January 2023 Newsletter

As a new year begins, we wish everyone a happy, healthy and prosperous 2023. Many families will be glad to put 2022 behind them and although challenges remain, we look forward to better times ahead.

As 2022 drew to a close, investors remained focused on inflation, interest rates and recession worries. Inflation is running at around 7% to 11% in most advanced economies, including Australia (7.3%). The Reserve Bank of Australia (RBA) lifted its target cash rate by another 25 basis points to 3.1% in December, the eighth monthly rise in a row, up from 0.1% in May. The RBA noted that “inflation is expected to take several years to return to target range (2-3%)”, and most economists expect at least one more rate increase.

High inflation and borrowing costs continued to weigh on consumers in December. The ANZ-Roy Morgan consumer price index was steady at 82.5 points in the run-up to Christmas, 26 points below the same period the year before. Slowing consumer demand and rising costs also dragged the NAB business confidence index into negative territory for the first time in 2022, down to -4.4 points in November.

But it’s not all bad news. Australian company profits rose 18.6% in the year to September, the fastest pace in five years. Unemployment remains low, despite edging up to 3.45% in November and annual wages growth was 3.1% in the September quarter, the fastest pace in a decade. The Aussie dollar lifted slightly to US68.13c in December, down 6% for the year. Iron ore prices lifted 8% over the month but were down 1% for the year, while oil prices (Brent Crude) eased slightly but were up 11.4% in 2022 as war in Ukraine disrupted supply.

As we look to the year ahead and start planning our goals for 2023, remember the benefits of a good accountant and that the team at King & Whittle are with you all the way. This can be the difference between getting stuck in financial frustration and flourishing.
We hope to assist and empower you to reach your financial and business goals. Don't hesitate to give us a call and we can have a chat.

2022 Year in Review

Inflation dominated the economic landscape

The year began optimistically, as we finally began to emerge from Covid restrictions. Russia threw a curve ball that reverberated around the world and suddenly people who hadn’t given a thought to the Reserve Bank were eagerly waiting for its monthly interest rate announcements.

2022 was the year of rising interest rates, surging inflation, war in Ukraine and recession fears. These factors created cost-of-living pressures for households and a downturn in share and bond markets.

Super funds suffered their first calendar year loss since 2011. Ratings group Chant West estimates the median growth fund fell about 4 per cent last year.ⁱ

The big picture

Even though investors have come to expect unpredictable markets, nobody could have predicted what unfolded in 2022.

Russia’s invasion of Ukraine in February led to a global economy and investment markets shake up. It disrupted energy and food supplies, pushing up prices and inflation.

Inflation sits around 7 per cent in Australia and the US, with the Euro area around 11 per cent.ⁱⁱ

As a result, central banks began aggressively lifting interest rates.

Rising inflation and interest rates

The Reserve Bank of Australia (RBA) lifted the cash rate from 0.1 per cent in May to 3.1 per cent in December,ⁱⁱⁱ quickly flowing through to mortgage interest rates.

Australia remains in a better position than most, with unemployment below 3.5 per cent and wages growth of 3.1 per cent running well behind inflation.^iv

Australia’s economic growth increased to 5.9% in the September quarter^v before contracting to an estimated 3 per cent by year’s end.^vi

Volatile share markets

Investors endured a nail-biting year.

Global shares plunged in October only to snap back late in the year on hopes that interest rates may be near their peak. The US market finished 19 per cent lower, due to exposure to high-tech stocks and the Federal Reserve’s aggressive interest rate hikes. Chinese shares were down 15 per cent as strict Covid lockdowns shut down much of its economy.

Australian shares performed well by comparison, down just 7 per cent.

Energy and utilities stocks were strong due to the impact of the war in Ukraine on oil and gas prices. The worst performers were information technology, real estate and consumer discretionary stocks due to cost-of-living pressures.

Property slowdown

After peaking in May, national home values fell sharply as the Reserve Bank began increasing interest rates. The CoreLogic home value index fell 5.3% in 2022, the first calendar year decline since the global financial crisis of 2008.

Sydney (-12 per cent), and Melbourne (-8 per cent) led the downturn. Bucking the trend, prices edged higher in Adelaide (up 10 per cent), Perth (3.6 per cent), Darwin (4.3 per cent).

