super changes add flexibility

Super Changes Add Flexbility

super changes add flexibility

Super Changes Add Flexbility

Just when you thought you had a grip on the superannuation rules, they change again. This time though, the changes are mostly positive, especially for older super members keen to top up their savings.

From 1 July 2020, changes came into effect with the potential to help retirees as well as members suffering financial hardship due to the economic impacts of COVID-19.

If you are not working you may be able to contribute to super for longer, while couples can take advantage of spouse contributions for longer. The temporary reduction in minimum pension drawdowns remains in place, as does early access to super. And if you own a business, you have a brief window of opportunity to get up to date with your employees’ super payments without penalty.

Here’s a summary of the new rules.

Work test to kick in at 67

Under changes to the work test, if you are aged 65 or 66 you can now put money into super even if you aren’t working. This gives people flexibility to make voluntary catch-up contributions for a few more years and give their retirement savings a last-minute boost.

Say you are 65 and inherit some money. You can now make a voluntary non-concessional contribution to your super account up to the annual limit of $100,000, even if you are not currently working enough hours to satisfy the work test. You can make withdrawals from this money or start a super pension.

Under the work test, which now kicks in at age 67, you must work at least 40 hours within 30 consecutive days in the financial year in which you make the contribution.

It was also proposed to allow people aged 65 and 66 at the start of the financial year to use the existing non-concessional bring forward rules. If eligible, this allows you to ‘bring forward’ up to three years’ worth of non-concessional contributions (up to $300,000) in the current financial year. Legislation must be passed before this proposal becomes effective.

Couples get a super boost

Couples also have more flexibility to grow their retirement savings later in life, thanks to recent changes to spouse contributions. As of 1 July 2020, you can contribute to your spouse’s super fund until they reach age 75, up from the previous age limit of 70.

What’s more, if your spouse (married or de facto) earns less than $37,000 you may be able to claim a tax offset of up to $540 for your contribution to their super. The offset phases out once your partner’s income reaches $40,000.

The usual non-concessional contribution limits still apply, and the receiving spouse still needs to meet the work test where applicable (outlined above).

Super pension drawdowns halved

Retirees whose superannuation has taken a hit from the COVID-19 market volatility have also been given a bit more wriggle room this financial year. The government has temporarily halved the minimum amount retirees must withdraw each financial year from their account-based super pension.

This temporary measure will help retirees who might otherwise have to sell assets at depressed prices to provide cash for their pension payments.

For example, someone aged 65 would normally be required to withdraw 5 per cent of their super pension account balance each financial year. But in 2020-21 they need only withdraw 2.5 per cent of their account balance if they wish. The minimum drawdown rate increases gradually with age, reaching 7 per cent from age 95 under the temporary rules (normally 14 per cent), as you can see in the table below. There is no maximum withdrawal rate.

Table 1: Minimum pension drawdown rates (as a percentage of your super pension account balance)

Age of beneficiaryTemporary withdrawal rate
2019-20 and 2020-21
Normal withdrawal rate
Under 652%4%
65 to 742.5%5%
75 to 793%6%
80 to 843.5%7%
85 to 894.5%9%
90 to 945.5%11%
95 and older7%14%

Source: ATO

Early release of super

Younger super fund members have not been forgotten. You can withdraw up to $10,000 from your super account this financial year if you are suffering financial hardship due to the economic impact of COVID-19. This is in addition to the $10,000 you could withdraw last financial year.

It must be stressed though, that the early withdrawal of your super should be a last resort because of the adverse impact on your retirement savings. An amount of $10,000 withdrawn early in your working life could potentially be worth many times that by the time you retire.

If, after weighing up your financial options, you wish to take advantage of this temporary measure the application period has recently been extended to 31 December 2020.

This article is intended as an information source only and to provide general information only. The comments, examples, words and extracts from legislation and other sources in this publication do not constitute legal advice, financial or tax advice and should not be relied upon as such. All readers should seek advice from a professional adviser regarding the application of any of the comments in this article to their particular situation.


Outsmart your biases using investor psychology to your advantage

Outsmart your biases: using investor psychology to your advantage

Outsmart your biases using investor psychology to your advantage

Outsmart your biases: using investor psychology to your advantage

When it comes to decision making, we don’t always get it right. It is human nature to fall for several behavioural traps when making everyday decisions and also when trying to predict the future. Even the smartest people can succumb to their own biases when forming judgements and making choices.

While it’s unrealistic to expect to never again make a bad decision, we can of course recognise and anticipate possible biases so we can make informed decisions. This knowledge helps us to better understand how our mind works so we can use this information to our advantage for our next financial decisions, investments and life choices.

Here are a few of the most common behavioural biases (and therefore traps) to be aware of and tips for how to overcome them.

