Economic update: Housing and property leading the economy again

In the wake of the Federal Budget consumer confidence has dipped in the quarter to June and our resilient Australian dollar is continuing to make our domestic outlook more difficult than it needs to be. This combined with the tragedy this week in Eastern Europe and escalating challenges in the Middle East makes geopolitical risk to the world higher than it has been of late.

The domestic cash rate remains unchanged at 2.50% and there is no sign of a rise to come in the near term. The Reserve Bank came out in early July and warned that Australians shouldn’t always expect house prices to rise and minutes in mid July indicated they will be holding rates steady until there are significant signs of improvement outside of the mining sector. On the positive, our economy has had moderate growth and there are continued signs that the transition away from mining is slowly occurring with growth in our tourism, oil and gas and property sectors.

Housing construction and new home sales have expanded significantly over the past year, although in the second quarter the pace of increase has moderated a little.

In international markets the US economy has continued to show very positive signs. The US Business output boomed over the month of June – manufacturing output and new orders rose at the fastest pace since April 2010 and job creation hit a four-month high.

A ‘mini-stimulus’ package from the Chinese Government has helped improve economic activity in the region. The Chinese economy has grown at an annual rate of 7.5% in the second quarter, up slightly from 7.4% in the first three months of the year.

The European share market was the only region posting losses in June, with slowed industrial growth.

The Australian bond market continued to perform steadily over the quarter with the UBS Australia Composite All Maturities Index increasing by 3.08%. Within the asset class Government bonds were the stronger performer gaining 3.55%, while corporate bonds increased by 2.57%.

While bonds performed well, Australian equities lost ground in the month of June, recording a loss of -1.45% as measured by the S&P/ASX 300. Over the entire quarter equities only recorded only a slight gain of 0.88%. [Read more…]

Avoiding uncommercial borrowing conditions

The ATO has recently warned that SMSF income generated from limited recourse borrowing arrangements (LRBAs) deemed to be uncommercial may be subject to high tax rates.

If a LRBA is found to be uncommercial then all income derived from the related asset can be taxed at up to 45% including rental income, dividends, interest and capital gains.

At this point no detailed guidelines have been released, and LRBAs are being assessed on a case by case basis to determine whether or not the high tax rate will be applied to related income. As such it is advisable to ensure that all loans taken out by your SMSF meet commercial terms. It is also recommended that all documentation is retained in case you are required to provide evidence of commercial loan conditions.

What makes a LRBA uncommercial?

A LRBA may be considered uncommercial if the terms result in a greater return than would be expected from a standard industry loan. Factors that may be considered by the ATO when assessing the terms of a loan include the loan to value ratio, interest rates that are below market value, and unusually long repayment periods.

The ATO has also indicated that LRBAs used to purchase assets with limited material security, for example shares, will be more likely to attract the higher tax rate, as it is unusual for commercial lenders to approve loans for these types of investments.

New penalty scheme for SMSF trustees

From July 1 2014 the ATO will have increased powers to issue a range of penalties to SMSF trustees found to be in breach of superannuation laws.

The new regulations will give the ATO increased flexibility in dealing with non-compliant SMSF trustees. This will improve the ability to deal with cases fairly and appropriately.

Previous Penalties

Up until now the SMSF penalty options available to the ATO have been relatively harsh, including barring a person from being an SMSF trustee and subjecting the fund’s assets to a penalty tax.

As these penalties are disproportionate to many minor infringements by SMSF trustees, they have been used sparingly. As such there was no capacity for the ATO to deal with less serious non-compliance issues. Under the new system, the ATO will be able to apply a range of penalties to SMSF trustees including rectification orders, educational directions and administrative financial penalties. Trustees found to be in violation of superannuation law may subject to any combination of these penalties.

Rectification Orders

If a trustee is given a rectification order, they will be required to undertake specific action to rectify the non-compliance issue. Evidence of the rectification action will need to be provided to the ATO.

The ATO has indicated that it will take into consideration potential financial detriments to the fund that may be expected as a result of the rectification action.

Educational Directions

Trustees who are given educational directions will be required to undertake and complete an education program within a specified timeframe. Again, evidence of completion will need to be provided to the ATO.

While no fees can be charged for trustees who undertake a course as a result of an educational direction, any other related costs (such as travel) must not be paid or reimbursed by the relevant SMSF.

Administrative Penalties

The new administrative financial penalties are the most significant changes to current legislation. Financial penalties ranging from $850 to $10,200 can be issued for each individual non-compliance issue, and must be paid by the trustee personally.

