could be different.

Also, the small business CGT concessions would not normally apply to the sale of an investment property. This is because the concessions can only apply if the asset passes an active asset test, which requires the property to have been used in qualifying business activities for a minimum period of time.

Assets used in a business carried on by the owner or certain related parties can often be treated as active assets for the purpose of these concessions, but there is a specific exception for assets used mainly to derive rent from unrelated parties.

If the property has been solely used to derive rent (even if used in a rental business) from unrelated parties, the property is likely to fail the active asset test and the small business CGT concessions shouldn’t be available.

Interestingly, the answer didn’t refer to the general CGT discount or indexation, which are the most likely concessions that would apply to a situation like this.

If the seller is an Australian resident (and not a temporary resident) during the period they owned the property and has owned the property for more than 12 months, the 50% CGT general discount would often be available to reduce the capital gain.

If the property was acquired before 21 September 1999, indexation of the cost base could be available instead. It would be necessary to compare both options to see which provides the more favourable result.

ChatGPT: It is advisable to consult with a tax professional to determine the specific tax implications of selling an investment property.

The accountant: Yes, indeed it is. Thank you ChatGPT.

Full throttle in 2023

In a volatile market, keeping to a strategy, or let’s face it creating one, can be tough.

The downside of not taking time out for your strategy is that there is a tendency to keep a short-term focus at an operational level to try and pick quick wins to generate financial returns. Sometimes in the process, this short-term focus undermines longer term value and returns.

Here are our ‘must dos’:

Know what your position is.

A business health check is an analysis of the current state of your business. It is an analytical review of its operation with view to providing a broad overview of operating performance and identifying potential issues. Understanding your position will reveal your risks and capacity to develop.

Know what to look for.

Once you know your position, the next question is what are the measures that are going to give you the best insight into business performance. In a volatile market, this information will give you what you need to make informed decisions at any one point in time.

Be prepared to make quick decisions.

If you know your position and have the data you need, be prepared to make quick decisions and take the first mover advantage. If you have the two elements above, you have your radar for identifying opportunities and mitigating risk. Most businesses are simply a replication of what they see. While the pandemic and market instability is difficult, we have also seen a wave of innovation as people adapt to find solutions.

Don’t bank on a single opportunity.

If COVID has taught us anything it is that things change, and we need to adapt and change with the circumstances. While one single opportunity might make all the difference, an overreliance on one product, service, or methodology of delivering those products and services, exposes you to risk.

Understand your end game.

What are you aiming for? Family empire? Fast growth and sale? Sustainable growth and sale as a retirement plan? Public listing? Even if you plan on simply running and growing your business for decades to come, that is a decision. Your end game and your progress towards that end game impacts your structure, focus, and decision making.

Document your strategy.

Document your strategy – knowing it in your head is not enough. This does not have to be an onerous War & Peace approach. It is understanding what you are aiming for, and breaking that down into measurable objectives, then into measurable outcomes and timeframes (preferably actionable against rolling 90 day plans). This approach also makes management meetings a lot more meaningful.

Is ‘downsizing’ worth it?

From 1 January 2023, those 55 and over can make a ‘downsizer’ contribution to superannuation.

Downsizer contributions are an excellent way to get money into superannuation quickly. And now that the age limit has reduced to 55 from 60, more people have an opportunity to use this strategy if it suits their needs.

What’s a ‘downsizer’ contribution?

If you are aged 55 years or older, you can contribute $300,000 from the proceeds of the sale of your home to your superannuation fund.

Downsizer contributions are excluded from the existing age test, work test, and the transfer balance threshold (but are 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 and 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).

Sale proceeds contributed to superannuation under this measure count towards the Age Pension assets test. Because a downsizer contribution can only be made once in a lifetime, it is important to ensure that this is the right option for you.

Let’s look at the eligibility criteria:

• You are 55 years or older (from 1 January 2023) at the time of making the contribution.
• The home was owned by you or your spouse for 10 years or more prior to the sale – the ownership period is generally calculated from the date of settlement of purchase to the date of settlement of sale.
• The home is in Australia and is not a caravan, houseboat, or other mobile home.
• The proceeds (capital gain or loss) from the sale of the home are either exempt or partially exempt from capital gains tax (CGT) under the main residence exemption, or would be entitled to such an exemption if the home was a post-CGT asset rather than a pre-CGT asset (acquired before 20 September 1985). Check with us if you are uncertain.
• You provide your super fund with the Downsizer contribution into super form (NAT 75073) either before or at the time of making the downsizer contribution.
• The downsizer contribution is made within 90 days of receiving the proceeds of sale, which is usually at the date of settlement.
• You have not previously made a downsizer contribution to super from the sale of another home or from the part sale of your home.

Do I have to buy another smaller home?

The name ‘downsizer’ is a bit of a misnomer. To access this measure 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.

The ATO’s final position on risky trust distributions

The ATO has released its final position on how it will apply some integrity rules dealing with trust distributions – changing the goal posts for trusts distributing to adult children, corporate beneficiaries, and entities with losses. As a result, many family groups will pay higher taxes because of the ATO’s more aggressive approach.

Section 100A

The tax legislation contains an integrity rule, section 100A, which is aimed at situations where income of a trust is appointed in favour of a beneficiary, but the economic benefit of the distribution is provided to another individual or entity. For section 100A to apply, there needs to be a ‘reimbursement agreement’ in place at or before the time the income is appointed to the beneficiary. Distributions to minor beneficiaries and other beneficiaries who are under a legal disability are not impacted by these rules.

If trust distributions are caught by section 100A, this generally results in the trustee being taxed on the income at penalty rates rather than the beneficiary being taxed at their own marginal tax rates.

While section 100A has been around since 1979, until recently there has been relatively little guidance on how the ATO approaches section 100A. This is no longer the case and the ATO’s recent guidance indicates that a number of scenarios involving trust distributions could be at risk.

For section 100A to apply:

• The present entitlement (a person or an entity is or becomes entitled to income from the trust) must relate to a reimbursement agreement;
• The agreement must provide for a benefit to be provided to a person other than the beneficiary who is presently entitled to the trust income; and
• A purpose of one or more of the parties to the agreement must be that a person would be liable to pay less income tax for a year of income.

High risk areas

Until recently many people have relied on the exclusions to section 100A which prevent the rules applying when the distribution is to a beneficiary who is under a legal disability (e.g., a minor) or where the arrangement is part of an ordinary family or commercial dealing (the ‘ordinary dealing’ exception). It is the ordinary dealing exception that is currently in the spotlight.

For example, let’s assume that a university student who is over 18 and has no other sources of income is made presently entitled to $100,000 of trust income. The student agrees to pay the funds (less tax they need to pay to the ATO) to their parents to reimburse them for costs that were incurred when the student was a minor. This situation is likely to be considered high risk if the student is on a lower marginal tax rate than the parents because the parents are receiving the real benefit of the income.

The ATO is also concerned with scenarios involving circular distributions. For example, this could occur when a trust distributes income to a company that is owned by the trust. The company then pays dividends back to the trust, which distributes some or all of the dividends back to the company. And so on. The ATO views these arrangements as high risk from a section 100A perspective.

Common scenarios identified as high risk by the ATO include:

• The beneficiary is a company or trust with losses and the beneficiary is not part of the same family group as the trust making the distribution.
• A company or trust which is entitled to distributions from the trust returns the funds to the trustee (i.e., circular arrangements).
• The beneficiary is issued units by the trustee of the trust (or a related trust) with the amount owed for the units being set-off against the entitlement and where the market value of the units is less than the subscription price or the trustee is able to do this without the consent of the beneficiary.
• Adult children are made presently entitled to income, but the funds are paid to a parent in relation to expenses incurred before the beneficiary turned 18.

Where to from here?

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

The ATO’s new approach applies to entitlements before and after the publication of the new guidance but for entitlements arising before 1 July 2022, the ATO will not generally pursue these if they are either low risk under the new guidance, or if they comply with the ATO’s previous guidance on trust reimbursement agreements.

SMSF reporting changes from 1 July 2023

If you have an SMSF with a total balance of less than $1 million, from 1 July 2023 you will need to report quarterly to the ATO instead of annually. Previously, SMSFs with a balance under $1m reported annually at the same time as lodging the SMSF annual return.

Quote of the month

“Begin with the end in mind.”

Stephen Covey

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

Markets

Local: The ASX200 index fell -2.4% over February, as the RBAs 25 bps rate hike to 3.35% placed pressure on the already decelerating economy.

Global: The S&P 500 also lost momentum, dropping -2.4%. The Dow Jones Industrial Average fell -4.19% for the month and was down -1.48% YTD.

Gold: Gold prices fell strongly by US $105.25 to US $1,819, on increased scarcity driven by the sector’s requirement to replenish resource inventories of wasting assets and the lack of new discoveries.

Iron Ore: Iron Ore price fell $3.00 to US $126 /Mt on flat demand and a soft Chinese property market.

Oil: Brent Oil price also fell by $2.04 to US $82.45 /bbl fuelled by a stronger USD.

Property

Housing: CoreLogic’s Home Value Index (HVI) recorded a sharp reduction in the rate of decline through February.

The national index declined -0.14% over the month, the smallest monthly fall since May 2022 (-0.13%), when rate hikes commenced.

A 0.3% rise in Sydney dwelling values was the most significant driver of the national deceleration, however, the loss of downwards momentum was broad-based. Darwin (-0.3%) was the only capital city to record a steeper monthly fall in February, albeit from relatively flat conditions previously. Every other capital city except Hobart (-1.4%) saw housing values fall by less than half a per cent over the month.

CoreLogic’s research director, Tim Lawless, said “The past four weeks have seen the flow of new capital city listings tracking -17.0% lower than a year ago and -11.9% below the previous five-year average, this trend towards a below average flow of new listings has been evident since September last year, coinciding with a loss of momentum in the rate of value decline.”

Economy

Interest Rates: The RBA Cash rate has now had 10 consecutive rate rises. A rise of 0.25% at the start of March has pushed the cash rate to 3.6%. Further increases are likely in the months ahead.

Retail Sales: In January retail sales in Australia rose by 1.9% MoM and rose 7.5% compared with January 2022.

Bond Yields: Australian government 10-year bond moved in reaction to tightening monetary policy, selling off 30bps to 3.86%. The US 10-year bond also sold off 39bps to 3.92%, in reaction to stronger than expected economic data.

Exchange Rate: The Aussie dollar fell over February against both the American dollar to finish the month at $0.675, and the Euro at $0.637.

Bitcoin: Bitcoin moved just 0.03% last month in US dollar terms, making February 2023 its least volatile in history. Bitcoin finished the month at US $23,410.

Inflation: The monthly Consumer Price Index (CPI) indicator rose 7.4% in the year to January 2023, Michelle Marquardt, ABS Head of Prices Statistics, said “This month’s annual increase of 7.4% is lower than the 8.4% rise for the year to December 2022. It is, however, the second highest annual increase since the start of the monthly CPI indicator series in September 2018, signifying ongoing high inflation.”

Consumer Confidence: The Westpac-Melbourne Institute Consumer Sentiment Index fell 6.9% from 84.3 in January to 78.5 in February. After a modest rally through the Christmas-New Year period, consumer confidence has fallen sharply to be back near the historic lows seen last November. Cost of living pressures and interest rate rises continue to weigh heavily. Hopes of some easing in both have been dashed by the strong December quarter CPI and the RBA’s resumption of its interest rate tightening cycle.

Employment: Australia’s seasonally adjusted unemployment rate unexpectedly increased to 3.7% in January 2023 from December’s near five-decade low of 3.5% and above market estimates of 3.5%. This was the highest jobless rate since last May, as the number of unemployed climbed by 21,900 to 523,200.

Purchasing Managers Index: The headline seasonally adjusted S&P Global Australia Manufacturing Purchasing Manager’s Index™ (PMI®) posted 50.5 in February, up from the neutral level of 50.0 in January. This signalled an improvement in the health of the Australian manufacturing sector in February, albeit only marginally.

US Services PMI: The Feb US Services PMI printed at a strong 55.1, above estimates of 54.5 and nearly the same as January. New orders, which surprised last month, rose again by 2.2 points to 62.6.

US Global Manufacturing PMI: The S&P Global Manufacturing PMI for the US was revised lower to 47.3 in February of 2023 from a preliminary of 47.8 and compared to 46.9 in January. The reading showed manufacturing activity shrank for a fourth consecutive month, amid further contractions in output and new orders, although rates slowed in both instances. Weak domestic and foreign client demand reportedly drove a further drop in total new sales as firms adjusted their spending activity and inventory holdings down accordingly.

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

Comments

Chinas Reopening

China underwent one of the world’s longest, and strictest, COVID management policies. Snap lockdowns of entire cities weakened consumer spending and disrupted supply chains were key features of the Chinese economy in 2022. This saw China’s economy grow by only 3% in 2022 – it’s worst performance in nearly half a century.

The abrupt end of China’s zero COVID policy was announced in December, and after 1,016 days China re-opened their borders to the world on the 8th of January. Already, this reopening has shifted the dial on global economic sentiment. The Economist magazine says that “China’s reopening will be the biggest economic event of 2023”. The IMF’s latest World Economic Outlook paints the outlook as ‘less gloomy’ than previously forecast, largely thanks to China’s sudden reopening.

China is expected to be a significant engine of global economic growth in 2023 and 2024. China and India alone are expected to account for around half of global growth this year, versus just a tenth for the US and Euro area combined.

Chart: Contributions to world GDP growth

Yang Jianwen, an economist at the Shanghai Academy of Social Sciences, said property and consumption were the “two biggest issues” China needed to solve. Shanghai was well-placed to tackle both, he said, adding that the city’s real estate market was “not under great pressure”.

Importantly though, consumer spending figures during the Lunar New Year period are already looking up. This is a much-needed boost for China after December retail figures contracted 1.8%, marking the third consecutive monthly decline. Box office tickets and searches for travel improved, signalling the start of a consumer bounce back over 2023 as savings loaded consumers return to old spending habits.

The rest of the world is also gearing up for China’s reopening. At an otherwise very difficult time for the global economy, the global outlook is supported by a re-engaged China. With no more restrictions, there is the potential for supply chain disruptions to ease considerably over the year.

Last week’s RBA Statement on Monetary Policy noted “the earlier opening of the Chinese economy is supporting Australia’s terms of trade and national income”.

China’s reopening will also have important implications for two key exports: international education and tourism. Australia was a popular destination for both pre-COVID, with 1.4 million short term visitors from China in 2019 (an average of 120,000 per month) and 212,000 Chinese students in 2019.

COVID border closures hit tourism particularly hard with only 9,000 short term visitor arrivals from China in November 2022, only a sliver of the pre-COVID monthly average. International student numbers fell to 155,000 in 2022 as pre-COVID students finished their courses and fewer new students replaced them.

Both exports are expected to have big upsides in 2023, though the timing of this resurgence is unclear. China is facing long delays in processing passports and visas as well as sky rocketing flight prices. These are both globally competitive markets, as other countries vie for the same boost to education and tourism as Australia.

Sources: AFR, Deloitte

The Fixed Interest Rate Cliff

Mortgage rates fell dramatically during the pandemic. This was particularly the case for debt on ‘fixed’ terms (where payments are held steady for a specified period). Short-term fixed loan rates averaged as low as 1.95% in May 2021 for owner-occupiers, as bank funding costs plunged in line with the RBA’s temporary Term Funding Facility and fierce competition among lenders.

Fixed term home lending has historically comprised around 15% of new home loans, however as fixed interest rates plunged to record lows, fixed term home lending surged to 46.0% of new mortgage commitments in July and August of 2021. The RBA October Financial Stability Review noted that about 35% of outstanding housing credit was on fixed terms. This included the fixed component of split loans, so not all of these fixed loans represent the entire debt value of housing purchases.

The RBA noted in the Financial Stability Review that around two thirds of the 35% outstanding fixed mortgage debt would expire in 2023. Hence the ‘cliff’: around 23% of all outstanding mortgage debt will be re-priced over the course of the year, and re-priced at a much higher rate. When fixed terms come to an end, borrowers will need to refinance their loan. Factoring in another 50 basis points of rate hikes over March and April, average variable rates could be around 5.7% for owner-occupiers and over 6.0% for investors.

As more fixed loans revert to variable rates, there is likely to be some challenge to serviceability. Interest rates have risen beyond 3 percentage points for many borrowers, which is the minimum serviceability buffer recommended by APRA in assessing whether someone can repay their debt.

Stretched serviceability could be compounded by an increase in the unemployment rate this year along with higher than budgeted household costs due to high inflation. A rise in distressed sales could also put added downward pressure on property values. If people are forced to sell their home in a declining market, there is the added risk of being unable to recover mortgage debt from the sale of a home.

Looking ahead, there’s no escaping that Australians with fixed-rate loans are about to see a painful adjustment. This is partly the intention of rising rates, as households have to curb spending in response to higher interest costs. So far, listings data and arrears data suggest there is minimal impact on the housing market from defaults. However, the true test of the market will be over the next ten months.

Sources: CoreLogic, RBA

How Does Tax Apply to Electric Cars?

Just in time for the Fringe Benefits Tax (FBT) year that started on 1 April, the Australian Taxation Office (ATO) has released new details on electric vehicles.

The FBT exemption for electric cars

If your employer provides you with the use of a car that is classified as a zero or low emissions vehicle there is an FBT exemption that can potentially apply to the employer from 1 July 2022, regardless of whether the benefit is provided in connection with a salary sacrifice arrangement or not. The FBT exemption should normally apply where:

• The value of the car is below the luxury car tax threshold for fuel efficient vehicles ($84,916 (GST Inclusive) for 2022-23) when it was first purchased. If you buy an EV second-hand, the FBT exemption will not apply if the original sales price was above the relevant luxury car tax limit; and
• The car is both first held and used on or after 1 July 2022. This means that the car could have been purchased before 1 July 2022, but might still qualify for the FBT exemption if it wasn’t made available to employees until 1 July 2022 or later.

The exemption also includes associated benefits such as:

• Registration
• Insurance
• Repairs or maintenance, and
• Fuel, including electricity to charge and run the vehicle.

But, it does not include a charging station (see How do the tax rules apply to home charging units?).

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.

Who the FBT exemption does not apply to

By its nature, the FBT exemption only applies where an employer provides a car to an employee. Partners of a partnership and sole traders are not employees and cannot access the exemption personally.

If you are a beneficiary of a trust or shareholder of a company, the exemption can only apply if the benefit is provided in your capacity as an employee or as a director of the entity (you need to be able to show you have an active role in the running of the entity).

How do the tax rules apply to home charging units?

The ATO has confirmed that charging stations don’t fall within the scope of the FBT exemption for electric cars. This means that FBT could be triggered if an employer provides a charging unit to an employee.

If an employee purchases a home charging unit then it might be possible to claim depreciation deductions for the cost of the unit over a number of income years if the unit is used to charge a vehicle that is used for income producing purposes. However, if an employee is only using the vehicle for private purposes then the cost of the charging unit is a private expense and not deductible.

What about the cost of electricity?

A friend of mine travels a lot for work and used to rack up large travel expenses…right up until he switched to an electric vehicle. Now it costs him 3 cents per km in electricity.

Because it is often difficult to distinguish home electricity usage, the ATO has set down a rate of 4.20 cents per km for running costs for EVs provided to an employee (from 1 April 2022 for FBT and 1 July 2022 for income tax).

If you use this rate, you cannot also claim any of the costs associated with costs incurred at commercial charging stations. It is one or the other, not both.

You also have the option of using actual electricity costs if you can calculate them accurately.

Selling a business? The pros and cons of earn-out clauses

Earn-out clauses for the sale of a business are increasingly common. We look at the positives and negatives that every business owner should consider.

Business transactions often include earn-out clauses where the vendors ‘earn’ part of the purchase price based on the performance of the business post the transaction. Typically, an earn-out will run for a period of one to three years post transaction date.

There are two main reasons to include an earn-out in a sale:

1. To bridge a gap in the sale price expectations between the vendor and the purchaser. The earn out represents an ‘at risk’ form of consideration. If the business produces the result, the vendors are rewarded through a higher sale price.
2. To incentivise the vendors who are continuing to work in the business and maintain the growth momentum of the business post sale.

Advantages of earn-outs include:

• The ultimate sale price has a performance component to it – both buyer and seller benefit.
• May assist in achieving a sale where a price impasse would otherwise prevent the sale.
• If the calculation of the earn-out is transparent and easily measurable, there should be no dispute between the parties.
• Creates equity where the business has lagging income, new business initiatives in play at the time of sale or a high growth rate.
• The incremental sale price can be effectively funded by the business out of realised growth.

The key to an effective earn-out is in their construction, both from a commercial and a legal perspective. Get them right and they can enhance the continuity and succession of a business.

What sharing platforms are sharing with the ATO

From 1 July 2023, a new reporting regime will require platforms that enable taxi services including ride sourcing, and short-term accommodation to report their transactions to the ATO each year. From 1 July 2024, the regime will expand to include all other platforms.

While the legislative instrument for the reporting regime is still in draft (see LI 2022/D27), it is expected that platform providers will report their transactions to the ATO every six months.

What information on sellers will the ATO know?

The platforms will submit data on the sellers for transactions on their platform including:

• ABN and business / trading name (where applicable)
• First, middle and surname/family name (for individuals)
• Date of birth (for individuals)
• Residential or business address
• Email address and telephone numbers
• Bank account details.
• And, for platforms facilitating short-term accommodation:
• Listed property name
• Listed property address
• Number of nights booked.

In addition, the platforms will provide aggregate quarterly data on the value of transactions, industry types, total gross income etc.

The reporting regime does not include platforms that simply match suppliers to sellers and are not engaged in the transaction such as quotes for hiring tradies where the job is not accepted through the website.

Company money: A guide for owners for owners

When you start up a business, inevitably, it consumes not just a lot of time but a lot of cash and much of this is money you have already paid tax on. So, it only seems fair that when the business is up and running the business can pay you back. Right?

There a myriad of ways owners look for payback from a company they have invested their time and money into it from dividends, salary and wages, jobs for sometimes underqualified family members to cash advances and personal expenses like school fees and nights out picked up as a company expense. But, once the cash is in the company, it is company money.

We look at the flow of money in and out of a company and the problems that trip business owners up.

Repaying money loaned to the company

If you have lent money to your company, you can draw this money back out as a loan repayment. The loan repayment is not deductible to the company but any interest payments made to you will be as long as the borrowed money has been used in the company’s business activities (assuming interest has actually been charged on the loan).

Conversely, any repayments made by the company on the loan principal are not income for tax purposes but you will need to declare any interest earned in your income tax return. All loans, including the loan term and repayments, should be documented.

Dividends: Paying out profits

Dividends basically represent company profits being paid out to the shareholders of a company. If the company has franking credits from income tax it has paid, the dividends might be franked and the credits can often be used by the shareholder to reduce their personal tax liability.

When a dividend is paid by a private company it must provide a distribution statement to the shareholders within four months after the end of the financial year. This gives private companies up to four months after the end of the financial year to work out the extent to which dividends will be franked.

If any of the shares in the company are held by a discretionary trust then there are some additional issues that will need to be considered, including whether the trust has a positive amount of net income for the year, whether the trust has made a family trust election for tax purposes and who will become entitled to distributions made by the trust for that year.

Repaying share capital

Many private companies are set up with a relatively small amount of share capital. However, if a company has a larger share capital balance then there might be scope for the company to undertake a return of share capital to the shareholders. Whether this is possible will depend on the terms of the company constitution and there are some corporate law issues that need to be addressed.

From a tax perspective, a return of share capital will normally reduce the cost base of the shares for CGT purposes, which means that a larger capital gain could arise on future sale of the shares but there won’t necessarily be an immediate tax liability. Having said that, there are some integrity rules in the tax system that need to be considered. The risk of these rules being triggered tends to be higher if the company has retained profits that could be paid out as dividends.

Shareholder loans, payments and forgiven debts: Using company money

There are some rules in the tax law (known as Division 7A) that determine how money taken out of a company is treated. Division 7A is a particularly tricky piece of tax law designed to prevent business owners accessing funds in a way that circumvents income tax. While amounts taken from a company bank account by the owners are often debited to a shareholder’s loan account in the financial statements, Division 7A ensures that any payments, loans, or forgiven debts are treated as if they were dividends for tax purposes unless there is a loan agreement in place which meets certain strict requirements. These ‘deemed’ dividends cannot normally be franked.

If you have taken money out of the company bank account then the main ways of avoiding this deemed dividend from being triggered are to ensure that the loan is fully repaid or placed under a complying loan agreement before the earlier of the due date and actual lodgement date of the company’s tax return for that year. To be a complying loan agreement the agreement requires minimum annual repayments to be made over a set period of time and there is a minimum benchmark interest rate that applies – currently 4.77% for 2022-23.

For example, if your company is paying school fees for your kids, or you take money out of the company bank account to pay down your personal home loan, if you don’t pay back this amount or put a complying loan agreement in place then this amount is likely to be treated as a deemed unfranked dividend. That is, you need to declare this amount in your personal income tax return as if it was a dividend and without the benefit of any franking credits. This means that even though the company might have already paid tax on this amount, you will be taxed on it again without the ability to claim a credit for the tax already paid by the company (causing double taxation of the same company profits).

The rules are very strict when it comes to loan repayments. If a repayment is made but the same amount or more is loaned to the shareholder shortly afterwards then there are some special rules that can apply to basically ignore the repayment. There are some exceptions to these rules and the position needs to be managed carefully to avoid adverse tax implications.

Update: Tax on super balances above $3m

In a very quick turnaround from announcement to draft legislation, Treasury has released the exposure draft legislation for consultation to enact the Government’s intention to impose a 30% tax on future superannuation fund earnings where the member’s total superannuation balance is above $3m.

The draft legislation confirms the Government’s intention to:

• Impose the tax on member accounts with superannuation balances above $3 million from 1 July 2025 (not indexed); and
• Apply the additional 15% tax to ‘unrealised gains’. This will mean that a tax liability will arise if the value of the assets goes up

Currently, all fund income is taxed at either 15%, or 10% for capital assets that have been held by the fund for more than 12 months. Unrealised gains, that is gains that are made because of changes in value, gains on paper, are not currently taxed – only when the gain is realised on sale or disposal of the asset.

If enacted, the legislation would mean that those impacted, could be paying tax on gains in value but without the cash from a sale to support the tax payment.

Budget 2023-24

The 2023-24 Federal Budget will be released on Tuesday, 9 May 2023. Look out for our update the next day on the important issues to you, your superannuation and your business.

Little has been released to date on the impending Budget beyond the tax on super balances above $3m and the decision not to extend the temporary $1,500 low and middle income tax offset beyond 30 June 2023.

Cost of living is a focus but on this, the Government is walking a tightrope between easing pressure without increasing inflation.

In the election cycle, if there is going to be a tightening, the mid-term Budgets are the time to do it. The Government will undoubtedly look at concessions provided within the tax system and whether those concessions meet their stated objective and when it comes to spending, potentially redraw the allocations. Some of the areas to watch include:

• The legislated stage three tax cuts, that collapse the 32.5% and 37% tax brackets to a single rate of 30% for those with assessable income between $45,000 and $200,000 are not due to commence until 1 July 2024. The Government committed to keeping the tax cuts during the election and can bypass the issue until the 2024-25 Budget, but we’ll see.
• Provision for announced defence spending.

Active support to develop a viable clean energy industry and transition to clean energy (see the joint submission from the Business Council of Australia, Australian Council of Trade Unions, World Wide Fund for Nature-Australia and the Australian Conservation Foundation).

• Productivity measures – Temporary full expensing – the productivity measure designed to encourage business investment that enables a business to fully expense the cost of depreciable assets in the first year of use – is set to expire on 30 June 2023. The Government will either extend, redevelop the small business instant asset write-off, or remove the concession altogether.

Technology and training boosts – In the 2022-23 Federal Budget, the former Government announced that it would provide certain business taxpayers with ‘bonus’ tax deductions for investing in employee training or improving digital operations. The Skills and Training Boost allows small businesses (aggregated turnover less than $50 million) to claim a 120% deduction for eligible expenditure incurred on external training for employees between 29 March 2022 and 30 June 2024. The Technology Investment Boost provides a 120% deduction for eligible expenses that are incurred for the purposes of improving digital operations or digitising business operations. This can include the cost of depreciating assets. The boost is aimed at costs incurred between 29 March 2022 and 30 June 2023 and is limited to a maximum bonus deduction of $20,000. But, the legislation enabling both boosts has not passed Parliament. There is an opportunity in the Budget to extend the scope and nature of the concession.

Quote of the month

“Intellectuals solve problems, geniuses prevent them.”

Albert Einstein

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.

‘Ace in the Hole’ Budget 2023-24

The ‘ace in the hole’ of the 2023-24 Federal Budget was the $4.2bn surplus; the first in 15 years.

The surplus was driven by a surge in the corporate and individual tax take. High commodity prices, inflation, and high employment have all pushed up corporate and individual tax receipts. But the gains can’t be relied on long term. The Budget is expected to deliver a deficit of $13.9 billion in 2023-24, and a $35.1bn deficit in 2024-25.

Social initiatives dominated the Budget:

• Energy bill relief for some households and small business
• Encouraging doctors to offer bulk billing by tripling the incentive for children under 16, pensioners and other Commonwealth card holders
• Increases to commonwealth rent assistance
• Increases to JobSeeker and other income support payments
• Expanding access to the single parenting payment

The legislated stage 3 tax cuts legislated to take effect on 1 July 2024 remain in place. Stage 3 radically simplifies the tax brackets by collapsing the 32.5% and 37% rates into a single 30% rate for those earning between $45,001 and $200,000.

For small business, the instant asset write-off will enable multiple assets of up to $20,000 to be written-off in the year of purchase.

What wasn’t in the Budget?

There was no mention of the loss carry back rules for companies, suggesting that these rules will expire on 30 June 2023, along with the temporary full expensing rules. The loss carry back rules allow eligible companies to apply tax losses against taxable profits made in certain previous income years, rather than carrying them forward to future years.

There is no mention of the simplification of Division 7A – Division 7A captures situations where shareholders access company profits in the form of loans, payments or the forgiveness of debts. The 2016-17 Federal Budget proposed changes to reduce the compliance burden of Division 7A. These changes were initially meant to apply from 1 July 2018 but were deferred a number of times, before the Government announced that any changes would commence from the start of the income year following the date on which the changes receive Royal Assent. Aside from a Treasury discussion paper released back in October 2018, this issue remains in limbo.

The Budget also doesn’t refer to either the Skills and Training Boost or the Technology Investment Boost. These measures, announced by the previous Government, would provide a bonus deduction equal to 20% of qualifying expenditure if the legislation containing these measures is passed in its current form (Treasury Laws Amendment (2022 Measures No. 4) Bill 2022). The Technology Investment Boost is aimed at expenditure incurred between 7:30pm (ACT) on 29 March 2022 and 30 June 2023. The Skills and Training Boost is aimed at expenditure incurred between 7:30pm (ACT) on 29 March 2022 and 30 June 2024.

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

As always, we’re here if you need us!