Loss aversion

This bias is ruled by fear, as you are focused on what you can lose rather than what you can gain. Mark Twain posed the example of a cat who jumps on a hot stove once and never will again, even though the stove would be cold and potentially contain food later, as a way to illustrate loss aversion.

Overcoming this bias requires confidence and pragmatism, as often the fear and expectation of loss is greater than the loss itself. It can help to lower the cost of failure (for example, if you are investing) and increase the likelihood of success to feel more assured when making decisions.

Overconfidence

On the flipside, overconfidence can cause bad decision making as it means you’ll take greater risks. Facets of this bias include an illusion of control, planning fallacy (such as underestimating how long a project will take) and positive illusions.

This type of bias is often linked to people with high self-evaluations, however anyone can fall into the trap of overconfidence. To avoid it, consider the consequences of the decision and explore all possibilities rather than just the best case scenario. Be open to feedback and advice from others to help balance overconfidence and to give you more options to consider.

Groupthink

Groupthink is where you are influenced by the ideas of others in order to reach a consensus in a group situation – this is also called the bandwagon effect. Something might not sit well with you but rather than voicing your feelings and being at odds with the group, you go along with it.

It is easy to get swept along with group consensus but there are ways you can minimise groupthink. Encouraging conversation and debate allows differing ideas and opinions to be considered – in a group scenario this enables everyone to have their voices heard.

Even when making a decision by yourself you can still be swayed by the opinions of others, so don’t let these overpower your instincts. Think critically and have confidence in your own analysis.

The primacy/recency effect

This bias is part of the serial-position effect: why we can often remember the first and last items in a series the most clearly (and forget what comes in the middle). The primacy and recency effect are intertwined for this reason, and they are often used by teachers, speakers, lawyers and advertising, in order to make their message most impactful.

Awareness of this effect can help you understand why you’re likely not using all information presented in your decision making, but only the first and last messages. Keep a record of all information to get a more accurate picture of the situation. It also helps to do your research so you won’t just be influenced by the message from one source either.

These are just some of the biases that impact our decision making, from the day-to-day to the bigger life decisions. Having a trusted adviser in your corner can help improve your financial decision making, by providing market research together with considered advice through an external, unemotional lens. In fact recent findings from Russell Investments found one significant benefit of an advisers is they prevent clients from making silly behavioural mistakes.i

We can offer guidance to help you overcome your biases and make better choices, so don't hesitate to get in touch today.

 

i https://russellinvestments.com/au/blog/5-key-ways-advisers-deliver

This article is intended as an information source only and to provide general information only. The comments, examples, words and extracts from legislation and other sources in this publication do not constitute legal advice, financial or tax advice and should not be relied upon as such. All readers should seek advice from a professional adviser regarding the application of any of the comments in this article to their particular situation.


Making your savings work harder

Making your savings work harder

Making your savings work harder

Making your savings work harder

With tax cuts and stimulus payments on the way, Treasurer Josh Frydenberg is urging us to open our wallets and spend to kick start the national economy. But if your personal balance sheet could do with a kick along, then saving and investing what you can also makes sense.

One positive from this COVID-19 induced recession, is that it has made many of us more aware of the importance of building a financial buffer to tide us over in lean times. Even people with secure employment have caught the savings bug.

According to the latest ME Bank Household Finance Confidence Report, 57 per cent of households are spending less than they earn. This is the highest percentage in almost a decade.i

More troubling however, was the finding that one in five households has less than $1,000 in savings, and only one third of households could maintain their lifestyle for three months if they lost their income.

Whatever your financial position, if saving is a priority the next step is deciding where to put your cash.

Banking on low interest

Everyone needs cash in the bank for living expenses and a rainy day. If you’ve been caught short this year, then building a cash buffer may be a priority.

If you have a short-term savings goal such as buying a car or your first home within the next year or so, then the bank is also the best place for your savings. Your capital is guaranteed by the Government so there’s no risk of investment losses.

But with interest rates close to zero, the bank is probably not the best place for long-term savings. So once your need for readily accessible cash is covered, there are more attractive places to build long-term wealth.

Pay down your mortgage

A question often asked is whether it’s better to put savings into super or your mortgage. Well, it depends on factors including your age, personal circumstances and preferences, interest rates and tax bracket.

If you have a mortgage, then making extra repayments can reduce the total amount of interest you pay and cut years off the life of your loan. This strategy has the most impact for younger people in the early years of a 25 to 30-year loan.

If your mortgage has a redraw or offset facility, you can still access your savings if you need cash for an emergency or home renovations down the track. This may be a deciding factor if retirement is a long way off.

Boost your super

Making extra super contributions is arguably the most tax-effective investment, especially for higher income earners.

