King & Whittle October 2023 Newsletter
The warmer weather and spring rains are a welcome break from the colder months. And, while outside activities become more tempting, don’t forget to find a moment or two to review your finances to make sure you’re up-to-date and on-track.
Household wealth has increased for the third quarter in a row. It rose by 2.6% in the June quarter, pushed up by rising house prices and increases in superannuation balances. Meanwhile demand for credit was the lowest since 2005. But consumers are not spending and consumer confidence is down. Retail sales growth was the slowest since the pandemic lockdown.
While the number of job vacancies have fallen by about 18% since their peak in May this year, they are still around 72 per cent higher than just before the pandemic – that’s an extra 160,000 positions that employers are looking to fill. Unemployment was unchanged at 3.7%.
The Australian dollar rebounded a little to finish the month where it began but it’s ended the quarter about 3% thanks to surging oil prices, interest rate uncertainty and the US markets.
Brent crude has continued its relentless climb since June, ending the month just over 30% higher than three months ago. That’s pushed petrol prices ever higher – about 17% over the same period – with the national average price for unleaded at $2.11 a litre compared to $1.80 in June. Oil prices are expected to continue to increase because of depleted US inventories and cuts to production in Saudia Arabia and Russia. Increasing petrol prices helped fuel a jump in inflation last month.
As for Internal news at King & Whittle:
We celebrated the promotion of Jennifer Rapson to Senior Associate.
Jennifer has been a well respected and loved member of our King & Whittle family for 20 years.
She has been integral to the growth of our firm.
We are so fortunate to have Jennifer's extensive knowledge and experience and her mentoring of staff and clients, guiding us forward. Her recent return from maternity leave and now return to full time capacity is an exciting new chapter for herself and the future of our firm.
We warmly congratulate you Jennifer.
Graeme Neill has officially retired as a consultant of King & Whittle. We thank him for the many years of service.
Also, a friendly reminder to all clients to ensure their Director ID information has been supplied and is up to date.
If you become a new director of a company, you will need a Directors ID. If you have any questions about the Director ID process, please visit the website or contact your King & Whittle Adviser.
Enjoy the read....
Market movements & review video - October 2023
Stay up to date with what's happened in Australian markets over the past month.
Household wealth has grown for the third quarter in a row, rising by 2.6% in the June quarter, pushed up by rising house prices and increases in super balances.
Click the video below to view our October update.
Please get in touch if you’d like assistance with your personal financial situation.
Rental investor? How to get your tax return right
With Treasury estimating the government misses out on billions in potential tax revenue from rental property deductions and the ATO recently warning extra care is needed when lodging returns with this type of income, rental investors can consider themselves well and truly in the tax man’s sights.
In fact, the ATO’s Random Enquiry Program (REP) showed 9 out of 10 returns reporting net rental income needed adjustment, leading ATO second commissioner Jeremy Hirschhorn to note: “This is startling and clearly something we need to address”.
So, if you’re a rental property investor, it’s time to ensure you’re getting your deductions right.
Deductions under the microscope
Rental property investors can claim a wide range of deductions for expenses associated with maintaining and financing their property interests. These include interest expenses, capital works and other deductions required to maintain the property.
It’s clear from the REP, however, many rental property investors need to learn a little more about what is deductible and also when they can claim a deduction for the amount.
Although some expenses can be claimed immediately (such as management fees and council rates), other expenses (such as borrowing costs and capital works) must be claimed over a number of years.
Red flags for the ATO
Common mistakes rental property investors are making include failing to include rental income for short-term arrangements and insurance payouts, overclaiming deductions, and claiming for improvements to private properties.
Rental income must be the gross amount received and must be reported in the same financial year the tenant pays.
Another common mistake is claiming an immediate deduction for initial repairs when purchasing. Existing damage must be claimed over several years as a capital works deduction and is also used to work out your capital gain or loss on selling.
Improvements such as renovating a bathroom, are a building cost and must be claimed at2.5% annually2.5 per cent annually over 40 years from completion, while damaged detachable items costing more than $300 should be claimed as a depreciating asset.
Tips to get your tax return right
When completing your return, it’s essential to apportion both your rental income and deductions in line with your ownership share of the property.
If there is a mortgage over the property and the loan is also used for private purposes (such as a buying a new car or taking a holiday), your interest expenses must be apportioned. This needs to continue for the duration of the loan, even if you repay the personal expense.
Deductions also need to be split to reflect any private use. This also applies if you only use part of the property to earn rent.
Ensure your deductions are in order
Borrowing expenses (such as loan establishment fees and title searches costing over $100) must be deducted over five years. In the first year, these expenses should be apportioned for the number of days of ownership.
Purchase costs (such as conveyancing fees and stamp duty outside the ACT) cannot be claimed but form part of your capital gains tax (CGT) calculations.
Ask the previous owner for details of any capital works deductions claimed so you can correctly calculate your own deductions. Alternatively, hire a qualified professional to estimate previous construction costs.
Although payments to a body corporate administration fund are fully deductible in the year incurred, payments to a special purpose fund for capital improvements or repairs are not immediately deductible.