Doug Tarrant

Principal
Level One Business and Financial Advisers

T: 02 4227 6744

E:

Individuals & families

Energy price plan relief

$1.5bn has been provided over 5 years to provide targeted energy bill relief and progressing gas market reform.

The Energy Bill Relief Fund will provide targeted energy bill relief to eligible households and small business customers, which includes pensioners, Commonwealth Seniors Health Card holders, Family Tax Benefit A and B recipients and small business customers of electricity retailers.

In partnership with the states and territories, the plan is expected to deliver up to $500 in electricity bill relief for eligible households and up to $650 for eligible small businesses.

Funding has also been provided to the ACCC to enforce the temporary cap of $12 per gigajoule on the price of gas and to develop and implement a mandatory gas code of conduct. And, funding for Australian Energy Regulator to monitor coal and gas markets across the National Electricity Market.

The Government expects that retail electricity price increases in 2023-24 will be around 25% smaller and retail gas price increases around 16% smaller as a result of their interventions.

Household energy upgrade fund

A $1.3bn Household Energy Upgrades Fund will be established to support home upgrades that improve energy performance. No, the Government is not giving out cash for upgrades but providing $1bn to the Clean Energy Finance Corporation to provide low-cost finance and mortgages in partnership with private financial institutions for home upgrades that save energy.

$300m is committed to upgrading social housing in collaboration with states and territories. And, over $36m to upgrade the energy ratings systems.

Incentive to provide Medicare bulk billing to concession card holders and children

As previously announced, the bulk billing incentive benefits for consultations for Commonwealth concession card holders and patients aged under 16 years of age will be tripled from 2022-23.

Less people to pay Medicare Levy

The Medicare levy low-income thresholds for singles, families and seniors and pensioners will increase from 1 July 2022.

For each dependent child or student, the family income thresholds will increase by a further $3,760 instead of the previous amount of $3,619.

Exempting lump sum payments in arrears from Medicare Levy

The Government will introduce a technical amendment to ensure that low income earners who receive eligible lump sum payments are not subject to a higher amount of the Medicare Levy. For example, if an individual receives a lump sum compensation payment for underpaid wages.

To qualify, taxpayers must be eligible for a reduction in the Medicare levy in the 2 most recent years to which the lump sum accrues. Taxpayers must also satisfy the eligibility requirements of the existing lump sum payment in arrears tax offset, including that a lump sum accounts for at least 10% of the taxpayer’s income in the year of receipt.

Increasing JobSeeker

The Government will increase support for people receiving working age payments including JobSeeker.

The base rate of working age and student payments will increase by $40 per fortnight from 20 September 2023. The increase applies to the JobSeeker Payment, Youth Allowance, Parenting Payment (Partnered), Austudy, ABSTUDY, Disability Support Pension (Youth), and Special Benefit.

In addition, eligibility for the existing higher single JobSeeker Payment rate for recipients aged 60 years and over will be extended to recipients aged 55 years and over who are on the payment for 9 or more continuous months.

Single parent payment increase

As previously announced, the age cut-off for the Parenting Payment (Single) will increase from 8 to 14.

From 20 September 2023, (subject to the passage of legislation), single parents will no longer have to transfer to JobSeeker when their youngest child turns eight. Instead, they will continue to receive the higher support, with a current base rate of $922.10 per fortnight until their youngest child turns 14.

As a result, eligible single parents currently on JobSeeker will receive an increase to payments of $176.90 per fortnight.

Single parents moving to Parenting Payment (Single) will also benefit from more generous earning arrangements compared to JobSeeker. Eligible single parents with one child will be able to earn an extra $569.10 per fortnight, plus an extra $24.60 per additional child, before their payment stops.

Resources

Media Release: Extending the financial safety net for single parents

Increased rent assistance

The maximum rates of the Commonwealth Rent Assistance (CRA) allowances will increase by 15% from 2022-23.

Scheme enabling pensioners to earn more extended

The measure enabling age pensioners and veterans to earn more money before their pension is reduced has been extended for another 6 months, until 31 December 2023.

Under this measure, pensioners can earn up to $11,800 before their pension is reduced.

In-home aged care increase

An additional 9,500 Home Care Packages will be available in 2023-24. The $338.7m package also includes a trial to test products and services for a new assistive technologies loan program, commencing in July 2024 within 2 states and territories.

Access to home guarantee scheme expanded to friends and siblings

As previously announced, from 1 July 2023, access to the Government’s Home Guarantee Scheme will be expanded to joint applications from “friends, siblings, and other family members” and to those who have not owned a home for at least 10 years.

Superannuation & investors

Clarifying the non-arms length income rules for super funds

The non-arms length income (NALI) rules prevent superannuation trustees artificially increasing the balance of the fund, and accessing preferential tax treatment on the higher amount, by failing to recognise expenses incurred by the fund provided by a related party at a reduced rate. For example, your brother is a qualified accountant and does all of your SMSF’s accounting work for free (that he would normally charge $5k for).

Currently, where expenses incurred by the fund are not at arm’s length and below market rates, any income derived could be deemed to be non-arm’s length income and taxed at the top marginal tax rate. Expenses are divided into two categories, general and specific. General expenses relate to all of the income of the fund, for example accounting and audit fees. Specific expenses relate to a specific asset such as maintenance expenses on a property owned by an SMSF.

A Treasury consultation paper released in January 2023 recommended amendments to the way NALI is dealt with. The consultation recommended capping the amount of fund income taxable as NALI to 5 times the amount of the breach. The Budget confirms this cap to twice the level of a general expense.

In addition, fund income taxable as NALI will exclude contributions.

Expenditure that occurred prior to the 2018-19 income year will be exempt.

And, as per the consultation, large APRA regulated funds will be exempted from the NALI provisions for both general and specific expenses of the fund.

Confirmed 30% tax on super earnings above $3m

An additional tax of 15% on earnings will apply to individuals with a total superannuation balance over $3 million at the end of a financial year from 1 July 2025. The definition of total superannuation balance (TSB) for the new tax uses the current definition and includes amounts in retirement phase pensions.

The calculation for the tax aims to capture growth in TSB over the financial year allowing for contributions (including insurance proceeds) and withdrawals. This method captures both realised and unrealised gains, enabling negative earnings to be carried forward and offset against future years.

Interests in defined benefit schemes will be appropriately valued and will have earnings taxed under this measure in a similar way to other interests.

Individuals will have the choice of paying the tax personally or from their superannuation fund and those with multiple accounts can nominate which fund will pay the tax.

This measure is estimated to increase tax receipts by $950m and increase payments by $47.6m over the 5 years from 2022-23.

Business & employers

$20,000 small business instant asset write-off

Small businesses, with an aggregated turnover of less than $10 million, will be able to immediately deduct the full cost of eligible depreciating assets costing less than $20,000 that are first used or installed ready for use between 1 July 2023 and 30 June 2024.

“Immediately deductible” means a tax deduction for the asset can be claimed in the same income year that the asset was purchased and used (or installed ready for use).

If the business is registered for GST, the cost of the asset needs to be less than $20,000 after subtracting the GST credits that can be claimed for the asset. If the business is not registered for GST, it is $20,000 including GST.

The write-off applies per asset, so a small business can deduct the cost of multiple assets.

The rules only apply to assets that fall within the scope of the depreciation provisions. Expenditure on capital improvements to buildings that falls within the scope of the capital works rules is not expected to qualify.

Assets valued at $20,000 or more (which cannot be immediately deducted) can continue to be placed into the small business simplified depreciation pool and depreciated at 15% in the first income year and 30% each income year thereafter.

The provisions that prevent small businesses from re-entering the simplified depreciation regime for 5 years if they opt-out will continue to be suspended until 30 June 2024. This will be particularly relevant to small business entities that chose to leave the simplified depreciation system in order to opt-out of applying the temporary full expensing rules to one or more specific assets.

This announcement effectively confirms that the temporary full expensing rules, which have provided an immediate deduction for the full cost of assets acquired from 6 October 2020, will come to an end on 30 June 2023. Small business entities that are considering acquiring depreciating assets with a cost of $20,000 or more and business entities with aggregated turnover of $10 million or more should keep this cut-off date in mind as 30 June 2023 approaches.

$20,000 small business incentives for energy efficiency

As previously announced, the Small Business Energy Incentive provides an additional deduction of 20% of the cost of eligible depreciating assets that support electrification and more efficient use of energy.

Up to $100,000 of total expenditure will be eligible, with a maximum bonus deduction of $20,000.

The incentive is available to small and medium businesses with aggregated annual turnover of less than $50 million.

While the full detail of what qualifies for the incentive is not yet available, it is expected to apply to a range of depreciating assets and upgrades to existing assets such as electrifying heating and cooling systems, upgrading to more efficient fridges and induction cooktops, and installing batteries and heat pumps.

Some exclusions will apply including electric vehicles, renewable electricity generation assets, capital works, and assets that are not connected to the electricity grid and use fossil fuels.

Eligible assets or upgrades will need to be first used or installed ready for use between 1 July 2023 and 30 June 2024 to qualify for the bonus deduction.

Resources

Media Release: Small Business Energy Incentive

Lowering tax instalments for small business

Normally, GST and PAYG instalment amounts are adjusted using a GDP adjustment or uplift.

In 2022-23, the Government reduced this uplift factor to 2% instead of the 10% rate that would have applied. And now for 2023-24, the Government has set the uplift factor to 6% instead of the 12% rate that would have applied.

The 6% uplift rate will apply to small to medium enterprises eligible to use the relevant instalment methods for instalments for the 2023-24 income year and are due after the amending legislation comes into effect:

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

‘Payday’ super – Increasing payment frequency of employee super

As previously announced, from 1 July 2026, employers will be required to pay their employees’ super guarantee entitlements on the same day that they pay salary and wages.

Currently, SG is paid quarterly.

The Government will undertake a consultation process with the aim of providing details of the final design of the measure in the 2024-25 Federal Budget.

Resources

Media Release: Introducing payday super

Hybrid cars excluded from FBT exemption for electric cars

As previously announced, plug-in hybrid electric cars will be excluded from the fringe benefits tax (FBT) exemption for eligible electric cars from 1 April 2025.

Arrangements entered into between 1 July 2022 and 31 March 2025 can remain eligible for the FBT exemption as long as the exemption applied to the car before 1 April 2025 and the employer has a financially binding commitment to continue providing private use of the car on and after this date.

Franked distributions funded by capital raisings start date

In 2016-17, the Government announced that it would seek to prevent shareholders from taking advantage of franking credits attached to dividends that are funded by capital raisings. The Budget confirms the Government’s intention to pursue this measure with a revised start date of 15 September 2022.

Under the measure, a distribution (dividend) paid by an entity will be treated as being funded by capital raising if:

• The distribution is not consistent with an established practice of the entity of making distributions of that kind on a regular basis;
• There is an issue of equity interests in the entity; and
• It is reasonable to conclude, having regard to all relevant circumstances, that either:
  • The principal effect of the issue of any of the equity interests was to directly or indirectly fund all or part of the distribution; or
  • An entity that issued or facilitated the issue of the interests did so for a purpose of funding all or part of the distribution.

The proposed changes seek to prevent the use of artificial arrangements where capital is raised to fund the payment of franked dividends to shareholders and therefore enable the distribution of franking credits. The Government is concerned that these arrangements can involve a manipulation of the system to allow existing shareholders to obtain the benefit of both the franking credits and the profits that generated those credits being retained in the company.

The effect of the proposed amendments is that direct or indirect recipients of affected dividends are not entitled to a tax offset, and the amount of the franking credit is not included in the assessable income of the recipient. The dividends are also not exempt from non-resident withholding tax.

The application date of the original measure was to be 19 December 2016. It has now shifted to 15 September 2022.

This measure is contained in Treasury Laws Amendment (2023 Measures No. 1) Bill 2023, which was introduced to Parliament on 16 February 2023.

Tax breaks for build-to-rent developments

As previously announced, the Government is actively sweetening the deal for build-to-rent developments.

For eligible new build-to-rent projects where construction commences after 7:30pm AEST on 9 May 2023, the Government will:

• Increase the rate for the capital works tax deduction (depreciation) from 2.5% to 4% p.a.
• Reduce the final withholding tax rate on eligible fund payments from managed investment trust (MIT) investments from 30% to 15%.

The measure applies to build-to-rent projects where 50 or more apartments are made available to rent to the general public. The dwellings must be retained under single ownership for at least 10 years before being able to be sold and landlords must offer a lease term of at least 3 years for each dwelling.

The reduced MIT withholding tax rate for residential build-to-rent will apply from 1 July 2024. The Government will work through a consultation process to determine implementation details, including any minimum proportion of dwellings being offered as affordable tenancies and the length of time dwellings must be retained under single ownership.

Resources

Media Release: Billions to boost social and affordable rental homes

Cost of tobacco to increase from September

The tobacco excise and excise-equivalent customs duty will increase by 5% per year for 3 years from 1 September 2023 in addition to ordinary indexing.

In addition, the duty on products subject to the per kilogram excise and excise-equivalent customs duty (i.e., roll-your-own tobacco), will increase. The ‘equivalisation weight’ will be progressively lowered from 0.7 to 0.6 grams on 1 September each year from 2023, with the new weight coming fully into effect from 1 September 2026.

The measure is expected to increase receipts by $3.3bn and increase GST payments to the states and territories by $290m over the 5 years from 2022-23.

15% multi-national global and domestic minimum tax

The Government will implement key aspects of the OECD’s Two Pillar Solution introducing:

• A 15% global minimum tax for large multinational enterprises with the Income Inclusion Rule applying to income years starting on or after 1 January 2024 and the Undertaxed Profits Rule applying to income years starting on or after 1 January 2025.
• A 15% domestic minimum tax applying to income years starting on or after 1 January 2024.

The tax is based on the OECD Global Anti-Base Erosion Model Rules, which are designed to ensure large multinationals pay an effective minimum level of tax on the income arising in each jurisdiction where they operate.

The global minimum tax rules would allow Australia to apply a top up tax on a resident multinational parent or subsidiary company where the group’s income is taxed below 15%.

The global minimum tax and domestic minimum tax will apply to large multinationals

with annual global revenue of EUR750 million (approximately $1.2 billion) or more.

Heavy vehicle user charge increase

The Heavy Vehicle Road User Charge rate from 27.2 cents per litre of diesel by 6% per year over 3 years from 2023-24 to 32.4 cents per litre in 2025-26.

Tax law changes for general insurers

The introduction of the new accounting standard, AASB17 Insurance Contracts, by the Australian Accounting Standards Board, has meant that the tax law is no longer aligned with accounting standards. A legislative amendment will be made to enable general insurers to continue to use audited financial reporting information, which is calculated according to the new standard, as the basis for their tax returns.

Clean building MIT withholding tax concession extended

The clean building managed investment trust (MIT) withholding tax concession will be extended to eligible data centres and warehouses that meet the relevant energy efficiency standard, where construction commences after 7:30pm AEST on 9 May 2023.

This measure will also raise the minimum energy efficiency requirements for existing and new clean buildings to a 6-star rating from the Green Building Council Australia or a 6-star rating under the National Australian Built Environment Rating System. The Government will consult on transitional arrangements for existing buildings.

Tax treatment of exploration and mining, quarrying and prospecting rights

As previously announced, the Government will amend the Petroleum Resource Rent Tax (PRRT) to clarify that ‘exploration for petroleum’ is limited to the ‘discovery and identification of the existence, extent and nature of the petroleum resource’ and does not extend to ‘activities and feasibility studies directed at evaluating whether the resource is commercially recoverable’.

The tax treatment of depreciation deductions for mining, quarrying and prospecting rights will also be clarified to ensure that deductions will only commence when they are used (not merely held).

Bringing forward tax on natural gas

As previously announced, the Government will amend the Petroleum Resource Rent Tax (PRRT) to limit deductions and introduce a series of integrity measures for the offshore LNG industry. Consultation on the changes will occur later in 2023.

This measure is estimated to increase receipts by $2.4bn over the 5 years from 2022-23. The ATO will also be provided with $4.4 million to administer and ensure compliance.

Picking winners: Hydrogen industry

Over $2bn has been committed to accelerate the development of Australia’s hydrogen industry, catalyse clean energy industries, and help Australia connect to new global hydrogen supply chains.

The Hydrogen Headstart program will provide revenue support for investment in renewable hydrogen production through competitive production contracts, including funding for the Australian Renewable Energy Agency and the Department of Climate Change, Energy, the Environment and Water to support the development and operation of the program.

In a separate program, $38.2m has been provided for a Guarantee of Origin scheme, which will certify renewable energy and track and verify emissions from clean energy products – in particular hydrogen from 2023-24.

Resources

Media Release: Hydrogen Headstart to power new jobs & industry

Critical technology industry support

$116m over 5 years will support the development of critical technologies. This includes support for businesses to integrate quantum and artificial intelligence (AI) technologies into their operations through:

• A Critical Technologies Challenge Program supporting projects that use critical technologies to solve significant national challenges, and will commence with a focus on projects that use quantum computing
• Extending the National AI Centre and its role in supporting responsible AI usage
• Establishing an Australian Centre for Quantum Growth to support ecosystem growth and commercialisation in Australia’s quantum industry
• Supporting SME’s adoption of AI technologies to improve business processes and increase trade competitiveness.

In addition, a Powering Australia Industry

Growth Centre will develop advanced technology and skills as part of the Government’s Australian Made Battery Plan.

Support for child care workforce

A series of measures will support the Early Childhood Education and Care (ECEC) sector including:

• $34.4m over 5 years to subsidise ECEC services to backfill up to 75,000 early childhood educators, and training for teachers and directors.
• $33.1m over 5 years for financial assistance for up to 6,000 educators to undertake a paid practicum in initial teacher education courses at a bachelor or post-graduate level.
• $4.8m for up to 2,000 ECEC workers to undertake a practicum exchange at a different service.

15% pay increase for Aged Care Workers

$515m over 5 years will be provided to fund the outcome of the Fair Work Commission’s decision on the Aged Care Work Value Case – increasing award wages by 15% from 30 June 2023 for many aged care workers including registered nurses, enrolled nurses, assistants in nursing, personal care workers, home care workers, recreational activity officers, and some head chefs and cooks.

The increase will be partially offset by a temporary reduction in the residential aged care provision ratio from 78 places to 60.1 places per 1,000 people aged over 70 years.

Scrapped ‘Patent Box’ regime

The Patent Box regime was to provide a concessional effective corporate tax rate of 17% on income derived from patents, to the extent that the taxpayer undertakes the R&D of that patent in Australia. The patent box tax regime was originally announced for the medical and biotech industries, and later extended to agriculture and emissions.

All ‘patent box’ measures have now been scrapped.

Delayed Streamlining excise administration for fuel and alcohol

The start date for the 2022-23 March Budget measure to streamline fuel and alcohol excise compliance has been pushed back to 1 July 2024.

Film industry location offset

To attract investment from large-budget screen productions and provide domestic employment and training opportunities, the Location Offset rebate rate will increase to 30%, whilst increasing the minimum Qualifying Australian Production Expenditure thresholds to $20m for feature films and $1.5m per hour for television series.

Government & regulators

Extending Part IVA anti-avoidance rules

Part IVA is the general anti-avoidance provision that the ATO can use to attack arrangements that are entered into in order to obtain tax benefits.

The scope of Part IVA will be extended so that it can apply to:

• Schemes that reduce tax paid in Australia by accessing a lower withholding tax rate on income paid to foreign residents
• Schemes that achieve an Australian income tax benefit, even where the dominant purpose was to reduce foreign income tax.

This measure will apply to income years commencing on or after 1 July 2024, regardless of whether the scheme was entered into before that date.

AAT to be replaced

The Administrative Appeals Tribunal will be replaced by a new federal administrative review body. Funding has been provided to appoint new members to the AAT to address the backlog, to manage the transition, and to develop a modern case management system for the new body.

Small business ATO compliance

Among the programs to reduce the compliance burden on small business is a series of initiatives to cut paperwork. These include:

• From 1 July 2024, small businesses will be permitted to authorise their tax agent to lodge multiple Single Touch Payroll forms on their behalf.
• From 1 July 2024, the Australian Taxation Office (ATO) will reduce the use of cheques for income tax refunds.
• From 1 July 2025, small businesses will be permitted up to 4 years to amend their income tax returns (generally 2 years).

Personal income tax compliance and rental property owners under scrutiny

The ATO will receive $89.6m and Treasury $1.2m over two years to extend the personal income tax compliance program for two years and to expand it to target emerging issues such as deductions relating to short-term rental properties to ensure they are genuinely available to rent.

Lowering tax and super liabilities

The ATO and Treasury will be funded to address the growth in tax and superannuation liabilities. The focus is on:

• High-value debts over $100,000
• Aged debts older than two years where those taxpayers are either:
  • Public and multinational groups with an aggregated turnover of greater than $10 million, or
  • Privately owned groups or individuals controlling over $5 million of net wealth.

Small business lodgment penalty amnesty

Small businesses with an aggregated turnover of less than $10m, will be able to access a lodgment penalty amnesty program. The amnesty will remit failure-to-lodge penalties for outstanding tax statements lodged in the period from 1 June 2023 to 31 December 2023 that were originally due during the period from 1 December 2019 to 29 February 2022.

GST compliance program extended

The ATO will receive over $588m over 4 years to continue its work to improve GST compliance. The funding is also intended to help the ATO develop more sophisticated analytical tools to combat emerging risks.

The measure is estimated to increase receipts by $7.6bn and increase payments by $3.8bn over the 5 years from 2022-23.

Serious Financial Crime Taskforce and Serious Organised Crime program extended and merged

The Government will extend funding for the Serious Financial Crime Taskforce (SFCT) and Serious Organised Crime program (SOC) over 4 years to 30 June 2027 and merge the programs, with a merged SFCT to commence from 1 July 2023.

Anti-slavery Commissioner

An Anti-Slavery Commissioner will be established to work across Government, industry and society, to support compliance with the Modern Slavery Act 2018, improving transparency of supply chains.

Other

Support for SMEs and start-ups

An Industry Growth Program will support SMEs and start-ups to commercialise their ideas and grow their operations (businesses operating in the National Reconstruction Fund are a priority). The program has $392.4 million over 4 years.

An additional $39.6m over 4 years will support the Single Business Service to help SMEs engage with Government.

Resources

Media Release: Investing in industry growth

Cybersecurity funding

A small business wardens program through the Council of Small Business Organisations Australia (COSBOA) will support small businesses to build in-house capability to protect against cyber threats. $23.4 million has been provided over 3 years from 2023-24.

Disruptive defence technology funding

$3.4bn over 10 years has been provided to the Department of Defence to establish the ‘Advanced Strategic Capabilities Accelerator.’ Working with Australian industry, the accelerator seeks to “to lift capacity to translate disruptive new technologies into Defence capability rapidly.” Hmmm.

Direct pathway for kiwis to become Australian citizens

The Government will provide a direct pathway to Australian citizenship for New Zealand citizens in Australia from 1 July 2023, by allowing those who hold a non-protected Special Category visa (subclass 444), and meet general residence and other eligibility requirements, to apply directly for citizenship without becoming permanent residents first.

Reintroduction of work hour cap on international student visa holders

During the pandemic, the cap on the number of hours an international student visa holder could work was removed.

From 1 July 2023 a work cap of 48 hours per fortnight will be reinstated. International students working in the aged care sector will be exempt from the cap until 21 December 2023.

International student post-study work rights extended

In a move designed to strengthen the pipeline of skilled labour, from 1 July 2023, the Government will grant an extra two years of post-study work rights to international higher education graduates of Australian institutions with eligible qualifications.

Increase in wage expectations for temporary skilled workers

Employers who wish to nominate workers for subclass 482, 186 and 187 visas must meet certain salary and employment condition requirements. This includes ensuring that the overseas worker is paid no less than an Australia worker doing the same job, and the visa programs does not undercut the Australian labour market. If a worker will be paid less than $250,000, the employer needs to prove that the overseas worker will be paid at least the Temporary Skilled Migration Income Threshold (TSMIT).

From 1 July 2023, TSMIT will increase from the current rate of $53,900 to $70,000.

Visa application charges increase

From 1 July 2023, Visa application charges will increase by:

• 6% for visa applications
• 15% for select visitor and temporary isa subclasses
• 40% for business innovation and investment visas

The Pacific Engagement Visa and Pacific Australia Labour Mobility schemes are exempt from the increase.

$1bn to boost biosecurity

The Government has committed $1bn over 4 years to strengthen Australia’s biosecurity system. The spending is focused on biosecurity policy and implementation including preparedness, digital systems in cargo pathways, and the reduction of biosecurity risks in Northern Australia.

The initiative is partially offset by increasing costs for the clearance of low value imported cargo and a biosecurity protection levy on Australian producers of agricultural, forestry and fishery products from 1 July 2024.

The economy

In surplus …for now

The surplus was driven by a surge in the corporate and individual tax take. High commodity prices, inflation, and high employment have all pushed up corporate and individual tax receipts. But the gains can’t be relied on long term. The Budget is expected to deliver a deficit of $13.9 billion in 2023-24, and a $35.1bn deficit in 2024-25.

Inflation to drop to 3.25%

While remaining persistently high for longer than anticipated, inflation is expected to fall from 6% to 3.25% in 2023-24.

The $3bn energy relief partnership with the states and territories and the temporary price cap on gas and black coal, are estimated to lower inflation by 0.75% in 2023-24.

Debt still an issue

Gross debt to GDP is expected to peak lower and earlier at 36.5% of GDP in 2025-26. While $154bn less than the March 2022 expectations, it is an eye watering $1.015 trillion. Net debt rises steadily to 24.1% of GDP to $702.9bn in 2026-27. And, this is assuming the Government can deliver on its anticipated savings reigning in the National Disability Insurance Scheme from a growth rate of 14% to 8%.

Growth slow down

Growth is expected to slow. Real GDP growth is expected to slow to 1.5% in 2023-24, before rising to 2.25% in 2024-25.

Unemployment remains low

The unemployment rate is projected to remain low by historical standards, rising modestly to 4.25% in 2023–24 and 4.5% per cent in 2024-25.

Identified savings

Notable Budget savings include:

• Tax on super balances above $3m
• Compliance programs matched to the ‘payday’ super guarantee changes
• Reforms to how liquid natural gas projects are taxed
• Implementing a global minimum tax and a domestic minimum tax

All up, the Government expects $13.7bn in improvements related to tax receipt measures.

Timeline of initiatives

Markets

Local:

The ASX200 index rose 1.8% in June underperforming the MSCI Developed Markets Index which rose 5.7% in the same time period, following softening rate hike expectations.

Global:

The S&P 500 gained 6.6% in June, bringing its YTD return to 15.91%.

The Dow Jones Industrial Average® increased 4.56% for the month and was up 3.80% YTD.

The STOXX Europe 600 Index is up 4.09 points or 0.89% this quarter to 461.93.

Gold:

The spot price for Gold fell by US $52.15 to US $1,912 as the Fed and ECB hone in on inflation levels.

Iron Ore:

Iron Ore prices rose by US $13.50 to US $113.50/ Mt on demand growing slightly more than supply and inventories falling.

Oil:

Brent Oil rose by US $2.24 to reach US $74.90/ bbl, as trading was tighter on market fundamentals over the driving season, coupled with continued political uncertainty in Russia.

Property

Housing:

Australian housing values have increased four months in a row, with seven out of eight capital cities recording a rise in June.

CoreLogic’s national Home Value Index (HVI) increased 1.1% in June, decelerating slightly from the 1.2% gain recorded in May. Every capital city except Hobart (-0.3%) saw dwelling values rise in June, with CoreLogic’s research director, Tim Lawless, noting that Sydney continues to lead the cycle.

“Sydney home values increased another 1.7% in June, taking the cumulative recovery since the January trough to 6.7%. In dollar terms, Sydney’s median housing value is rising by roughly $4,262 a week,” Mr Lawless said. Regional housing values have also trended higher, albeit at a slower pace relative to the capitals.

Economy

Interest Rates:

Australia kept the cash rate on hold at 4.1% as it grapples with whether it has done enough to tame inflation.

RBA governor Philip Lowe said the decision to keep the official rate on hold at 4.1% on Tuesday “will provide some time to assess the impact of the increase in interest rates to date and the economic outlook”.

Retail Sales:

Australian retail turnover rose 0.7% in May 2023, this follows a flat result in April 2023 and a 0.4% rise in March 2023. Ben Dorber, ABS head of retail statistics, said: “Retail turnover was supported by a rise in spending on food and eating out, combined with a boost in spending on discretionary goods. “This latest rise reflected some resilience in spending with consumers taking advantage of larger than usual promotional activity and sales events for May.”

Bond Yields:

In June the Australian government 10-year bond rose by 42 bps to 4.02%, whilst the US 10-year bond also rose by 18 bps to 3.81% on concerns of further tightening by the Fed.

Exchange Rate:

The Aussie dollar rose slightly against the American dollar in June, finishing the month at $0.66, and remained steady against the Euro at $0.61.

Inflation:

Australia: The monthly Consumer Price Index (CPI) indicator in Australia advanced 5.6% in the year to May 2023, slowing from a 6.8% rise in the year to April 2023, and below the market consensus of 6.1%. It was the lowest annual inflation rate since April 2022, due mainly to a softer pace in the growth of both housing and transport prices.

USA: In May, the Consumer Price Index for All Urban Consumers increased 0.1%, seasonally adjusted, and rose 4.0% over the last 12 months.

EU: Euro area annual inflation is expected to be 5.5% in June 2023, down from 6.1% in May. Looking at the main components of euro area inflation, food, alcohol & tobacco is expected to have the highest annual rate in June.

Consumer Confidence:

The Melbourne Institute of Consumer Sentiment index rose 0.2%, from 79.0 in May to 79.2 in June. For the last year the Index has held around levels we have not seen on a sustained basis since the deep recession of the late 1980s/early 1990s. The survey was taken over the period 5-9 June. That period covered the announcement of the decision by the Reserve Bank to lift the cash rate by 0.25% from 3.85% to 4.1%. While the full survey showed little net change in sentiment, responses within the survey week show a big rate rise impact. Prior to the announcement of the rate hike decision confidence had lifted sharply from 79.0 in May to 89.0. But following the announcement it tumbled to an extremely low 72.6.

Employment:

Australia: The unemployment rate fell by 0.1% to 3.6% in May (seasonally adjusted). Bjorn Jarvis, ABS head of labour statistics, said: “with employment increasing by around 76,000 people and the number of unemployed decreasing by 17,000 people, the unemployment rate fell to 3.6%. “The strong growth in employment in May followed a small decrease in April, around Easter, when employment fell by more than it usually would over the holiday period.

USA: Total nonfarm payroll employment increased by 209,000 in June, and the unemployment rate changed little at 3.6%. Employment continued to trend up in government, health care, social assistance, and construction.

Agriculture:

ABARES released their Australian Crop Report for the 2023/24 season recently. The area planted for winter crops in Australia is forecast to fall but remain historically high in 2023/24. Plantings at 23.3 million hectares would be 6% above the 10-year average.

Purchasing Managers Index:

Australia’s manufacturing sector is on track for a soft landing with further evidence in June of soft activity, weakness in new orders and easing price pressures. The overall manufacturing PMI dipped in June to 48.2, a level that is historically associated with a cyclical slowdown in activity, but is still well above recession readings, which typically see PMI readings below 42.