Even so, super is likely to be more attractive as you get closer to retirement, the kids have left home, and your home is close to being paid off.

You can make personal, tax-deductible contributions up to the annual cap of $25,000. Be aware though that this cap includes super guarantee payments made by your employer and salary sacrifice amounts.

You can also make after-tax contributions of up to $100,000 a year up to age 75, subject to a work test after age 67.

Invest outside super

If you would like to invest in shares or property but don’t want to lock your money away in super until you retire, then you could invest outside super.

If you are new to investing, you could wait until you have saved $5,000 or so in the bank and then buy a parcel of shares or an exchange-traded fund (ETF). ETFs give you access to a diversified portfolio of investments in a particular market, market sector or asset class.

First home buyers might consider the Federal Government’s expanded First Home Loan Deposit Scheme with as little as 5 per cent deposit. There are limited packages available and price caps on the home value, depending on where you live.

With tax cuts set to flow and a new appreciation of the importance of financial security, now is the perfect time to start a savings plan. Contact our office if you would like to discuss your savings and investment strategy.

i https://www.mebank.com.au/getmedia/c27b0a0d-cc4e-470e-8a37-722d6f00af98/Household_Financial_Comfort_Report_July_2020_FINAL.pdf

This article is intended as an information source only and to provide general information only. The comments, examples, words and extracts from legislation and other sources in this publication do not constitute legal advice, financial or tax advice and should not be relied upon as such. All readers should seek advice from a professional adviser regarding the application of any of the comments in this article to their particular situation.


FBT changes under COVID- What are the rules

FBT changes under COVID: What are the rules?

FBT changes under COVID- What are the rules

FBT changes under COVID: What are the rules?

The COVID-19 pandemic is raising some interesting questions for small business employers in relation to their Fringe Benefit Tax (FBT) liabilities.

With many employees working from home, common employee benefits are often not being supplied, while some employers are now providing protective equipment such as gloves and COVID-19 testing.

To complicate things there are new FBT exemptions on the horizon next year, so it’s important to ensure you know the rules when preparing your FBT return.

Workplace items used at home

If you have provided your employees with a laptop, portable printer or electronic device so they can work from home due to COVID-19, these items are exempt from FBT if they are primarily used for the employee’s work.

Where you allow your employee to use a monitor or keyboard normally used in the workplace, provide them with stationery or computer consumables, or pay for their phone and internet access, the minor benefits exemption applies. This covers minor, infrequent and irregular employee benefits of less than $300.

COVID-19 protective items

On the other hand, you may need to pay FBT on items given to employees to help protect them while at work, such as gloves, masks and anti-bacterial spray.

These benefits are exempt, however, if you provide them to employees who have physical contact or proximity to customers or who are involved in cleaning premises. If your employee’s specific duties are not covered by this rule, the $300 minor benefits exemption may still apply.

Emergency health care

There is a limited exemption from FBT if you provide emergency health care to employees affected by COVID-19. This only applies to health care treatment provided to an employee on your premises or adjacent to their worksite.

Flu vaccinations and COVID-19 tests

Reimbursing your employees for getting a flu vaccination is exempt from FBT, provided it is offered to all employees. The same applies to COVID-19 testing if it is available to all staff and is carried out by a qualified health professional.

FBT and car fringe benefits

Where employees have been garaging their work cars at home due to COVID-19 there can be FBT implications. Normally, a car fringe benefit arises if an employer makes a car available for private use by the employee, or if it is garaged at home.

During the pandemic, if a home garaged car is not being driven – or only for maintenance purposes – the ATO accepts a fringe benefit is not being provided. If you use the operating cost method and maintain appropriate records, there is nil taxable value for the car and no FBT liability.

Where you are not using the operating cost method or don’t have odometer records, an FBT liability will arise as it’s assumed the car is available for private use.

Logbooks and driving patterns

Where you use the operating cost method with an employee vehicle, during the pandemic you can rely on its existing logbook to make a reasonable estimate of the business kilometres travelled or choose to start a new logbook.

Accommodation, food and transport

FBT does not apply if you provide emergency accommodation, food and transport to an employee if they are at risk of being adversely affected by COVID-19 and the benefit provides emergency assistance.

This assistance can include costs relating to relocating an affected employee and food or accommodation provided due to travel restrictions or a requirement to self-isolate.

Temporary accommodation and meals provided to fly-in fly-out employees unable to return home due to COVID-19 restrictions are also exempt.

New SME exemption coming

You also need to keep in mind the rule change for the FBT year starting in April. The October Federal Budget included the announcement of a new FBT concession for businesses with an aggregate annual turnover between $10 and $50 million.