Don’t forget CGT
It sounds obvious, but it’s essential to have evidence of all your rental income and expenses when lodging a claim. This needs to be retained while you own the property and for five years after selling.
Another tip is to ensure you calculate your capital gain (or loss) correctly when selling.
You are not permitted to include amounts already claimed as a deduction, including depreciation and capital works.
Capital gains must be included in your tax return for the income year the property is sold, while capital losses can be carried forward.
Please don’t hesitate to call if you have any questions regarding the preparation of documentation for your next tax return.
A positive property outlook for some
Residential property investors have been on a wild ride in recent years as prices slumped during the pandemic then quickly skyrocketed before losing ground again.
Now, with prices levelling out or slowly increasing, there is good news around the corner, according to some analysts.i
A combination of positive indicators for housing could help to fuel further price rises.
With a widespread view that the Reserve Bank’s interest rate increases are beginning to work to ease spending, some believe we may see the first rate cuts as early as next March. Add to that the increase in migration and the fall in new house construction, and residential property gains may follow. CBA Chief Economist Stephen Halmarick is forecasting a 7 per cent rise in house prices this year and another 5 per cent in 2024 claiming that, by this time next year, prices will return to “all-time record highs”.
The sustained levels of high demand clashing with historically low levels of for-sale listings are also pushing prices up, according to the Property Investment Professionals of Australia (PIPA).ii
In the meantime, some investors are doing it tough with rising interest rates and the end of fixed interest rate mortgages sometimes a contributing factor. The number of short-term property resales made at a loss has jumped, according to property analysts CoreLogic, from 2.7 per cent a year ago to 9.7 per cent in the June quarter this year.iii The median loss was $30,000, for houses sold within two years, compared to a median profit of $75,000.
PIPA’s annual survey to gauge property investor sentiment found just over 12 per cent of investors sold at least one investment property in the past year.iv Less than a quarter of those houses sold went to other investors, continuing a trend that has been happening for several years.
Almost half of those who sold said they were concerned about governments increasing or threatening to increase taxes, duties and levies.
Where are rents headed?
Will rents continue to rise or stabilise? Experts’ views are mixed about the short-term outlook for the rental market.
The Reserve Bank says the continuing shortage of rental housing is likely to support ongoing increases in rents.
The rents paid by new tenants provide a good indication of price movements in rental housing. Actual rents paid by new tenants increased by 14 per cent over the year to February 2023. Since the onset of the pandemic in 2020, rents paid by new tenants have increased by 24 per cent.vi
But CoreLogic predicts a slowing in rental price growth next year, saying rents rose for the 35th month in a row in July but monthly growth has eased over the past four months. It says the expected drop in interest rates next year combined with softer income growth and stretched rental affordability will contribute to a slowing in rents.
Build-to-rent growth
Australia’s growing build-to-rent (BTR) market is getting a boost with tax concessions from governments eager to increase housing stock.
BTR projects, common in Europe and North American, see landlords build a large-scale residential development intending to hold it for the long-term while renting the apartments for as long as three years with rent increases locked in. Rents are often slightly higher than market averages in return for better communal amenities such as roof gardens and gyms.
Institutional investors, such as super funds, are also getting onboard with the projects, favouring the steady income stream.
While Australia’s BTR market is mostly being driven by large developers and global players, smaller private investors are also getting in on the act. On the plus side, BTR offers regular income, often better returns and the chance to minimise expenses, not to mention the government tax concessions.
On the downside, there is the possibility the concept might not take off in Australia and that vacancy rates may be higher. Meanwhile, the locked-in rental increases may not keep pace with rapid market changes.
i https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/total-value-dwellings/latest-release
ii, iv https://www.pipa.asn.au/wp-content/uploads/PIPA_Investor-Survey-Report_2023_Final.pdf
iii https://www.corelogic.com.au/news-research/news/2023/short-term-loss-making-resales-on-the-rise
v, vi https://www.rba.gov.au/publications/bulletin/2023/jun/new-insights-into-the-rental-market.html
Yours, mine & ours - estate and succession planning for modern families
Navigating complex family relationships and blended families can be challenging at times and particularly when a family member dies.
A good estate plan can help to make sure your wishes are carried out when you die. An estate plan, of which a will is the first and most important part, can ensure your estate is distributed in the way you want. It can also help if you become incapacitated, particularly when it includes an enduring power of attorney and a medical power of attorney that indicate who should be in charge of your affairs and any relevant instructions.
Professional advice is vital in estate planning to make sure that you have considered all the issues, including tax matters, and that your loved ones are protected. It is also important to clearly communicate your wishes, particularly when there are complex issues involved, so that your wishes are clearly understood.
Here are some of the issues to think about.
Superannuation
A binding death benefit nomination should be at the top of your list when you are considering the distribution of your superannuation funds.
This makes certain that your super death benefit is paid to those you choose because without one, the trustee of your super fund will make their own decision.
The nomination is usually valid for three years before it lapses and must be renewed.