US Services PMI:

The S&P Global US Services PMI edged down to 54.1 in June 2023 from 54.9 in May and compared with market expectations of 54, preliminary estimates showed. Demand conditions at service providers remained robust, as new orders increased at a strong rate and new export orders also rose.

US Global Manufacturing PMI:

The S&P Global US Manufacturing PMI was confirmed at a six-month low of 46.3 in June of 2023, pointing to a second successive monthly decline in the health of the manufacturing sector, amid a renewed fall in output and a sharp downturn in new orders, dragged down by suppressed demand due to inflationary pressure and higher interest rates.

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

Comments

What really drives interest rates

Why do banks decide to increase or decrease interest rates and who influences their decision? This article explains as simply as possible what drives interest rates and may assist clients’ with the age-old question: “do I lock in a fixed rate, or opt for a variable rate?

The Reserve Bank of Australia (RBA) and the major trading banks may play the most visible role in setting interest rates, but in many cases, they are being reactive rather than proactive.

A wide range of external factors feed into their decision-making process, including, in no small part, our collective behaviour as investors and savers, borrowers and consumers. Then there’s the rate of inflation and wages growth, foreign currency exchange, the economic health of our trading partners, and the interest rates paid by local banks to borrow money from overseas. As a result of this, interest rate levels in other countries – particularly the US, have becoming increasingly important in driving local policy decisions.

Suddenly it’s not so easy to figure out where interest rates are headed, even in the short term.

A fine balance

To look at just one part of the puzzle: the RBA dropped the cash rate to 0.10% in November 2020 – the lowest rate on record. This made it cheaper for businesses to borrow and invest in job-creating activities.

However, mortgage rates also followed the cash rate down, allowing homebuyers and investors to borrow more which subsequently drove up house prices.

So how does the RBA keep a lid on housing costs without choking business activity and consumer spending?

One way is to get by with a little help from its friends, in this case, the banking regulator, the Australian Prudential Regulation Authority (APRA).

APRA is able to impose a range of restrictions on the banks. These include capping new interest-only lending and limiting the growth in lending to investors. Lenders can also be ordered to keep a tight rein on ‘risky’ loans, for example, where loans exceed 80% of the value of the property.

While APRA’s main motive is to make the banks more resilient to any shocks such as another global financial crisis and the economic slowdown caused by the COVID-19 pandemic, a side effect is that the banks have to reduce the amount they lend for housing. And according to the rule of supply and demand, if less money is available, then the cost of that money – the interest rate – will go up.

In May of 2022, the RBA increased the cash rate by 25 basis points to 0.35%, marking the first rate rise since November 2010. Since then the cash rate has been increased eleven more times to 4.10%. The RBA advised these rises have been made to assist in curbing the rapidly rising inflation rate across the country, with the economy recovering more quickly post-pandemic than initially expected.

Navigating uncertain waters

If inflation proves to be sticky, interest rates will remain higher for a sustained period of time. Inversely, if inflation falls quicker than expected, so will interest rates.

Leading economists have predicted the possibility of another two or three 0.25% interest rate hikes between August and October, adding 0.5% – 0.75% to current mortgage rates. Determining what will happen to rates at the end of 2023 will depend on the rate of inflation and whether this rate has fallen adequately enough. The big 4 banks have all predicted that interest rates should peak at 4.35%-4.6% in the coming months and then start to decline over the 2024 and 2025 years. The rate of decline and amount of decline is uncertain.

Appreciating the complexity of interest rates doesn’t always help in deciding how to respond to them. Even the experts get it wrong when trying to predict where interest rates are going. This doesn’t help answer borrowers’ eternal question: “do I lock in a fixed rate, or opt for a variable rate?”

Australia’s Employment Forecasts:

The Australian labour market is remaining resilient, heightened by the Labour Force Survey conducted in May 2023. Since the end of 2022, total employment has grown by more than 219,000 workers, with 75,900 workers added in the month of May.

Concurrently the unemployment rate remained low at 3.6% and the labour force participation rate reached an all-time high of 66.9%.

This strong performance is fighting against the backdrop of a broader economic slowdown as policy makers continue to test the limits of the economy, following a retail recession, extremely low consumer confidence and growing business failures. Much of the continued strength is due to the better access to workers than what we experienced during the pandemic.

In the year to May 2023 Australia’s civilian population aged 15 and above grew by 2.7% – the fastest annual rate on record. Recent growth is due to strong migration, with the Commonwealth Budget estimating net overseas migration of 400,000 people this financial year and 315,000 people in 2023-24 – well above pre-COVID rates. This additional labour supply has gone into reducing unmet labour demand – with national job vacancies falling for the third straight quarter.

Human services workers bore the brunt of the COVID pandemic as lockdowns dampened demand for service-based industries such as tourism and retail. White collar workers, on the other hand, didn’t see the same reduction in demand and were able to transition to a work from home environment which helped to mitigate employment declines.

Looking forward the labour market will likely slow down and be more pronounced for blue collar workers as industries such as construction and manufacturing are expected to be harder hit from deteriorating economic activity.

It is expected that human services workers will fare the best in the two years ahead, supported by underlying demand for more ’necessary’ services-based occupations. Average expected employment gains of 135,900 per annum over the next two years are comprised of 55,500 white collar job gains, 12,300 blue collar job losses and 92,600 gains per annum in human services, in job roles such as social work, nursing and counselling.

Sources: AFR, Deloitte Access Economics

Markets

Local:

The ASX200 index matched the Developed Market world performance index, rising (+3.2%) in July.

Global:

The S&P 500 gained 3.2% over July in local currency terms.

The Dow Jones Industrial Average® increased 3.35% for the month and was up 7.28% YTD.

The Stoxx Europe 600 Index rose 2.2% this month but is still 4.4% short of its all time high reached in January 2022.

Gold:

The spot price for Gold held steady despite dollar fluctuations and uncertainty in the rates space, rising by US $42 to US $1,954.

Iron Ore:

Iron Ore price rose by US $1 to US $114.50/Mt on Chinese steel demand and iron ore supply rising seasonally.

Oil:

Brent Oil price rose by US $10 to hit US $84.99/bbl, trading on tighter market fundamentals and improved US Macroeconomic data.

Property

Housing:

CoreLogic’s national Home Value Index (HVI) rose 0.7% in July marking a fifth consecutive month of housing value recovery.

Since finding a floor in February, the national HVI is up 4.1%, following a -9.1% decline from record highs in April 2022.

Nationally, home values remain -5.3% below the April 2022 peak, with only Perth, Adelaide and Regional South Australia recording a new cyclical high in dwelling values through July.

While housing values are continuing to record a broad based rise, the rate of growth has lost momentum over the past two months, slowing from 1.2% in May.

Economy

Interest Rates:

The RBA announced that they would keep the cash rate on hold for a second consecutive month at 4.1%. The RBA has stated that it needed more time to assess the effects of 400 basis points of interest rate rises it had delivered since May 2022.

Retail Sales:

Australian retail turnover fell 0.8% in June 2023, following a 0.8% rise in May 2023, and a 0.1% fall in April 2023.

Ben Dorber, ABS head of retail statistics, said: “Retail turnover fell sharply in June due to weaker than usual spending on end of financial year sales. This comes as cost-of-living pressures continued to weigh on consumer spending.

Bond Yields:

Australian government 10-year bond fell slightly to finish the month at 4.05%, trading relatively unchanged as the RBA kept the cash rate at 4.1%.

US Bond yields rose materially by 14bps to 3.95%, as the Fed passed through another 0.25% hike to 5.5% in July.

Exchange Rate:

The Aussie dollar remained steady over July finishing the month at $0.668 against the American dollar and at $0.607 against the Euro.

Inflation:

Australia: The Consumer Price Index (CPI) rose 0.8% in the June 2023 quarter and 6.0% annually.

USA: The annual inflation rate in the US slowed to 3% in June of 2023, the lowest since March of 2021 and compared to 4% in May and expectations of 3.1%.

EU: The euro area annual inflation rate was 5.5% in June 2023, down from 6.1% in May. A year earlier, the rate was 8.6%. European Union annual inflation was 6.4% in June 2023, down from 7.1% in May. A year earlier, the rate was 9.6%.

Consumer Confidence:

The Melbourne Institute of Consumer Sentiment index rose by 2.7%, from 79.2 in June to 81.3 in July. Sentiment remains at the deeply pessimistic levels that have prevailed for just over a year now. The Index plunged 17% over the first half of 2022 and has barely budged since then, holding in the very weak 78-86 range. Even with the latest modest lift, the Index is still firmly in this range and 3% below its level of a year ago. The main drags on sentiment throughout this period of depressingly low consumer sentiment have been the surging cost of living and sharply higher interest rates. Our research suggests inflation has been the more dominant factor.

Employment:

Australia: The unemployment rate remained at 3.5% in June (seasonally adjusted). Bjorn Jarvis, ABS head of labour statistics, said: “with employment increasing by around 33,000 people and the number of unemployed decreasing by 11,000 people, the unemployment rate remained at 3.5%.

USA: Total nonfarm payroll employment rose by 187,000 in July, and the unemployment rate changed little at 3.5%. Job gains occurred in health care, social assistance, financial activities, and wholesale trade.

Purchasing Managers Index:

The Judo Bank Australia Manufacturing PMI rose to 49.6 in July 2023 from 48.2 in June, signalling a fifth monthly decline in manufacturing activity since the start of 2023, but to the softest extent in the current sequence and was marginal overall. (Readings below 50 points indicate contraction in activity, with lower results indicating a faster rate of contraction).

US Services PMI:

The S&P Global US Services PMI dropped to 52.4 in July 2023, down from 54.4 the previous month and below market expectations of 54.0, according to a preliminary estimate. The latest reading pointed to the weakest pace of expansion in the sector since February, as new sales growth slowed amid constraints on client spending, including higher interest rates.

US Global Manufacturing PMI:

The S&P Global US Manufacturing PMI was confirmed at 49 in July of 2023, signaling the softest decline in operating conditions in the manufacturing sector in three months. New orders declined again as domestic and external demand conditions remained muted.

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

Comments

The Narrow Inflation Path

Data recently released by the ABS showed an 6.0% increase in Australia’s Consumer Price Index (CPI) over the 12 months to June 2023. Prices are clearly decelerating. With CPI growth continuing its downward trend first observed in March (7.0%) after headline inflation peaked in December (at 7.8%).

Underlying inflation, which removes items with particularly large price changes, rose 5.9% in the year to June, down from 6.6% in March.

The moderation in inflation continues the recent trend of goods prices growing more slowly than services prices (as global energy prices moderate and supply chains unblock), where goods prices rose 5.8% compared to 6.3% growth amongst services in the year to June 2023. Similarly, price growth for tradeable products (4.4%) was slower than non-tradable’s (6.9%), highlighting that after a period where Australia ’imported’ very strong inflation, we are now importing more moderate price growth, and this will continue to flow through to lower headline inflation in Australia over coming quarters.

More broadly, the Reserve Bank of Australia (RBA) is focused on whether these global trends and its actions have done enough to lower inflation to within the target range of 2-3%. Noting the lagged impacts of cash rate decisions, additional rate hikes in recent months show the Bank’s commitment to this goal.

But rate hikes in recent months have also softened the outlook for the Australian economy. Recent forecasts have predicted that Australia’s economy will grow by just 0.9% in 2023-24, well-below average annual growth of 2.6% in the decade before the pandemic.

The outlook is worse when removing the effect of population growth. The 0.9% expected GDP growth in 2023-24 is supported by expected population growth of 1.8% – hence a ‘per capita recession’. This indicates that prosperity will have stalled during the fight against inflation.

Fighting inflation while maintaining a positive trajectory is a perilous task. Over-tightening policy risks plunging the economy into recession and damaging the remarkable job gains made since 2021. Do too little and inflation remains higher for longer than it needs to. This has often been described by the RBA as a narrow path, but that narrow path has come to resemble a tightrope.

But price growth which is primarily caused by issues of supply – be it global shipping costs and import prices, the costs of a disorderly energy transition, or higher rents and house prices because of a handbrake on housing construction – cannot be readily solved by higher interest rates.

While the full effect of the 400 basis points of interest rate increases to date is yet to be seen, concerns remain that most of the inflation in the system stems from supply side issues – a fact confirmed in recent research by the RBA itself (below) – and is therefore largely immune from monetary policy.

As seen in graph 1, Supply side shocks have been the main contributor to inflationary pressures over the past few years, as unexpected increase in costs or disruption to production have occurred. Mostly due to the oil shortages felt by the Ukraine-Russia conflict and the Covid-19 pandemic.

This is inconsistent with previous inflation figures which are predominantly felt by demand side shocks. Demand side shocks are due to more jobs and higher wages increasing household incomes and leading to a rise in consumer spending, further increasing aggregate demand and the scope for firms to increase the prices of their goods and services. When this happens across a large number of businesses and sectors, further inflation occurs.

Due to the foreign conflict and the pandemic, the perfect storm of demand-pull and cost-push inflation occurred, which has caused some of the highest inflation rates in history.

Australia’s ability to develop a stronger set of inflation-fighting tools is equally important in the longer term as it is currently, with supply-side shocks expected to increasingly occur in the future as a result of climate change and other global factors.

Sources: AFR, Deloitte, RBA

Apple Inc. – A Damning Report

The mighty Apple announced its results recently, showing a definitive break in its remarkable elegant and orderly rise since December 2022.

The following Bloomberg report comments on the Apple’s decline in revenue.

(Bloomberg) – Apple Inc. posted its third straight quarter of declining sales and predicted a similar performance in the current period, hurt by an industrywide slump that has sapped demand for phones, computers and tablets.

After the company reported a revenue decline of 1.4% in the fiscal third quarter, CFO Luca Maestri said on a conference call that Apple’s performance would be similar this period. An additional drop would mark the longest streak of declines in two decades – a startling slowdown of the worlds most valuable company.

Apple shares dropped 4.8% to $181.99 in New York at the start of August, stripping the company of its $3 trillion valuation. It was the worst one-day decrease since September 2022.

Sources: Bloomberg, The Pain Report

Why is my tax refund so small?

The tax refund many Australians expect has dramatically reduced. We show you why.

There is a psychology to tax refunds that successive Governments have been reticent to tamper with. As a nation, Australia relies heavily on personal and corporate income tax, with personal income tax including taxes on capital gains representing 40% of revenue compared to the OECD average of 24%. And, for the amount we pay, we expect a reward.

The reward is in the form of tax deductions that reduce the amount of net income that is assessed for tax purposes and tax offsets that reduce the tax payable, generating a refund for some. And, refunds have a positive impact on tax compliance.

As part of the previous Government’s efforts to flatten out the progressive individual income tax system, a time-limited low and middle income tax offset was introduced. The lifespan of the offset was extended twice, partly as a stimulus measure in response to COVID-19. The offset delivered up to $1,080 from 2018-19 to 2020-21, and up to $1,500 in 2021-22 for those earning up to $126,000. This was a significant boost for many people each tax time and bolstered the tax returns of millions of Australians. For many, the end of this offset has meant that their tax refund has reduced dramatically compared to previous years.

Do we pay more tax than other nations?

It depends on how you look at the statistics. Australia relies heavily on income tax, collecting 40% of tax revenue from personal income. That makes Australia the fourth highest taxing nation for personal tax in the OECD – but we were second highest in 2019 if that makes you feel better. But, if you are looking at take home pay there is a separate measure for that. The Employee tax on labour income looks at our take home pay once tax is taken out and benefits have been added back in. This shows that the take home pay of an average single worker is 77% of their gross wage compared to the OCED average of 75.4%. For the average worker with a family (one married earner with 2 children), once tax and family benefits are taken into account, the Australian take home pay average is 84.1% compared to the OECD average of 85.9%. All of this means that Australia is a high taxing nation but returns much of that in the form of means tested benefits.

Australia also does not have social security contributions like other nations. These contributions represent an average of 27% of the total tax take for OECD nations.

And, because Australia has a progressive tax system, the pain of taxation is felt more by higher income earners. The top 11.6% of Australian income earners contribute 55.3% of the tax revenue from personal income tax.

With the final round of legislated income tax cuts due to commence on 1 July 2024, this should reduce the overall dependence on personal income tax relative to corporate and other taxes.

So, do we personally pay more tax than other nations? If you are a high-income earner the answer is likely to be yes. If not, the answer is no.

As Benjamin Disraeli reportedly said, “…lies, damn lies, and statistics”. It’s all how you read it.

Is a second job worth it?

In an Uber the other day, the driver revealed that he had become a driver to pay for his second mortgage. He invested in property but with interest rates spiking, the only way he could hold onto the property was to earn additional income. His “day job” starts early and ends at 3pm at which time he heads off to start driving.

He is not alone. The latest stats from the Australian Bureau of Statistics reveal that the number of workers holding multiple jobs has increased by 2.1% since December 2022 – in total, Australia has 947,300 people holding multiple jobs or 6.6% of the working population.

The reason why people take on second jobs is varied. For some, it is to manage increasing costs, for others it is to start up a new venture but with the security of a regular income stream from their primary occupation.

Is it worth it?

From a tax perspective, Australia has a progressive income tax system – the more you earn the more tax you pay, and access to social benefits tapers off. It’s important when looking at a second job to understand your overall position – how much you are likely to earn, your costs of generating income, and what this income level will mean.

The trap for many picking up a ‘gig economy’ second job is that they are often independent contractors. That is, you are responsible for managing your tax affairs. All Uber drivers for example, are required to hold an ABN and be registered for GST. There is a compliance cost to this and from a cashflow perspective, 1/11^th of the fee collected needs to be remitted to the Tax Office once a quarter. It’s important to quarantine both the GST owing and income tax to ensure you have the cashflow to pay the tax when it is due. The upside is you can claim the expenses related to your second job.

If you are taking on a second job, ensure that your tax-free threshold applies to your highest paying job from a PAYG withholding perspective.

Succession: What does it take to and your business to the next generation?

What is the end game for your business? Succession is not just a topic for a TV series or billionaire families, it’s about successfully transitioning your business and maximising its capital value for you, the owners.

When it comes to generational succession of a family business, there are a few important aspects:

• Succession of the business;
• Succession of the ownership of the business;
• Succession planning/pathway; and
• Moving from a business family to an investment family.

For generational succession to succeed, even if that succession is the sale of the business and the management of the sale proceeds for the benefit of the family, communication is essential. Where generational succession fails, it is often because succession has not been formalised until a catalyst event or retirement planning requires it.

A concept of ‘legacy’ is not enough. Successful succession occurs when the guiding principles of governance, family rules, aligning values, dispute resolution, succession and estate planning are managed well before discontent tears it apart.

Generational succession usually involves the transfer of an interest in a business to another generation of a family (usually younger). It is often a family in business rather than simply a family business.

The options for how a movement of an interest may occur are many and varied but usually focus on the transfer of some or all of the equity held in the business over a period or at a defined point in time and the payment of some form of consideration for the equity transferred. Alternatively, a part of the equity transfer may ultimately be dealt with through the estate.

Generational succession comes with its own set of issues that need to be dealt with:

Capability and willingness of the next generation

A realistic assessment of whether the business can continue successfully after the transition. In some cases, the older 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. While reasonable objectives, they only work where there is capability and willingness. Communication of expectations is essential.

Capital transfer

Consider the capital requirements of the exiting generation. To what extent do you need to extract capital from the business at the time of the transition? The higher the level of capital needed, the greater the pressure on the business and the equity stakeholders.

In many 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. Either scenario needs to be assessed for its sustainability at a business and shareholder level. In some scenarios the exiting owners will transition their ownership on an agreed timeframe.

Managing remuneration

In many small and medium businesses, 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 generational succession, there should be an increased level of formality around compensation. Compensation should be matched to roles, and where performance incentives exist, these should be clearly structured.

Who has operational management and control?

Transition of control is often a sensitive area. It is essential to establish and agree in advance how operating and management control will be maintained and transitioned. This is important not only for the generational stakeholders but also for the business. Often the exiting business owners have a firm view on how the business should be run. Uncertainty in the management and decision making of the business can lead to confusion or a vacuum – either will have an adverse impact. Tensions often arise because:

• The incoming generation want freedom of decision making and the ability to put their imprint on the business.
• Without operating control, they feel that they have management in name only.
• The exiting generation believe that their experience is necessary to the business and entitles them to a continued say.
• A perception that capital investment should equate to ultimate operating control.
• An uncertainty by either or both generations about the extent of their ongoing roles.

Agreeing transition of control in advance, on an agreed timeframe, can significantly reduce tensions.

Transition timeframes and expectations

Generational succession is often a process rather than an event. The extended timeframe for the transition requires active management to ensure that there are mutual expectations and to avoid the process being derailed by frustration.

The established generation may have identified that they want to scale down their business involvement and bring on other family members to succeed them. This does not necessarily mean that they want to withdraw completely. An extended transition period is not uncommon and can often assist the business in managing the change. This can also work well in managing income and capital withdrawal requirements.

The need for greater formality and management structure

A danger for many SMEs is the blurring of the boundaries between the role of the Board, shareholders, and management. With generational succession, this can become even more pronounced. Formality in these structures is important, with clear definitions of the roles and clarification of the expectations. For example, who should be a director and what is their role?

For some, the role of the family is managed by a family constitution – an agreed set of rules. For others there will be an external advisory group that advises the family to ensure that the required independent expertise is brought to bear.

Successfully managing generational change is a process we can help you navigate. Talk to us about how we can help to structure an effective transition path.

Thinking of subdividing? The tax implications and pitfalls of small-scale subdivisions

You’ve got a block of land that’s perfect for a subdivision. The details have all been worked out with Council, the builders, and the bank. But, one important aspect has been left out; the tax implications.

Many small-scale developers often assume that their tax exposure is minimal – but this is not always the case and the tax treatment of a subdivision project can significantly impact on cashflow and the financial viability of the project.

New guidance from the Australian Taxation Office (ATO) walks through the tax impact of small-scale subdivision projects. We look at some of the leading issues:

Tax treatment of the subdivision

Subdividing land

The tax treatment of even a small subdivision can become complex very quickly and tax applies according to the circumstances. You cannot simply assume that just because it’s a small development, any profit from the eventual sale will be taxed as a capital gain and qualify for CGT concessions.

In general, if you own a property personally, it has been held and used for private purposes over an extended period, you subdivide it and sell the newly created block, then capital gains tax is likely to apply to any gain you make. The gain is recognised from the point you first acquired the land, although you will need to apportion the amount paid for the property between the subdivided lots. If you are subdividing a property that contains your home – the main residence exemption will not generally be available if you sell a subdivided block separately from the block containing your home, even if the land has only ever been used for private purposes in connection with your home.

If a property is initially owned jointly but the property is subdivided and the lots split between the owners, then this will normally trigger upfront tax implications even though the land hasn’t been sold to an unrelated party yet. Arrangements like this (referred to as partitioning) can be complex to deal with from a tax perspective.

Developing a property

But what happens if you develop the land? It’s not uncommon for people to decide to subdivide and develop their block by building a house or duplex and then selling the new dwelling.

When someone develops a property with the intention of selling the finished product at a profit in the short term, there is a risk that this will be taxed as income rather than under the capital gains tax rules. This limits the availability of CGT concessions (such as the 50% CGT discount) and will often expose the owners to GST liabilities as well. This can be the case even for one-off property developments.

Let’s look at an example. Claude purchased his home on 1 July 2001 for $300,000. In July 2020, Claude began investigating the idea of subdividing his block and building a new house, then selling it. A registered valuers report on the subdivision says that the original house and land is now worth $360,000, and the subdivided lot is worth $240,000 (the valuation is an important step before commencement to prevent any debates with the ATO). Claude decides to go ahead and build a dwelling on the newly subdivided block and takes out a loan of $400,000 for the development. He intends to pay off the loan as soon as the house sells.

In July 2021, Claude sells the subdivided block and new home for $1,210,000 (GST-inclusive).

Here is how the tax works for Claude’s scenario:

• Claude made an overall economic gain of $580,000.
• The overall gain ($580,000) is based on the GST exclusive sale proceeds ($1,100,000, although we are assuming that the GST margin scheme isn’t applied) minus the GST exclusive development expenses ($400,000) and the original cost attributable to the newly subdivided lot of $120,000 ($300,000 × 40%).
• The increase in the value of the newly created subdivided lot from when it was originally acquired (1 July 2001) up to when the profit-making activities began (1 July 2020) should be treated as a capital gain.
• The value of the newly created subdivided lot at the time Claude began to undertake profit-making activities on 1 July 2020 was $240,000. The original cost, attributable to the newly created subdivided lot was $120,000 (40% × $300,000) on 1 July 2001. This means that there is a capital gain of $120,000.
• As Claude has held the subdivided block for greater than 12 months he is entitled to a 50% CGT discount, hence there is a discounted capital gain of $60,000.
• The increase in the value of the newly created subdivided lot from when the profit-making activities began up to the time of sale should be treated as ordinary income.
• The net profit ($460,000) will be based on the GST exclusive sale proceeds ($1,100,000) minus the GST exclusive development expenses ($400,000) and the value of the subdivided lot ($240,000).

If Claude is not carrying on a business, he cannot claim a deduction for the development expenses as they are incurred. They will be taken into account in determining the net profit on sale.

If Claude finished the development but decided not to sell the property, then this would complicate the income tax and GST treatment. We would need to explore what Claude plans to do with the property.

Do I need to register for GST?

If you are an individual who is subdividing land that has been held and used for private purposes then you might not need to GST, although this will depend on the situation. However, if you are engaged in a property development business or a one-off project that is undertaken in a business-like manner, then it is more likely that you would need to register for GST.

In Claude’s scenario, because the projected sale price of the developed land was above the GST threshold of $75,000, he will probably need to register for GST. This will mean that he:

• Has a ‘default’ GST liability of $110,000 on the sale price of the developed block, although it might be possible to reduce the GST liability by applying the GST margin scheme
• Needs to provide a notification to the purchaser of the amount at settlement to be withheld and paid to the ATO
• Is able to claim $40,000 credits for the GST included in the development expenses (subject to the normal GST rules), and
• Must report these transactions by completing business activity statements.

The tax consequences of subdivision and other property projects can be complex. If you are contemplating undertaking a subdivision and any property development activities, please contact us and we can help walk you through the scenarios and tax impact of the project.

Quote of the month

“It always seems impossible until it’s done.”

Nelson Mandela

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

Markets

Local:

The ASX200 index fell -0.73% over August, keeping the index steady over the month.

Global:

The S&P 500 was down 1.77% in August, bringing its YTD return to 17.40%.

The Dow Jones Industrial Average decreased 2.36% for the month and was up 4.75% YTD.

The Stoxx Europe 600 Index declined -2.5% in August, down from previous record highs.

Gold:

The spot price for Gold fell slightly in August, finishing the month at US $1,939.

Iron Ore:

Iron Ore price increased by US $3 from its July figure to finish August at US $117.50/Mt.

Oil:

Brent Oil price continued its upward trend in August reaching US $86.86/bbl as US macroeconomic data continues to improve.

Property

Housing:

CoreLogic’s national Home Value Index (HVI) marked a sixth consecutive monthly rise, up 0.8% in August.

The monthly gain was a slight acceleration from the 0.7% increase in July, interrupting a two-month trend of slowing capital gains. Since bottoming out in February, the national HVI is up 4.9%, adding approximately $34,301 to the median dwelling value.

The recovery trend remains broad-based, with every capital city except Hobart (-0.1%) recording a rise in dwelling values over the month. Gains were led by a 1.5% increase across Brisbane, followed by Sydney and Adelaide where home values were up 1.1%.

Economy

Interest Rates:

The Reserve Bank has kept interest rates on hold at 4.1% for the third month straight but has flagged further increases may be needed to ensure inflation remains under control. It leaves the cash rate at its highest level since April 2012, and is the fourth time the RBA has paused its current rate-hiking cycle since it first began raising them in May 2022.

Retail Sales:

Retail sales in Australia increased by 0.5% MoM in July 2023, topping market estimates of 0.3% and reversing from a 0.8% fall in the previous month. Most non-food industries rose following larger falls in June. Department stores (3.6% vs -4.8% in June) recorded the largest rise, followed by clothing, footwear, and personal accessory retailing (2.0% vs -2.3%).

Bond Yields:

Australian government 10-year bond yields increased over August to finish the month at 4.13%, trading relatively unchanged as the RBA kept the cash rate at 4.1%.

The yield on the US 10-year government bond approached 4.3% in the first week of September as traders bet the Fed will keep interest rates high for a long period as the US economy continues to show signs of resilience.

Exchange Rate:

The Aussie dollar fell slightly over August finishing the month at $0.648 against the American dollar and at $0.594 against the Euro.

Inflation:

Australia: The monthly Consumer Price Index (CPI) indicator rose 4.9% in the 12 months to July 2023. The July annual increase of 4.9% is down from 5.4% in June. Annual price rises continue to ease from the peak of 8.4% in December 2022.

USA: Annual inflation rate in the US accelerated to 3.2% in July 2023 from 3% in June, but below forecasts of 3.3%. It marks a halt in the 12 consecutive months of declines, due to base effects. A year earlier, inflation had started to fall from its peak of 9.1%.

EU: Euro area annual inflation is expected to be 5.3% in August 2023, stable compared to July 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 August (9.8%, compared with 10.8% in July), followed by services (5.5%, compared with 5.6% in July), non-energy industrial goods (4.8%, compared with 5.0% in July) and energy (-3.3%, compared with -6.1% in July).

Consumer Confidence:

The Melbourne Institute of Consumer Sentiment index dipped 0.4% to 81 in August from 81.3 in July. Sentiment continues to show only a muted response to the RBA Board’s decision to leave the cash rate on hold in recent meetings. The Board opted to leave rates unchanged for a second month in a row at its August meeting, the first consecutive ‘on hold’ decisions since the tightening cycle began in May last year. Consumer sentiment has only lifted 2.3% in response, with continued pressures on family finances and concerns about the interest rate and economic outlook still weighing heavily on confidence.

Employment:

Australia: The unemployment rate increased by 0.2% to 3.7% in July (seasonally adjusted). Bjorn Jarvis, ABS head of labour statistics, said: “with employment dropping by around 15,000 people and the number of unemployed increasing by 36,000 people, the unemployment rate rose to 3.7%. “The fall in employment follows an average monthly increase of around 42,000 people during the first half of this year. Employment is still around 387,000 people higher than last July.

USA: Total nonfarm payroll employment increased by 187,000 in August, and the unemployment rate rose to 3.8%. Employment continued to trend up in health care, leisure and hospitality, social assistance, and construction. Employment in transportation and warehousing declined.

Purchasing Managers Index:

The Judo Bank Australia Manufacturing PMI remained unchanged at 49.6 in August 2023, final estimates showed. It pointed to the sixth month of contraction in the manufacturing sector but the strongest since February, indicating signs of recovery in recent month. (Readings below 50 points indicate contraction in activity, with lower results indicating a faster rate of contraction).

US Services PMI:

The S&P Global US Services PMI fell to 51 in August of 2023 from 52.3 in the previous month, missing market expectations of 52.2 to reflect the slowest expansion in the US services sector in six months. High interest rates and broad-based inflationary pressures weighed on consumer spending, driving service providers to report the fastest drop in new business since the start of the year.