From 1 April 2021, if your business is eligible it will be exempt from the current 47 per cent fringe benefits tax on car parking and work-related portable electronic devices such as phones or laptops provided to employees.

If you have any questions regarding your Fringe Benefit Tax liabilities, please don’t hesitate to give us a call.

This article is intended as an information source only and to provide general information only. The comments, examples, words and extracts from legislation and other sources in this publication do not constitute legal advice, financial or tax advice and should not be relied upon as such. All readers should seek advice from a professional adviser regarding the application of any of the comments in this article to their particular situation.


Easy ways to boost your credit score

Easy ways to boost your credit score

Easy ways to boost your credit score

 

Easy ways to boost your credit score

Most Australians are only vaguely aware – or completely unaware – of the fact that credit-reporting agencies monitor their financial transactions.

While most Australians don’t give much thought to what’s on their credit report, the credit score that’s based on the contents of that report can have a significant impact on your financial choices. A modest score may mean you miss out on getting a mortgage or business loan.

There’s no shame in relying heavily on your credit card or delaying bill or loan payments to help ride out the financial impacts of the pandemic. However, it is worth understanding how the financial decisions you’re making can affect your creditworthiness.

Know the score

Australia’s credit reporting agencies make it as easy as possible for people to access their credit scores. You should be able to get a free copy of your consumer credit report by contacting the relevant credit-reporting agency or putting in a request via its website.i

The two big players in the credit-reporting industry are Equifax and Experian, but Illion may also have a ‘consumer credit report’ on you. If you’re based in the Apple Isle, the Tasmanian Collection Service will be keeping an eye on whether you’re paying your bills.

Credit scores range from 1 to 1000 or 1200, depending on the agency rating it. If you discover your score is around 500 or better (again, depending on the agency) you can take comfort in the knowledge you’re of above-average creditworthiness. If your score is lower, there are some simple remedies.

Credit repair 101

While credit reporting agencies guard the finer details of their credit-score calculations, they are transparent about what will cause people’s credit score to fall and what is required to rectify the situation.

Here’s what you need to do to boost your creditworthiness.

Sort out any unpaid bills

People often discover unpaid bills – the technical term is ‘delinquencies’ – on their credit report that they either didn’t know existed or which they assumed were ancient history and covered by a statute of limitations.

If you’ve been wrongly charged for something, act quickly to get the charge removed. Start by contacting the business that has mistakenly billed you. If that doesn’t resolve the issue, contact the credit reporting agency.

If you’ve been legitimately charged but didn’t get the bill or were unable to pay it, contact the creditor and negotiate repayment arrangements.

Stop applying for credit

In the current unpredictable environment, it can be comforting to know you have access to plentiful credit in an emergency. But credit agencies view multiple applications for credit in a short period of time as a sign of financial distress, so think twice about applying for another credit or store card. Even if you don’t ever get the card, the fact you’ve enquired about doing so is listed on your credit file.

On this point, it’s worth considering alternative options before applying for credit. While applying for JobKeeper or JobSeeker, or withdrawing money from your super account, may have other financial implications, your credit score won’t be impacted.ii

Don’t put off paying bills for too long

The Australian Banking Association recently announced that borrowers who have deferred bank loans will not have their credit rating affected until at least March 2021.iii That’s welcome news, but don’t assume all companies will be as generous.

Unless the business you owe money to has put in place other arrangements, if they send you a bill for $150 or more and you don’t pay it off within 60 days of the due date, your late or missing payment will stay on your credit report for the next five years.

Get on the front foot

Even if you think you’ve been careful in your spending, debts can quickly mount up or get lost in the bottom of a drawer, so it’s worth getting into the habit of checking your credit score from time to time just to be sure.

This is particularly important if you are hoping to borrow money to buy a home, start a business, or for a major purchase. If you’d like advice about getting your finances back into shape and maximising your ability to access credit in the future, please call.

i https://moneysmart.gov.au/managing-debt/credit-scores-and-credit-reports

ii https://www.societyone.com.au/blog/early-access-to-super

iii https://www.smh.com.au/business/banking-and-finance/credit-rating-amnesty-for-loan-deferrals-extended-20200913-p55v5y.html

This article is intended as an information source only and to provide general information only. The comments, examples, words and extracts from legislation and other sources in this publication do not constitute legal advice, financial or tax advice and should not be relied upon as such. All readers should seek advice from a professional adviser regarding the application of any of the comments in this article to their particular situation.


Granny flats- tax tips and traps

Granny flats: tax tips and traps

Granny flats- tax tips and traps

Granny flats: tax tips and traps

The idea of adding a granny flat to your property sounds like a great idea. A property to rent out to generate some welcome extra income, or a home for adult children or mum and dad in their later years.