Blended families
If you have been married more than once and/or have children with more than one partner, your will helps to effectively provide for those you choose.
You may wish, for example, to ensure that your children receive the proceeds of your estate rather than your spouse or ex-spouse. Alternatively, you may need to ensure your will protects your current spouse from the claims of previous spouses.
When it comes to the family home, the type of home ownership is important. If you have purchased as 'joint tenants', the entire asset will pass to the surviving spouse. On the other hand, if you have purchased as 'tenants in common', each spouse can distribute their share of the house to others.
You may also wish to include a ‘life interest’ in the home so that your current spouse can continue to live in the home until their death before it ultimately passes to your other beneficiaries.
Trusts
Any existing family trusts should be reviewed with a blended family in mind. Check that the trust deed provides clear instructions for succession, if you want to ensure your children from past relationships are catered for.
Your will can also establish new trusts, known as testamentary trusts, to provide for any dependents with disability, when you are worried that a child may waste or misuse your assets, or to allow for young children.
A testamentary trust can also help to protect your adult child’s interests if they were to divorce a partner or are facing bankruptcy. Any inheritance they receive from you would become part of their property and can be considered in a divorce settlement or called on by creditors.
Handing on a business
If you are in business with partners, or would like to hand on the family business to one child but not others, a life insurance policy may be a useful strategy – sometimes known as estate equalisation – to even the distributions from your estate.
In the case of a business partnership, you would name your partner or partners as beneficiaries of the life insurance policy, to effectively ‘buy you out’ of the business. Where it’s a family business due to be handed on to one child, your life insurance would go to your other children to match the value of the business.
Note that it is crucial to continually review the value of the business and the value of the life insurance to ensure they remain current.
Estate planning can be tricky and emotional, particularly when your circumstances are a little more complex. So, get in touch with us to ensure your estate plan meets your wishes and takes account of all the issues.
Retirement planning for small business owners
When you run your own business a good retirement plan can bring real peace of mind. Read more about your options - and why it's never too early to start.
Planning your retirement
When you’re busy running your own business retiring could be the last thing on your mind. But planning your retirement well in advance can make it easier to enjoy the future you want.
Will you sell your business?
Many business owners plan to sell their business to fund their retirement - but it's important to be realistic. It isn’t always easy to find a buyer who's prepared to pay the price you want, particularly if you're hoping for a quick sale. And, even if you intend to keep on working well beyond retirement age, unforeseen circumstances such as poor health or a change in market conditions could force your hand, so it's important to be prepared.
Allow plenty of time
If possible, you should give yourself at least three years to plan for the sale of your business. Most buyers will want to see three years of financial statements and you'll also need time to work on increasing the value of your business. This could include everything from keeping your equipment up to date and making sure your premises are always clean and well-maintained to boosting your sales with a strong online presence. Remember that a buyer is investing in the future of the business so they’ll want to see positive yet realistic forecasts.
In the meantime, it's also important to protect your business with the right insurance. Appropriate Income Protection, Total and Permanent Disability (TPD), Trauma and Business Expenses insurance can help prevent debt from accumulating if you’re unable to work and enable you to pay someone to keep your business up and running if you can’t.
Succession planning
Passing your business on to a family member or employee may sound straightforward but, again, you should allow plenty of time to work through the process and clarify all the details. For example, do you intend to retain any interest in the business? Who will own any property, such as the business premises? And, if your successor plans to buy the business from you, can you be sure they'll have access to the money when you want it?
A good succession plan will cover all this and more to ensure you can make the transition with minimum disruption and maximum benefit. And it's important to talk to a professional adviser about how you can best structure your business to protect your assets and minimise tax.
Saving money for retirement
Personal superannuation isn’t compulsory for small business owners so you might be tempted to put investing in your business ahead of your savings. This can be risky as there's no guarantee your business alone will provide enough money for you to live comfortably in retirement.
Building your business and your superannuation investment simultaneously can help to mitigate the risk. Many business owners choose a self-managed superannuation fund (SMSF) as this may provide benefits such as a lower tax rate, more investment options and flexibility when it comes to drawing an income. However, a SMSF isn’t right for everyone so you need to discuss your strategy with a professional adviser.
Planning to live longer
In general, Australians are living longer, which means you could spend decades in retirement. Ideally, you’ll have enough savings to cover your expenses well into your nineties.
Financial security in retirement could underpin many of the decisions you make about your business so it’s important to think about the lifestyle you want. As a general rule, if you own your own home, you’ll need 70-80 per cent of your pre-retirement income to maintain the same standard of living. The age pension and other government supplements provide a safety net but, at the moment, these are set at about 28 per cent of the average wage, and this is very unlikely to increase.
The most successful retirement planning is long term. Your spending and your needs are sure to change as your retirement progresses so your plan must be adaptable enough to evolve. And it's never too early to take action. Once you have your retirement goal in mind you can work out the steps that will help you take control of your retirement and enjoy the lifestyle you want.
Source: NAB
Reproduced with permission of National Australia Bank (‘NAB’). This article was originally published at https://www.nab.com.au/business/small-business/moments/future/planning
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.
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