US Global Manufacturing PMI:

The S&P Global US Manufacturing PMI was revised higher to 47.9 in August 2023 from a preliminary of 47 and compared to 49 in July. The manufacturing sector has contracted every month since November 2022 except for a brief stabilisation in April, and the latest PMI reading was in line with the average over this period.

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

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Superannuation is Big Business:

AustralianSuper accused of trying to profit from grieving widows by taking up to eight months to pay out their entitlements

Australia’s largest superannuation company has apologised for the distress it caused two widows, and paid out their deceased husband’s entitlements in full, after it was accused of taking advantage of older women to drive company profits.

Eunice Brooke and Llynda Chapman’s husbands both passed away in late 2022, but the pair claim they spent months going round in circles as AustralianSuper delayed paying out their husband’s claims.

“It’s empty promises from the beginning to the end. There is always an excuse. There’s always a delay. There’s always some story of why they cannot do it,” Ms Brooke told Sky News Investigations Reporter Jonathan Lea.

Both widows described a wall that made it impossible to directly contact a claims member to check if uploaded documents had been received, checked and correctly acted upon. They say there was also no way to escalate their case to a senior manager.

“I honestly did not believe that I would ever get my money… but I thought I’m going to fight it no matter what,” said Ms Brooke, who discovered the company at one point had incorrectly listed a “totally different name” as her beneficiary.

For Llynda Chapman, AustralianSuper’s treatment stood in stark contrast to another superannuation company which paid out her husband’s funds swiftly.

“I always learned not to put all our eggs in one basket. We did have another super fund and that paid out within two weeks. I put the application in and two weeks later I had it,” she said.

AustralianSuper refused multiple requests for an interview, saying instead by statement that it “would like to apologise for delays that occurred in the processing of the death claims of the two members. Both cases have now been resolved…”

“… AustralianSuper is deeply sorry for the added distress caused by the delays in processing and paying out these claims.”

Federal Minister for Financial Services Stephen Jones told Sky News Australia he was deeply concerned, warning if service standards didn’t lift, the government would look to toughen regulations.

“The industry is on notice. They’ve got to lift their standards. If they are not able to do that voluntarily, then the government will look to put in place service standards which are in line with community expectations,” he said.

“The truth is superannuation funds make money by having more money, and if they are paying money out, then they are not getting fees on that so there is a financial incentive to keep as much money as they can in their funds, however, their first and most important obligation is to the investors.”

Death Benefit Nominations

In the last financial year, the Australian Financial Complaints Authority (AFCA) received 366 formal complaints about death benefit nominations in super. It’s the third-most complained about area in super, behind account administration and insurance.

And behind each complaint there is stress for those involved, such as pressure on relationships or tension between family members.

Disputes can also leave those who might be relying on the money out of pocket while they wait for the process to be completed.

Making a death benefit nomination

A death benefit nomination directs where any leftover super goes when you die. Nominations can be binding or non-binding.

• In a binding nomination, the super fund has to follow your wishes.
• In a non-binding nomination, the super fund has discretion over where to distribute the money.

Nominations can also be lapsing or non-lapsing.

• Lapsing nominations expire after three years and the member has to renew them for them to remain valid and binding.
• Non-lapsing nominations don’t expire.

When a nomination isn’t binding, has lapsed, or isn’t valid for any reason, the fund has some discretion over who gets the money.

It is possible to join a super fund without ever completing a nomination form, or a super fund may not check that a nomination is valid. In both cases where there is no valid nomination the fund would be responsible for distributing the funds as they see fit.

“I think it would be good to check for validity at the time the members created the nomination,”

Super Consumers Australia policy manager Franco Morelli agrees with the experts that there’s value in an independent audit of the nomination system.

“The nomination process is currently extremely complex and puts a lot of onus on members to get it right. A review could determine how we can simplify and improve the process to give Australians peace of mind about what happens to any super they have left over.”

Sources: Choice, Sky News

Markets

Local: The ASX200 index rose 6.2% in January as investors improved their economic outlook.

Global: The S&P 500 also gained 5.3% over January.

Gold: Spot price for Gold rose strongly to US $1,924, following a positive reaction to the slower US PPI reading and safe haven flows after renewed geopolitical tensions.

Iron Ore: Iron Ore prices slowed to US $129/Mt with slowing demand by China off the slowdown in the constructure season.

Oil: Brent Oil price dropped slightly to US $84.90/bbl with a strong USD and uncertainty around Chinese demand.

Property

Housing: CoreLogic’s national Home Value Index (HVI) fell a further -1.0% in January, a slight improvement on the -1.1% decline recorded in December, and the smallest month-on-month decline since June last year.

The reduction in the rate of decline was evident across most capital cities, except for Adelaide (-0.8%) and Perth (-0.3%) where housing values have held firmer since interest rates began rising in May.

CoreLogic Research Director Tim Lawless said although the housing downturn remains geographically broad-based there are signs some momentum has left the housing downturn.

“The quarterly trend in housing values is clearly pointing to a reduction in the pace of decline across most regions, however at -1.0% over the month and -3.2% over the rolling quarter, national housing values are still falling quite rapidly compared to previous downturns,”.

Economy

Interest Rates: The Reserve Bank of Australia has pushed through a ninth consecutive rate rise at its first meeting of 2023 to contain the sharp increase in the cost of living. Policymakers lifted the official cash rate by 25 basis points to 3.35% from 3.1% in line with expectations.

Retail Sales: Retail sales in Australia declined by 3.9% month-over-month to AUD 34.47 billion in December 2022, reversing from an upwardly revised 1.7% in the previous month and worse than market forecasts of a 0.3% fall.

Bond Yields: Australian government 10-year bond fell by 50 bps to 3.55% from the previous month. The US 10-year bond also fell 35 bps to 3.53%, a reaction to stabilising GDP and inflation prints which supported investor sentiment.

Exchange Rate: The Aussie dollar improved over January finishing the month at $0.704 and stayed steady against the Euro at $0.649.

Inflation: The Consumer Price Index (CPI) rose 1.9% in the December 2022 quarter and 7.8% annually.

Consumer Confidence: The Westpac Melbourne Institute Consumer Sentiment Index increased by 5%, from 80.3 in December to 84.3 in January. This is the largest increase in the Index since April 2021, and prior to that, since October 2020 when consumers were responding to positive news around the pandemic. One likely explanation for the lift in confidence is that January was the first month since April last year that did not see an increase in the RBA cash rate. While that was because there was no RBA Board meeting in the month rather than an explicit decision by the Bank to leave rates unchanged, the break in the tightening cycle looks to have provided some relief.

Employment: Australia’s unemployment rate has remained flat at 3.5%, surprising market expectations which had forecast a mild fall. New data also showed that for December 2022 employment decreased by around 15,000 people while the number of unemployed Australians increased by 6,000 people.

US Employment: Total nonfarm payroll employment rose by 517,000 in January, and the unemployment rate changed little at 3.4%. Growth was widespread, led by gains in leisure and hospitality, professional and business services, and health care. Employment also increased in government, partially reflecting the return of workers from a strike.

Agriculture: Australia’s crop exports were valued at an estimated 39.6 billion Australian dollars in the fiscal year 2022. It was forecasted that this value would increase to around 46.7 billion Australian dollars in the 2023 financial year.

Purchasing Managers Index: The Judo Bank Flash Australia Manufacturing PMI posted 49.8 in January 2023, down from a final reading of 50.2 in the previous month, marking the first contraction of the manufacturing sector in 32 months. Manufacturing output shrank due to weaker demand and supply constraints. Domestic and global new orders decreased as a result of higher interest rates and a deterioration in global economic conditions. On the positive side, manufacturers expanded their workforce numbers at the fastest rate in five months, despite lower demand and output.

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

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Summary of the World Bank’s Global Economic Prospects Report

Global growth is slowing sharply in the face of elevated inflation, higher interest rates, reduced investment, and disruptions caused by Russia’s invasion of Ukraine, according to the World Bank’s latest Global Economic Prospects report.

Given fragile economic conditions, any new adverse development—such as higher-than-expected inflation, abrupt rises in interest rates to contain it, a resurgence of the COVID-19 pandemic, or escalating geopolitical tensions—could push the global economy into recession. This would mark the first time in more than 80 years that two global recessions have occurred within the same decade.

The global economy is projected to grow by 1.7% in 2023 and 2.7% in 2024. The sharp downturn in growth is expected to be widespread, with forecasts in 2023 revised down for 95% of advanced economies and nearly 70% of emerging market and developing economies.

Over the next two years, per-capita income growth in emerging market and developing economies is projected to average 2.8%, a full percentage point lower than the 2010-2019 average. In Sub-Saharan Africa, which accounts for about 60% of the world’s extreme poor-growth in per capita income over 2023-24 is expected to average just 1.2%, a rate that could cause poverty rates to rise, not fall.

Growth in advanced economies is projected to slow from 2.5% in 2022 to 0.5% in 2023. Over the past two decades, slowdowns of this scale have foreshadowed a global recession. In the United States, growth is forecast to fall to 0.5% in 2023, 1.9 percentage points below previous forecasts and the weakest performance outside of official recessions since 1970. In 2023, euro-area growth is expected at zero percent, a downward revision of 1.9 percentage points. In China, growth is projected at 4.3% in 2023, 0.9 percentage point below previous forecasts.

Excluding China, growth in emerging market and developing economies is expected to decelerate from 3.8% in 2022 to 2.7% in 2023, reflecting significantly weaker external demand compounded by high inflation, currency depreciation, tighter financing conditions, and other domestic headwinds.

By the end of 2024, GDP levels in emerging and developing economies will be roughly 6% below levels expected before the pandemic. Although global inflation is expected to moderate, it will remain above pre-pandemic levels.

The report offers the first comprehensive assessment of the medium-term outlook for investment growth in emerging market and developing economies. Over the 2022-2024 period, gross investment in these economies is likely to grow by about 3.5% on average—less than half the rate that prevailed in the previous two decades. The report lays out a menu of options for policy makers to accelerate investment growth.

“Subdued investment is a serious concern because it is associated with weak productivity and trade and dampens overall economic prospects. Without strong and sustained investment growth, it is simply impossible to make meaningful progress in achieving broader development and climate-related goals,” said Ayhan Kose, Director of the World Bank’s Prospects Group.

Sources: The World Bank

2022 Inflation

The December 2022 quarter confirmed that inflation still sits well above the RBA’s target band for inflation – increasing by 7.8% through the year, and by 1.9% in the quarter.

This is the highest inflation has been since 1990 and confirms that Australia’s inflation rate was still rising through to late 2022. Unlike the US, for example, where it has started to move down.

The most significant contributors to the quarterly increase were travel costs, with both domestic (13.3%) and international travel prices (7.6%) increasing notably. Electricity prices were also a key contributor, increasing by 8.6% in the December quarter. While grocery prices overall kept rising, there was some respite – fruit and vegetable prices dropped by 7.3% in the quarter.

By state prices grew markedly quicker in Perth, increasing by 3.6% in the December quarter, elevated by the end of electricity rebates in WA. Adelaide however had the highest annual inflation (8.6%), followed then by Perth (8.3%) and Melbourne (8.0%).

With the combination of high inflation, rising interest rates, falling house prices, low levels of consumer confidence and negative real wage growth, spending growth is expected to decelerate markedly over coming months.

The Reserve Bank has consumers in a pincer movement. The rapid shift up in interest rates means that mortgage repayments, including principal and interest, are already on track to rise to a record high as a share of household disposable income. Yet, at the same time, real household disposable income per capita is falling. That combination means consumer spending in real terms is expected to fall over the next six months in Australia.

Sources: ABS, Deloitte Access Economics

What’s the Deal with Working from Home?

The Australian Taxation Office (ATO) has updated its approach to how you claim expenses for working from home.

The ATO has ‘refreshed’ the way you can claim deductions for the costs you incur when you work from home. From 1 July 2022 onwards, you can choose either to use a new ‘fixed rate’ method (67 cents per hour), or the ‘actual cost’ method depending on what works out best for your scenario. Either way, you will need to gather and retain certain records to make a claim.

The first issue for claiming any deduction is that there must be a link between the costs you incurred and the way you earn your income. If you incur an expense but it doesn’t relate to your work, or only partially relates to your work, you cannot claim the full cost as a deduction.

The second key issue is that you need to incur costs associated with working from home. For example, if you are living with your parents and not picking up any of the expenses for running the home then you can’t claim deductions for working from home as you have not incurred the expenses, even if you are paying board (the ATO treats this as a private arrangement).

Let’s take a look at the detail:

The new ‘fixed rate’ method

Previously, there were two fixed rate methods to choose from for the 2021-22 income year:

• A cover-all 80 cents per hour rate for expenses incurred while working from home (which was available from 1 March 2020). This COVID-19 related rate was intended to cover all additional running expenses incurred while working from home; or
• If you had a space dedicated to work but were not running a business from home, you could claim 52 cents for every hour you worked from home to cover the running expenses of your home. This rate doesn’t cover certain items such as the depreciation of electronic devices, which can be claimed separately.

It’s clear that working from home arrangements are here to stay for many workplaces even though COVID restrictions have eased. So, from the 2022-23 financial year onwards, the ATO has combined these two fixed rate methods to create one revised method accessible by anyone working from home, regardless of whether they have a dedicated space or are just working at the kitchen table.

The new rate is 67 cents per hour and covers your energy expenses (electricity and gas), phone usage (mobile and home), internet, stationery, and computer consumables. You can separately claim the cost of the decline in value of assets such as computers, repairs, and maintenance for these assets, and if you have a dedicated home office, the cost of cleaning the office. If there is more than one person working from the same home, each person can make a claim using the fixed rate method if they meet the basic eligibility conditions.

What proof do the ATO need that I am working from home?

To use the fixed rate method, you will need a record of all of the hours you worked from home. The ATO has warned that it will no longer accept estimates or a sample diary over a four week period. For example, if you normally work from home on Mondays but one day you have an in-person meeting outside of your home, your diary should show that you did not work from home for at least a portion of that day.

Having said that, the ATO will allow taxpayers to keep a record which is representative of the total number of hours worked from home during the period from 1 July 2022 to 28 February 2023.

There is nothing in the ATO guidance to suggest that claims are limited to standard office hours. That is, if you work from home outside standard office hours or over the weekend, then make sure you keep an accurate record of the hours you are working so that you can maximise your deductions.

You also need to keep a copy of at least one document for each running cost you have incurred during the year which is covered by the fixed rate method. This could include invoices, bills or credit card statements. Where bills are in the name of one member of a household but the cost is shared, each member of the household who contributes to the payment of that expense will be taken to have incurred it. For example, a husband and wife, or flatmates where they jointly contribute to costs.

You need to keep these records for five years so that if the ATO come calling, you can prove your claim. If this proof is not available at the time, the deduction will be denied. If your work from home diary is electronic, ensure you can access this diary over time (such as producing a PDF summary of your calendar clearly showing the dates and times of your work at the end of each financial year).

The ‘actual’ method

Some people might find that the actual method produces a better result if their expenses are higher. As the name suggests, you can claim the actual additional expenses you incur when you work from home (and reduce the claim by any personal use and use by other family members). However, you will need to ensure you have kept records of these expenses and the extent to which the expenses relate to your work.

Using this method, you can claim the work related portion of:

• The decline in value of depreciating assets – for example, home office furniture (desk, chair) and furnishings, phones and computers, laptops or similar devices.
• Electricity and gas (energy expenses) for heating, cooling and lighting.
• Home and mobile phone, data and internet expenses.
• Stationery and computer consumables, such as printer ink and paper.
• Cleaning your dedicated home office.

Be careful with this method because the ATO are looking closely to ensure these expenses are directly related to how you earn your income. For example, you can’t claim personal expenses such as coffee, tea and toilet paper even if you do use these items when you are at work. Nor can you claim occupancy expenses such as rent, mortgage interest, property insurance, and land taxes and rates unless your home is a place of business. It is unusual for an employee’s home to be classified as a place of business.

I run a business from home, what can I claim?

Where your home is also your principal place of business and an area is set aside exclusively for business activities, you can potentially claim a deduction for an appropriate portion of occupancy expenses as well as running costs. An example would be a doctor who runs their surgery from home.

The doctor may have one-third of the home set aside as a place of business where they see patients.

It is important to keep in mind that Capital Gains Tax (CGT) might be payable on the eventual sale of the home. While your main residence is normally exempt from CGT, the portion of the home set aside as a place of business will not generally qualify for the main residence exemption for the period it is used for this purpose, although if you are eligible, the small business CGT concessions and general CGT discount may reduce any resulting capital gain.

Future earnings for super balances above $3m taxed at 30% from 2025-26

The Government has announced that from 2025‑26, the 15% concessional tax rate applied to future earnings for superannuation balances above $3 million will increase to 30%.

The concessional tax rate on earnings from superannuation in the accumulation phase will remain at 15% up to $3m. From $3m onwards, the rate will increase to 30%. The amendment applies to future earnings; it is not retrospective.

80,000 people are expected to be impacted by the measure.

The announcement doesn’t propose any changes to the transfer balance cap or the amount that a member can have in the tax-free retirement phase.

The ‘Super’ Wars

A consultation paper released by Treasury has sparked a national debate about the role, purpose and access to superannuation ahead of the 2023-24 Federal Budget.

What is the purpose of superannuation? At first glance, the consultation released by Treasury in February titled Legislating the objective of Superannuation sounds innocuous enough. The consultation seeks to anchor future policies relating to superannuation to a legislated objective:

The objective of superannuation is to preserve savings to deliver income for a dignified retirement, alongside Government support, in an equitable and sustainable way.

But what seems self-evident has opened a Pandora’s Box of what superannuation is not. If superannuation is to “preserve savings”, that is, restricting access to superannuation savings to retirement only, by default it is not a means of accumulating wealth in a concessionally taxed environment. It is not a strategy to manage intergenerational wealth. The definition would also prevent initiatives such as the COVID-19 early access scheme used widely during the pandemic to give those in financial distress access to quick cash (over 3 million people withdrew $37.8 billion from their superannuation funds). And, it is not a method of purchasing a home sooner.

As an aside, the Treasurer points out that the average super balance in Australia is $150,000 – taking account of all those with a super balance including new entrants into the workforce. For those 65 and over, the average balance is around $400,000 across all income brackets.

Superannuation and national building

The second component of the Treasury consultation is nation building. At a recent speech, the Treasurer stated, “to my mind, defining super’s task as delivering income for retirement isn’t to narrow super’s role in our economy…it’s to elevate it, and broaden it.” The consultation states:

“There is a significant opportunity for Australia to leverage greater superannuation investment in areas where there is alignment between the best financial interests of members and national economic priorities, particularly given the long‑term investment horizon of superannuation funds.”

The compulsory superannuation guarantee (SG) was introduced in 1992 at a rate of 3% rising to 9% by July 2002. Now, Australia’s superannuation pool has grown from around $148 billion in 1992 to over $3.3 trillion. It now represents 139.6% of gross domestic product (GDP) and is projected to grow to around 244% of GDP by 30 June 2061. Australia’s pool of pension assets is now one of the largest in the world, and the fourth largest in the OECD.

The consultation does not define how this ambition would be achieved.

*The Treasurer has ruled out changes to the existing early access hardship provisions for super.

The Federal Budget is released on 9 May 2023. Look out for our update with all the relevant news to you, your business and your super.

1 July 2023 Super Balance Increase but no Change for Contributions

The general transfer balance cap (TBC) – the amount of money you can potentially hold in a tax-free retirement account, will increase by $200,000 on 1 July 2023 to $1.9 million. The TBC is indexed to the consumer price index each December.

The TBC applies individually. If your transfer balance account reached $1.7m or more at any point before 1 July 2023, your TBC after 1 July 2023 will remain at $1.7m. If the highest amount in your account was between $1 and $1.7m, then your cap is proportionally indexed based on the highest ever balance your transfer balance account reached.

That is, the ATO will look at the highest amount your transfer balance account has ever been, then apply indexation to the unused cap amount.

For example, if you started a retirement income stream valued at $1,275,000 on 1 October 2022 and this was the highest point your account reached before 1 July 2023, then your unused cap is $425,000 ($1.7m-$1.275m). This unused cap amount is used to work out your unused cap percentage ($425k/$1.7m=25%). The unused cap percentage is then applied to the indexation increase ($200k*25%=$50k) to create your new TBC of $1,750,000.

But don’t worry, you don’t have to calculate this yourself, you can see your personal transfer balance cap, available cap space, and transfer balance account transactions online through the ATO link in myGov.

The caps on the contributions you can make into super however, will remain the same. That is, $27,500 for concessional contributions and $110,00 for non-concessional contributions. The contribution caps are linked to December’s average weekly ordinary time earnings (AWOTE) figures.

What will the ATO be Asking about your Holiday Home?

Taxpayers claiming deductions on holiday homes are in the ATO’s sights.

The ATO is more than a little concerned that people with holiday homes are claiming more deductions than they should and have published the starting questions they will be asking to scrutinise claims:

• How many days was it rented out and was the rent in line with market values?
• Where do you advertise for rent and were any restrictions placed on tenants?
• Have you, your family or friends used the property?

The problem is blanket claims for the holiday home regardless of the time the home was rented out or available for rent. You will need to apportion your expenses if:

• Your property is genuinely available for rent for only part of the year.
• Your property is used for private purposes for part of the year.
• Only part of your property is used to earn rent.
• You charge less than market rent to family or friends to use the property.

The ATO has also indicated that deductions might be limited if a property is only made available for rent outside peak holiday times and the location of the property (or other factors) mean that it is unlikely to be rented out during those periods.

The regulator is also likely to be suspicious if the owner claims that the property was genuinely available for rent during peak holiday periods but wasn’t deriving any income during those periods. This might indicate that the property was really being used for private purposes or that the advertised rental rate was unrealistic.

Whether a property is genuinely available for rent is a matter of fact. Factors that help demonstrate a property is genuinely available for rent include; it is available during key holiday periods, kept in a condition that people would want to rent it, tenants are not unreasonably turned away, advertised in ways that give it broad exposure to possible tenants, and the conditions are not so restrictive that tenants are unlikely to rent the property.

End of the FBT year fast approaching

The Fringe Benefits Tax (FBT) year ends on 31 March 2023. If you operate a business, we’ll be in contact with you shortly to work out whether or not your business needs to be registered for FBT (if you are not already) and start collecting the information to work out your FBT liability (if any). We’ll look at the detail of cars or other business assets used for private purposes, benefits provided to employees, loans, salary sacrifice agreements etc.

Quote of the month

“Without effort, your talent is nothing more than unmet potential. Without effort, your skill is nothing more than what you could have done but didn’t.”

Angela Duckworth, Author of Grit: The Power of Passion and Perseverance

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

Markets

Local:

The ASX200 index fell slightly by -0.16% over March, following a -2.5% fall in February.

Global:

The S&P 500: Rose by 3.5% over the month to complete a second consecutive positive quarter.

The Dow Jones Industrial Average: Advanced 1.89% in March.

Stoxx Europe 600 Index: Finished lower than the previous month to finish down 2.36%.

Gold:

The spot price for Gold steadied around $1,980 and gained more than 8% in March, as investors wagered in that interest rates have likely reached near their peak in this tightening cycle.

Iron Ore:

Iron Ore price remained steady MoM rising US $1 to finish March at US $127/ Mt. As expectations of weaker demand in the long term constrained a real price rebound.

Oil:

Brent Oil price continued to decline to finish the month at US $80/bbl.

Property

Housing:

After remaining virtually flat in February (-0.1%), CoreLogic’s national Home Value Index (HVI) posted the first month-on-month rise since April 2022, up 0.6% in March.

Dwelling values were higher across the four largest capital cities and most of the broad ‘rest-of-state’ regions, led by a 1.4% gain in Sydney. CoreLogic’s Research Director, Tim Lawless, put the rise down to a combination of low advertised stock levels, extremely tight rental conditions, and additional demand from overseas migration.

“Although interest rates are high and there is an expectation the economy will slow through the year, it’s clear other factors are now placing upwards pressure on home prices,” Mr Lawless said.

“Advertised supply has been below average since September last year, with capital city listing numbers ending March almost -20% below the previous five-year average. Purchasing activity has also fallen but not as much as available supply; capital city sales activity was estimated to be roughly -7% below the previous five-year average through the March quarter.

Economy

Interest Rates:

The RBA has finally halted its cash rate after 10 consecutive increases. This is the first board meeting since April 2022 without a rate rise. The Board recognises that monetary policy operates with a lag and that the full effect of this substantial increase in interest rates is yet to be felt.

Retail Sales:

Retail sales in Australia grew by 0.2% MoM to AUD 35.14 billion in February 2023, beating market estimates of a 0.1% rise but slowing from a marginally revised 1.8% gain in the previous month.

Bitcoin:

Bitcoin had a steady rise over March to finish the month at USD $27,583. A 17% increase from the previous month.

Bond Yields:

Australian government 10-year bond fell to 3.29% over March. The US 10-year bond also fell to 3.49%.

Exchange Rate:

Over March the Aussie dollar remained stable against both the American dollar at $0.671, and the Euro at $0.615.

Inflation:

Australia: The February “Consumer Price Index” (CPI) slowed to 6.8% from 7.4% in January.

USA: The latest data from February shows that the US inflation rate is 6.04%.

UK: Recent data shows the UK inflation rate is at 10.4%

EU: Euro area annual inflation was 8.5% in February 2023, down from 8.6 % in January 2023.

Consumer Confidence:

The Westpac Melbourne Institute Consumer Sentiment Index was unchanged at 78.5 in March, holding near historical lows. This marks the second consecutive month of extremely weak consumer sentiment. Index reads below 80 are rare, back-to-back reads even rarer. Indeed, both the COVID shock and the Global Financial Crisis saw only one month of sentiment at these levels. Runs of sub-eighty reads have only been seen during the late 1980s/early 1990s recession and in the ‘banana republic’ period of concern in 1986, when the Australian dollar was in free-fall after the Federal government lost its triple-A rating.

Employment:

Australia: Australia’s seasonally adjusted unemployment rate declined to 3.5% in February 2023 from January’s eight-month high of 3.7% and below market estimates of 3.6%, as the number of unemployed decreased by 16,500 to 507,500. People looking for full-time jobs dropped by 4,800 to 341,500, and those seeking part-time jobs – by 11,700 to 166.000.

USA: Total nonfarm payroll employment rose by 311,000 in February, and the unemployment rate edged up to 3.6%. Notable job gains occurred in leisure and hospitality, retail trade, government, and health care. Employment declined in information and in transportation and warehousing.

Agriculture:

The gross value of agricultural production is forecast to reach a record of $90 billion in 2022-2023. The value of exports is also expected to reach a record of $75 billion.

Purchasing Managers Index:

The Australian Industry Group Australian Performance of Manufacturing Index (Australian PMI®) fell 1.4 points to 49.1 points in March 2023. Results below 50 points indicate an economic contraction. The lower the number indicates a faster rate of contraction.

US Services PMI:

The S&P Global US Services PMI rose to 53.8 in March 2023 from 50.6 in January, easily beating market expectations of 50.5, preliminary estimates showed. It was the fastest rise in output since April 2022.

US Global Manufacturing PMI:

The S&P Global US Manufacturing PMI increased to 49.1 in March of 2023 from 47.3 in February, beating forecasts of 47, preliminary estimates showed. The reading pointed to the smallest contraction in the current five-month sequence of falling factory activity, amid a renewed rise in production and a softer fall in new orders.

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

Comments

Australia’s Migration Recovery

There are plenty of indicators to suggest that Australia`s economy has slowed sufficiently to keep inflation down, this can somewhat be backed up by the RBA holding the cash rate to 3.60% at the April meeting, but there are also some tailwinds for the Australian economy in 2023, with strong population growth key amongst them.

Recent ABS population data showed that Australia had recorded its highest level of net migration since pre GFC. In the September 2022 quarter, the national population grew 0.5%, driven significantly by a spike in net migration of 106,000 in the quarter. Over the past year, net overseas migration is up to 304,000 (a near record for annual growth).

The recovery of migration following the pandemic has helped to relieve some pressure from the labour market. However, the unemployment rate still sits at 3.5%, suggesting many organisations are still struggling to find enough workers. As the most recent population data available from the ABS records the September 2022 quarter, it is possible that net overseas migration has already moved to a record high. One of the key drivers for this sharp population rebound is the return of international students.

Border closures, particularly in China, had delayed the return of many international students to on-campus‑learning in Australia. TEQSA (Tertiary Education Quality and Standards Agency), the regulator for tertiary education in Australia, made an announcement in October 2022 that international students will need to return to in person learning by the second semester of 2023. This highlights the potential for strong net migration numbers to continue through the remainder of 2023.

There are many key factors impacting the return of students from different countries.

• Students planning to return to Australia from China may have had their plans brought forward, after an unexpected statement from the Chinese government instructed students enrolled in overseas institutions to return in person classes for the coming semester. This announcement was followed up with a series of exceptions, leaving some uncertainty as to the true impact of this policy. Regardless, in December 2022 an estimated 39% of Chinese international students were based overseas, a majority of whom are expected to return to Australia by the start of semester 2, 2023.
• Indian students have been much faster to return to Australia following the reopening of the border. In 2023 there will likely be far fewer Indian students returning as many came back to Australia already in 2022. Visa applications from Indian students grew by 24,145 from 2021 to 2022.
• The temporary relaxation of working restrictions for student visa holders in 2022, and some recent permanent changes have attracted many students from lower income nations. Visa applications from Nepalese students grew 149% from 2021 to 2022 and are 60% above their levels in 2019. These students are attracted to Australia by the combination of education and access to the high wages of the Australian labour market.

The continued recovery of international student numbers provides a tailwind for Australia’s overall population and income growth in 2023, providing some offset to the demand crunch coming via the Reserve Bank. On top of this, healthy numbers of international students have started to help ease labour shortages, particularly in industries like hospitality and retail.

Sources: ABS, AFR, Deloitte

Reverse mortgage demand surges as cost of living hits retirees

Cash-poor retirees are tapping into equity in their homes through reverse mortgages to cover rising living expenses as the industry tries to improve its tarnished reputation following the withdrawal of major banks.

As the population ages, policymakers are keen to encourage retirees to draw down on their wealth to fund their incomes, and Treasury’s Retirement Income Review of 2020 drew attention to reverse mortgages as an option.

Reverse mortgages are loans that allow people aged sixty or older to borrow against the equity in their home and not repay the lender until they move out, sell the home, or die.

Major banks stopped selling this type of loan last decade amid concerns about the risk to their reputations. A 2018 review by a corporate watchdog said reverse mortgages were playing a role in helping older Australians, but lenders had failed to consider the risks of the products, such as how retirees taking out the loans would afford future costs, such as aged care.

As the cost of living rises, and a government-provided reverse mortgage scheme grows in popularity, specialist lenders are reporting increasing demand for the products.

Dr Joshua Funder, chief executive of reverse mortgage provider Household Capital, said there was a growing awareness of the product, which people saw as a way to maintain or increase their income in the difficult economic climate.

