King & Whittle November 2023 Newsletter

It’s November, and all eyes will be looking towards the “race that stops a nation” and the Reserve Bank who meet on the same day. As the days get longer as we head towards summer the countdown for the approaching holiday season begins.

Investors are keeping a close eye on oil price movements over fears of an escalation of conflict in the Middle East. The World Bank has warned that, if the conflict widens to other countries, oil prices could rise by up to 75% in 2024. In the meantime, Brent crude fell slightly in October.

The Aussie dollar ended October close to its lowest levels in a year and far below its peak of almost 69 cents in July.

Inflation rose again in the September quarter, but growth was still lower than last year. CPI increased by 1.2% during the quarter and 5.4% annually.

Unemployment fell slightly in September to 3.6% although that was largely caused by a number of people leaving the labour market to retire or for other reasons.

A strong rise in retail trading in September, the largest since January, might be a good omen for Christmas sales although spending for the year has been historically low.

China’s economic stimulus and improved outlook saw the biggest jump in iron ore prices in a single month to around $122.

King & Whittle once again this year, proudly supports Rainbows and Sunshine, helping children in need.
Rainbows and Sunshine is an Australian volunteer organisation that produces and donates its original kids' products to social service agencies, health service organisations, health and community facilities that support children experiencing hardship. Our support enables the ongoing giving programs of books, music and videos to benefit children. We are delighted to be involved with this wonderful organisation.

The King & Whittle office will be closed on Monday 6th November, 2023 with Tuesday the 7th November being a public holiday, Melbourne Cup Day. We look forward to assisting you on our return on Wednesday 8th November, 2023. Please contact your King & Whittle advisor directly, should you require anything urgent during that time.
 

Signs of a well-run small business

According to the ATO, simple habits like managing your cash flow effectively and apportioning your private and business expenses accurately help ensure you are running your business efficiently.

Findings from the ATO’s Small Business Random Enquiry Program show that businesses operating well and complying with their tax obligations tend to keep good records and conduct thorough reconciliation processes. They also take time to understand their tax and super obligations.

Using digital tools

In a digital world, technology helps businesses to streamline many processes and reduce overheads.

Digital tools can also increase the efficiency of your business systems, products and services and help track and manage customer data and employee records.

Introducing digital tools can support business growth. Don’t forget that some of the associated costs (such as hardware purchases and subscription fees) are tax deductible.

Good cash-flow management

Over the years, the ATO has noted effective business owners tend to use cash flow projection or budgeting tools.

With cash flow problems often the reason that small businesses fail, clear insights into your cash flow position and careful management of income and expenses is essential.

Having a good handle on your cash flow position makes it easier to meet financial commitments such as tax and employee super payments and allows you to check whether you are trading profitably, or just working to pay your bills.

Cash flow projection or budget tools can be off-the-shelf products, or talk to us about how we can work with you to use the ATO’s Cash Flow Coaching Kit.

Careful tax management

Well-run businesses also declare all their income – including cash income – in their tax returns.

Businesses omitting income by depositing it into private accounts or mortgages, or not declaring cash sales and incorrectly recording director’s fees and drawings are not on top of their tax obligations.

The same goes for failing to account correctly for private use of the business’s assets or funds.

With the ATO returning to a tougher stance after the COVID disruptions, these practices are likely to attract attention.

The ATO’s online Record Keeping Evaluation Tool can be helpful in assessing how well your business is maintaining its required business records.

Lodging paperwork on time

The ATO considers late tax returns to be an early indicator of a small business not actively engaged with the tax system and a red flag for a poorly run operation.

If your business has run off the rails a bit, it’s worth noting there is currently an tax amnesty in place (until 31 December 2023), for small businesses with overdue income tax returns, fringe benefits returns or business activity statements.

These returns and statements must have been originally due between 1 December 2019 and 28 February 2022.

Eligible businesses had an aggregated turnover of less than $10 million at the time the original lodgement was due.

Getting advice from trusted sources

Seeking professional advice is another key indicator of a well-run business and is particularly important at the moment to help navigate the uncertain business environment.

Over the years, the ATO has commented how small businesses that have regular contact with a tax professional are more likely to be reporting their tax position correctly.

The ATO itself also provides assistance and information to small businesses, including online tools such as the Employee or Contractor? tool, Tax Withheld Calculator and the Home Office Expenses Calculator.