But there are important tax and personal considerations to consider before taking the plunge and digging up the backyard. Although the Federal Budget proposed significant reform in this area (which we cover later in this article), important tax questions remain.

Tax and granny flats: what you need to know

A granny flat is usually a self-contained secondary dwelling with a separate entrance, bathroom, kitchen and living space.

Unlike an investment property, granny flats do not have a separate title and are built within the boundary of your existing property or attached to your home. A granny flat cannot be sold separately unless you subdivide the existing property title.

Before you rush off to start building, you need to carefully consider the tax implications and get professional advice, or you could find yourself facing significant tax bills.

For example, if you rent out your granny flat at commercial rates to a third party like a student, the rent will be assessable income and you will pay income tax on it at your marginal tax rate. You are, however, entitled to claim the normal deductions for depreciation against income from an investment property.i

Subdividing the property could also create a GST obligation, as the flat may be deemed a new residential property.

Granny flats and capital gains

Under current legislation, the main tax issue when adding a granny flat is that it can create a capital gains tax (CGT) headache when it comes time to sell your home. CGT is payable on the difference in value between the time you bought the property and the time you sell.

Normally, your main residence is exempt from CGT, but adding a granny flat can affect this. If you charge rent to a student living in your granny flat for example, you will lose some of your main residence exemption from CGT as the property is partly being used for income-producing purposes.

When a family member lives in a granny flat and does not pay commercial rent, generally the main residence exemption still applies as the arrangement is deemed private or domestic.

CGT and cash contributions

Things get more complicated if a relative provides a cash sum to help pay for the cost of building a granny flat in return for a right of occupancy for life or life interest.

Under current tax laws, a cash sum paid by one party to build a granny flat is a CGT event. This means if your parent makes a financial contribution towards you building a flat to live in on your property, you will have a partial CGT liability to pay when you eventually sell your home.

To make things worse, the normal 50 per cent discount on CGT for the disposal of an asset held for over 12 months may not be available.

Potential for elder abuse

In many cases, concern about paying CGT means families fail to put formal agreements in place when a relative contributes to the cost of a granny flat. This leaves the family member with no protection if the relationship breaks down and creates the potential for financial abuse.

The family member can also lose out financially if they need to move into an aged care facility, or if the homeowner needs to sell.

It’s also worth noting that an interest in a granny flat can affect social security entitlements and aged care fees.

Proposed Federal Budget exemption

To solve some of these issues, the October 2020 Federal Budget included a proposed CGT exemption for granny flats where a formal written agreement is in place. The new measure will be limited to arrangements covering family relationships and disabled children – not commercial rentals.

Eligibility conditions for the new CGT exemption will depend on the legislation eventually being passed by Parliament. If passed, a start date is expected as early as 1 July 2021.

If you are considering building a granny flat on your property, contact us today to discuss the potential tax implications.

https://www.ato.gov.au/General/property/your-home/renting-out-part-or-all-of-your-home/

This article is intended as an information source only and to provide general information only. The comments, examples, words and extracts from legislation and other sources in this publication do not constitute legal advice, financial or tax advice and should not be relied upon as such. All readers should seek advice from a professional adviser regarding the application of any of the comments in this article to their particular situation.


Inflation and deflation - what do these terms mean for our economy?

Inflation, Deflation what's in a a name

Inflation and deflation - what do these terms mean for our economy?

When the inflation rate fell into negative territory in the June quarter, it was so unusual it begged the question of what this means for the economy. Are we facing deflation or even stagflation and what is the difference?

In the June quarter the annual inflation rate fell to minus 0.3 per cent, only the third time in 72 years of record keeping that the rate has been in the negative.

Much of the fall was attributed to free childcare (part of the special COVID-19 measures) and low petroleum prices during the quarter. The general view is that the September quarter will return to positive territory when childcare fees resume.

So what is inflation and why does it matter?

What is inflation?

In Australia, the main measure of inflation is the consumer price index (CPI). This measures the rate of change in the average price of a basket of selected goods and services over time.

While the index can move up and down, a negative inflation rate – no, that’s not an oxymoron - is referred to as deflation.

Generally, the Reserve Bank of Australia (RBA) aims to keep the inflation rate between 2 and 3 per cent. But in the current environment, the RBA is now expecting the CPI to remain below 2 per cent until at least December 2022.

A falling consumer price index - particularly one that is in negative territory – sounds like it should be a good thing as it will give you greater purchasing power with the lower prices. After all, who doesn’t like a bargain? But in reality, it can play havoc with retail businesses who are faced with lower profits but not necessarily lower costs. This can put a squeeze on their business, which can often lead to retrenchments and a spike in unemployment.

The other two occasions when Australia experienced deflation were in 1962 and in 1997-98.