Rising interest rates and falling house prices mean reverse mortgages – which have higher interest rates than normal home loans – will erode a borrower’s equity faster than otherwise.

But Funder said customers were being cautious in how much they borrowed, saying some might draw down an extra $1000 a month to help cover rising costs.

“We’re seeing people be very careful about meeting their non-discretionary needs and cost-of-living increases and leaving themselves home equity that will be available in the future to meet their needs regardless of interest rates and home prices,” Funder said.

He cited “increased debt consolidation and cost-of-living requests” as a key driver, alongside demand from retirees using the money for “modest lifestyle spending” such as on holidays or new cars, following an end to COVID-19 lockdowns.

It also said the federal government’s Home Equity Access Scheme, which provides limited reverse mortgages, had raised awareness. As older Australians can get a voluntary non-taxable loan from the Australian government. Which by using the equity in Australian real estate as security for the loan, are able to access extra funds.

Jarden analyst Grant Lowe said Australia’s reverse mortgage market had most likely been growing because of a “demographic tailwind” and the federal government’s involvement in the sector.

If the correct loan structure is obtained, a reverse mortgage provides a way of remaining in the family home instead of selling it to raise funds to live off. For many people, this is an enormous benefit and can relieve some of the pressures that the rising cost of living has provided.

Sources: AFR, Services Australia

$20k Small Business Energy Incentive

In a pre-Budget announcement, the Government has committed to a Small Business Energy Incentive Scheme that offers a bonus tax deduction of up to $20,000.

The Small Business Energy Incentive encourages small and medium businesses with an aggregated turnover of less than $50 million to invest in spending that supports “electrification” and more efficient use of energy.

Up to $100,000 of total expenditure will be eligible for the incentive, with the maximum bonus tax deduction of $20,000 per business. Eligible assets or upgrades will need to be first used or installed ready for use between 1 July 2023 and 30 June 2024 to qualify for the bonus deduction.

If your business is contemplating upgrading to improve energy efficiency, it’s worth waiting to see the detail of the proposal. We’ll bring you more details of the scheme and how your business might benefit as soon as they are released.

Look out for our 2023-24 Budget update with the details important to you, your business, and your superannuation.

‘OnlyFans’ Tax Risk Warning

The explosion of OnlyFans, YouTubers, TikTokers and others all offer an opportunity for ‘content creators’ to profit from the audiences they generate. But now the Tax Office has given notice to the booming industry.

Back in October 2022, OnlyFans CEO Ami Gan announced that the platform had reached a milestone – paying out $10 billion to content creators since its launch in 2016. While known for its adult content, the OnlyFans CEO intends to broaden the platform’s scope and provide a means for other content creators – chefs, personal trainers, etc – to utilise its subscription and reward model to generate income. While there are plenty of stories of content creators generating large incomes from the platform like Perth creator Lucy Banks who told Channel 7 she earnt $60,000 in one month, the average income per month is reportedly around USD $150-$180. Creators might also receive ‘gifts’ in various forms from their subscribers.

OnlyFans is not the only platform generating revenue for Australians; there are plenty of other stories. Google’s AdSense calculator estimates that for finance channels with 50,000 monthly views, estimated income is $15,012 ($9,390 for beauty & fitness channels). The message is, there are a lot of content creators generating benefits in a wide variety of forms and the Tax Office wants to ensure everyone is crystal clear about their expectations.

How content creators are taxed

A new update released by the Australian Taxation Office (ATO) in April outlines the regulator’s expectations for how content creators will be assessed for tax purposes:

Income tax on money, gifts and goods

If you make an income as a content creator, then it’s likely it will be assessed for tax purposes unless what you are doing is a genuine hobby with no expectation of generating a profit (see When is a side hustle a business?). For subscriber-based sites like OnlyFans, there is normally no question about the profit-making expectation.

The ATO’s guide also makes it clear that assessable income covers not only money but appearance fees, goods you receive, cryptocurrency, or gifts from fans. And, this is where the problem lies for most content creators. Income in the form of money is easy to track and report. Non-monetary income in the form of goods is not so easy. Let’s say a company sends you a handbag with a retail value of $800. The bag is yours to keep. The Tax Office expects you to declare the market value of the bag as income and pay tax on that income. If you receive multiple items throughout the year, or larger inducements like a destination holiday, then this might create a cashflow problem when you need to pay real money to the Tax Office for a ‘free’ product.

The ATO’s blanket statement that all ‘gifts’ and products should be reported as assessable income fails to recognise that it is not always quite that simple in practice. If you create content as a hobby and not as a profit-making venture for example, and a company sends you an unsolicited gift, the position is a little less clear. It really comes down to the specific scenario.

The timing of when you receive income is also important for content creators. 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 an OnlyFans content creator for example, this is when your OnlyFans account is credited, not when you direct the money to be paid to your personal or business account. So, squirrelling it away from the ATO in your platform account won’t protect you from paying tax on it. And, from 1 July 2023, a new reporting regime will require electronic distribution platforms to report their transactions to the ATO. The regime starts with ride sharing and short-term accommodation platforms, then extends to all other platforms, including OnlyFans, from 1 July 2024.

Do I need to register for GST?

Generally, once you earn or expect to earn $75,000 or more per annum, you will need to register for GST. The exception to the $75,000 threshold is Uber and other ride-sourcing drivers who must have an ABN and be registered for GST regardless of how much they earn.

However, even if a content creator is required to register for GST, this doesn’t necessarily mean that all of the money and goods they receive will trigger a GST liability. For example, the GST rules contain some special provisions which sometimes enable supplies made to foreign resident customers to be GST-free (although they still normally need to be taken into account in determining whether the supplier needs to register for GST).

Even if GST-free income is received from foreign resident customers, it will normally still be possible to claim back GST credits for the expenses incurred in connection with these activities.

What deductions can I claim?

The upside of being a profit-making venture is that if you spend money to generate income, you can claim a deduction for certain expenses that directly relate to that income. Items such as video production equipment, microphones, online stores etc., might be deductible although in some cases the deductions will be spread over a number of income years. However, you can’t normally claim items such as cosmetic surgery, gym memberships, ‘every day’ clothes, or the cost of your hairdresser ‘because you need to look good’. The Tax Office does not consider that these are directly related to how you earn your income and that in many cases, these are still primarily private expenses (see the ATO’s occupation specific guides for what you can claim).

When is a side hustle a business?

The distinction between something you do on the side and carrying on a business can be a fine line. There is no one test for what determines whether you are carrying on a business versus a hobby but factors such as the regularity of your transactions, whether or not you are promoting yourself as a business (developing a brand name etc.,), if you engage in marketing activities, whether you intend to develop a business and make a profit (or have the capacity to generate a profit over time), the size, scale and permanency of your activities, and whether you operate in a business-like manner, all go toward determining whether what you are doing is a business or merely a hobby.

If your activities are just a hobby then the income is not assessable, and the expenses are not deductible. If you are carrying on a business, then you need to declare the income earned but you also get to claim deductions for the cost of the business activities (although this still needs to be analysed to see whether amounts can be deducted upfront or over a period of time).

ATO Rental Property Blitz

The Australian Taxation Office (ATO) has launched a full-on assault on rental property owners who incorrectly report income and expenses.

The ATO’s assessment, based on previous data matching programs, is that there is a tax gap of around $1 billion from incorrect reporting of rental property income and expenses. And, they would like that back now please.

As a result, banks and other financial institutions will be required to hand the ATO residential investment loan data on an estimated 1.7 million rental property owners for the period from 2021-22 through to 2025-26.

The data collected will include:

• identification details (names, addresses, phone numbers, dates of birth, etc.)
• account details (account numbers, BSB’s, balances, commencement and end dates, etc.)
• transaction details (transaction date, transaction amount etc.)
• property details (addresses, etc.)

In addition to identifying whether landlords are declaring their residential investment property income at all, the data matching program is looking specifically at how rental property loan interest and borrowing expense deductions have been reported in the rental property schedules, and whether net capital gains have been declared for property used to generate income.

Banks are not the only source of data. In a complimentary program, the ATO is targeting rental property management software. Over the last decade, much of the financial management of residential rental property has moved online, facilitated by various platform providers. The ATO will require these rental property software providers to provide details of property owners including their bank details, income, expenses and the amount of those expenses, and details of their associated rental properties and agents. Data collection of the estimated 1.6 million individuals in this data program will cover the period from 2018-19 to 2022-23.

With that, let’s recap on the common problem areas:

Claiming interest and redrawing on the loan

The interest component of your investment property loan is generally deductible. However, if you redraw on your invest loan for personal purposes, interest on this portion of the loan will not be deductible. This means that interest expenses will need to be apportioned into deductible and non-deductible parts and repayments will often need to be apportioned too. If the redrawn funds are used to produce investment income, then the interest on this portion of the loan should be deductible.

Borrowing costs

You can claim a deduction for borrowing costs (typically over five years) such as application fees, mortgage registration and filing, mortgage broker fees, stamp duty on mortgage, title search fee, valuation fee, mortgage insurance and legals on the loan. Life insurance to pay the loan on death is not deductible even if taking out the insurance was a requirement to get finance. If the loan is repaid early or refinanced, the whole amount including mortgage discharge expenses and penalty interest can often be deductible.

Repairs or maintenance

Deductions claimed for repairs and maintenance is an area that the Tax Office always looks closely at so it’s important to understand the rules. An area of major confusion is the difference between repairs and maintenance, and capital works. While repairs and maintenance can be claimed immediately, the deduction for capital works is generally spread over a number of years.

Repairs must relate directly to the wear and tear resulting from the property being rented out. This generally involves a replacement or renewal of a worn out or broken part – for example, replacing damaged palings of a fence or fixing a broken toilet. The following expenses will not qualify as deductible repairs, but are capital:

• Replacement of an entire asset (for example, a complete fence, a new hot water system, oven, replacing a shower curtain with a glass wall, etc.)
• Improvements and extensions.

Also remember that any repairs and maintenance undertaken to fix problems that existed at the time the property was purchased are not deductible.

Access to home guarantee scheme expanded to friends and siblings

From 1 July 2023, access to the Government’s Home Guarantee Scheme will be expanded to joint applications from “friends, siblings, and other family members” and to those who have not owned a home for at least 10 years.

The eligibility criteria for access to the First Home Guarantee Scheme and Regional First Home Buyers Scheme will be expanded. From 1 July 2023, the schemes will no longer be limited to individuals and couples who are married or in de facto relationships, but will also include eligible friends, siblings, and other family members for joint applications. In addition, the requirement for the applicants to be Australian citizens at the time they enter the loan has been extended to include permanent residents.

The schemes guarantee part of a first home owner’s home loan enabling them to purchase a home with as little as 5% deposit without paying Lenders Mortgage Insurance. Guarantees are capped at 15% of the value of the property. Thirty five thousand places are available for the First Home Guarantee Scheme each financial year. From 1 October 2022 there will be ten thousand places available each financial year until 30 June 2025 for the Regional First Home Buyers Scheme.

Eligibility to the Family Home Guarantee will also be extended. From 1 July 2025, the scheme will no longer be restricted to single parents with at least one dependent natural or adopted child, but will also be available to borrowers who are single legal guardians of dependent children such as aunts, uncles and grandparents.

The Family Home Guarantee guarantees the home loan of an eligible single parent with at least one dependent child enabling them to purchase a home with as little as 2% deposit without paying Lenders Mortgage Insurance. The guarantee is capped at 15% of the value of the property. Five thousand places are available to the scheme each year to 30 June 2025.

Question of the month: Company loan to pay down the mortgage

A friend’s accountant suggested that they could reduce interest on non-deductible debt by using company cash to offset their personal mortgage, then transferring the cash back by 30 June. Is this an acceptable strategy?

This might initially sound like a brilliant strategy but what is really happening is that you are using company funds to derive a personal benefit. Doing this once might not attract attention, but doing this more than once might trigger a deemed unfranked dividend under Division 7A. Section 109R is designed for scenarios like this. If this occurs, the repayment you made will be ignored, meaning that a deemed dividend could be triggered in relation to the funds initially borrowed from the company unless a complying loan agreement is put in place, in which case minimum loan repayments would need to be made to prevent a deemed dividend from arising.

For example, let’s assume you are a shareholder of the company (or an associate of a shareholder) and you borrow money from the company on 1 July 2022. This loan would generally fall within the scope of Division 7A, but a deemed dividend can be avoided if the loan is fully repaid by the earlier of the due date and actual lodgement date of the company’s 2023 tax return.

However, if you repay the loan but it appears that you intend to borrow a similar or larger amount from the company when making the repayment then the repayment can be ignored. The main exception to this is where the repayment is made in a way that is taxable to the individual (e.g., dividends or directors’ fees are set-off against the loan balance).

One of the most common situations where section 109R could apply is where funds are taken from the company bank account and placed into a director’s home loan offset account. Even if the funds are transferred back to the company before the end of the year, there is a significant risk of section 109R applying if the pattern repeats. That is, the money will be treated as a dividend and taxed as assessable income.

Right to super to be enshrined in National Employment Standards

The Government has announced that it will enshrine a right to superannuation payments in the National Employment Standards (NES).

Currently, workers not covered by a modern award or an enterprise agreement containing a term requiring an employer to make superannuation contributions have to rely on the ATO to recover their lost superannuation entitlements.

By bringing the right to superannuation into the NES, workers will have the right to directly pursue superannuation owed to them. Employers may also face civil penalties if they do not comply with the entitlement.

Penalties of up to $82,500 per breach apply to companies that are found to have contravened the NES.

The ATO’s most recent estimate of unpaid superannuation indicates that workers lost $3.4 billion in unpaid super in 2019‑20.

Quote of the month

“impossible is temporary…”

“a man who has no imagination has no wings.”

Muhammad Ali

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.

Workers owed $3.6bn in super guarantee

Workers are owed over $3.6 billion in superannuation guarantee according to the latest Australian Taxation Office estimates – a figure the Government and the regulators are looking to dramatically change.

Superficially, the statistics on employer superannuation guarantee (SG) compliance look pretty good with over 94%, or over $71 billion, collected without intervention from the regulators in 2020-21.

The net gap in SG has also declined from a peak of 5.7% in 2015-16 to 5.1% in 2020-21. The COVID-19 stimulus measures helped drive up the voluntary contributions with the largest increase in 2019-20, which the Australian Taxation Office (ATO) says they “suspect reflects the link between payment of super contributions and pay as you go (PAYG) withholding by employers. PAYG withholding is linked to the ability to claim stimulus payments such as Cash Flow Boost.”

Despite these gains, a little adds up to a lot and 5.1% equates to a $3.6 billion net gap in payments that should be in the superannuation funds of workers. Lurking within the amount owed is $1.8 billion of payments from hidden wages. That is, off-the-books cash payments, undisclosed wages, and non-payment of super where employees are misclassified as contractors.

In addition, the ATO notes that as at 28 February 2022, $1.1 billion of SG charge debt was subject to insolvency, which is unlikely to ever be recovered. Quarterly reporting enables debt to escalate before the ATO has a chance to identify and act on an emerging problem.

Employers should not assume that the Government will tackle SG underpayments the same way they have in the past with compliance programs. Instead, technology and legislative change will do the work for them.

Single touch payroll matched to super fund data

Single touch payroll (STP), the reporting mechanism employers must use to report payments to workers, provides a comprehensive, granular level of near-real time data to the regulators on income paid to employees. The ATO is now matching STP data to the information reported to them by superannuation funds to identify late payments, and under or incorrect reporting.

Late payment of quarterly superannuation guarantee is emerging as an area of concern with some employers missing payment deadlines, either because of cashflow difficulties (i.e., SG payments not put aside during the quarter), or technical issues where the timing of contributions is incorrect. Super guarantee needs to be received by the employee’s fund before the due date. Unless you are using the ATO’s superannuation clearing house, payments are unlikely to be received by the employee’s fund if the quarterly payment is made on the due date. The super guarantee laws do not have a tolerance for a ‘little bit’ late. Contributions are either on time, or they are not.

When SG is paid late

If an employer fails to meet the quarterly SG contribution deadline, they need to pay the SG charge (SGC) and lodge a Superannuation Guarantee Statement within a month of the late payment. The SGC applies even if you pay the outstanding SG soon after the deadline. The SGC is particularly painful for employers because it is comprised of:

• The employee’s superannuation guarantee shortfall amount – i.e., the SG owing.
• 10% interest p.a. on the SG owing for the quarter – calculated from the first day of the quarter until the 28^th day after the SG was due, or the date the SG statement is lodged, whichever is later; and
• An administration fee of $20 for each employee with a shortfall per quarter.

Unlike normal SG contributions, SGC amounts are not deductible, even if you pay the outstanding amount.

And, the calculation for SGC is different to how you calculate SG. The SGC is calculated using the employee’s salary or wages rather than their ordinary time earnings (OTE). An employee’s salary and wages may be higher than their OTE, particularly if you have workers who are paid overtime.

It’s important that employers that have made late SG payments lodge a superannuation guarantee statement quickly as interest accrues until the statement is lodged. The ATO can also apply penalties for late lodgment of a statement, or failing to provide a statement during an audit, of up to 200% of the SG charge. And, where an SG charge amount remains outstanding, a company director may become personally liable for a penalty equal to the unpaid amount.

The danger of misclassifying contractors

Many business owners assume that if they hire independent contractors, they will not be responsible for PAYG withholding, superannuation guarantee, payroll tax and workers compensation obligations. However, each set of rules operates slightly differently and, in some cases, genuine contractors can be treated as if they were employees. There are significant penalties faced by employers that get it wrong.

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

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

‘Payday’ super from 1 July 2026

The Government intends to introduce laws that will require employers to pay SG at the same, or similar time, as they pay employee salary and wages. The logic is that by increasing the frequency of SG contributions, employees will be around 1.5% better off by retirement, and there will be less opportunity for an SG liability to build up where the employer misses a deadline.

Originally announced in the 2023-24 Federal Budget, Treasury has released a consultation paper to start the process of making payday super a reality. Subject to the passage of the legislation, the reforms are scheduled to take effect from 1 July 2026.

What is proposed?

The consultation paper canvasses two options for the timing of SG payments: on the day salary and wages are paid; or a ‘due date’ model that requires contributions to be received by the employee’s superannuation fund within a certain number of days following ‘payday’. A ‘payday’ captures every payment to an employee with an OTE component.

The SGC would also be updated with interest accruing on late payments from ‘payday’.

Currently, 62.6% of employers make SG payments quarterly, 32.7% monthly, and 3.8% fortnightly or weekly.

We’ll bring you more on ‘payday’ super as details are released. For now, there is nothing you need to do.

Up to 10 years in prison for deliberate ‘wage theft’

Legislation currently being debated in Parliament will introduce a new criminal offence for intentional “wage theft”. If enacted, in addition to the criminal offence, a fine will apply. The fine is three times the underpayment and:

• For individuals – 5,000 penalty units (currently $1,565,000).
• For businesses – 25,000 penalty units (currently $7,825,000).

The reforms are not intended to capture unintentional mistakes and a compliance ‘safe harbour’ will be introduced by the Fair Work Ombudsman for small businesses.

In addition to addressing wage theft, the Bill also seeks to:

• Replace the definition of a ‘casual employee’ and create a pathway to permanent work.
• Change the test for ‘sham contracting’ from a test of ‘recklessness’ to ‘reasonableness.’
• Bolster the powers of the Fair Work Commission including the ability to set minimum standards for ‘employee-like’ workers including those in the gig economy.
• Introduce a new offence of “industrial manslaughter” in the Work Health and Safety Act 2011.

The Bill introducing the reforms has been referred to the Senate Education and Employment Legislation Committee. The Committee is scheduled to report back in February 2024.

“Wage-theft” is illegal in Queensland, South Australia and Victoria under State laws. While the Federal Bill is not intended to interfere with State legislation, the impact of the interaction between the existing State legislation and the proposed Federal reforms is unclear.

Over the last two years, the Fair Work Ombudsman has recovered over $1 billion in back-payments, mostly from large corporates and universities. Court ordered penalties of $6.4 million were paid by employers across this same time period.

When trust distributions to a company are left unpaid

What happens when a trust appoints income to a private company beneficiary but does not actually make the payment?

The tax treatment of this unpaid amount was at the centre of a recent case before the Administrative Appeals Tribunal (AAT) that saw a taxpayer successfully challenge the ATO’s long held position (Bendel and Commissioner of Taxation [2023] AATA 3074). For many years, the ATO’s position has been that if a trust appoints income to a private company beneficiary but does not actually make the payment, this unpaid amount can be treated as a loan. Under Division 7A of the tax rules, these loans can be taxed as unfranked dividends unless they are managed using a complying loan agreement with annual principal and interest repayments.

This AAT decision challenges an important ATO position, with the tax outcomes being potentially significant for trust clients that currently owe (or may have owed in the past) unpaid trust entitlements to related private companies.

But this is not the end of this story. On 26 October 2023, the Tax Commissioner lodged a notice of appeal to the Federal Court. There is no guarantee that the Federal Court will reach the same conclusion as the AAT. We will need to wait and see.

As the case progresses, we will let you know about the impact.

Fixed-term employment contracts limited to 2 years

From 6 December 2023, employers can no longer employ an employee on a fixed-term contract that:

• is for 2 or more years (including extensions)
• may be extended more than once, or
• is a new contract:
  • that is for the same or a substantially similar role as previous contracts
  • with substantial continuity of the employment relationship between the end of the previous contract and the new contract, and either:
• the total period of the contracts is 2 or more years,
• the new contract can be renewed or extended, or
• a previous contract was extended.

The changes were introduced as part of the Pay secrecy, job ads and flexible work amendments. See the Fair Work Ombudsman’s website for more details.

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

Treasury has released draft legislation for consultation to enact the Government’s plan to increase the tax rate on earnings on superannuation balances above $3m from 15% to 30% from 1 July 2025. This is the final step before the legislation is introduced into Parliament.

From a planning perspective, for those with superannuation balances close to or above $3m, it will be important to explore the implications of your personal situation – there is no one size fits all strategy and what is best for you will depend on how a potentially wide array of factors impact on your individual scenario.

When is food GST-free?

Chobani plain yoghurt is GST-free but Chobani’s ‘flip’ range is taxable? A recent case before the AAT demonstrates how fine the dividing line is between GST-free and taxable foods.

Back in 2000 when the Goods & Services Tax (GST) was first introduced, basic food was excluded to secure the support of the Democrats for the new tax regime. Twenty three years later, the result of this exclusion is an unwieldy dividing line between GST-free and taxable foods that is consistently tested and altered. It is this dividing line that US yoghurt giant Chobani Pty Ltd recently tested in a case before the Administrative Appeals Tribunal (AAT).

At the centre of the case was Chobani’s Flip Strawberry Shortcake flavoured yoghurt and whether the product, composed of a tub of strawberry flavoured yoghurt with a separate tub of baked cookie and white chocolate pieces, is subject to GST. If the two components were sold in isolation, the baked cookie pieces would be taxable and the yoghurt GST-free.

Chobani had originally treated the flip yoghurt range as GST-free, relying on a 2001 GST ruling that allowed “a supply that appears to have more than one part but is essentially a supply of one thing” to be a composite supply. A product that is a composite supply could be treated as GST-free if the other components did not exceed the lesser of $3 or 20% of the overall product. In Chobani’s case, this meant that they could treat the flip yoghurt as GST-free.

Then in 2021, the ATO advised Chobani that its position had changed and it intended to treat the flip yoghurt as a combination food and therefore taxable.

Under the GST system, ‘combination foods’ where at least one of the food components is taxable, are subject to GST. Lunch packs of tuna and crackers, for example, are a combination food and therefore GST applies to the whole product because it is intended that the tuna and crackers are eaten together. But, where the food is a ‘mixed supply’, where each item is separate from the other and not intended to be consumed together, the GST will apply (or not) to each individual product. An example would be a hamper.

In the Chobani case, the AAT found in favour of the Commissioner’s interpretation that the flip product was a combination food and therefore subject to GST on the whole product.

The outcome of the Chobani test case has a number of implications. The first is that the ATO has issued a new draft GST ruling on combination foods (GST 2023/D1) replacing the previous guidance. The guidance states that three principles apply when determining whether there is a supply of a combination food:

• There must be at least one separately identifiable taxable food.
• The separately identifiable taxable food must be sufficiently joined together with the overall product.
• The separately identifiable taxable food must not be so integrated into the overall product, or be so insignificant within that product, that it has no effect on the essential character of that product.

The second implication is that at least one classification on the ATO’s GST status of major product lines list will change. Weirdly, dip (with biscuits, wrapped individually and packaged together), was listed as a mixed supply, not a combination food.

In a previous case, Birds Eye (Simplot Australia) was also unsuccessful in its appeal to the Federal Court that their frozen vegetable products that combined omelette, rice or grains were GST-free. The Court determined that the foods were either prepared meals or a combination of foods and therefore taxable.

For food manufacturers, importers and distributors, it is important to keep up to date with the changing GST landscape and ensure that you are utilising the correct classifications – it’s a moving feast!

Warning: Redrawing investment loans

The ATO estimates that incorrect reporting of rental property income and expenses is costing around $1 billion each year in forgone tax revenue. A big part of the problem is how taxpayers are claiming interest on their investment property loans.

We’ve seen an uptick in ATO activity focussing on refinanced or redrawn loans. This activity is a result of a major data matching program of residential property loan data from financial institutions from 2021-22 to 2025-26. This data is being matched to what taxpayers have claimed on their tax returns. Those with anomalies can expect contact from the ATO to explain the discrepancy.

If you have an investment property loan and redraw on the loan for a different purpose to the original borrowing, the loan account becomes a mixed purpose account. Interest accruing on mixed purpose accounts need to be apportioned between each of the different purposes the money was used for.

On the other hand, if the redrawn funds are used to produce investment income, then the interest on this portion of the loan should be deductible.

For example, if you have redrawn on the loan to pay for a private holiday, or pay down personal debt, then the interest relating to this portion of the loan balance is not deductible. Not only will the interest expenses need to be apportioned into deductible and non-deductible parts, but repayments will normally need to be apportioned too.

Withdrawals from an offset account are treated as savings rather than a new borrowing. If you have a loan account and an interest offset account is attached to this account that reduces the interest payable on the loan, withdrawing funds from the offset account will typically increase the amount of interest accruing on the loan, but won’t change the deductible percentage of the interest expenses. That is, when you withdraw funds from the offset account this is really a withdrawal of savings and won’t impact on the extent to which interest accruing on the loan account is deductible.

If you have a home loan that was used to acquire your private home and you have funds sitting in an offset account, withdrawing those funds to pay the deposit on a rental property won’t enable you to claim any of the interest accruing on the home loan. However, if you redraw funds from the home loan to acquire a rental property then interest accruing on this portion of the loan should be deductible. The tax treatment always depends on how the arrangement is structured.

Think you might have a problem? Contact us and we can investigate the issue before the ATO contact you.

Quote of the month

“Do your little bit of good where you are; it’s those little bits of good put together that overwhelm the world.”

Desmond Tutu, Anglican Bishop and theologian

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

Markets

Local:

The ASX200 index performed well in November, rising by 5.03%

Global:

The S&P 500 was up 8.92% in November, bringing its YTD return to 18.97%.

The Dow Jones Industrial Average rose 8.77% for the month and was up 8.46% YTD.

The European STOXX Europe 600 Index ended November 1.35% higher, as a steep decline in inflation and falling bond yields lifted investor sentiment.

Gold:

The spot price for Gold continued to trend higher, finishing the month at US $2,035.

Iron Ore:

Iron Ore price in November averaged US $130.5/Mt, up by US $11.5/Mt month-on-month, as sentiment remains positive from more funds being poured into the Chinese economy.

Oil:

Brent Oil price continued to trend lower finishing the month at US $80.86/bbl, down from US $85.02/bbl in October.

Property

Housing:

CoreLogic’s national Home Value Index (HVI) rose 0.6% in November, the smallest monthly gain since the growth cycle commenced in February. Despite the slowdown, the national HVI reached a new record high in November. After falling -7.5% from a peak in April 2022 to a trough in January 2023, housing values have bounced 8.3% higher over the past 10 months.

Economy

Interest Rates:

Reserve Bank governor Michele Bullock has left the cash rate on hold at 4.35%, but warned she may be forced to lift interest rates next year if domestically driven inflationary pressures remain strong.

Retail Sales:

Australian retail turnover fell 0.2% in October 2023, according to seasonally adjusted figures released by the Australian Bureau of Statistics (ABS). This follows rises of 0.9% in September 2023 and 0.2% in August 2023.

Bond Yields:

Australia’s 10-year government bond yield rose above 4.3%, rebounding from 11-week lows and tracking a rise in US Treasury yields as investors continued to assess the global economic and interest rate outlook.

The U.S. 10-year Treasury yield finished November at 4.37%.

Bitcoin:

The average closing price for Bitcoin (BTC) last month was $36,596.16. Leaving it up 8.8% for the month and the latest price is currently sitting at $42,194.

Exchange Rate:

The Aussie dollar remained steady in November against the American dollar, at $0.665, and against the Euro at $0.606.

Inflation:

Australia: The monthly Consumer Price Index (CPI) indicator rose 4.9% in the 12 months to October 2023, Leigh Merrington, acting ABS head of prices statistics, said: “The 4.9% increase is down from 5.6% in September and below the peak of 8.4% in December 2022.”

EU: Euro area annual inflation is expected to be 2.4% in November 2023, down from 2.9% in October 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 November (6.9%, compared with 7.4% in October).

US: The annual inflation rate in the US slowed to 3.2% in October 2023 from 3.7% in both September and August, and below market forecasts of 3.3%. Energy costs dropped 4.5% (vs -0.5% in September), with gasoline declining 5.3%.

Consumer Confidence:

The Westpac-Melbourne Institute Index of Consumer Sentiment declined 2.6% to 79.9 in November, down from 82 in October. The RBA’s November rate hike has put renewed pressure on family finances and reignited concerns about both the rising cost of living and the prospect of further rate rises to come. Previous months had been showing some tentative signs that sentiment was starting to lift out of the deep pessimism that has prevailed since the middle of last year. That rally looks to have been cut short before it even really began.

Employment:

Australia: The unemployment rate increased by 0.2 percentage points to 3.7% in October (seasonally adjusted). Bjorn Jarvis, ABS head of labour statistics, said: “With employment increasing by 55,000 people, and the number of unemployed people increasing by 28,000, the unemployment rate rose to 3.7% in October. This was back to around where it had been in July and August.

USA: Total nonfarm payroll employment increased by 150,000 in October, and the unemployment rate changed little at 3.9%. Job gains occurred in health care, government, and social assistance. Employment declined in manufacturing due to strike activity.

Purchasing Managers Index:

The headline seasonally adjusted Judo Bank Australia Manufacturing Purchasing Manager’s Index™ (PMI) posted 47.7 in November, down from 48.2 in October. The latest reading signaled a ninth monthly deterioration in manufacturing sector conditions and at the quickest 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 Business Activity Index posted 50.8 in November, matching the earlier released ‘flash’ estimate and little-changed from October’s reading of 50.6. The latest data signaled the fastest expansion in output since July, albeit only marginal and slower than the long-run series average.

