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.

Prosperity CEO appointed to LEA’s Global Board

Prosperity Advisers is a member of LEA Global / Leading Edge Alliance ranked by the International Accounting Bulletin as the second largest International firm association of independent accounting firms for 2014.

The LEA Global is an International alliance of independently owned accounting and consulting firms. Established in 1999, The LEA has more than 190 member firms worldwide with collective revenues of over 2.9 billion USD. Over 100 countries are represented by the association.

“By utilising technology, developing innovative special interest groups, and connecting internationally to the knowledge of our member firms, LEA Global members are able to compete on a substantial scale, throughout the country and across the globe,” stated Michael Davis, Managing Partner HW Fisher & Company, London and LEA Chair.

“LEA provides the resources that support their consistent growth and, subsequently, its own. The combined knowledge of the many top firms in LEA is shared across all firms, and contributes to the continuing success of each.

“When the idea for LEA was conceived, the plan was to introduce an independent association that helped firms compete with the Big Four. The competitive landscape changed since our inception in 1999 as other large national and regional firms emerged. Yet the continued growth of the Alliance is a testament to the independent successes of member firms and their ability to understand and proactively deal with new challenges. The appeal of an accomplished association that consistently meets the needs of its membership is indisputable,” said Gary Shamis, Managing Partner SS&G Financial Services, Inc. & LEA Chair Emeritus.

“Accounting has come out of the dark ages. The most successful firms operate as strategic businesses, and this view extends to its client base, centers of influence and the alliance it belongs to.  Over the past 14 years, LEA’s success has proven that the attention and support it provides to its members, including their overall operations special interest groups, has been a major factor in the success of its member firms.”

LEA Foundation firm, Prosperity Advisers Group CEO, Allan McKeown has recently been appointed to LEA’s Global Advisory Board.

Prosperity is a full-service accounting, business and financial advisory firm.  Prosperity has an East Coast footprint with offices in Sydney, Newcastle and Brisbane.

McKeown said “our firm’s membership has been invaluable in providing our clients with personal contacts and a global reach to assist with their International business expansion.”

 

National Commission of Audit: Clearing the way for another golden age?

Click here to view the full National Commission of Audit Recommendations

The sun has risen on first day after the release of the National Commission of Audit (NCOA) report on the efficiency of the Commonwealth Government. Despite the frenzy of cries of disadvantage reacting to specific recommendations, my bet is that the sun will continue to keep rising. The only people at risk of imminent injury are people who try to lift the entire report in one movement.

I read several kilos of the Report last night while I watched the TV news reports tallying up how much I am going to lose when my share of the ‘kick in the guts’ is delivered. But the overall message of this document is actually positive. Australia is not yet a fiscal basket case and if some things are changed we will avoid the distress some other developed countries find themselves in.

Put specific recommendations aside, there is a lot of good common sense. The Report draws focus on massive inefficiency and duplication of activity across tiers of Government – poor fiscal management where taxpayer’s money on the expense line is being wasted on what a small business operator or a pensioner would call a profligate scale. This report is all about trimming this out of the expense line of the Government’s profit and loss statement.

In return, a massive dividend is on offer. If some of these measures are adopted, the budget bottom line could improve in our time by $60-70 billion per annum.  Please re-read the last sentence. That’s a lot of money – and a very big pot of gold to benefit the country to be reinvested in its future.

There are some gutsy moves.

  • Giving States the power to levy income taxes could put an interesting cat amongst the pigeons and cause mass migration to ‘tax haven’ States.
  • Pension and retirement measures feature heavily. For existing pensioners and retirees there is good news. The most significant changes are designed to take full effect by 2027-28 when the pension age is expected to rise to age 70 and the access age for private super will rise to 62 (then ultimately 65). The Report is raising the ladder to access the Government pension and gaining early access to private superannuation for Gen X and Gen Y. Pain for current and imminent retirees looks limited.
  • The most immediate health care initiative is the $15 medicare co-payment and extension of the existing obligation for high income earners to obtain private health insurance for basic services.
  • The Government’s Paid Parental Leave policy takes a hit with a proposal to limit it to average weekly earnings. However there is a proposal to reinvest the saving in expanded access to childcare to services including nanny style at home care.
  • Family Tax Benefit B would get removed completely and Family Tax Benefit A becomes more tightly means tested.
  • Exporters will be disappointed with the proposed removal of the Export Markets Development Grant and significant reforms to the administration and allocation of grants and research and development which looks to a key target of efficiency reform.