To simplify making super contributions for your employees, check out the Super Guarantee Charge Statement and Calculator and the Small Business Superannuation Clearing House.

Properly managed small businesses seek advice from their accountant in relation to a range of issues. We can work with you to improve your business operation as a whole, not just to meet your tax obligations.

Life happens when you're making other plans

From Proverbs to John Lennon, many people have said it - and the last nine months have been a reminder of its truth: life happens when you are making other plans. While investors were worrying about the recession that sharply rising interest rates would surely lead to, fretting about the cost of living and waiting for unemployment to rise and earnings to drop, the stock market was quietly building a powerful rally.

After the trauma of 2022 when shares and bonds both fell in tandem, leaving nowhere for investors to hide, it was inevitable that the priority for many would be capital preservation and income generation not growth. But while everyone was seeking out safe money market funds or clipping the coupon on bonds offering a decent yield for the first time in years, the stock market has been on a tear.

Between the market’s most recent peak at the start of 2022 and its low point in the middle of October last year, the MSCI World Index fell by 27pc. To regain its previous high, it needed to bounce back by 37pc. So far it is up by 29pc. It has, therefore, clawed back almost four fifths of its earlier fall. If this had been no more than a bear market rally, it would most likely have run out of steam after regaining half its losses. It is starting to feel like a proper bull market.

But it is a bull market that no-one has noticed. It has crept up on the rails, out of sight. Last month, the S&P 500 rose by 3.1pc, while the Nasdaq added 4pc. It was the fifth month on the trot that the US stock market had risen - a run it had not achieved since the post-vaccine surge in 2021.

One of the reasons this secret rally has passed many investors by is that it has been achieved on the back of the performances of just a handful of shares. The Magnificent Seven tech giants have done all the heavy lifting while everything else has bumbled along worrying about the future. In the first five months of 2023, an equal weighted version of the S&P 500 fell by 1pc while the market leaders soared.

But since the beginning of June, the rally has broadened out as investors have gained confidence that this is the real McCoy. In the last two months, that equal weighted version of the US benchmark has risen by more than 10pc. US small caps have outperformed the S&P 500 in recent weeks. Meanwhile, the rest of the world is catching up too. Over the last month, the best performing investments have included Chinese and UK shares, which had been left out of the rally so far in 2023.

All of this has happened despite a catalogue of things to worry about. The war has ground on. China’s economy has resolutely refused to bounce back after Covid restrictions were lifted. Cracks are showing in the UK housing market. This week Fitch questioned the US’s creditworthiness. Most importantly, interest rates have continued to rise as central banks err on the side of caution.

It might seem strange that markets have shrugged this off. In fact, it is normal. Typically markets move a good six to nine months before the real economy. So, what are they telling us now?

First, that the economy is holding up a lot better in the face of the last 18 months’ interest rate assault than anyone had the right to expect. Tomorrow’s non-farm payroll employment data will most likely show that America is still creating jobs. Unemployment remains historically low. Consumers, protected by long-term fixed mortgages and with secure jobs, continue to spend. The soft landing - falling inflation, no recession - that felt at times like so much wishful thinking, looks more and more likely.

From an investment perspective, the key is how that benign economic backdrop feeds through into corporate earnings. With half of America’s leading companies having reported their second quarter profits, about 80pc of them have beaten expectations. It means that a shallow decline in earnings for 2023 as a whole, after good growth in 2021 and 2022 and ahead of a decent recovery next year, looks plausible. That really would be the very definition of a soft landing.

The next important question is whether, after the strong rally of the last nine months, investors are paying a fair price for the growth in prospect. Since the October low, the multiple of expected earnings at which the US stock market is priced has risen from 15 to 20. That is quite a vote of confidence in the future and cannot be expected to go much further in the absence of evidence that the earnings recession is coming to an end.

This is a dangerous moment for investors. The bull market which has crept up on us, hidden in full view, is now out in the open. People like me are writing about it. Investors are looking at their pension statements and extrapolating their gains. The baton is about to be handed on from a market re-rating to actual delivery of earnings growth. It could happen smoothly. But we should expect a wobble or two along the way.

The biggest risk for investors is that just as they were more interested in grabbing 3-4pc from a super-safe money market fund six months ago they now start to chase the 10-20pc that they hope the stock market can continue to provide. Being slightly late is why most investors’ achieved returns are lower than the headline market data suggest they should be. As John Lennon almost said: ‘man proposes but God disposes’.