US Global Manufacturing PMI:

The seasonally adjusted S&P Global US Manufacturing Purchasing Managers’ Index™ (PMI) posted 49.4 in November, unchanged from the earlier released ‘flash’ estimate, but down from 50.0 in October. The fall in the headline figure signaled a renewed decline in the health of the manufacturing sector and one that was the strongest since August.

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

Comments

The Housing Affordability Report

The recent report by ANZ and CoreLogic has highlighted many of the challenges we are currently facing in terms of home buying, as well as some of the small opportunities that still exist despite the highly inflated market.

CoreLogic’s national home value index (HVI) rose 0.9% in October, up further from a 0.7% rise in September. Since finding a trough in January 2023, the national HVI has increased by 7.6%, leaving the index only 0.5% below the previous historic high recorded in April 2022.

This has shown that home values are still rising even as interest rates continued to rise through the start of the year, this has created a dual challenge for the next cohort of buyers.

The average new occupier mortgage rate across all lenders has been reported at 5.9% in June this year. Historically, increases in interest rates have put downward pressure on housing prices, but strong net overseas migration, constraints on housing supply, and the recent fall in the average number of people per dwelling, have all pushed prices higher.

Furthermore, a 20% deposit on the median home value in Australia currently represents 148% of median household income, compared with a historic five-year average of 136%. Taking inflation into account, real incomes fell through the June quarter, meaning there is less left over for servicing housing costs after other necessary expenditures like energy bills and groceries.

This presents a particular challenge for many first home buyers. Home owners often benefit from gains in home values to put toward their next purchase, while first home buyers must accumulate a deposit in an environment where home price growth is again outpacing growth in income. This ‘deposit hurdle’ was the biggest affordability challenge throughout the 2010s.

Now, first home buyers who are able to clear the deposit hurdle and serviceability assessment must dedicate more of their income to housing costs. The national estimate of median income required to service new mortgage costs are at a near-record high in the series (45.5% of income), while the years to save a deposit is estimated to be 9.9 years. For prospective first home buyers in the rental market, the portion of income to service rent at the median level pushed to record highs in the June quarter, at 31.4%. Combined with other increases in the cost of living and limited wage growth, more savers are likely to see a slowdown in how quickly they can build their deposit. This is also reflected in the household savings ratio derived from ABS data, which fell to 3.5% in the June quarter.

First home buyer activity has been declining fairly consistently since a peak in January 2021. ABS housing finance data (figure 2) shows the number of monthly first home buyer loan commitments over time. First home buyer activity often becomes concentrated under periods of government incentives.

Looking at the larger regional cities within Australia, there were 52 house or unit markets that remained serviceable, at 30% or less of median income required to service a new mortgage. The 52 markets represent around 30% of the 174 markets analysed.

There are several reasons these markets are affordable, though not all of them will be appealing to prospective home buyers. The cheapest three markets by median value are in the Australian outback, and income measures in these markets can skew higher because of employment across highly compensated sectors like mining and construction. These areas are often cheaper to service a mortgage in than rent because the temporary nature of work on mining projects often makes temporary accommodation more desirable.

Other markets are in major cities and are on the periphery of the greater capital city region. These include Sydney’s South West, Adelaide North and Mandurah in Perth, which are among the lowest ranked regions by median household income in each city. There were many locations identified across Perth and Brisbane where 30% or less of median household income was required to service a mortgage, though these were all unit markets. The relatively affordable nature of these markets may also explain the very positive internal migration trends seen across Brisbane and Perth in the past couple of years.

Looking ahead, the multiple challenges faced by prospective first home buyers may start to ease from mid-2024 onwards. ANZ forecasts the official cash rate will move lower from late 2024, and though the fall in rates will be modest over the medium term, this could help relieve ongoing housing costs for home owners. In the meantime, regional analysis of affordability metrics suggests there are markets where deposit hurdles are relatively low, and serviceability is manageable, though this may come at a compromise on the size and location of homes relative to some first home buyer’s expectations.

Sources: ABS, ANZ, CoreLogic

The controversial case of the taxpayer who claimed a loss on their home

A decision by the Administrative Appeals Tribunal has the tax world in a flurry after the Tribunal found in favour of a taxpayer who sold the apartment she lived in for a loss, then claimed the $265,935 loss in her tax return as a deduction.

In this case, the taxpayer successfully argued that the purchase and sale of the apartment was a short-term profit making venture and that the loss generated from this could be claimed as a tax deduction. The tax rules generally allow you to deduct losses that relate to a commercial activity, although you cannot claim the loss if it is private or capital in nature. The taxpayer argued that she acquired the apartment in order to make a short-term profit and that the loss that was made on the sale should be deductible, even though she had lived in the property as her private residence across the ownership period. The Australian Taxation Office (ATO), as you can imagine, had a different point of view.

The facts of the case were:

• July 2015 – The taxpayer lived in a large family home. When her husband passed away, she entered into an ‘off-the-plan’ contract to purchase an apartment intended to be completed by 30 June 2019.
• December 2016 – The taxpayer was notified that completion of the off-the-plan apartment was delayed until 30 June 2020.
• May 2018 – Taxpayer settles on the sale of her family home on advice from her real estate agent that it was a good time to sell.
• May 2018 – Taxpayer settled on another apartment, as a purchaser, in the same complex that had been completed. She had money from the sale of her family home that she could use, and only intended to keep the property for a short period of time as she needed to use the funds to settle the off-the-plan apartment. Her position was that it was an opportunity to make a profit.
• April 2020 – The taxpayer entered into a contract to sell the apartment at a loss during the first COVID lockdown.
• July 2020 – Settlement on sale of the apartment occurred.
• July 2020 – The purchase of the off-the-plan apartment completed and was settled. A substantial portion of the proceeds of the sale of the other apartment, and some of the proceeds of the sale of the family home, were used to settle the off-the-plan apartment.

The Tax Commissioner’s position was that someone approaching the opportunity in a business-like manner as a profit-making venture would not live in the apartment and would have waited to sell if the market was not favourable.

The Tribunal set a low bar for proof of a profit-making intention and found that the fact that the taxpayer lived in the property was secondary to her profit-making intent.

The reason why this case is controversial is not simply because of the loss claimed by one taxpayer. It is because of the broader implications to property owners if the ATO determines that a transaction is commercial in nature and taxes any profit as ordinary income rather than under the Capital Gains Tax (CGT) provisions. For example, if the taxpayer in this case had made a profit instead of a loss, she would have paid tax on the profit at her marginal tax rate. She would not have been able to apply the main residence exemption or the CGT discount.

One of the important things to take from this case is that living in a property doesn’t necessarily guarantee that the sale of the property will be taxed under the CGT rules or will qualify for the main residence exemption. For example, property ‘flippers’ who buy and renovate a house may face a significant personal tax bill on any gain they make with no access to the concessions that exist within the CGT rules.

It will be some time before we know the full implications of this case and the ATO is yet to confirm whether it will appeal the decision. Either way, determining whether a transaction is taxed on revenue or capital account can be a complex process and it is important to seek advice before entering into transactions involving property.

Bah humbug: The Christmas tax dilemma

Don’t want to pay tax on Christmas? Here are our top tips to avoid giving the Australian Tax Office a bonus this festive season.

1. Keep team gifts spontaneous

$300 is the minor benefit threshold for FBT so anything at or above this level will mean that your Christmas generosity will result in a gift to the ATO at a rate of 47%. To qualify as a minor benefit, gifts also have to be ad hoc – no monthly gym memberships or giving one person multiple gift vouchers amounting to $300 or more.

Gifts of cash from the business are treated as salary and wages – PAYG withholding is triggered and the amount is normally subject to the superannuation guarantee.

Aside from the tax issues, think about what will be of value to your team. The most appreciated gift is the one that means something to the individual. Giving a bottle of wine to someone who doesn’t drink, chocolates to a health fanatic, or time off to someone with excess leave, isn’t going to garner much in the way of goodwill. A sincere personal message will often have a greater impact than a generic gift.

2. The FBT Christmas party crunch

If you really want to avoid tax on your work Christmas party then host it in the office on a workday. This way, Fringe Benefits Tax (FBT) is unlikely to apply regardless of how much you spend per person. Also, taxi travel that starts or finishes at an employee’s place of work is exempt from FBT. So, if you have a few team members that need to be loaded into a taxi after overindulging in Christmas cheer, the ride home is exempt from FBT.

If your work Christmas party is out of the office, keep the cost of your celebrations below $300 per person if you want to avoid paying FBT. The downside is that the business cannot claim deductions or GST credits for the expenses if there is no FBT payable in relation to the party.

If the party is held somewhere other than your business premises, then the taxi travel is taken to be a separate benefit from the party itself and any Christmas gifts you have provided. In theory, this means that if the cost of each item per person is below $300 then the gift, party and taxi travel can potentially all be FBT-free. Just remember that the minor benefits exemption requires a number of factors to be considered, including the total value of associated benefits provided across the FBT year.

If entertainment is provided to employees and an FBT exemption applies, you will not be able to claim tax deductions or GST credits for the expenses.

If your business hosts slightly more extravagant parties and goes above the $300 per person minor benefit limit, you will pay FBT but you can also claim a tax deduction and GST credits for the cost of the event. Just bear in mind that deductions are only useful to offset against tax. If your business is paying no or limited amounts of tax, a tax deduction is not going to help offset the cost of the party.

3. Avoid client lunches and give a gift

The most effective way of sharing the Christmas joy with customers is not necessarily the most tax effective. If, for example, you take your client out or entertain them in any way, it’s not tax deductible and you can’t claim back the GST. There are specific rules designed to prevent deductions and GST credits from being claimed when the expenses relate to entertainment, regardless of whether there is an expectation of generating goodwill and increased business sales. Restaurants, a show, golf, and corporate race days all fall into the ‘entertainment’ category.

However, if you send your customer a gift, then the gift is tax deductible as long as there is an expectation that the business will benefit (assuming the gift does not amount to entertainment). Even better, why don’t you deliver the gift yourself for your best customers and personally wish them a Merry Christmas. It will have a much bigger impact even if they are not available and the receptionist tells them you delivered the gift.

From a marketing perspective, if your budget is tight, it’s better to focus on the customers you believe deliver the most value to your business rather than spending a small amount on every customer regardless of value. If you are going to invest in Christmas gifts, then make it something people remember and appropriate to your business.

You could also make a donation on behalf of your customers (where your business takes the tax deduction) or for your customers (where they receive the tax deduction).

4. Charities love cash

Charities love cash. They don’t have to spend any of their precious resources to receive it – unlike a lot of charity dinners, auctions, and promotional campaigns. And, from a tax perspective, it’s the safest way to ensure that you or your business can claim a deduction for the full amount of the donation.

There are a few rules to giving to charities that make the difference between whether you will or won’t receive a tax deduction.

The charity must be a deductible gift recipient (DGR). You can find the list of DGRs on the Australian Business Register (use the advanced search).

If you buy any form of merchandise for the ‘donation’ – biscuits, teddies, balls or you buy something at an auction – then it’s generally not deductible. Your donation needs to be a gift, not an exchange for something material. Buying a goat or funding a child’s education in the third world is generally ok because you are generally donating an amount equivalent to the cause rather than directly funding that thing.

The tax deduction for charitable giving over $2 goes to the person or entity who made the gift and whose name is on the receipt.

5. Christmas bonuses

If you are planning to provide your team with a cash bonus rather than a gift voucher or other item of property, then remember that this will be taxed in much the same way as salary and wages. A PAYG withholding obligation will be triggered and the ATO’s view is that the bonus will also be treated as ordinary time earnings (unless it relates specifically to overtime work) which means that it will be subject to the superannuation guarantee provisions.

The Christmas tax quick guide

Here’s our quick guide to the tax impact of Christmas celebrations. The information is for GST registered businesses that are not using the 50-50 split method for meal entertainment.

The key influences of 2024

Uncertainty has reigned over the last few years, but can we expect more consistency as we head into 2024? We explore some of the key issues and influences.

Inflation and labour supply

RBA Governor Michelle Bullock stated, “Inflation is past its peak and heading in the right direction, but it is likely to return to target a bit more slowly than we previously thought.” While there have been encouraging signs, uncertainty remains. Domestically, inflation is persistent, growth has slowed but the labour market remains tight. And, the Australian economy remains at risk with uncertainty over the Chinese economy and ongoing international conflicts. At this stage, the RBA have not ruled out further interest rate increases.

The unemployment rate remains at 3.7% and the labour market tight. Wages grew 1.3% for the September 2023 quarter and 4.0% over the year, pushing wages to a 14 year high. High-skilled workers are particularly difficult to source, and we appear to have reached a point now where employers are unwilling to pay inflated salaries to acquire those willing to move.

Income tax cuts and the end of some concessions

From 1 July 2024, the stage 3 tax cuts that radically simplify the personal income tax brackets come into effect. The tax cuts collapse the 32.5% and 37% tax brackets into a single 30% rate for those earning between $45,001 and $200,000 – this is assuming the May Federal Budget does not postpone or scrap them!

The superannuation guarantee rate will rise again on 1 July 2024 to 11.5%.

For small and medium businesses with group turnover of less than $50m, a series of concessions are set to end or reduce back to conventional levels:

• The Skills and Training Boost ends on 30 June 2024. The boost provides a bonus deduction equal to 20% of eligible expenditure for external training provided to your workers for costs incurred between 29 March 2022 and 30 June 2024.
• The Small Business Energy Incentive is scheduled to end on 30 June 2024, although legislation to introduce this concession still hasn’t passed through Parliament. The incentive is intended to provide an additional 20% deduction on the cost of eligible depreciating assets that support electrification and more efficient use of energy.

The instant asset write-off for businesses with group turnover of less than $10m is due to reduce back to $1,000 from 1 July 2024. The cost threshold is meant to be $20,000 for the 2024 financial year, but legislation relating to this measure hasn’t passed through Parliament yet.

Worker rights and rewards

There have been a myriad of changes and enhancements to workplace laws across 2023 and employers can expect greater scrutiny in 2024:

• A 5.75% increase in the minimum wage to $23.23 per hour from 1 July 2023.
• New rules and a 2 year limit to some fixed term employment contracts (no renewing).
• A landmark case that defined how to determine whether a worker is a contractor or employee. The ATO has followed through with new rulings to ensure employers are paying the correct entitlements. It’s essential that employers have assessed contractors to ensure that they are classified correctly.
• Greater flexibility for unpaid parental leave.

Tax on super balances above $3m hits Parliament

Legislation enabling an extra 15% tax on earnings on super balances above $3m is before Parliament.

While not a concern for the average worker, if enacted, those with significant property or other illiquid assets in their superannuation fund are most at risk, for example farmers and business operators who own their business property in their self managed superannuation fund (SMSF).

The issue is how the tax is calculated. The tax captures the growth in the balance of a member’s superannuation over the financial year (allowing for contributions and withdrawals). It captures both:

• Realised gains from the sale of assets, and
• Unrealised gains triggered by an increase in the value of superannuation assets. For example, if the value of a property increases.

If the member’s total super balance has decreased – the loss can be offset against future years.

The ATO will calculate the tax each year. Members with balances in excess of $3 million will be tested for the first time on 30 June 2026, with the first notice of assessment expected to be issued to those impacted in the 2026-27 financial year.

If you are likely to be impacted by the impending new tax, it is important to speak to your financial adviser. While keeping assets within superannuation will remain the best option for many from a tax and planning perspective, it’s important to ensure that you’re in the best possible position.

Quote of the month

“There are those who give with joy, and that joy is their reward.”

Kahlil Gibran, author

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

Markets

Local:

The ASX200 had a strong April rising 1.85% over the month. Investor sentiment improved with the RBA`s decision not to increase interest rates for the first time in a year.

Global:

The S&P 500® was up 1.46% in April, bringing its YTD return to 8.59%.

The Dow Jones Industrial Average® rose 2.48% for the month and was up 2.87% YTD.

The Stoxx Europe 600 Index rose 2.6% in April.

Gold:

The spot price for Gold continued to be stable reaching $1,987 at the end of April. After reaching $1,980 in March. Investors are expecting that interest rates will likely reach near their peak in this tightening cycle which is being factored into the price.

Iron Ore:

Iron Ore price dropped significantly by US $22 to reach US $105/Mt as expectations of long term weaker demand are starting to be factored in.

Oil:

Brent Oil price remained steady over the month to remain at US $80/bbl.

Property

Housing:

After falling -9.1% between May 2022 and February 2023, Australian housing values look to have bottomed out, posting a second consecutive monthly rise. CoreLogic’s national Home Value Index (HVI) increased by half a percent in April, following a 0.6% lift in March to be 1.0% higher over the past three months.

According to CoreLogic’s Research Director, Tim Lawless, it is becoming increasingly clear the housing market has moved through an inflection point. “Not only are we seeing housing values stabilising or rising across most areas of the country, but a number of other indicators are also confirming the positive shift. Auction clearance rates are holding slightly above the long run average, sentiment has lifted, and home sales are trending around the previous five-year average.”

Economy

Interest Rates:

The Reserve Bank of Australia raised interest rates to 3.85% at the start of May, stunning economists and markets, which were predicting almost no chance of an increase just one month after the central bank hit pause.

Retail Sales:

Retail sales in Australia increased by 0.4% month-over-month to AUD $35.30 billion in March 2023, faster than a 0.2% growth in the prior period. It was the third consecutive rise in retail trade, as food retailing continued to perform strongly.

Bitcoin:

Bitcoin continued its steady increase to finish April at USD $29,217.94.

Bond Yields:

Both the Australian government 10-year bond and US government 10-year bond remained steady from the previous month. At 3.23% and 3.45% respectively.

Exchange Rate:

The Aussie dollar fell slightly in April against both the American dollar at $0.66 and the Euro at $0.60.

Inflation:

Australia: The Australian monthly CPI indicator rose 6.3% in the year to March 2023, which is lower than the 6.8% movement in February and the 7.4% movement in January. On an annual basis, CPI inflation increased 7.0% in the March 2023 quarter, which is lower than the rises of 7.8% in December 2022 and 7.3% in September 2022.

USA: The consumer price index eased to 5% in March 2023 on an annual basis, down from 6% in February, according to the U.S. Bureau of Labor Statistics inflation report.

EU: Euro area annual inflation is expected to be 7.0% in April 2023, up from 6.9% in March according to a flash estimate from Eurostat.

Consumer Confidence:

The Westpac Melbourne Institute Consumer Sentiment Index increased by 9.4% in April from 78.4 in March to 85.8 in April. This strong recovery in the Index can be largely attributed to the decision by the Board of the Reserve Bank to break the sequence of ten consecutive meetings when the cash rate was increased by deciding to pause at the April meeting.

Employment:

Australia: Australia’s seasonally adjusted unemployment rate stood at 3.5% in March 2023, unchanged from February’s near 50-year low but below market estimates of 3.6%. The number of unemployed declined by 1,600 to 507,000, as people seeking full-time jobs fell by 3,100 to 339.200 while those looking for part-time jobs climbed by 1,400 to 167,800.

USA: Total nonfarm payroll employment rose by 253,000 in April, and the unemployment rate changed little at 3.4%. Employment continued to trend up in professional and business services, health care, leisure and hospitality, and social assistance.

Agriculture:

The gross value of agricultural production is forecast to reach a record of $90 billion in 2022-2023. The value of exports is also expected to reach a record of $75 billion.

Purchasing Managers Index:

Australia’s manufacturing sector has signaled a deepening downturn with its headline seasonally adjusted purchasing manager’s index (PMI) at 48.0 in April, down from 49.1 in March. This signaled a second straight month-on-month deterioration in overall business conditions, the first back-to-back downturn in the sector since the start of the pandemic in March-May 2020.

US Services PMI:

The S&P Global US Services PMI was revised slightly down to 53.6 in April of 2023 from a preliminary of 53.7 but continued to point to the biggest expansion in the services sector in a year, as output, new orders and employment growth all accelerated.

US Global Manufacturing PMI:

The seasonally adjusted S&P Global US Manufacturing Purchasing Managers’ Index™ (PMI™) posted 50.2 in April, up from 49.2 in March, and broadly in line with the earlier released ‘flash’ estimate of 50.4. The latest index reading was the first to post above the 50.0 neutral mark for six months and was the highest since October 2022.

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

Comments

The Long Inflation Roadmap

Recent inflation figures shows that inflation grew by 1.4% over the March quarter 2023, and 7.0% over the 12 month period. This confirms that we are past the peak of 7.8% seen in late 2022. The downward path has commenced but we are not expected to reach the RBAs target band of 2-3% for some time. With some forecasts pushing this to as late as 2025.

Supply constraints are becoming less of a driver of price pressures, but price growth is expected to remain sticky in some key domestic sectors. We are starting to move away from goods prices being the main contributor of inflation to a more even balance between goods and services.

The housing sector leads the way on annual price growth, with rental prices up 10.1% over the year to April 2023. This included the combined capitals annual rental increase of 11.7% in the past year which was a new record largely underpinned by increasing demand for capital city units.

The main cause of inflated rental prices is the extremely low rental vacancy rates across the country. The rental component of the CPI is expected to continue increasing as leases are re-negotiated throughout the next year.

Energy prices have also risen considerably, with gas and other household fuel prices increasing 26.2% over the year and electricity prices increasing 15.5% over the year. Power bills are expected to increase by up to 23.7% by July in New South Wales, South Australia and Queensland.

After 350 basis points of increases in the cash rate over the past 12 months, the Reserve Bank’s pause in April was a welcome breather to allow time to see the impact on both prices and the real economy so far. It will still take a considerable amount of time to get back into the inflation comfort zone of 2-3% per annum, but we are now heading in the right direction.

Sources: ABS, AFR, Deloitte

Why millennials should be mapping their retirement today

While millennials have for decades been treated like ‘the children of Neverland, who never grew up’, reality is fast catching up with this generation, who are now young adults between the ages of 24 and 40.

Like generations before them, they are now buying, or at least trying to buy, homes and starting families of their own. And with this, the stark reality is that their retirement is looming just around the corner in the early years of 2050.

For all too many, planning for their retirement is just something they don’t want to face. But the reality is that the sooner they start ‘mapping’ or preparing for their retirement, the better off they will be.

According to Investopedia, if you are a 26-year-old millennial, you should aim over the next four years to have at least one year’s worth of income in your superannuation fund. If you are a 40-year-old millennial, you should already have three times your annual income in super.

They suggest millennials should contribute at least 15 per cent of their gross salary, including the 10 per cent compulsory super guarantee contribution, to superannuation each year if they have any chance of achieving a secure retirement.

This seems a pipe dream for Marion, who is 29 and earns $95,000 a year as a successful professional accountant. While her employer contributes 10.5 per cent of her income to super, she has less than $100,000 in super, and is more focused on boosting her non-super savings of $75,000, so she can buy a small apartment. She is not alone.

Most millennials, burdened by HECS debts and increasingly casual employment arrangements, will find the need to boost their super contributions a challenge, especially as most millennials, like Marion, are also struggling to save a deposit for an ever more expensive home of their own.

They know they will live longer than previous generations and that health and living costs will be much greater for them in retirement, while social security entitlements will be much less than what their grandparents received.

Nonetheless, when asked, millennials want to retire earlier than previous generations and are looking for a different type of retirement. One where they can travel more while still enjoying doing so and keep working on a casual part-time basis, but only if they enjoy the work.

All of this means that amongst all the competing demands on their time and money, superannuation has to become part of the landscape of Neverland.

For Marion, it has meant searching for a better superannuation fund with lower fees and better investment options while scaling back her plans to buy an apartment and perhaps relying more on the Bank of Mum and Dad to help her do so.

As previous generations have done, millennials need to take control of their superannuation, and the sooner, the better.

The first step is to consolidate any multiple super accounts into one and then, wherever possible, boost their contributions to the magic 15 per cent mark.

Happily, most millennials, including those who are self-employed, will have a super fund and will only need to add an extra 5 per cent to take their total contributions to 15 per cent of their prevailing salary.

Then they can leave compound interest to work its magic and, like a snowball rolling down a hillside, build the balance within their super.

It’s then a matter of working closely with a qualified adviser who can ensure your superannuation stays on track and help you to achieve the best possible outcomes when you do start thinking seriously about retiring.

The 120% technology and skills ‘boost’ deduction

The 120% skills and training, and technology costs deduction for small and medium business have passed Parliament. We’ll show you how to take maximise your deductions.

Almost a year after the 2022-23 Federal Budget announcement, the 120% tax deduction for expenditure by small and medium businesses (SME) on technology, or skills and training for their staff, is finally law. But there are a few complexities in the timing – to utilise the technology investment boost, you had to of purchased the technology and when it comes to acquiring eligible assets, installed it ready for use by 30 June 2023; that’s just seven days from the date the legislation passed Parliament.

Who can access the boosts?

The 120% skills and training, and technology boosts are available to small business entities (individual sole traders, partnership, company or trading trust) with an aggregated annual turnover of less than $50 million. Aggregated turnover is the turnover of your business and that of your affiliates and connected entities.

$20k technology investment boost

The Technology Investment Boost provides SMEs with a bonus deduction for expenses and depreciating assets for digital operations or digitising from 7:30pm (AEST) on 29 March 2022 until 30 June 2023.

You ‘incur’ an expense when you are in debt for it; this might be a tax invoice or it might be a contract where you are legally liable for the cost.

For depreciating assets, like computer hardware, there is an extra step. The technology needs to have been purchased and installed ready for use. For example, if you ordered 10 computers, you need to have received the computers and had them set up ready to use by at least 30 June 2023. Ordering them on 29 June won’t be enough to claim the boost if you did not receive them.

The types of expenses that might be eligible for the technology boost include:

• Digital enabling items – computer and telecommunications hardware and equipment, software, internet costs, systems and services that form and facilitate the use of computer networks;
• Digital media and marketing – audio and visual content that can be created, accessed, stored or viewed on digital devices, including web page design;
• E-commerce – goods or services supporting digitally ordered or platform-enabled online transactions, portable payment devices, digital inventory management, subscriptions to cloud-based services, and advice on digital operations or digitising operations, such as advice about digital tools to support business continuity and growth; or
• Cyber security – cyber security systems, backup management and monitoring services.

The technology also must be “wholly or substantially for the purposes of an entity’s digital operations or digitising the entity’s operations”. That is, there must be a direct link to your business’s digital operations. For example, claiming the drone you bought at say Christmas 2022 won’t be deductible unless your business is, for example, a real estate agency that needed a drone to take aerial images of client homes to market on their website. The expense needs to relate to how the business earns its income, in particular its digital operations.

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

Where the expenditure has mixed use (i.e., partly private), the bonus deduction applies to the proportion of the expenditure that is for business use.

There are a few costs that the technology boost won’t cover such as costs relating to employing staff, raising capital, construction of business premises, and the cost of goods and services the business sells. The boost will not apply to:

• Assets that you purchased but then sold within the relevant period (e.g., on or prior to 30 June 2023).
• Capital works costs (for example, improvements to a building used as business premises).
• Financing costs such as interest expenses.
• Salary or wage costs.
• Training or education costs, that is, training staff on software or technology won’t qualify (see Skills and Training Boost).
• Trading stock or the cost of trading stock.

Let’s look at the example of A Co Pty Ltd (A Co) that purchased multiple laptops on 15 July 2022 to help its employees to work from home. The total cost was $100,000. The laptops were delivered on 19 July 2022 and immediately issued to staff entirely for business use.

As the holder of the assets, A Co is entitled to claim a deduction for the depreciation of a capital expense. A Co can claim the cost of the laptops ($100,000) as a deduction under the temporary full expensing in its 2022-23 income tax return. It can also claim the maximum $20,000 bonus deduction in its 2022-23 income tax return.

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

The good news for many eligible businesses is that your technology subscriptions and other products you use in your business might qualify for the boost.

The boost is claimed in your tax return with the extra 20% sitting on top your normal claim. That is, however the way the expense or asset is claimed (immediately or over time), the bonus 20% applies in the same way.

The Skills and Training Boost

The Skills and Training Boost gives you a 120% tax deduction for external training courses provided to employees. The aim of this boost is to help SMEs grow their workforce, including taking on less-skilled employees and upskilling them using external training to develop their skills and enhance their productivity.

Sole traders, partners in a partnership, independent contractors and other non-employees do not qualify for the boost as they are not employees. Similarly, associates such as spouses or partners, or trustees of a trust, don’t qualify.

As always, there are a few rules:

• Registration for the training course had to be from 7:30pm (AEST) on 29 March 2022 until 30 June 2024. If an employee is part the way through an eligible training course, enrolments in courses or classes after 29 March 2022 are eligible, not before.
• The training needs to be deductible to your business under ordinary rules. That is, the training is related to how the business earns its income.
• A registered training provider needs to charge your business (either directly or indirectly) for the training (see What organisations can provide training for the boost).
• The training must be for employees of your business and delivered in-person in Australia or online.
• The training provider cannot be your business or an associate of your business.

Training expenditure can include costs incidental to the training, for example, the cost of books or equipment necessary for the training course but only if the training provider charges the business for these costs.

Let’s look at an example. Animals 4U Pty Ltd is a small entity that operates a veterinary centre. The business recently took on a new employee to assist with jobs across the centre. The employee has some prior experience in animal studies and is keen to upskill to become a veterinary nurse. The business pays $3,500 for the employee to undertake external training in veterinary nursing. The training meets the requirements of a GST-free supply of education. The training is delivered by a registered training provider, registered to deliver veterinary nursing education.

The bonus deduction is calculated as 20% of the amount of expenditure the business could typically deduct. In this case, the full $3,500 is deductible as a business operating expense. Assuming the other eligibility criteria for the boost are satisfied, the bonus deduction is calculated as 20% of $3,500. That is, $700.

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

What organisations can provide training for the boost?

Not all courses provided by training companies will qualify for the boost; only those charged by registered training providers within their registration. Typically, this is vocational training to learn a trade or courses that count towards a qualification rather than professional development.

Qualifying training providers will be registered by:

• Tertiary Education Quality and Standards Agency (search the register – includes States and Territories)
• Australian Skills Quality Authority (ASQA)
• Victorian Registration and Qualifications Authority (search the register)
• Training Accreditation Council of Western Australia

While some training you might want to have engaged might not be delivered by registered training organisations, there is still a lot out there, particularly the short-courses offered by universities, or the flexible courses designed for upskilling rather than as a degree qualification. If you have recently completed performance reviews for staff and training is part of their development pathway, it might be worth exploring.

Backing a winner: Digital games tax

The digital games and interactive entertainment sector is the largest creative sector in the world and one of the fastest growing industries worldwide. The global digital games industry is worth around $250 billion and in Australia, grew 22% between 2020 and 2021 generating $226.5 million in income and employing over 1,300 fulltime workers. And, it’s an industry the Government wants to support with a new tax offset.

The Digital Games Tax Offset is equal to 30% of the company’s total qualifying Australian development expenditure incurred from 1 July 2022. Companies can claim up to $20 million per company (or group of companies) per year (to reach the cap a company would need to spend around $66.7 million in eligible expenditure).

State based tax incentives are also available in South Australia, Victoria and New South Wales offering an additional 10% and Queensland offering 15% on top of the federal support. Globally, a 40% tax offset is standard for this industry so the tax offset brings Australia back into a competitive position.

Who is eligible?