The 1962 negative rate was after then Prime Minister Menzies implemented two credit squeezes to end the inflation caused by the Korean War Boom. The 1997 episode was in the wake of the Asian Financial crisis.

A slowing economy

Clearly, we are living in extraordinary times with COVID-19 and until the pandemic is more under control we can expect further slowing in the economy.

But at least this curtailment of economic activity is not coinciding with higher prices for goods. If that were the case, the country would be faced with stagflation which poses a far greater squeeze on households than deflation. Stagflation is a situation with rising inflation (prices) and slowing economic growth, often accompanied with high unemployment.

Of course, if your job is not in jeopardy, you will benefit from cheaper goods. But if lower prices become the norm, people may hold off major purchases on the expectation that they can buy even more cheaply in the future. This is not good news as consumer spending makes up 60 per cent of total economic activity, so a contraction in spending generally results in a contraction in the economy.

However, if your employment is insecure and the overall unemployment rate rises, this will depress household spending. It will also have an impact on the property market.

Unemployment takes its toll

According to the latest figures, more than one million Australians are currently unemployed and many more could face uncertainty going forward. Whether you rent or are buying your property, finding the funds can present problems.

In some areas, as demand dried up in the June quarter, rents dropped by as much as 25 per cent. This may be good for renters, but it is not for those with investment property as part of their retirement strategy. If rents fall – or indeed if your property is vacant for some time - it may jeopardise retirement income.

Property prices are also under attack with distressed sales coming to the fore as the unemployment rate grows. When property values fall, mortgages become more expensive in real terms as your equity may be reduced – and in some cases you could find yourself with negative equity in your property.

Hopefully, the measures introduced in Australia to counter COVID-19 will prove successful and the economy will begin to recover.

If you would like to discuss your overall investment strategy in light of these challenging times, then please call.

This article is intended as an information source only and to provide general information only. The comments, examples, words and extracts from legislation and other sources in this publication do not constitute legal advice, financial or tax advice and should not be relied upon as such. All readers should seek advice from a professional adviser regarding the application of any of the comments in this article to their particular situation.


Investment opportunities amidst the COVID-19 disruption

COVID-19 is resulting in significant disruption to well-established business paradigms, impacting businesses, sectors and stocks across the board.

However as Albert Einstein once said “in the middle of difficulty lies opportunity”. That certainly rings true in 2020 as analysists predict significant changes in the types of businesses that will prosper through the crisis and beyond, with certain sectors and types of businesses dominating others.

At a time where our movement has been constrained in an unprecedented way, sectors relating to the movement of goods, data and people are being heavily impacted by the crisis but are also well positioned to capitalise on the changes brought on by the pandemic.

Supply chain and logistics embrace technology

The pandemic has significantly impacted many bricks and mortar businesses, yet online shopping has boomed. Australia’s e-commerce industry had a growth of over 80% in the two months after the COVID-19 pandemic was declared by the World Health Organisation.

Yet this boost to e-commerce has brought its own challenges. Back in April 2020, Australia Post was delivering an estimated 1.8 million parcels each day, which resulted in lengthy delays to delivery times.Meeting the demand for timely deliveries, avoiding supply chain disruption and bottle necks has called for innovation in logistics.

While demand may not remain at the heightened COVID-19 levels, experts are predicting long-term shifts, such as micro supply chains and decentralising of manufacturing capacity. Also critical to the creation of smart and nimble supply chains and effective logistics is the use of technology to drive efficiencies and manage significant fluctuations in demand.

Data movement and security a focus for business

It’s clear that where people’s physical mobility is limited, fast and secure movement of data is critical. 2020 has seen innovation being applied to find new ways to secure, verify and exchange business-critical information.

With many workers based at home, this shift to a hybrid workplace means a change in workflows as well as the immediate need for security measures to protect networks, as staff are no longer using their corporate networks. The increase of Zoom calls, for example, has meant becoming more aware and prepared for the potential of cyber hacks.

Businesses need to ensure their systems are robust and well-tested as we move to an increased reliance on technology. Expect a stronger emphasis on collaboration tools, workflow management and data protection.

Challenges and opportunities for travel

Suffice to say the travel industry has been one of the hardest hit during the COVID-19 pandemic. There’s no doubt travel will surge once restrictions loosen, although this industry is one that will see profound change as it adapts to the post-COVID landscape.

Airlines are struggling to navigate uncharted territory. The ones that survive this crisis will have to be strategically creative to find a way to prioritise public health and sustainability, all the while maintaining profitability.

With more rigorous sanitation requirements, the quick turnaround times budget airlines have relied on may not be possible, meaning fewer flights and at a higher cost – this will change the budget carrier landscape substantially and make travel less accessible for some.