Not all of these measures will succeed.  They may not be designed to succeed in their present form.  Australia has a poor record of adopting recommendations from reports by eminent Australians. The authors who assume the burden of responsibility – whom I have no doubt are passionate enthusiasts for our country – must surely push some measures to the limit in the expectation that a less severe mid-point will ultimately be chosen in the tug-of-war of the political process.  A ‘kick in the guts’ is much more likely to be a dull ache.

Economic update : the state of the economy and the markets leading up to the Federal Budget

The budget is coming.  With just two weeks to go it looks like, the Government will deliver a budget with a strong long term outlook and an amount of short-term pain including the introduction of a debt levy. Not surprising really given the state of the domestic economy and the sheer number of baby boomers that will leave the workforce in coming years.  

Over the last three months, our economy has behaved with relative stability.

The last quarter, and in particular, the last month has seen the Australian dollar rise adding more pressure to rebalance the domestic economy. On the flip side, housing prices have continued to rise over the quarter combined with an increasing level of building approvals showing confidence is certainly in place.

Interest rates have remained unchanged throughout the quarter at 2.50% and RBA Governor, Glenn Stevens has commented that further rate cuts are unlikely in the short term. The board appear more comfortable with the global outlook and are predicting a reasonable pick-up this year. In Australia, the housing market has rallied in recent months and household spending has continued to increase, encouraged by our historically low interest rates.

In international markets, the US and Euro Regions have shown improvements in recent months. The US Federal Reserve made the announcement in March to reduce asset purchases by a further $10 billion a month to $55 billion. Following on from this announcement, US 3-year and 10-year Government Bond Yields rose by 0.07% and 0.32% respectively.

Overall International Bonds outperformed global equities in March, with the Barclays Global Aggregate (Hedged) $A Index increasing by 0.31%. Treasury stocks and corporate bonds gained by 0.35% and 0.36% respectively for the month.

Australian equities posted modest gains in March, with the ASX 300 rising 0.21% for the month. Commodity prices declined by 2.0% for the month in terms of Australian dollar terms, largely coming from the fall of iron ore, coking coal and steaming coal. On a market capitalisation basis, large company stocks performed better than smaller companies. The S&P / ASX 50 Leaders Index increased by 0.33% in March, while the S&P/ASX Small Ordinaries Index posted a loss of 1.16%.

On a sector basis, Financials (ex-Property) was the best performing and gained 2.92% in March. All the big four banks also recorded another round of strong gains in March. Materials and Healthcare were the weakest sectors declining by -2.89% and -2.07% respectively.

While residential dwelling investments continue to expand, commercial properties (office buildings and large shopping centre investments) declined over the month. The Australian Listed Property Market posted a loss of -1.58%.

In international equities, the Fed’s further decision to taper and indication that quantitative easing could end earlier (possibly within the next 6 months) has resulted in a more optimistic growth outlook. The MSCI North America (Local Currency) Index posted a small return of 0.68% in March.

The best performing region was India with 4.75% over the month due to political optimism. Japan was one of the worst performers losing -7.51% in the first quarter of 2014 due to the sudden 3% sales tax threatening to endanger their recovery.

China lost -1.74% and Europe reversed its previous months strong position and lost -0.65% in March.

Global resources performed poorly in the month with the FTSE Gold Mines Index and HSBC Global Mining Index declining by -11.14% and -5.42% respectively.

Over the coming three months we expect, if there are no sudden changes to the global environment….

1. A Federal Budget that takes some positive steps to reduce the deficit, cutting welfare payments to those not working and incentivising mothers into the workforce; and

2. A stable interest rate environment that is supportive of business and consumer confidence.

Sydney – investing for the future

Prosperity Advisers is planning for substantial growth in 2014 despite the tight economic conditions. The expected increase in operations has prompted a move recently to larger custom designed premises in Elizabeth Street.

Sydney Office Principal, Stephen Guthrie said “the move allows ample space for growth, provides our people more modern and effective work spaces and importantly for our clients and visitors it provides additional briefing rooms and convenient transport links.”

The firm has over 100 staff across its Sydney, Newcastle and Brisbane offices. CEO, Allan McKeown says “Prosperity has invested in building our capability in a number of areas.