Source:
Reproduced with permission of Fidelity Australia. This article was originally published at https://www.fidelity.com.au/insights/investment-articles/life-happens-when-youre-making-other-plans/
This document has been prepared without taking into account your objectives, financial situation or needs. You should consider these matters before acting on the information. You should also consider the relevant Product Disclosure Statements (“PDS”) for any Fidelity Australia product mentioned in this document before making any decision about whether to acquire the product. The PDS can be obtained by contacting Fidelity Australia on 1800 119 270 or by downloading it from our website at www.fidelity.com.au. This document may include general commentary on market activity, sector trends or other broad-based economic or political conditions that should not be taken as investment advice. Information stated herein about specific securities is subject to change. Any reference to specific securities should not be taken as a recommendation to buy, sell or hold these securities. While the information contained in this document has been prepared with reasonable care, no responsibility or liability is accepted for any errors or omissions or misstatements however caused. This document is intended as general information only. The document may not be reproduced or transmitted without prior written permission of Fidelity Australia. The issuer of Fidelity Australia’s managed investment schemes is FIL Responsible Entity (Australia) Limited ABN 33 148 059 009. Reference to ($) are in Australian dollars unless stated otherwise.
© 2023. FIL Responsible Entity (Australia) Limited.
Important:
This provides general information and hasn’t taken your circumstances into account. It’s important to consider your particular circumstances before deciding what’s right for you. Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business nor our Licensee takes any responsibility for any action or any service provided by the author. Any links have been provided with permission for information purposes only and will take you to external websites, which are not connected to our company in any way. Note: Our company does not endorse and is not responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page.

Diversification

Diversification is an investment strategy that lowers your portfolio's risk and helps you get more stable returns.

You diversify by investing your money across different asset classes — such as shares, property, bonds and private equity. Then you diversify across the different options within each asset class. For example, if you buy shares, you buy across a range of different sectors such as financials, resources, healthcare and energy. You can also diversify by investing your money across different fund managers and product issuers. 

Diversification lowers your portfolio's risk because different asset classes do well at different times. If one business or sector fails or performs badly, you won't lose all your money. Having a variety of investments with different risks will balance out the overall risk of a portfolio. 

It's worth taking the time to review your investments and look for opportunities to diversify.

How diversification benefits you

Diversification is your best defence against a single investment failing or one asset class performing poorly (for example, the share market falling or one fund manager failing).

If you diversify your investments, when some fall in value, others may rise and balance out the fall. Diversification lowers your portfolio risk because, no matter what the economy does, some investments are likely to benefit. For example, when interest rates fall, bond prices rise, while shares generally do poorly at this time.

How to diversify

To diversify well you need to invest across different asset classes and within different options in an asset class. You can also diversify by investing in different fund managers or product issuers. 

Review your investments

List all of your investments and what they're worth. This could include:

• cash in a savings account

• shares

• managed funds

• an investment property

• your home

• your super

This will show you which asset classes you're investing in and where you could diversify.

Identify gaps and research other asset classes

If most of your money is in one or two asset classes, research other asset classes. For example, if you own a house, an investment property won't help you diversify. If property prices fall, you won't have any other investments to balance out the fall. To diversify, you could invest in different asset classes such as shares or bonds.

Then within each asset class, make sure your money is invested across the different options available. For example, if you're mainly invested in one sector such as financials, you should research other sectors such as mining, materials, health care, capital goods and commercial and professional services.

The way your super fund invests is a good example of diversification. Check your fund's website or annual statement to see how they invest. 

Invest overseas

Australia has a small share of the world's investment opportunities. Investing some of your money overseas will lower the risk of investing in a single market. For example, investments in Asian and European markets may perform well when the Australian markets falls.

If you invest overseas you'll be exposed to exchange rate risk. 

Invest through a managed fund, managed account, ETF or LIC

A simple way to diversify is to invest through a managed fund, managed account, exhcange-traded fund (ETF) or listed investment company (LIC).

Managed funds and managed accounts

Managed funds and managed accounts can help you invest across a range of asset classes. Some managed funds and managed accounts offer pre-made diversified portfolios. These usually have the labels of conservative, growth or high growth depending on their asset allocation.

ETFs and LICs

ETFs and LICs provide a low cost way to invest in an asset class or diversify within an asset class.

Most ETFs in Australia are passive funds. These track an asset price or market index, such as the ASX200 or S&P500. 