Longer term trends emerging from the crisis will include greater automation driven by public health and budget constraints, and changing consumer preferences such as holidaying closer to home.

Public transport will also be impacted, as the need for distancing will restrict the number of passengers allowed to travel. Less congestion on our roads may be the silver lining to more flexible working arrangements, with some people continuing to work from home. This ability to work from anywhere will make it possible for an increasing number of Australians to relocate to regional areas.

The term ‘new normal’ has been expressed many times already and for good reason – lives have changed permanently. Only time will tell what life will look like post-pandemic, but there will be more changes as society emerges from the pandemic that will impact how we live, and these will drive innovation in the way businesses and industries operate.


Analysis of Australian Federal Budget 2020-21

Tax and business investment took centre stage in the Federal Budget this year, as the Morrison Government seeks to reboot growth and repair the damage wrought by COVID-19 on Australia’s economy and employment.

Treasurer Josh Frydenberg emphasised the Coalition’s focus on tax by bringing forward the start date for the next round of tax changes. Backdated to 1 July 2020, the measures will provide immediate tax relief for individuals and small businesses. They also represent a significant step in reshaping Australia’s current progressive tax system.

In addition, the reintroduction of measures allowing the carry-back of tax losses and a significant expansion of existing asset write-offs should help support medium and small businesses who have been facing some of the toughest trading conditions in living memory.

Early start to personal tax cuts

At the centre of the tax changes announced by the Treasurer is a new 1 July 2020 start date for the next stage of the government’s tax plan.

Under the Stage 2 changes:

  • The existing low-income tax offset increases from $445 to $700,
  • The upper limit of the 19 per cent tax bracket increases from $37,000 to $45,000, and
  • The upper limit of the 32.5 per cent bracket increases from $90,000 to $120,000.

There is also a one-year extension of the low and middle-income tax offset (LMITO) during 2020-21 worth up to $1,080 for individuals and $2,160 for dual income couples.

Companies gain full asset write-off

For businesses, a major announcement was the introduction of a temporary tax incentive allowing the full cost of eligible depreciable assets to be written off in the year they are first used or installed ready for use. This will also apply to the cost of improvements.

From Budget night, companies with a turnover of up to $5 billion – over 99 per cent of businesses – can fully claim eligible depreciable assets as an expense until 30 June 2022. This will significantly reduce the cost of eligible assets by providing a cash flow benefit.

Temporary carry-back of tax losses

Companies with turnovers of up to $5 billion will also be able to generate a tax refund by offsetting tax losses against previous profits on which tax has been paid. Losses incurred in 2019-20, 2020-21 and 2021-22 can be carried back against profits made in or after 2018-19.

Under the new measure, eligible companies can elect to receive a tax refund when they lodge their 2020-21 and 2021-22 returns. This will help previously profitable companies who are making losses due to COVID-19 access a cash refund to keep their business running, or to take advantage of the new full write-off provision.

JobMaker hiring credit for young employees

Businesses will now be able to access a new JobMaker Hiring Credit if they hire additional employees working at least 20 hours a week.

From 7 October 2020, eligible employers will be able to claim $200 a week for each new employee they hire aged between 16 and 29, and $100 a week for additional hires aged 30 to 35 years old. New employees must have been unemployed or in education prior to hiring.

New jobs created until 6 October 2021 will attract the hiring credit for up to 12 months, with the credit claimed quarterly in arrears from the ATO.

More small business tax concessions

The Treasurer also made several announcements prior to the Budget providing valuable tax concessions for small businesses. From 1 July 2020, the annual turnover test for a range of business tax concessions will increase from $10 million to $50 million. This includes immediate deductions for eligible start-up expenses and prepaid expenditure.

In addition, from 1 April 2021, eligible businesses will be exempt from the 47% FBT on car parking and work-related portable devices such as phones and laptops provided to employees.

From 1 July 2021, eligible business will be able to access simplified trading stock rules, remit their PAYG instalments based on GDP adjusted notional tax, settle excise duty monthly and enjoy a two-year (instead of four-year) amendment period for income tax assessments.

If you would like to discuss how to make the most of these and other Budget announcements, please get in touch.


The Foundations of Successful Investing

If you have any interest at all in financial well-being and security, you’ve probably heard the advice many times that you need to invest your savings.

And you probably also know that just as some investments can reap huge profits over time, others go badly wrong and even wipe out your savings entirely.

Why Invest at All?

Knowing that investment can be a very risky business, it’s tempting to think it might be safer to just forgo the chance of investment returns and simply hold on to what you’ve got. To avoid investment risk entirely and just keep your money in cash, in the bank.

But this is not a great option.