Companies that are Australian tax residents or foreign tax residents with a permanent establishment in Australia can qualify.

To access the offset, the company needs a certificate issued by the Arts Minister following the completion of a new digital game, the porting of a digital game to a new platform, or for ongoing development of one or more existing digital games during the income year. This certificate then determines the offset claimed in the tax return with the Minister determining the amount of qualifying expenditure. More information will be available on the arts.gov.au website in early July 2023.

The company’s qualifying Australian development expenditure incurred needs to be at least $500,000 (could be over multiple years).

What is development expenditure?

The way the rules work is that any expenditure that a company incurs in relation to the development of the qualifying game is eligible expenditure…unless it is specifically excluded. A company develops a game by doing any of the activities necessary to complete, port, update, improve or maintain an eligible game.

The legislation takes a further step by specifically including employee remuneration or independent contractors engaged by the company to carry out work on the development of the game (excluding bonuses linked to the performance of the company or the game). Prototyping is also specifically included as is underlying game technology.

Employees that are not developing the game, for example admin staff or overseas contractors, are excluded. As are corporate costs like business overheads, marketing, travel, entertainment etc.

What games are eligible?

A digital game that can receive a classification and is made available to the general public over the internet (i.e., games developed for in-house purposes don’t qualify). The game does not include gambling or gambling like elements (loot boxes are likely to make a game ineligible if for example, the virtual items can be sold for currency) nor is used for advertising or for commercial purposes.

Australian digital games successes

Remember Fruit Ninja? Fruit Ninja, founded by HalfBrick, became a sensation in 2015 with over 1 billion downloads. Who knew a game that slices fruit with a sword would capture so much attention. Anyone with kids would have seen Crossy Road developed by Melbourne based Hipster Whale. Ninety days after it release it had 50 million downloads, earning over $10m. The Sims Freeplay was created by a merger of Melbourne studios Iron Monkey and Firemint when they were purchased by EA Games. Then there is Melbourne based Big Ant Studios, one of the world’s biggest sports game developers and known for games such as the Tennis World Tour Game, Cricket 22 and an upcoming Rugby World Cup 2023 game.

What changed on 1 July 2023

Cents per kilometre increase

The cents per kilometre rate for motor vehicle expenses for 2023-24 has increased to 85 cents.

Employers & business

• Superannuation guarantee increases to 11% from 10.5%
• National and Award minimum wage increases take effect.
• The minimum salary that must be paid to a sponsored employee – the Temporary Skilled Migration Income Threshold – increased to $70,000 from $53,900.
• Work restrictions for student visa holders reintroduced to 48 hours per fortnight.
• The cap on claims via the small claims court procedures for workers to recover unpaid work entitlements increases from $20,000 to $100,000.
• Energy Bill Relief Fund for small business kicks in – it will apply to your energy bills if you meet the criteria.
• Sharing economy reporting to the ATO commences for electronic distribution platforms.

Superannuation

• Superannuation guarantee increases to 11%
• Indexation increases the general transfer balance cap to $1.9 million.
• Minimum pension amounts for super income streams return to default rates.
• SMSF transfer balance event reporting moves from annual to quarterly for all funds.

For you and your family

• The new 67 cent fixed rate method for working from home deductions – make sure you have a record of when you work from home. The ATO won’t accept a simple “I work from home every Wednesday” x 8 hours calculation.
• Access to the first home loan guarantee expands to “friends, siblings, and other family members.”
• The Medicare low income threshold has increased for 2022-23.
• The child care subsidy will increase from 10 July 2023 for families with household income under $530,000. See the Services Australia website for details.
• New parents able to claim up to 20 weeks paid parental leave.
• Access the age pension increased to 67 years of age.

Important: 1 July 2023 wage increases

For employers, incorrectly calculating wages is not portrayed as a mistake, it’s “wage theft.” Beyond the reputational issues of getting it wrong, the Fair Work Commission backs it up with fines of $9,390 per breach for a corporation. In 2021-22 alone, the Fair Work Ombudsman recovered $532 million in unpaid wages recovered for over 384,000 workers.

On 1 July 2023, award rates of pay and the National Minimum Wage increased by 5.75%.

It is critically important that all employers review their payroll systems and ensure they are applying the correct rates and Awards.

The National Minimum Wage applies to workers not covered by an Award or registered agreement. From 1 July 2023, the National Minimum wage has increased to $23.23 per hour ($882.80 per week for a full time employee working a standard 38 hours week).

For casuals, the minimum wage including the 25% casual loading is a minimum of $29.04 per hour.

For workers under an Award, adult minimum award wages increase by 5.75% applied from the first full pay period on or after 1 July 2023. Proportionate increases apply to junior workers, apprentice and supported wages.

In addition, the superannuation guarantee increased from 10.5% to 11% on 1 July 2023.

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

Quote of the month

“Decency is avoiding disrespect, not avoiding disagreement. Integrity is trying to get it right, not being right.”

Adam Grant, Professor, Wharton School, University of Pennsylvania

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

Markets

Local:

The ASX200 underperformed in May falling -2.5% on continued rate hike expectations.

Global:

The S&P 500® gained 0.4% in May.

The Dow Jones Industrial Average® dropped 3.49% for the month and was off 0.72% YTD.

The Stoxx Europe 600 Index is down 14.88 points or 3.19% this month to finish at 451.76.

Gold:

Gold prices fell by US$30.10 to US$1,952 on a stronger USD and continued rate hike expectations.

Iron Ore:

Iron Ore prices fell by US$5 to US$100 /Mt on seasonally weaker demand and prices.

Oil:

Brent oil fell by US$6 to US$73.5/ bbl, as concerns continued around Chinese oil demand after weaker than expected Chinese manufacturing PMI at 48.8 in May.

Property

Housing:

CoreLogic’s national Home Value Index (HVI) has recorded a third consecutive monthly rise, with the pace of growth accelerating sharply to 1.2% in May. After finding a floor in February, home values increased 0.6% and 0.5% through March and April respectively.

The rise in values was broad-based with the rate of growth accelerating across every capital city last month.

CoreLogic’s Research Director, Tim Lawless, noted the positive trend is a symptom of persistently low levels of available housing supply running up against rising housing demand.

Economy

Interest Rates:

The Reserve Bank of Australia has lifted the cash rate to an 11-year high of 4.1% at its June meeting and flagged further interest rate rises, as it grapples with upside risks to inflation, accelerating wages growth and stagnant productivity. The cash rate is now at its highest level since April 2012.

Retail Sales:

Australian retail turnover was unchanged (0.0%) in April 2023, this follows a 0.4% rise in March 2023 and 0.2% rise in February 2023.

Bitcoin:

Bitcoin fell slightly in May to finish the month at USD$27,713.91.

Bond Yields:

The Australian government 10-year bond rose to 3.60% and the US government 10-year bond also rose to 3.64%, as rate hikes continue to apply pressure.

Exchange Rate:

The Aussie dollar remained steady in May against both the American dollar at $0.65 and the Euro at $0.61.

Inflation:

Australia: The monthly CPI indicator rose 6.8% in the twelve months to April. The most significant price rises were Housing (+8.9%), Food and non-alcoholic beverages (+7.9%) and Transport (+7.1%).

USA: The Consumer Price Index for All Urban Consumers (CPI-U) rose 0.4% in April on a seasonally adjusted basis, after increasing 0.1% in March. Over the last 12 months, the all items index increased 4.9%.

EU: The euro zone’s annual headline inflation rate fell to 6.1% in May from 7% in April, below the 6.3% predicted in a Reuters poll of economists. Core inflation, closely watched by the European Central Bank, eased to 5.3% from 5.6%.

Consumer Confidence:

The Westpac Melbourne Institute Consumer Sentiment Index fell by 7.9%, from 85.8 in April to 79.0 in May. The Index has fallen back to just above the dismal levels seen back in March, which recorded the lowest monthly read since the COVID outbreak in 2020 and, before that, since the deep recession of the early 1990s. The two key developments over the last month have been the surprise decision by the Reserve Bank Board to lift the cash rate by a further 0.25% in May and the Federal Budget.

Employment:

Australia: Australia’s seasonally adjusted unemployment rate unexpectedly rose to 3.7% in April 2023, marking a slight increase from the previous months and deviating from market expectations of 3.5%. The number of unemployed individuals increased by 18,400 to reach 528,000, while employment declined by 4,300, reaching a total of 13.88 million.

USA: Total nonfarm payroll employment increased by 339,000 in May, and the unemployment rate rose by 0.3% to 3.7%. Job gains occurred in professional and business services, government, health care, construction, transportation and warehousing, and social assistance.

Purchasing Managers Index:

The Judo Bank Australia Manufacturing PMI edged up to 48.4 in May 2023 from 48 in the previous month. It pointed to the third consecutive month of deterioration in the manufacturing sector due to lower new orders as tighter global monetary policies dampened buying interest resulting in subdued domestic and foreign demand.

US Services PMI:

The S&P Global US Services PMI was revised slightly lower to 54.9 in May 2023 from a preliminary 55.1 but continued to point to the strongest expansion in the services sector since April 2022, mainly supported by new business. The upturn in new orders was driven by improved demand conditions in both domestic and export markets. At the same time, firms stepped up their hiring activity again, with employment increasing at a solid pace.

US Global Manufacturing PMI:

The S&P Global US Manufacturing PMI was revised slightly lower to 48.4 in May 2023 from a preliminary of 48.5 driven by a solid contraction in new orders amid muted demand condition

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

Comments

Consumer Sentiment

Consumer confidence is continuing to trend lower as they dig in for a lengthy period of stubbornly strong inflation and witnessing interest rates remain at levels not seen for more than a decade.

The Index has fallen back to just above the dismal levels seen back in March, which recorded the lowest monthly read since the COVID outbreak in 2020 and, before that, since the deep recession of the early 1990s.

The two key developments over the last month have been the decision by the Reserve Bank Board to lift the cash rate by a further 0.25% in May and again in June and the outcome of the Federal Budget. The survey is usually conducted in the week of the Reserve Bank Board meeting but was delayed a week to gauge the sentiment impact of the Federal Budget. While this means we do not have ‘before’ and ‘after’ reads on the surprise RBA decision, we do have a clear ‘before’ and ‘after’ picture on the Budget.

Sentiment amongst those surveyed before the Budget announcement showed an index read of 81.3 (down 5.3% compared to April). Sentiment amongst those surveyed after the announcement came in at 75.3, down an additional 7.4%. A strict interpretation would attribute about 60% of the May fall to the Federal budget and the remaining 40% to the interest rate decision and other factors.

But even though consumer sentiment has clearly soured, it’s not yet bad enough to force central banks to contemplate cutting interest rates.

That means that the big question for investors is whether this pervasive pessimism will make consumers cut their spending much more viciously in the second half of the year.

This would precipitate an abrupt economic slowdown, given that consumer spending is the main driver of economic growth and possibly even produce the interest rate cuts that financial markets continue to expect.

As the Reserve Bank’s latest Statement on Monetary Policy noted “household consumption remained subdued in the March quarter”.

The RBA also pointed out that “the consumption of discretionary goods – including clothing and footwear, and household goods – has declined, but there was continued steady growth in discretionary services categories such as transport and hotels, cafés and restaurants”. As consumers prioritise spending on experiences, rather than on discretionary goods.

According to the minutes from its May meeting, the Reserve Bank board considered the possibility that consumption could turn out to be even weaker than expected.

“Many households were experiencing significant financial pressures associated with the higher cost of living and increased mortgage payments, and a further increase in aggregate mortgage payments was expected as fixed rate loans progressively expire”.

But even though there are signs that consumers are beginning to buckle, central banks are not yet confident enough about the outlook for inflation to pause their campaigns to push borrowing costs higher.

Sources: AFR, Westpac

Housing Market Update

Not that long ago, Australia was in the midst of the fastest drop in housing values on record, as rapidly increasing interest rates caused capital city values to plunge more than 9% in the space of about 10 months.

That’s all changed since hitting a low in February, with three consecutive months of positive growth in housing values due to a significant imbalance between supply and demand.

Not only are we seeing housing values stabilising or rising across most areas of the country, but a number of other indicators are also confirming the positive shift. Auction clearance rates are holding slightly above the long run average, while sentiment has lifted, and home sales are trending around the previous 5-year average.

There’s not a lot of competition in the market for vendors currently with decade-low listing numbers. It’s one of the reasons selling conditions have strengthened, as evidenced by above average clearance rates, faster selling time and less negotiation. For context, the total number of homes listed for sale nationally is tracking 28% below usual. When listing volumes are very low, selling conditions strengthen, which means potential vendors thinking about selling may well be tempted to list now rather than waiting until the traditional spring period, when activity surges and there’s a spike in competition to sell.

Despite some of this positive news, the ability to service a loan is going to be one of the biggest hurdles that prospective buyers will face this year. Interest rates are high, but loan servicing assessment levels are three percentage points higher again. However, qualifying for the loan is only one challenge. We can’t ignore low consumer sentiment levels, which will also be having some dampening effect on the market’s current exuberance, and we shouldn’t expect to see a material lift in property activity until there’s an improvement in consumer confidence more broadly.

The 2023 Outlook

The total volume of dwellings for sale in Australia has been trending lower since the onset of COVID-19 restrictions in 2020. As of April 2023, there were 138,144 listings observed over the month, which is near decade-lows. Total listings were -31.5% below the decade monthly average, and -33.8% below the average for April.

While interest rates are close to peaking, (we believe 2 more rate rises are still likely to come) the cost of debt remains much higher than the pre-COVID decade average against a backdrop of near record levels of house indebtedness. The combination of a high cost of debt and a high level of debt, as well as cost of living pressures are likely to keep sentiment levels low, at least until interest rates start to come down.

Although values have fallen, the housing market remains unaffordable for many. Even with the recent sharp drop in values, the median value of a capital city dwelling remains 12.0% or roughly $83,000 higher than it was at the beginning of COVID in March 2020. Serviceability costs have also continued to rise, with approximately 42% of the median capital city household income required to service a new mortgage, a figure that is expected to continue to rise.

Furthermore, we are yet to see the full impact of the rapid rate hiking cycle flowing through to household balance sheets. The lag of the rate hikes hitting households will be longer than usual, due to the larger portion of fixed rate borrowers who have, so far, been insulated from these rate hikes. As more borrowers feel the impact of higher interest rates its likely we will see more evidence of distress and reduced consumer sentiment leading to a potential lift in motivated listings.

The overall outlook for housing markets largely rests with the trajectory of interest rates. The timing of future rate cuts remains uncertain and with many tipping the cash rate to reach 4.85% (currently at 4.1%) it could be a long time coming. However, once we see rates coming down (possibly in 2025), that is when we could see more sustained momentum gather in housing markets.

Sources: AFR, Core Logic, NAB

Markets

Local:

The ASX200 index fell again in September to finish the month -2.84% down.

Global:

The S&P 500 was down -4.87% in September, bringing its YTD return to 11.68%.

The Dow Jones Industrial Average decreased -3.50% for the month and was up 1.09% YTD.

The Stoxx Europe 600 Index also declined by -1.6% over the month.

Gold:

The spot price for Gold continued to trend lower, moving down to US $1,848.

Iron Ore:

Iron Ore price increased by US $2 from its August figure to finish September at US $119.50/Mt.

Oil:

Brent Oil price continued its upward trend in September reaching US $90.71 /bbl.

Property

Housing:

CoreLogic’s national Home Value Index (HVI) recorded a 0.8% rise in September as the recovery trend moved through an eighth consecutive month of growth.

The rise follows a 0.7% lift in August (revised down from 0.8%) taking the quarterly pace of growth in national home values to 2.2%. Quarterly growth has eased from a 3.0% gain in the June quarter, reflecting a slowdown as advertised stock levels rise, helping to take some heat out of the market. The September quarter saw Adelaide recording the highest capital gain at 4.3%, followed by Brisbane at 3.9% and Perth at 3.6%. At the other end of the growth spectrum is Hobart where values were down -0.2% over the quarter, taking the southern capital to a new cyclical low.

Economy

Interest Rates:

The RBA decided to leave the cash rate target unchanged at 4.10%. This will provide further time to assess the impact of the increase in interest rates to date and the economic outlook.

Retail Sales:

Retail sales in Australia increased by 0.2% mom in August 2023, compared with market estimates of 0.3% and after a final 0.5% growth in the prior month. The modest rise highlighted that consumers continued restraining their spending as interest rates remained elevated.

Bond Yields:

Australia’s 10-year government bond yield fell below 4.6%, retreating slightly from 12-year highs as the Reserve Bank of Australia kept its cash rate unchanged at 4.1% during its September policy meeting.

The yield on the US 10-year government bond approached 4.6% by the end of September, down from previous highs during the month as inflation measures showed some signs of easing.

Bitcoin:

Bitcoin prices traded mostly sideways in September in a range between $25,000 and $27,000 before finishing the month at $27,155, a 5.1% monthly increase.

Exchange Rate:

The Aussie dollar stayed steady in September against the American dollar, at $0.646, and gained slightly against the Euro at $0.610.

Inflation:

Australia: The monthly Consumer Price Index (CPI) indicator rose 5.2% in the 12 months to August 2023. This month’s annual increase of 5.2% is up from 4.9% in July. Annual inflation remains below the peak of 8.4% in December 2022.

USA: The annual inflation rate in the US accelerated for a second straight month to 3.7% in August from 3.2% in July, above market forecasts of 3.6%. Oil prices have been on the rise in the previous two months, which coupled with base effects from last year, pushed the inflation higher.

EU: The inflation rate in the Euro Area declined to 4.3% year-on-year in September 2023, reaching its lowest level since October 2021 and falling below the market consensus of 4.5%.

Consumer Confidence:

The Westpac-Melbourne Institute Index of Consumer Sentiment slipped 1.5% to 79.7 in September from 81.0 in August. Sentiment has languished at deeply pessimistic levels for more than a year now. Since the survey began in 1974, the only comparable period of such sustained weakness was during the recession of the early 1990s when even weaker levels held for more than two years. Persistent pessimism has continued despite easing fears of further interest rate rises. This has seen a clear lift in the confidence of mortgage holders, up 7.8% in the latest month. However, this gain was more than offset by a 6.1% fall in the confidence of renters and a 5.8% fall in the confidence of consumers that own their home outright.

Employment:

Australia: The seasonally adjusted unemployment rate stood at 3.7% in August 2023, unchanged from July’s three-month high and matching the market forecast. With the participation rate increasing to 67.0%.

USA: Total nonfarm payroll employment rose by 336,000 in September, and the unemployment rate was unchanged at 3.8%. Job gains occurred in leisure and hospitality; government; health care; professional, scientific, technical services; and social assistance.

Purchasing Managers Index:

The Judo Bank Australia Manufacturing PMI was revised higher to 48.7 in September 2023, from a preliminary of 48.2 and compared with 49.6 in the previous month. The latest reading signaled a seventh monthly decline in manufacturing operating conditions. Although the pace of deterioration accelerated since August, it remained modest overall. 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 fell to 50.2 in September 2023 from 50.5 in August, below market expectations of 50.6, preliminary estimates showed. It was the slowest rise in business activity in the current eight-month sequence of growth. Service sector firms saw a solid decrease in new business, following pressure on customer purchasing power from high inflation and interest rate hikes.

US Global Manufacturing PMI:

The S&P Global US Manufacturing PMI was revised higher to 49.8 in September 2023, surpassing the preliminary estimate of 48.9 and exceeding August’s final reading of 47.9. The latest figure pointed to a fifth consecutive month of contraction in the sector’s health, albeit only fractional. Output increased at a marginal pace that was nonetheless the fastest since May. In contrast, job creation remained moderate, and new orders continued to decline for the fifth consecutive month, reflecting the impact of high interest rates and inflation on consumer demand.

Adviser Numbers:

The industry had around 28,000 advisers on the FAR at the start of 2019, eventually reaching under 16,000 after the final adviser exam deadline last October, stabilising at around the 15,800 mark. Analysis of the ASIC Financial Adviser Register showed a net loss of 599 advisers for a final tally of 15,584 registered planners to close the 2023 FY.

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

Comments

Australia’s Population Change

Recent population data released from the ABS shows that Australia’s population continues to grow rapidly. In the year ending 31st March 2023, Australia’s population increased by 563,200, putting 12 month growth at 2.2% and quarterly growth at 0.7%.

Unsurprisingly, net overseas migration (NOM) remains the biggest driver of population growth, accounting for 81% of total growth over the year to March 2023. NOM remains at record highs – in the March quarter alone, there were 152,200 net arrivals, driven largely by the return of international students for Semester 1 and a low level of departures.

The Intergenerational report released earlier this year highlights 3 key areas, population, participation and productivity to be the key drivers of economic growth over the next 40 years. As has been recognised for decades, Australia’s population is ageing, impacted by Australians living longer and having fewer children. Australia’s population growth is expected to slow over the next 40 years, growing at 1.1% a year, compared to 1.4% a year over the previous 40 years. By 2062-63, life expectancy is projected to be 87 years for men and 89.5 years for women. With an ageing population, Australia’s labour force participation rate is also forecast to decrease from the current record high of 66.6% to 63.8% by 2062-63.

Mirroring the lower forecasts of other advanced economies, such as New Zealand, the United States, and the United Kingdom, Australia’s productivity is expected to grow at 1.2% per year, which is down from 1.5% in the previous Intergenerational Report.

Significantly, this year’s Intergenerational Report is the first to focus on the global transition to net zero, which the report states ‘may be the most profound driver of change in the economy’.

The report outlines two ways climate change will impact the labour market and Australia’s productivity: the creation of new job opportunities and decline of labour productivity due to rising temperatures.

Firstly, the transition to net zero will create job opportunities. This is particularly likely in the mining and manufacturing sectors, as Australia has some of the largest reserves globally of critical minerals needed to produce clean energy technologies, such as lithium and cobalt. By 2040, growing exports of critical minerals and energy-transition minerals have the potential to create over 115,000 new jobs while contributing $71.2 billion to GDP, according to recent independent modelling for the Department of Industry, Science and Resources.

Secondly, labour productivity in certain sectors is at risk of decline due to rising temperatures. The greatest impact will be seen in labour-intensive roles, such as labourers, technical and trades workers, and machinery operators, due to exposure to outdoor temperatures and the physical efforts of the role. Industries will need to adapt to increasing temperatures in innovative ways to sustain the size and productivity of their workforces.

In summary, immigration has transformed Australia into the successful multicultural society it is today. Rapid population growth has made our houses more valuable and enabled our businesses to make larger profits by creating a bigger market. Yet population growth incurs costs and has masked falling productivity growth alongside heightened pressure on key services and rapid inflation of property prices. This has undermined living standards and fuelled the current rental and housing crisis. Supply cannot readily keep pace with Australia’s current population trajectory. Interestingly enough, it was the period of low immigration during COVID-19 that finally enabled wage growth to pick-up, rents to fall during the pandemic and unemployment to hit record lows!

It is vital to bring population policy to the forefront of policy debate and understand that it is not a limitless panacea for economic prosperity but a policy tool which must be carefully managed in the interests of the population at large.

Sources: Deloitte Access Economics

The Housing Shortage

The benchmark report released by the Urban Development Institute, indicated over the 2022 calendar year, greenfield lot sales almost halved and settled apartment sales fell to their lowest level since the global financial crisis as buyer demand plummeted, thanks to higher interest rates, surging construction work and fears about builder failures.

With both house-and-land and new apartment sales expected to be subdued again this year, the Urban Development Institute forecasts that dwelling completions will “retract sharply” and fall about 50,000 below the 200,000 dwellings needed annually to meet the federal government’s plan to build 1 million homes over five years from 2024 under the National Housing Accord.

The medium to high-density sector has increasingly become an important part of Australia’s residential real estate market, with units steadily making up a larger portion of Australia’s housing stock. In August, CoreLogic estimated that units made up 25.9% of national housing stock and around 30.4% of Australia’s capital city housing stock, up from 19.6% and 22.9% respectively, at the start of 2010.

The continued reliance on the unit sector to deliver fresh housing stock is particularly evident across some of Australia’s largest capitals, including Sydney and Melbourne, as well as the ACT, where limited land supply has made further development of low-density dwellings increasingly difficult.

However, the latest National Housing Finance and Investment Corporation (NHFIC) ‘State of the Nation’s Housing’ report forecasts a national housing deficit of approximately 106,300 by 2027 (later upgraded to 175,000), with around 59% of the shortfall expected in the unit market.

On the demand side, a stronger-than-expected level of net overseas migration has seen overall housing demand skyrocket. This has occurred amid high levels of overseas arrivals, and about a 25% drop off in departures relative to the pre-COVID average. Figure 2 displays the annual trend in net overseas migration by state. In the year to March 2023, net overseas migration reached a new record high, with 454,400 people added to Australia’s population. At the current average household size, this equates to an additional 181,723 households.

Australia is on track to fall more than 60,000 new homes short of the 240,000 total needed in the first year of an ambitious new housing affordability crisis-busting program. The Housing Industry Association’s National Outlook have recently forecasted just 178,839 new apartments, townhouses, units and houses will be built next year.

In 2025 the projections suggest only 195,105 homes will be added to the nation’s housing supply. It comes after a recent national cabinet meeting pledging to make Australia’s housing shortage a key focus, adding 200,000 homes to a previously declared target of building a million new residences across the nation by the end of 2029.

Further housing supply reforms are also on the horizon, with the NSW Government focused on driving more supply through collaboration with all levels of government, communities, and the private sector.

Sources: AFR, NSW Government, Core Logic

$20k deduction for ‘electrifying’ your business

Electricity is the new black. Gas and other fossil fuels are out. A new, limited incentive nudges business towards energy efficiency. We show you how to maximise the deduction!

The small business energy incentive is the latest measure providing a bonus tax deduction to nudge the investment behaviour of small and medium businesses, this time towards more efficient energy use and electrification. Fossil fuels are out, gas is out, electricity is the name of the game.

Legislation before Parliament will see SMEs with an aggregated turnover of less than $50 million able to claim a bonus 20% tax deduction on up to $100,000 of their costs to improve energy efficiency in the business. But, the tax deduction is time limited. Assuming the legislation passes Parliament, you only have until 30 June 2024 to invest in new, or upgrade existing assets.

How much?

Your business can invest up to $100,000 in total, with a maximum bonus tax deduction of $20,000 per business entity. The energy incentive is not provided as a cash refund, it either reduces your taxable income or increases the tax loss for the 2024 income year.

What qualifies?

The energy incentive applies to both new assets and expenditure on upgrading existing assets. There is no specific list of assets that can qualify. Instead, the rules provide a series of eligibility criteria that need to be satisfied.

First, the expenditure incurred in relation to the asset must qualify for a deduction under another provision of the tax law.

If your business is acquiring a new depreciating asset, it must be first used or installed for any purpose, and a taxable purpose, between 1 July 2023 and 30 June 2024. If you are improving an existing asset, the expenditure must be incurred between 1 July 2023 and 30 June 2024.

If your business is acquiring a new depreciating asset the following additional conditions need to be satisfied:

• The asset must use electricity; and
• There is a new reasonably comparable asset that uses a fossil fuel available in the market; or
• It is more energy efficient than the asset it is replacing; or
• If it is not a replacement, it is more energy efficient than a new reasonably comparable asset available in the market; or
• It is an energy storage, time-shifting or monitoring asset, or an asset that improves the energy efficiency of another asset.

If you are improving an existing asset the expenditure needs to satisfy at least one of the following conditions:

• It enables the asset to only use electricity, or energy that is generated from a renewable source, instead of a fossil fuel;
• It enables the asset to be more energy efficient, provided that asset only uses electricity, or energy generated from a renewable source; or
• It facilitates the storage, time-shifting or usage monitoring of electricity, or energy generated from a renewable source.

What doesn’t qualify?

Certain kinds of assets and improvements are not eligible for the bonus deduction, including where the asset or improvement uses a fossil fuel. So, hybrids are out. Solar panels and motor vehicles are also excluded.

In addition, the following assets are specifically excluded from the rules:

• Assets, and expenditure on assets, that can use a fossil fuel;
• Assets, and expenditure on assets, which have the sole or predominant purpose of generating electricity (such as solar photovoltaic panels);
• Capital works (such as buildings and structural improvements);
• Motor vehicles (including hybrid and electric vehicles) and expenditure on motor vehicles;
• Assets and expenditure on an asset where expenditure on the asset is allocated to a software development pool; and
• Financing costs, including interest, payments in the nature of interest and expenses of borrowing.

What does qualify?

The legislation contains a few examples of what would qualify:

• Electrifying heating and cooling systems
• Upgrading to more efficient fridges and induction cooktops (for example replacing gas cook tops)
• Installing batteries and heat pumps
• Installing an electric reverse cycle air conditioner instead of a gas heater
• Replacing a coffee machine with a more energy efficient coffee machine if the manufacturer’s electricity consumption information supports this – keep the documentation!
• Thermal storage that can store heat or cold from a renewable source
• Solar thermal hot water system (assuming it meets the other criteria)

The legislation to implement the energy incentive is before Parliament. If you intend to make a major outlay to take advantage of the bonus deduction, talk to us first just to make sure it qualifies.

The ‘Airbnb’ Tax

Property investors that choose to utilise their property for short-term stays (or leave it vacant) are firmly in the sights of the regulators.

The Victorian Government’s recent Housing Statement announced Australia’s first short-stay property tax. The additional tax, which is scheduled to come into effect from 1 January 2025, is expected to generate $70 million plus annually. The Short Stay Levy will be set at 7.5% of the short stay accommodation platforms’ revenue – so, a few days in Melbourne at $850 will cost an extra $63.75 taking the stay to $913.75.

According to the statement there are more than 36,000 short stay accommodation places – with almost half of these in regional Victoria. More than 29,000 of those places are entire homes.

Airbnb’s ANZ Country Manager Susan Wheeldon however says that “short-term rentals in Victoria make up less than one percent of total housing stock. Acute housing issues existed long before the founding of Airbnb, and targeting these properties is not a long term solution.”

Property investors are now braced for an onslaught of similar taxes at either the local Government or State level.

For Victorian investment property owners this comes after a temporary land tax surcharge from the 2024 land tax year and for those keeping a property vacant, an increase to the absentee owner surcharge rate from 2% to 4% including a reduction in the tax-free threshold from $300,000 to $50,000 (for non-trust absentee owners).

Some local Government taxes on Airbnb style accommodation will be removed once the new tax comes into effect.

Some Councils already impose a surcharge on short stay accommodation. Brisbane City Council for example imposed a 50% rate surcharge on properties listed for short-term rental for more than 60 days a year in their 2022-23 Budget, only to increase it to 65% in 2023-24.

What happens overseas?

Bed taxes in some form are not uncommon internationally but it is unusual to isolate one form of tourist accommodation from another as the Victorian Government have chosen to do. Also unusual is the 7.5% rate – many local taxes on short stay accommodation are in the 5% range (despite California’s Transient Occupancy Tax of up to 15% depending on the region you are staying).

Globally, the idea of taxing vacant and short-term accommodation is also not new.

In British Columbia, the Underused Housing Tax – a 1% tax on the ownership of vacant or underused housing introduced from 1 January 2022 – has been credited with increasing the rental stock by up to 20,000 properties.