Most LICs are actively managed funds and invest in one asset class, such as Australian shares or private equity. 

Smart Tip

Before you invest in a managed fund, managed account, ETF or LIC speak to your adviser and read the product disclosure statement (PDS). This shows you where the fund invests, key features and benefits of the fund, the expected return, risks, fees and how to complain.

Keep your investments diversified

Over time, some of your investments will rise in value and others will fall. This means you could have more money in one asset class than when you started investing. You could also be less diversified. For example, if your shares go up and your bonds fall in price, you'll have a greater portion of money invested in shares. As shares are higher risk, your portfolio will also be higher risk. If you're not comfortable with this risk, it's time to re balance.

How to rebalance

You can rebalance your portfolio by:

• Investing some extra money, such as a tax refund, in an investment you want more exposure to.

• Selling some investments and putting your money in other types of investments.

Selling investments will lead to a capital gain or a capital loss. 

Get help with diversification

Finding the right investments can be challenging. If you need some help to build a diversified portfolio, talk to us.

Source:
Reproduced with the permission of ASIC’s MoneySmart Team. This article was originally published at https://moneysmart.gov.au/how-to-invest/diversification
Important note: This provides general information and hasn’t taken your circumstances into account.  It’s important to consider your particular circumstances before deciding what’s right for you. Although the information is from sources considered reliable, we do not guarantee that it is accurate or complete. You should not rely upon it and should seek qualified advice before making any investment decision. Except where liability under any statute cannot be excluded, we do not accept any liability (whether under contract, tort or otherwise) for any resulting loss or damage of the reader or any other person.  Past performance is not a reliable guide to future returns.
Important
Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business nor our Licensee takes any responsibility for any action or any service provided by the author. Any links have been provided with permission for information purposes only and will take you to external websites, which are not connected to our company in any way. Note: Our company does not endorse and is not responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page.

Rental property as investment or business

If you own a rental property or holiday home, work out if your rental arrangements are for an investment or a business.

Common rental arrangements

Common rental arrangements include where you:

• rent part of the property (rent out a room)

• rent the property for part of the year

• have a domestic arrangement with family members (meaning, you receive payment for board and lodging)

• rent the property to your family or friends

• rent your property consistent with normal commercial practices (arms-length arrangements).

Rental investors

Most owners are investors who are not in the business of letting rental properties, even where there is more than one investment property. This is because they:

• have minimal involvement in rental activities (such as, interviewing potential tenants or inspecting the property)

• still rely on income from their job.

Carrying on a business of letting rental properties

As the owner of rental properties, some of the factors that show you are carrying on a business of letting rental properties are the:

• significant size and scale of the rental property activities

• significant number of hours spent on the activities

• extensive personal involvement in the activities

• business-like manner in which the activities are planned, organised and carried on.

There are eight indicators to determine whether a business is being carried on. These are listed in paragraph 13 of TR 97/11. Although the ruling refers to primary production, these are equally relevant to non-primary production activities.

Domestic arrangements

Where you receive payment from family members in the form of 'board and lodging', your arrangement is of a domestic nature. This means you don't declare the rent as income and you can't claim expenses.

However, where you rent out your property to relatives or friends, the essential question to work out is whether the arrangements are:

• consistent with normal commercial practices in this area

• less than commercial rent.

If the arrangement is consistent with normal commercial practices, we treat you the same as any other owner in a comparable arms-length situation. If the property is rented out at less than commercial rent, other considerations arise and your claim for expenses may only be allowed up to the amount of rent you received.

Source: ato.gov.au

Reproduced with the permission of the Australian Tax Office. This article was originally published on https://www.ato.gov.au/Individuals/Investments-and-assets/Residential-rental-properties/Rental-property-as-investment-or-business/.
Important:
This provides general information and hasn’t taken your circumstances into account.  It’s important to consider your particular circumstances before deciding what’s right for you. Although the information is from sources considered reliable, we do not guarantee that it is accurate or complete. You should not rely upon it and should seek qualified advice before making any investment decision. Except where liability under any statute cannot be excluded, we do not accept any liability (whether under contract, tort or otherwise) for any resulting loss or damage of the reader or any other person. 
Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business nor our Licensee takes any responsibility for any action or any service provided by the author. Any links have been provided with permission for information purposes only and will take you to external websites, which are not connected to our company in any way. Note: Our company does not endorse and is not responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page.

Salary sacrifice - no sacrifice at all

What is a salary sacrifice arrangement?