True, so long as your bank doesn’t go bust, the dollar value of your savings won’t go down. But over time, inflation will eat away at your money’s real value, allowing you to buy less and less with it.

So what’s to do?

Just as you need a home to live, you need somewhere to put your money. But where? And what sort of ‘place’ should you be looking for?

Fundamental Principles of Safe Investment

Thinking about building an investment portfolio as if it were a bricks and mortar building is a useful analogy.

If you’re building a home, one of the most important risk factors to take into account is weather.

When you think about it, adverse weather conditions have perhaps the greatest power to destroy or lower the value of your home:

lightning, bushfire, typhoons, floods, freak hail storms, prolonged spells of extreme heat and drought.

Even with modern technology, we’re unable to predict adverse weather events far enough in advance to do anything about them. So, when we build, we need to choose our site, materials and design with care. We need to lay strong foundations and create a structure sturdy enough to withstand unpredictable and unusual weather conditions.

Your investment portfolio derives its value and earnings from the national and global economies. Just like the weather, these economies are prone to big swings and are notoriously unpredictable.

Even the best financial forecasters only get things right occasionally and will freely admit they can’t predict much of what happens. Worse still – unlike weather forecasters – economists and other financial forecasters rarely agree with each other. So, you never know whom to trust when it comes to economic predictions.

The COVID-19 crisis is good example of how unpredictable global economies can be. At the start of the year, many of the world’s stock markets were riding high. But as investors panicked with the news of the pandemic, the value of shares plunged, wiping trillions of dollars off everyone’s holdings.

In December of last year – NO ONE could have predicted this crisis with any certainty whatsoever.

And so, to construct a good investment portfolio, you need to build with a view to withstanding many types of economic risk, as far as possible – some predictable, some not.

With a carefully built portfolio based on sound foundations, you have a much better chance of weathering financial storms.
Investment principles.

The foundations of a strong portfolio rely on four key ‘pillars’ or investment principles.

Quality, Value, Diversity and Time.

Each of these pillars are equally important. Overlook just one and you are exposing yourself to too much risk.
Let’s look at each briefly, as they’re all crucial to your investing success…

Quality

Good quality investments should have an established track record of earnings. They also need a sound basis for their operations and any expected growth. ‘Exciting’ new investments based on emerging ‘fads’ or trends offering unusually large returns would be unlikely to tick the quality box.

Investments that offer good value will provide a return that is at least as good as the market average, and ideally, better. In the case of property or bonds, you’d look at yields and compare those to opportunities elsewhere.

Note that quality and value often go hand in hand – so it’s a case of looking for a balance between the two.

Quality assets may trade at such high prices that they offer lower initial value. Or it could be that earnings expectations are sometimes too high. The key here is quality… the expectation is that they will be around for a long time, not just a ‘good time’.

Lower quality investments often appear to offer higher yields, but may carry a higher degree of risk. We all hear of get rich quick ‘opportunities’ from time to time and hopefully know to ignore them. These almost always constitute very low-quality investments.

Diversity

We’re all familiar with the saying, “don’t put all your eggs into one basket”. This is what diversifying your portfolio means.
Diversity provides a degree of protection for portfolio.

By spreading your risk, you’re reducing your exposure to mishaps. Case in point, transport, oil and leisure stocks during the COVID pandemic, which have suffered very large losses. On the other hand, some sectors have benefitted greatly at the same time, such as healthcare and supermarkets.

True diversity in a portfolio gives the investor the opportunity to take advantage of “hot stocks” or asset classes, whilst balancing out the risk with quality stocks and asset classes. It can provide a buffer against mistakes in assessing value because nobody gets it right all of the time.

A well-balanced portfolio should be designed to cope with occasional losses.

Time

Time applies to the previous three pillars. It can give you the best chance of success.

Every market will suffer periodic downturns. But the prices of most asset classes e.g. shares and property, do rise with over time, with inflation.

A golden rule of investing is to be patient and avoid short termism. In other words, don’t panic when you see values go down suddenly, and avoid trying to pick smart short-term winners for quick gains – which can lead to many needless mistakes and much higher transaction costs than necessary.

Obviously, this little article is just a quick overview. There’s a lot more to these principles than we can cover here.

Please bear in mind too, that there is no one size fits all approach to building a portfolio. Constructing a portfolio that’s right for you requires taking into account your personal circumstances and financial goals.

Would you like to talk to a professional adviser about building a quality portfolio, or managing existing investments?
Contact the House of Wealth Financial Planning Team today for a free consultation.

This article is intended as an information source only and to provide general information only. The comments, examples, words and extracts from legislation and other sources in this publication do not constitute legal advice, financial or tax advice and should not be relied upon as such. All readers should seek advice from a professional adviser regarding the application of any of the comments in this article to their particular situation.