“The development of personal global connections through our international alliances has resulted in much activity as Sydney benefits from direct Asian investment and international interest in Australia as a safe harbour entry point. Our well resourced Asian desk with multi-lingual capability has been particularly well received.

“Our ability to meet the sophisticated needs of ultra high net wealth individuals through a comprehensive seamless service offering and the expansion of our medical and allied health speciality through our acquisition of the East Coast clients of a speciality firm, will also fuel our growth this year.”

Economic Update: The end of quantitative easing troubles markets


The last quarter, and more particularly, the last month has seen a fairly negative bias across most Australian and international equity markets.  Commodity prices fell slightly and gold has continued to plummet.  The Australian dollar has also been decreasing, posting losses against all the major currencies. But economically, this might not be such a bad thing.

Interest rates are being closely watched after the Reserve Bank decided to hold cash rates at 2.75% in June.   RBA Governor, Glenn Stevens explained that the mining downturn has driven a significant depreciation of the Aussie dollar over the past three months. This depreciation has increased the attractiveness of local exports and provided support to our otherwise challenged economy.

In international debt markets, the Federal Reserve in the USA rescinded its indefinite support of fixed income markets causing global corporate bonds to fall 2.36% and emerging market debt to plunge over 4% for the month.

Australian equities followed the global markets down in June, with the ASX 300 falling 2.4% for the month.  Small caps were the worst performers falling by 7.15%.  Information Technology and Materials sectors were the worst affected, falling 6.96% and 10.26% respectively in the month of June.  The materials sector has been significantly impacted by the rapid fall in the price of gold by 22.71% over the last 12 months.  This and the follow-on effects have driven some gold stocks down over 50%.

As is often the case during a downturn, the defensive healthcare sector outperformed the market, rallying by 1.33%.  Property also stayed fairly strong against other industries, with Australian REITs only declining 1.02% in June.

In international equities, the Fed’s announcement that they will wind back quantitative easing sooner than previously expected unbalanced markets.  Global equities subsequently declined by 2.43% during the last month of the June quarter.  Losses in China continued from previous months, with the MSCI China index slipping 7.07% in June, and the HSBC Manufacturing PMI falling to 49.2 which is seen as a slight contraction of the Chinese economy.  (A number above 50 signifies expansion, below 50 signifies contraction).

Over the coming three months we are looking for three slow but realistic shifts in the market,

  • We expect the USA will continue down the forewarned path of reducing its quantitative easing, bringing to fruition something the market already expects.   This could cause some market instability around announcements.
  • We see the continued weakness in commodity prices and Asian markets driving a gradual and painful weakness across the mining economy in Australia and a continued flow through to other sectors.
  • And the conclusion of the Federal Election period should bring the end of the inactivity that results from political uncertainty.

 

John Manuel is a Director of Financial Planning with Prosperity Advisers.

The Federal Budget 2013-2014: Comedy or Tragedy?


As potentially the final act plays out in Treasurer Wayne Swan’s Federal Budget performances, it is perhaps fitting to ask the question – was this long drama a comedy or a tragedy? 

Tonight’s budget was a safety first affair, largely being a renouncement of previous big announcements designed to reassure the patrons before they prepare to leave the theatre.  There is nothing in this budget to give a strong indication that the box office will not close on 14 September when the Federal Election is held.

The Budget confirms the announced significant deteriorations in the fiscal outlook.  Deteriorating commodity prices, diminished company tax revenues, disturbingly low carbon tax and mining tax revenues.  The inability of the Treasurer to reliably estimate short term forward revenue over past months definitely presents as a comedy.

But in my view, this is a tragic budget.  This Government, in its possible final act, has decided to attack large corporates and foreign investors in ways that achieve modest revenue gains, but which clearly present the message to the world that Australia is indifferent and ungrateful to inbound foreign capital  investors, or to corporate innovation and research and development by large corporates.

R&D concessions are scrapped for businesses with turnover of more than $20 billion.  Thin capitalisation thresholds are potentially reduced from a debt equity ratio of 3:1 to 1.5:1.  Outbound corporate investors will lose a tax deduction for interest on borrowings against some foreign investments that produce tax exempt dividends (still ultimately fully taxed to shareholders).  We will apply a non-final 10% of face value withholding tax when foreigners sell commercial real estate, mining assets (or residential real estate with a value of more than $2.5 million). Ultimately, we will require all entities with a turnover of more than $20 million to pay tax instalments monthly, creating a permanent cash drain even on smaller businesses.