Taking the alternative route to freeing up rental stock, New York introduced new rules in September 2023 that severely restrict Airbnb style accommodation options. Hosts need to register with the city if they offer accommodation for less than 30 consecutive days (unless their building is exempt as a hotel or accommodation establishment). Under the new rules the host must permanently reside in the property – entire properties will no longer be available – and, only two guests are allowed. The platforms are responsible for monitoring and enforcing compliance with the new rules.

New York is not alone in curbing the rise of short-term rentals. Amsterdam, Paris and San Francisco limit the number of days in a year an entire residence can be listed – between 30 and 90 days.

Closer to home in Byron Bay, the Byron Bay Council will limit “non hosted holiday letting to 60 days per year for most of the Shire” from 23 September 2024.

But do restrictions on Airbnb create rental stock?

According to Professor Nicole Gurran, from the University of Sydney’s School of Architecture, Design and Planning, if Australia is serious about controlling short-term rentals to solve Australia’s long-term rental crisis, then more needs to be done.

“In comparison to much of the international regulation of the short-term rental market, Australia is very “light touch”. The overarching aim is to encourage the tourism economy.

While this might have been appropriate five years ago when the rental market was in better shape, and long-term housing demand focused on inner city areas, the current crisis demands a new approach. Regulations must be tailored to the conditions of local housing markets, rather than the one-size-fits-all approach that exists today,” Professor Gurran says.

In a 2017 study, Professor Gurran and Professor Peter Phibbs found that, Airbnb absorbed 7% of stock in one Sydney municipality.

So, where is all this going? Governments are unlikely not to take advantage of the opportunity to share in what has become a lucrative short-term rental market. What that looks like will really depend on the States and Territories. Beyond revenue, further regulation is likely to ensure that private gain from short-term rentals is not at the expense of supply of long-term accommodation.

30% tax on super earnings above $3m

Treasury has released draft legislation to enact the Government’s plan to increase the tax rate on earnings on superannuation balances above $3m from 15% to 30% from 1 July 2025. This is the final step before the legislation is introduced into Parliament and a step closer to reality.

The draft legislation appears largely unchanged from the Government’s original announcement.

The proposed calculation aims to capture growth in total super balance (TSB) over the financial year allowing for contributions (including insurance proceeds) and withdrawals. This method captures both realised and unrealised gains, enabling negative earnings to be carried forward and offset against future years.

The ATO will perform the calculation for the tax on earnings. TSBs in excess of $3 million will be tested for the first time on 30 June 2026 with the first notice of assessment expected to be issued to those impacted in the 2026-27 financial year.

From a planning perspective, for those with superannuation balances close to or above $3m, it will be important to explore the implications to your personal situation – there is no one size fits all strategy here and what is best for you will depend on your circumstances. Superannuation, even with the increased tax, remains a tax efficient vehicle.

Self-education: What can you claim?

The Australian Taxation Office have released a new draft ruling on self-education expenses. We revisit the deductibility of self-education expenses and what you can and can’t claim.

If you undertake study that is connected to your work you can normally claim your costs of that study as a tax deduction – assuming your employer has not already picked up your expenses. There is also no limit to the value of the deduction you can claim. While this all sounds great and very encouraging there are still issues to consider before claiming your Harvard graduate degree, accommodation, and flights as a self-education expense.

Clients are often surprised by what cannot be claimed. Self-education expenses are not deductible if you are undertaking the education to obtain a new job or something not connected to how you earn your income now. Take the example of a nurse’s aide who attendees university to qualify as a registered nurse. The university degree and the expenses associated with degree are not deductible as the nursing degree is not sufficiently connected to their current role as a nurse’s aide.

The ATO have recently released a new draft ruling on self-education expenses. While the ruling does not introduce new rules, it does reinforce what the ATO will accept…and what they won’t.

Personal development courses

While not always the case, one of the key challenges in claiming deductions for self-development or personal development courses is that the knowledge or skills gained are often too general. Take the example of a manager who is having difficulty coping with work because of a stressful family situation. She pays for and attends a 4-week stress management course.

In that case, the stress management course is not deductible because the course was not designed to maintain or increase the skills or specific knowledge required in her current position.

When your employment ends part the way through your course

If your employment (or your income earning activity) ends part the way through completing a course, your expenses are only deductible up to the point that you stopped work. Anything from that point forward is not deductible (that is until you obtain a new role and assuming the course remains relevant).

Overseas trips with some work thrown in

Overseas study tours are deductible in limited circumstances. If you are travelling overseas, you need to prove that the dominant purpose of the trip is related to how you earn your income. Factors that help demonstrate this include the time devoted to the advancement of your work related knowledge, the trip not being merely recreational, and that the trip was requested by or supported by your employer. The ATO are strict on this. Take the example of a senior lecturer in history at a University. He takes a trip to China with his wife while on leave over the Christmas break to update his knowledge on his area of academic interest. While his job does not require him to undertake research, he incorporated some of the 600 photos he took and some of the learnings from the tour into the courses he teaches. Despite having a relationship to work, the trip is not deductible as, while relevant in some ways to his field of activity, it is incidental to the overall private and recreational nature of the trip.

Overseas conference with some recreation thrown in

We’ve all had them. Conferences where you spend a few days in sessions and then a day (or more) of touring or golf. When the dominant purpose of the trip is related directly to your work, then the ATO are more accommodating. If the leisure time, for example an afternoon tour organised by the conference, is incidental to the conference itself, then you can claim the full conference expenses.

Where you are extending your stay beyond the conference dates and this isn’t considered incidental, then you apportion the expenses and only claim the portion related to the conference. Let’s say you attend a conference for four days, then spend another four days on holiday. Assuming the conference is directly related to your work, you can claim your expenses related to the conference (assuming they were not picked up by your employer), and half of your airfare (as it’s a 50/50 split on how you spent your time between the conference and recreation).

Not fully deductible? Part of the course might qualify

If a particular course is not entirely deductible, a deduction may still be available for some of the course fees where there are particular subjects or modules in that course that are sufficiently related to your employment or income earning activities. In these cases, the course fees would be apportioned. Take the example of a civil engineer who is completing her MBA. While the MBA itself may not have a sufficient connection to her engineering role to be fully deductible, her expenses related to the project management subject she took as part of the degree could qualify.

Interaction with government assistance

If your course is a Commonwealth supported place, you cannot claim the course fees. But, the deductibility of course fees are not impacted merely because you borrow money to pay for those fees, for example a full-fee paying student using a government FEE-HELP loan to pay for course fees.

A warning on large claims

There is no limit on the amount you can claim as a self-education expense but the ATO is more likely to target large self-education expenses. For anyone who has completed post graduate study you know that these expenses can ratchet up very quickly, particularly when you add in any other expenses such as books or travel. It’s important to ensure that there is a clear connection between your current job or business activity and the self-education expenses before you claim them.

Airfares incurred to participate in self-education, provided you are not living at the location of the self-education activity, are deductible. Airfares are part of the cost of undertaking the self-education activities.

Quote of the month

“Grit is about doing the hard work, day in and day out, without immediate reward.”
Angela Duckworth, academic and psychologist

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.

The Billion Dollar TikTok Scandal

$1.7 billion paid out in fraudulent refunds, another $2.7bn in fraudulent claims stopped, around 56,000 alleged perpetrators and over 100 arrests to date. How did the TikTok tax scandal get out of control?

It was promoted as a victimless hack that delivered tens of thousands of dollars into your bank account. Like any hack, taking part was as simple as following the instructions. The streamlined process designed to make it easy for a small business to start-up under Australia’s self-assessment system, also made it easy for the ‘TikTok fraud’ to go viral.

How did it happen?

At some point in 2021, videos started to spread that spelt out how to get the Australian Taxation Office (ATO) to deliver money into your account. Not quite a loan but a hack that sometimes saw tens of thousands delivered into accounts, no questions asked. As the message gained traction, and with more and more people validating the hack, facilitators emerged. All you had to do was hand over your personal details to the facilitators and they would take care of the rest.

The fraud saw offenders inventing fake businesses, applying for an Australian Business Number (ABN), many in their own names, then submitting fictitious Business Activity Statements (BAS) to claim GST refunds.

By late 2021, the Banks noticed the uptick in suspicious activity, mostly large refunds that were out of character for those accounts – in some cases, Centrelink recipients receiving large credits from the ATO. The banks froze a number of accounts and reported the suspicious matters as they are required to do under the Anti-Money Laundering & Counter Terrorism legislation, including to the ATO.

In April 2022, the ATO formed Operation Protego to disrupt the rapid increase in GST refund fraud by individuals that were not genuinely in business. By that stage however, the strategy had gone viral.

By May 2022, the average GST refund paid was $20,000, claimed by around 40,000 people. The ATO conceded around $850 million had been paid out in potentially fraudulent claims. By June 2022, that figure had blown out to $1.2bn but the ATO had stemmed the flow, rejecting $1.7bn in fraudulent claims. Search warrants and arrests of scheme promoters followed.

It’s hard to understand how so many people – an estimated 56,000 Australians – made the leap in logic that some sort of hack had been discovered that enabled you to claim thousands of dollars in tax refunds as a ‘loan’ from the ATO. At the best of times the ATO is not known for its sporadic acts of generosity and laissez faire attitude to tax revenue. We know the opposite is true.

And, why so many accepted a view promoted on TikTok – the act of participating in the fraud required falsifying records at several stages and yet, failed to ring alarm bells. Unfortunately, naivety is not a compelling defence against fraud.

Caught in the web?

“The ATO has zero tolerance to any fraudulent or corrupt behaviour that may in any way impact the ATO.”

The TikTok tax fraud is extensive and has several layers of impact across the 56,000 taxpayers caught up in it.

The closest circle are the scheme promoters and facilitators. To date, more than 100 people have been arrested including members of outlaw motorcycle gangs, organised criminal organisations, and youth crime gangs – and more than 10 people have been convicted for their involvement.

The maximum penalty for promoting a tax fraud scheme is 10 years in prison.

The second circle are those actively engaged in the scheme – who declared that they were carrying on a business, established an ABN, and submitted GST refund claims for expenses they did not incur. For those who received fraudulent GST refunds, the money will need to be paid back, penalties are likely to apply, and there is a risk of criminal proceedings. If the ATO have contacted you, engagement will be the key to reducing penalties and preventing an escalation to criminal proceedings. If you were engaged in the GST refund fraud but the ATO has not contacted you yet, it will be important to work with us as soon as possible to declare and manage the issue.

Where to now for identify theft victims?

The third circle is comprised of the unwitting identity theft victims whose details have been used to generate fraudulent GST refunds. The ATO have had reports of people offering to buy and sell myGov details in order to access refunds. The conversation within the accounting community is that the ATO are inundated at present trying to manage the fallout, not just from the TikTok GST refund fraud but identity theft in general. So, keep on top of your myGov account and if you notice any unusual activity, contact us asap.

The TikTok fraud timeline

“Nobody is giving money away for free or offering loans that don’t need to be paid back.”
ATO Deputy Commissioner and Chief of the Serious Financial Crime Taskforce (SFCT) John Ford.

The upshot to date; $2.7bn in fraudulent claims rejected before being paid, $1.7bn fraudulent payments made with around $66m recovered by 30 June 2022. Another $700m in liabilities, including around $300 million in penalties, raised in 2023-24.

The case of the taxpayer who was paid too late

What a difference timing makes. A recent case before the Administrative Appeals Tribunal (AAT) is a reminder about the tax impact of the timing of employment income.

In this case, the taxpayer was a non-resident working in Kuwait. As part of his work, he was entitled to a ‘milestone bonus’ but, the employer was not in a position to pay the bonus at the time.

When the job ended, the taxpayer moved to Australia and became a resident. Once in Australia, the former employer honoured the performance bonus and paid it as a series of instalments.

The dispute between the ATO and the taxpayer started when the Commissioner issued amended assessments taxing the bonus payments received.

The dispute focused on when the bonus was derived. Had the bonus been derived while the taxpayer was still a non-resident then it would not have been taxed in Australia. This is because non-residents are normally only taxed in Australia on Australian sourced income. Employment income is typically sourced in the place where the work is performed (although there can be exceptions to this).

Australian tax case law says that employment income is normally derived on receipt. In the taxpayer’s case, this was when he received the payments from his former employer, not when he became entitled to the bonus. Because the taxpayer received the bonus when he was a tax resident of Australia, the bonus was subject to tax.

The difference for the taxpayer was quite dramatic. Had he been paid the bonus when it was due, he would have paid no tax as Kuwait does not impose income tax.

Please call us if you are concerned about tax residency or managing overseas income.

The shape of Australia’s future

What will the Australian community look like in 40 years? We look at the key takeaways from the Intergenerational Report.

The 2023 Intergenerational Report (IGR) is a crystal ball insight into what we can expect Australian society to look like in 40 years and the needs of the community as we grow and evolve. It doesn’t map out our path to flying cars and Jetsons style robotic domestic help (unfortunately) but it does forecast structural trends that will give many of us a level of anxiety about what we need to be doing now to successfully navigate the future.

The report links the continued growth and prosperity of Australia to five significant areas of influence:

We’re ageing

The number of people aged 65 and over will more than double and the number aged 85 and over will more than triple. We’re expected to live longer with the life expectancy of men increasing from 81.3 to 87 years and from 85.2 to 89.5 for women by 2062-63. And that’s a problem for the younger generation.

Who bears the burden of an ageing population?

Australia’s low birth rate, limited migration and increased longevity all have an impact. The old age percentage – the number of people aged 65 and over for every 100 people of traditional working age (15 to 64) in the population – will increase from 26.6% to 38.2%.

From a tax perspective, Australia’s reliance on personal tax means workers will bear an increasing proportion of the tax burden under current fiscal policy. In a recent interview, former Treasury boss Ken Henry labelled it an “intergenerational tragedy” with personal tax growing from 11.7% of GDP to 13.5% based on current policy. The report says that “only 12% of Australians aged 70 and over pay income tax and this age group now makes up 12.2% of the total population. This age group is expected to increase to 18.1% of the total population in 2062-63.” Wholesale tax reform will be required to prevent the growing tax burden on individuals dragging on the economy. With economic growth expected to slow to 2.2% from 3.1% over the next 40 years, the solution will not magically arise from corporate Australia. If it was not for our high rate of inflation you would think an increase to the GST was imminent.

Services and who pays

Demographic ageing alone is estimated to account for around 40% of the increase in Government spending over the next 40 years.

The outcome of an ageing population, as you would expect, is increased demand for care and support services that will push the Federal Budget back to a point where deficits are the norm if the current policies remain in place.

From a consumer perspective, it also means that the trend towards user-pays will only increase. As individuals, we need to ensure that we have the means to fund our old age because Government resources will be limited by increasing demand and this demand is funded by a deteriorating percentage of workers contributing to tax revenue.

It’s also likely that we will need to look at how we generate income. For some that might mean working longer, for others it is value adding – creating, buying and selling assets in some form, whether that is business, innovation, or through more traditional assets such as property or financial products.

Superannuation the size of a nation

Australia currently has the fourth largest pool of retirement assets in the world, with total superannuation balances projected to grow from 116% of GDP in 2022-23 to around 218% by 2062-63. Our superannuation system will be what underwrites retirement for most Australians. At present, around 70% of people over aged pension age receive some form of Government income support. Over time, and as our superannuation system matures, this percentage is expected to decline sharply as a percentage of GDP with Government support supplementing rather than providing for retirement (the first generation of workers with superannuation guarantee throughout their working life hit retirement age around 2058).

However, the IGR points out that, “the cost of superannuation concessions will increase, driven by earnings on the larger superannuation balances held by Australians.” The proposed tax on future earnings on super balances above $3m may not be the last.

You can expect the management of superannuation to be a priority for Government to ensure that retirement savings are maximised to reduce the reliance on Government support, and to ensure that this enormous pool is leveraged for the gain of not only members, but the nation.

Growth of services

Like most advanced economies, global competition has shifted Australia’s industrial base from the production of goods to services. Ninety percent of jobs are now in services.

With an ageing population, demand for health and care services is expected to soar. People aged 65 or older currently account for around 40% of total Australian health expenditure, despite being about 16% of the population. The IGR estimates that the workforce required to support this sector will need to be twice the size of what it is now to meet demand by 2049-50.

The Government’s biggest spending pressures will be health, aged care, the NDIS, defence and interest payments on government debt. Of these, the NDIS is the fastest growing at 7% per year.

The role of technology

The speed of technological change is difficult to predict, and the IGR doesn’t attempt to make predictions. But what we do know is that technology has had a transformational impact on labour productivity (the value of output of goods and services produced per hour of work). Over the last 30 years, labour productivity has accounted for around 70% of the growth in Australia’s real gross national income. But, tempering this is a slowing of labour productivity growth since the mid-2000s.

We know technological disruption is coming and the debate about the role of artificial intelligence is only just beginning. We also know that unless technology is accessible, our future will be one polarised by those who have and have not benefited from technological change.

Climate change transformation

There are two key aspects to climate change; the cost of rising temperatures, and the opportunity created by the shift to renewable energy.

Temperatures are anticipated to increase by 1.5 degrees before 2100, potentially before 2040.

From 1960 to 2018, climate disasters reduced annual labour productivity in the year they occurred by about 0.5% in advanced economies. However, for severe climate disasters labour productivity is estimated to be around 7% lower after three years. With rising temperatures, floods, bushfires and other extreme weather events are expected to increase in frequency and severity. The impact of climate change spelt out in the report is sobering with disruptions and changing patterns impacting agriculture, tourism, recreation and industries that rely on labour intensive outdoor work.

On the positive side, Australia could benefit from new “green” industries, such as hydrogen and other clean energy exports, critical minerals and green metals. It is also likely to drive new, innovative ideas as businesses invest in and develop low emissions technologies, providing a source of future productivity growth in a more sustainable economy. Australia’s potential to generate renewable energy more cheaply than many countries could also reduce costs for both new and traditional sectors, relative to the costs faced by other countries.

Geopolitical risks

Australia relies on open international markets. Trade disputes and military conflicts pose an external threat to Australia’s economy and well being. While the IGR cannot predict the nature of geopolitical events, it notes the importance of investing in national security, presumably this includes cybersecurity, ensuring access to international markets, and deepening regional partnerships to reduce supply chain vulnerabilities.

Legislating the ‘objective’ of super

The proposed objective of superannuation released in recently released draft legislation is: ‘to preserve savings to deliver income for a dignified retirement, alongside government support, in an equitable and sustainable way.’

The significance of legislating the objective of super is that any future legislated changes to the superannuation system must be in line with this objective. It’s a fairly broad definition. For example, “equitable” seeks to address the distributional impact of superannuation policy. That is, latitude for the Government to target tax concessions to address differences in demographic factors and structural inequities including intergenerational inequity and outcomes for different groups including women, First Nations Australians, vulnerable members and low-income earners.

“Sustainable” encapsulates the changing needs of an ageing population including reducing the reliance on the Age Pension. The draft also alludes to the viability of the cost of tax concessions used to incentivise Australians to save for retirement.

“Deliver income” appears to reinforce the concept that superannuation savings “should be drawn down to provide individuals with a source of income during their retirement.”

More than 15 million Australians now have a superannuation account. Australia’s superannuation pool has grown from around $148 billion in 1992 to $3.5 trillion in 2023, and will continue to grow. Total superannuation balances as a proportion of GDP are projected to almost double from 116% in 2022–23 to around 218% of GDP by 2062-63.

The consultation also recognises the value of the superannuation system as a source of capital, “which can support investment in capacity-building areas of the economy where there is alignment between the best financial interests of members and national economic priorities.”

Quote of the month

“Effective people are not problem-minded; they’re opportunity-minded. They feed opportunities and starve problems.”

Stephen Covey

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

Markets

Local:

The ASX200 index total return for October was a negative return of 3.8%, with the year to date negative return at 0.2%.

Global:

The S&P 500 was down -2.20% in October, bringing its YTD return to 9.23%.

The Dow Jones Industrial Average fell -1.36% for the month and was down -0.28% YTD.

The Stoxx Europe 600 Index also declined by -3.6% over October, amid escalating conflict in the Middle East.

Gold:

The spot price for Gold shot up over the October month to finish at US $1,982.

Iron Ore:

Iron Ore price remained steady over October to finish the month at US $118.75 /Mt.

Oil:

Brent Oil price fell slightly in October to reach US $85.02 /bbl. Down from $90.71 /bbl in September.

Property

Housing:

CoreLogic’s national Home Value Index (HVI) rose a further 0.9% in October, accelerating from a 0.7% rise in September (revised down from 0.8%).

Since finding a trough in January, the national HVI has increased 7.6%, leaving the index only half a percent below the historic high recorded in April last year.

CoreLogic’s research director, Tim Lawless, noted a nominal recovery in the national index is likely to be just around the corner. “At this rate of growth, we will see the national HVI reach a new record high mid-way through November, recovering from the -7.5% drop in values recorded over the recent downturn between May 2022 and January 2023.”

Economy

Interest Rates:

Reserve Bank governor Michele Bullock has hit borrowers with a 13th interest rate rise as she warned inflation will be higher next year than first thought and another rate rise was possible. Ms Bullock stated that the recent decision to increase the cash rate by 0.25% to 4.35% was due to unsatisfactory progress on lowering inflation as it had been slower than expected.

Retail Sales:

Australian retail turnover rose 0.9% in September 2023. This follows rises of 0.3% in August 2023 and 0.6% in July 2023, revised up from previously published estimates.

Ben Dorber, ABS head of retail statistics, said: “The strong rise in September came from a diverse range of factors across the Retail industry.

Bond Yields:

During the month the Australian 10-year bond yield increased by 44bps.

The US 10-year bond depreciated by 1.3% over October.

Bitcoin:

From mid-March to mid-October, Bitcoin traded mostly sideways in a price range between around $25,000 and $30,000. However, Bitcoin broke out to the upside on October 23, ultimately trading as high as $35,198 on the strength of ETF optimism and flight-to-safety buying amid an escalating conflict in the Middle East.

Exchange Rate:

The Aussie dollar fell slightly in October against both the American dollar, at $0.634, and the Euro at $0.599.

Inflation:

Australia: The Consumer Price Index (CPI) rose 1.2% in the September quarter. The most significant price rises were Automotive fuel (+7.2%), Rents (+2.2%), New dwelling purchase by owner-occupiers (+1.3%) and Electricity (+4.2%). Over the twelve months to the September 2023 quarter, the CPI rose 5.4%.

USA: The annual inflation rate for the United States was 3.7% for the 12 months ended to September, according to U.S. Labor Department data. This was the same as the 3.7% in the previous period.

EU: Euro area annual inflation is expected to be 2.9% in October 2023, down from 4.3% in September. Looking at the main components of euro area inflation, food, alcohol & tobacco is expected to have the highest annual rate in October (7.5%, compared with 8.8% in September), followed by services (4.6%, compared with 4.7% in September), non-energy industrial goods (3.5%, compared with 4.1% in September) and energy (-11.1%, compared with -4.6% in September).

Consumer Confidence:

The Westpac-Melbourne Institute Index of Consumer Sentiment rose 2.9% to 82 in October, up from 79.7 in September. The consumer mood has improved slightly but optimism remains in extremely short supply. At 82, the latest Index read is still in deeply pessimistic territory, consistent with a continuation of the contraction in per capita spending seen since late last year. While there are some faint glimmers of hope around family finances and the outlook for jobs, these are being overshadowed by continued high inflation and renewed rate rise concerns.

Employment:

Australia: Australia’s seasonally adjusted unemployment rate was unexpectedly at a three-month low of 3.6% in September 2023, easing slightly from August’s figure and falling below market consensus of 3.7%. The number of unemployed individuals dropped by 19.8 thousand to 520.5 thousand, as people looking for full-time jobs decreased by 19.7 thousand to 338.3 thousand while those seeking part-time jobs dropped by 0.1 thousand to 182.2 thousand.

USA: Total nonfarm payroll employment increased by 150,000 in October, and the unemployment rate changed little at 3.9%. Job gains occurred in health care, government, and social assistance. Employment declined in manufacturing due to strike activity.

Purchasing Managers Index:

The Judo Bank Flash Australia Manufacturing PMI shrinks further to 48.2 in October 2023, from 48.7 in the previous month, final estimates showed. It marked the eighth straight monthly decline in manufacturing sector conditions and the lowest figure since June. It was led by a sharp decline in new orders, the most since May 2020, as demand dampened. 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 increased to 50.9 in October 2023 from 50.2 in September, the highest in three months and above market expectations of 49.8, preliminary estimates showed. Employment rose but new business fell for a third month running, albeit at a softer pace than seen in September.

US Global Manufacturing PMI:

The S&P Global US Manufacturing PMI was confirmed at 50.0 in October 2023, marking a slight improvement from 49.8 in September and indicating a stabilization in the health of the manufacturing sector. New orders increased for the first time in six months, reaching the fastest pace since September 2022.

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

Comments

Q3 2023 Inflation Edges Up

Recent data released by the ABS showed that inflation increased over the September quarter by 1.2% in Australia’s CPI, up from 0.8% in the June quarter. This was an increase that was above market expectations and had provided the RBA with the ammunition it required to increase interest rates again at its November board meeting.

This figure takes annual inflation in the year to September to 5.4%, down from 6.0% in the year to June. But this rise in quarterly inflation (the first since the December quarter of 2022) shows that the path for price growth in Australia is still unpredictable, particularly when it comes to volatile items.

The most significant contributors to the quarterly increase were automotive fuel (+7.2% over the quarter), rents (+2.2%), new dwellings purchased by owner occupiers (+1.3%), and electricity (+4.2%). While there were offsetting price falls in some areas, like childcare, vegetables and domestic holiday travel, these were not enough to combat the spike in fuel and housing.

Notably, this was the first quarter of increase for automotive fuel, after two quarters of price fall this year. Housing costs overall were 2.2% higher over the quarter and 7.0% higher over the year, reflecting continued rental price growth and electricity price passthroughs from the annual wholesale mid-year price review. This was despite a range of offsets, like increases to Commonwealth Rent Assistance and the Energy Bill Relief Fund rebates.

While the annual rate of inflation continues to trend down, and domestic demand has already been squashed by previous rate rises, the September result will be of concern to the RBA. After leaving rates on hold at the last four meetings, the RBA’s new line in the October Board Minutes that “the Board has a low tolerance for a slower return of inflation to target than currently expected” indicated that CPI outcomes would be a major factor in their November decision, which had seen financial markets price in the recent RBA rate rise that the Board delivered on 7 November.

High inflation and interest rates have hurt consumers, causing consumer sentiment to remain low and likely explaining the recent uptick in shoplifting. In June 2023, Australian Consumer and Retail Studies (ACRS), which operates out of Monash Business School, surveyed 1,000 consumers across Australia about cost of living and consumer deviance. Unsurprisingly, consumers are generally pessimistic about their personal finances, with 50% reporting being financially worse off compared to a year ago (and 57% of 35–54-year-olds). As part of the ACRS survey, consumers were asked how justifiable deviant behaviours were. Concerningly for retailers, over a quarter (28%) of consumers believe shoplifting is a little to completely justifiable.

There was a clear generational divide on this question, with only 7% of older consumers (aged 55 or older) believing it was justifiable, compared to 53% of younger consumers (aged 18-34). Even more consumers believe manipulating deals and promotions to be okay. 67% of consumers surveyed believed that claiming a competing retailer has a better price in order to get a discount was a little to completely justifiable. Another dimension to the difficult environment being seen for many consumers.

Sources: ABS, AFR, Deloitte Access Economics

Reskilling in the Age of AI

Back in 2019 the Organisation for Economic Co-operation and Development (OECD) made a bold forecast. Within 15 to 20 years, it predicted, new automation technologies were likely to eliminate 14% of the world’s jobs and radically transform another 32%. Those were sobering numbers, involving more than 1 billion people globally—and they didn’t even factor in ChatGPT and the new wave of generative AI that has recently taken the market by storm.

Today’s advances in technology are changing the demand for skills at an accelerated pace. New technologies can not only handle a growing number of repetitive and manual tasks but also perform increasingly sophisticated kinds of knowledge-based work—such as research, coding, and writing—that have long been considered safe from disruption. The average half-life of skills is now less than five years, and in some tech fields it’s as low as two and a half years. Not all knowledge workers will lose their jobs in the years ahead, of course, but as they carry out their daily tasks, many of them may well discover that AI and other new technologies have so significantly altered the nature of what they do that in effect they’re working in completely new fields.

Reskilling Is a Strategic Imperative

During times of disruption, when many jobs are threatened, companies have often turned to reskilling to soften the blow of layoffs, to mitigate the feelings of guilt about social responsibility, and create a positive PR narrative. But most companies have moved beyond that narrow approach and now recognize reskilling as a strategic imperative. That shift reflects profound changes in the labour market, which is increasingly constrained by the aging of our working population, the emergence of new occupations, and an increasing need for employees to develop skills that are company-specific. Against this backdrop, effective reskilling initiatives are critical, because they allow companies to build competitive advantage quickly by developing talent that is not readily available in the market and filling skills gaps that are instrumental to achieving their strategic objectives—before and better than their competitors do.

Reskilling Is a Change-Management Initiative

To design and implement ambitious reskilling programs, companies must do a lot more than just train employees: They must create an organizational context conducive to success. To do that they need to ensure the right mindset and behaviours among employees and managers alike. From this perspective, reskilling is akin to a change-management initiative, because it requires a focus on many different tasks simultaneously.

It can be costly and logistically challenging to take employees away from their day jobs to participate in training. And adults tend not to like or learn well in classroom-style situations. In a 2021 BCG (Boston Consulting Group) survey 65% of the 209,000 participating workers said they prefer to learn on the job. As a result, the best approach for reskilling is to do as much training as possible by means of shadowing assignments, internal apprenticeships, and trial periods.

Employees Want to Reskill—When It Makes Sense

Many of the companies we spoke with mentioned that one of their biggest challenges was simply persuading employees to embark on reskilling programs. That’s understandable: Reskilling requires a lot of effort and can set a major life change in motion, and the outcome isn’t guaranteed. The OECD reports that only a very small fraction of workers typically take part in standard training programs, and those who do are often the ones who need them the least.

But workers may be more willing to engage in reskilling than prior data suggests. The BCG data shows, for example, that 68% of workers are aware of future disruptions in their fields and are willing to reskill to remain competitively employed. The key to success in this domain, our interviews suggest, is to treat workers respectfully and make the benefits of their participation in reskilling initiatives clear. As one of our interviewees explains, “The secret to scaling up reskilling programs is to design a product your employees actually like.”

Dedicating adequate time and attention to the task

Because reskilling involves occupational change, it usually requires intensive learning, which is possible only if employees have the time and mental space they need to succeed. To that end, four times a year Vodafone dedicates days during which employees may devote themselves entirely to learning and personal development. Bosch goes even further: To help traditional engineers at the company earn degrees and get training in emerging fields, its Mission to Move program covers the cost of tuition and time spent learning for as much as two days a week for a whole year. It even gives participants days off before exams to prepare.

So from what we can learn, the AI age is coming but the key to success is to engage your current workforce to embrace future technologies. Anyone who rejects these statements, may get left behind.

Sources: BCG, Harvard Business Review, OECD