Funds cannot be withdrawn from the SMSF to pay the penalties, nor can the trustee be reimbursed by the SMSF.

Using dividend franking credits

By investing in fully franked Australian shares, SMSF trustees can significantly reduce the amount of tax payable by their fund.

This is because these shares are issued with a franking credit, also known as an imputation credit, which can be used to offset the tax payable by the SMSF.

What are franking credits?

When companies pay out dividends to their shareholders, the income has already been subject to company tax. In order to avoid double taxation, where both the company and the shareholder have paid tax on the dividend, Australian dividends often come with a franking credit. This essentially means that the company tax that has already been paid is awarded to the shareholder as a franking credit, and the shareholder is then required to pay tax on the dividend at their marginal rate.

The benefits of imputation credits are also available to SMSFs who invest in fully franked Australian shares.

Franking credits and superannuation

From July 1 2015 the company tax rate will be 28.5% (cut from 30%), whereas the maximum amount of tax paid by an SMSF is just 15%. This makes acquiring fully franked shares with high yielding dividends an attractive tax break for SMSFs. If a significant portion of the fund’s investment portfolio is made up of fully franked shares, then their net tax bill can be considerably reduced.

If an SMSF receives a fully franked dividend in accumulation phase then the franking credit can offset the tax payable on the dividend. Franking credits can also be used to reduce or eliminate tax owed on any other income from the SMSF including capital gains tax, rental income and concessional contributions tax. If the SMSF has no other taxable income, the ATO provides the SMSF with a cash refund on the company tax paid.

In pension phase, when the SMSF tax rate is reduced to 0%, franking credits become even more beneficial as the entire value of the franking credit is returned to the SMSF.

Franking credits can be particularly advantageous for high income earners seeking to limit the amount of tax paid on concessional super contributions. For individuals earning over $300,000, the tax on concessional super contributions is set to increase from 15% to 30%. Instead of balking at investing additional funds into super, individuals seeking circumvent this tax hike may look at increasing their SMSF’s investment in fully franked Australian shares.

 

Prosperity’s China Investor Roadshow featured in AFR

 

 

 

 

 

 

 

 

Click on link to view article http://tinyurl.com/l93fxz8

 

 

New financial year cost savings

A challenging economy requires careful cash management to sustain your business.

Tough decisions are necessary which tend to involve workforce reduction and increased productivity from existing employees, both crucial to examine. However, if businesses look beyond labour, they can often find additional ways to drive meaningful long-term cost reductions. Here are a few areas to consider –

1.  Product lines and customer segments
Many businesses have product lines or customers that fail to generate meaningful profitability, or worse, generate losses. The Pareto Principle — the 80/20 rule — often applies; many find that the majority of their profits are generated by a relatively small number of products or customers. By simply shifting energy from less profitable products or customers to more profitable ones, companies can dramatically improve profitability.

2.  Outsourcing
Outsourcing Many businesses are gaining significant cost and operational efficiencies from outsourcing non core activities. Careful analysis including the proper allocation of on costs and overheads will reveal these functions usually cost much more in dollar terms and distraction that perhaps thought. Areas such as payroll, HR, IT, bookkeeping and even entire finance functions may be better performed by specialists who can deliver volume and expertise benefits to your business allowing your team to concentrate on strategy and execution.

3.  Inventory
Many manufacturers and distributors are still dealing with excess inventory levels, which can lead to unnecessary carrying costs and negative cash flows. The most profitable companies effectively use material requirement planning systems (MRPs) and/or enterprise resource planning systems (ERPs) to reduce inventory levels without running the risk of exhausting supplies.

4.  Suppliers
Businesses can often reduce general and administrative costs through techniques such as supplier consolidation and/or the implementation of formal tender processes. Think about the number of departments or locations using different suppliers for routine products such as office supplies. Then, think about how often purchases of such items are made on an ad-hoc basis without pre-negotiated pricing terms. By consolidating vendors and negotiating terms with selected suppliers, companies can leverage purchasing power to reduce general and administrative costs.

5. Employees
Whether your business has 20 employees or 2,000, it never hurts to engage them in cost-reduction initiatives. Because they are in the trenches, they often have first-hand knowledge of areas of waste. By soliciting their feedback and implementing an incentive system to reward them for cost savings, businesses often decrease costs and increase employee retention.

While there is no single solution for cost reductions that applies to all businesses, learning more about what other businesses have done can spur innovative strategies that lead to long-term improvements in profitability. By tackling these issues now, you can drive near-term increases in profitability and ensure you are prepared for any future economic difficulties.