Salary sacrifice is an agreement with your employer to contribute a certain amount of your pre-tax salary or potential bonus into your super. The aim is to potentially reduce your tax and boost your super balance at the same time.

The word sacrifice doesn’t really make this strategy sound appealing, but it has some great potential benefits.

How salary sacrifice works – bringing your taxable income down 

Instead of being taxed at your marginal tax rate of up to 47 per cent including Medicare Levy, these payments are generally taxed at the concessional rate of up to 15 per cent. 

If you’re a high income earner, with combined income and concessional super contributions of more than $250,000, your concessional contributions above the $250,000 will be taxed at an additional rate of 15 per cent (30 per cent in total). However, this is still lower than the top marginal tax rate of 47 per cent (including Medicare Levy).

Salary-sacrificed super contributions are part of your concessional (or before-tax) contributions for the financial year. The concessional contributions cap includes mandatory contributions made by your employer and is $27,500 per year, regardless of your age.

The Government’s MoneySmart website has a great super contributions optimiser calculator. It can give you an idea of how salary sacrificing can affect your super and take home pay.

If you like the idea of salary sacrifice, discuss it with your employer and see if you can make an arrangement with them. You should also seek advice from a tax agent or speak to your financial adviser to determine if this strategy suits your financial situation.

Personal deductible contributions

Similar to salary sacrifice arrangement, you can make personal contributions to super and claim a tax deduction for these contributions. By making a personal super contribution and claiming it as a tax deduction, you’ll reduce your taxable income and invest more in super.

The contribution will generally be taxed in the fund at the concessional rate of up to 15 per cent. This is instead of your marginal tax rate which could be up to 47 per cent including Medicare Levy.

An additional 15 per cent tax applies to concessional super contributions if your combined income and concessional contributions exceed $250,000. Depending on your circumstances, this strategy could result in a tax saving of up to 32 per cent and enable you to increase your super.

We recommend you contact us to discuss whether salary sacrifice or personal contributions would work for you.

Contributing some of your pre-tax salary into super could help you to reduce your tax and invest more for your retirement.

Let's say you have an income of $60,000 and you chose to salary sacrifice $10,000 over the course of the year. Your taxable income would drop to $50,000. This means you’d pay less in tax. 

Salary sacrifice isn't for everyone though. It is more effective if you earn over $37,000 and it’s important to remember not to go over the $27,500 before-tax contributions limits otherwise you could be paying extra tax.

You’ll need to remember the new cap for super contributions which from July 1 2023, for before-tax contributions, is $27,500 for everyone, regardless of your age. There are tax penalties if you go over this cap. Remember, compulsory employer contributions are included in your concessional contributions cap.

Get set for the future 

Setting up salary sacrifice is normally a straightforward process. If your employer agrees, you’ll need to arrange with them to have some of your pre-tax income paid straight into your super fund. You can access these funds when you reach your preservation age.

The benefits of contributing extra to your super from your pre-tax pay include easier budgeting. The money is not paid into your bank account, so you’re less likely to miss it. Also, you can receive a capped tax rate of 15 per cent or 30 per cent on the 'sacrificed' income.

An additional 15 per cent tax applies to concessional super contributions if your combined income and concessional contributions exceed $250,000.

If you're serious about getting your super up to speed, then salary sacrifice could be helpful. It’s an effective strategy to maximise your super contributions and lower your taxable income at the same time. Your take-home pay could cover today, your sacrificed salary could help fund tomorrow.

To size-up your savings and set up salary sacrifice, contact your employer. You should also seek advice from us first or tax professional.

Source: NAB
Reproduced with permission of National Australia Bank (‘NAB’). This article was originally published at https://www.nab.com.au/personal/life-moments/work/plan-retirement/salary-sacrifice
National Australia Bank Limited. ABN 12 004 044 937 AFSL and Australian Credit Licence 230686. The information contained in this article is intended to be of a general nature only. Any advice contained in this article has been prepared without taking into account your objectives, financial situation or needs. Before acting on any advice on this website, NAB recommends that you consider whether it is appropriate for your circumstances.
© 2023 National Australia Bank Limited ("NAB"). All rights reserved.
Important:
Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business nor our Licensee takes any responsibility for any action or any service provided by the author. Any links have been provided with permission for information purposes only and will take you to external websites, which are not connected to our company in any way. Note: Our company does not endorse and is not responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page.