Rental returns outpaced home prices, as interest rates, demographic shifts and low vacancy rates pushed rents up 10.2 per cent in 2022. Gross yields recovered to pre-Covid levels, rising to 3.78 per cent in December due to strong rental growth and falling housing values.

Despite the downturn, CoreLogic reports housing values generally remain above pre-COVID levels. At year end, capital cities combined were still 11.7 per cent above March 2020 levels, while regional markets were 32.2 per cent higher.

Looking ahead

While the outlook for 2023 remains challenging, there are signs that central banks are nearing the end of their rate hikes.  

Issues for investors to watch out for in the year ahead are:

• A protracted conflict in Ukraine

• A new COVID wave in China disrupting supply chains further, and

• Steeper than expected falls in Australian housing prices which could lead to forced sales and dampen consumer spending.

If you would like to discuss your investment strategy in the light of prevailing economic conditions, please get in touch.

Note: all share market figures are live prices as at 31 December 2022 sourced from: https://tradingeconomics.com/stocks.
All property figures are sourced from: https://www.corelogic.com.au/news-research/news/2022/corelogic-home-value-index-australian-housing-values-down-5.3-over-2022

i https://www.chantwest.com.au/resources/another-strong-month-for-super-funds-as-recovery-continues/

ii https://tradingeconomics.com/country-list/inflation-rate

iii https://www.rba.gov.au/statistics/cash-rate/

iv https://www.rba.gov.au/snapshots/economy-indicators-snapshot/

v https://www.abs.gov.au/statistics/economy/national-accounts/australian-national-accounts-national-income-expenditure-and-product/latest-release

vi https://www.rba.gov.au/publications/smp/2022/nov/economic-outlook.html

Time to take stock of your business

After three years of constant change, and with the end of the year and the holiday season in sight, many business owners will be relishing the thought of some much-needed downtime. To relax, but also to think.

A new calendar year can give you the perfect opportunity to decide what improvements you can make to your business. So why not take advantage of time away from the daily grind to work ON your business rather than just IN it.

With a number of economic challenges on the horizon, it seems more important than ever to plan for your business’ future.

So where do you start? The first thing is work out where your business is right now. If you don’t know your current situation, you can’t plan adequately for the future.
 

SWOT analysis

A good tool to use is a SWOT analysis. SWOT stands for Strengths, Weaknesses, Opportunities and Threats. Strengths and weaknesses are internal issues within a company while opportunities and threats tend to be external influences.

A company’s strengths and weaknesses are generally found in the areas of personnel, finance, manufacturing and marketing.

Opportunities and threats tend to be a product of changes in the economy, technology, legislation or society that impact on your business.

In your internal analysis, look at your company’s current financial situation. With interest rates on the rise, look at what is good debt versus bad debt and minimise the latter. Good debt is where you have borrowed for new equipment or other ways to increase productivity; bad debt is where you borrow just to keep your business afloat.

With the current higher interest rates, consider new ways to service your loans. Shop around and see what other financial institutions are offering. If you can get a better rate elsewhere, see if your current bank can match it before you make the move.

Also on the internal front, look at your company’s pricing, particularly as inflation continues to rise. Are your higher costs being reflected in your prices?
 

Staff shortages

If you are suffering from staff shortages, consider ways that you can make working in your business more attractive to potential employees and to retain your existing workforce.

With many people still working from home, you may want to consider whether your premises are too big for your current needs and whether hot desking where desks are used by different people at different times may be an option.

Another consideration should be a comprehensive look at those areas of your business that are performing well and those that are lagging. Perhaps focus on those that deliver actual profits and downsize the poorer performers.

Small businesses often run into trouble because larger clients are slow to pay. The Australian Supplier Payment Code which was introduced back in 2017 is a voluntary initiative to ensure small businesses are paid within 30 days of sending a correct invoice. Ideally, make sure your customers are party to this code to ensure prompt payments.

You could also take advantage of this quiet time to look at your current marketing and how you can make 2023 a more profitable year. Digital marketing came into its own during Covid. How much have you adapted your business to this strategy? And what about your levels of data security. Is your database protected?
 

Plan for the future

Once you have looked at the business and areas that may cause concern, the next stage is to plan ahead.

Again, there is an acronym that can be applied to this stage: SMART, which stands for Specific, Measurable, Achievable, Relevant and Timely.

Your plans should be Specific, with identifiable goals rather than generic ones. These goals need to be Measured, so create a target figure. Your goals should also be Achievable, or you could set yourself up for failure. Your plan should be Relevant to your company and fit in with the business model. And lastly, it should be Timely so set a realistic timetable in which to achieve it.

Once you have set out a plan with the goals clearly identified, the next stage is implementation. How will you go about the task? Who will be involved in the goals?

Finally, you need to monitor your progress. With the rapid pace of change in today’s business environment, the goal posts may move.

If you would like to discuss your business plan further to make sure you have covered all aspects, give us a call.

Federal Budget 2022-23: From a tax perspective

Quiet on the tax front, for now

For once, tax measures took a back seat in a Federal Budget, with the second version for this year being billed as a “solid and sensible Budget suited to the times”.

The October 2022 Budget resisted the recent trend to continually tinker with our tax system, but it seems likely this steady-as-she-goes approach won’t last long, with the new Treasurer, Jim Chalmers, repeatedly referring to the need for tax reform in the days prior to delivering his first Budget.

Tax was not entirely forgotten, however, with the ATO to extend many of its tax compliance programs, a new focus on multinational corporate tax and higher fines for tax breaches.
 

ATO compliance focus

The ATO was a big winner in the Budget, receiving extra funding to help it achieve higher levels of tax compliance.

The tax regulator will receive $80.3 million to extend its current Personal Income Tax Compliance Program for two years from 1 July 2023. This program will focus on overclaiming tax deductions and incorrect reporting of income.

The ATO also received additional funding for its Shadow Economy Program and Tax Avoidance Taskforce, with additional compliance activities in these areas expected to raise $3.7 billion over four years.
 

Tax penalty increases

Fines for breaches of the tax and financial laws will rise from 1 January 2023.

The current fine of $222 per penalty unit will rise to $275 per penalty unit, with fines to be indexed in line with the CPI again from 1 July 2023. This increase is expected to raise an additional $31.6 million over four years.
 

Multinational tax measures

The Budget included measures designed to close tax loopholes and ensure multinationals pay their fair share of tax in Australia. The multinational tax integrity package is expected to raise around $1 billion over 4 years.

The government also intends to focus on working with other countries to reform the international corporate tax system to “better address the challenges arising from digitalisation and globalisation”.
 

Electric vehicle buyers

More small businesses may be tempted to go electric with their vehicles, with the $345 million Electric Car Discount to exempt eligible electric vehicles from fringe benefits tax (FBT) and the 5 per cent import tariff.

On an electric car valued at about $50,000, the new FBT exemption will save an employer up to $9,000 a year. For individuals using a salary sacrifice arrangement, the saving could be up to $4,700 a year. As an additional sweetener, customs duties of up to $2,500 are also being removed if the vehicle was previously subject to an import tariff.
 

Supporting small business well-being

Small businesses have not been forgotten entirely, with the Budget providing $15.1 million in additional funding to extend the small business mental health and financial counselling programs, NewAccess for Small Business Owners and the Small Business Debt Helpline.

Almost $63 million in new grants will also be available to small and medium-sized businesses so they can improve their energy efficiency and reduce their energy usage by investing in energy efficient upgrades.
 

Lower eligibility age for downsizer contributions

The super system was given a break from its endless reforms, with only a minor tweak to the existing rules.

The Budget included a measure to allow more people to make downsizer contributions into their super accounts by reducing the minimum eligibility age from the current 60 to 55 years of age. Older Australians will also be encouraged to downsize by exempting their home sale proceeds from pension asset testing from the current 12 months to 24 months.
 

End of tax offsets and low-income payments

A noticeable absence from the Budget was new tax offsets and payments to lower-income earners.

There was no extension of the previous Low and Middle Income Tax Offset (LMITO), which means eligible taxpayers will no longer receive the offset when lodging their annual tax return. The Coalition’s one-off $420 cost-of-living offset was also not renewed.