The announced superannuation reforms are simply ill considered, riddled with potential injustices and inconsistencies which demonstrate a lack of proper due diligence and a tendency to announce measures without fully assessing potential impacts. Expect a red tape boom as compliance costs soar across all these measures that, by their nature, must be complex.

Small to medium business gets just about nothing (again!).  Exceptions are the quarterly refund of R&D tax credits to small enterprises – a welcome cash flow reprieve – and the removal of the thin capitalisation rules where debt deductions are less than $2 million.

The big picture measures have already been announced – the Gonski Education Reforms, the modest “Industry and Innovation” package, DisabilityCare Australia (funded by an increase in the Medicare levy from 1.5% to 2% from 1 July 2014).  Reannouncements of big infrastructure projects mainly already in the budget (again).  There is nothing to capture the imagination of businesses (large, small or international) and set up the environment for the next economic boom.  This budget represents an opportunity missed and simply sets up this Government and its people to tread water until voters express themselves at our looming election.  But most tragic of all, many of these budget measures may never see the light of day in Parliament. 

 

INDIVIDUALS & FAMILIES

Increase in the Medicare levy

From 1 July 2014, the Medicare levy will increase from 1.5% to 2%. This increase in the levy will fund DisabilityCare Australia.

2012/13 Medicare levy low income thresholds

The Medicare levy low income threshold for the 2012/13 income tax year will increase to $20,542 for individuals and $32,279 for pensioners eligible for the Seniors and Pensioners Tax Offset.

The Medicare levy low income threshold for families for the 2012/13 income tax year will increase to $33,693, and the additional family threshold for each dependant child or student will increase to $3,094.

Net Medical expenses tax offset to be phased out

For those taxpayers who claim the NME tax offset in the 2012/13 income year they will continue to be eligible for the offset in the 2013/14 income tax year if they have out of pocket medical expenses above the relevant thresholds.

The relevant threshold for people with adjusted taxable incomes above $84,000 ($168,000 for couples) is $5,000 in out of pocket expenses and the rate of reimbursement is 10%. For those taxpayers who claim the NME tax offset in the 2013/14 income year they will continue to be eligible for the tax offset in the 2014/15 income year.

Income tax cuts deferred 

Income tax cuts that had already been legislated (by way of increasing the tax free threshold) and that were due to commence on 1 July 2015 will be deferred indefinitely.

Replacing the Baby Bonus with new family payment arrangements 

Family Tax Benefit Part A (FTB Part A) payments will be increased by $2,000, to be paid in the year following the birth of a first child, and $1,000 for a second and subsequent child. The additional FTB Part A will be paid as an initial payment of $500, with the remainder to be paid in seven fortnightly instalments.

As a result of these reforms the Baby Bonus will be abolished.

HECS-HELP discount and voluntary HELP repayment bonus discounts will end

From 1 January 2014, the following discounts relating to the Higher Education Loan Program will be removed:

  • The 10% discount available to students electing to pay their student contribution upfront, and
  • The 5% bonus on voluntary payments made to the Tax Office of $500 or more. 

Work related self education expenses

From 1 July 2014, a taxpayer will only be able to claim a maximum deduction of $2,000 for work related self education expenses.

Eligible work related self education expenses include costs incurred on a course of study or other educational activity such as a conference or workshop, and include tuition fees, registration fees, textbooks, professional and trade journals, travel and accommodation expenses and computer expenses, where these expenses are incurred in the production of the taxpayer’s current assessable income.

Introduction of CGT Withholding Tax Regime for Non-resident Taxpayers

From 1 July 2016, where a foreign resident disposes of taxable Australian property, the purchaser will be required to withhold and remit to the Tax Office 10% of the proceeds from the sale. This measure will apply to commercial property and residential property with a value over $2.5million.

 

CORPORATES AND BUSINESS

The dramatic fall in the health of the budget has meant that for the business community the budget delivers only bad news. This bad news comes in the form of bringing forward the timing of tax payments irrespective of the cash flow and administrative problems this may cause, or the tightening of other provisions such as the thin capitalisation provisions for international businesses.

In a business environment that is probably best described a fragile, let’s hope the budget doesn’t further hamper an already difficult environment.

Monthly PAYG Tax Instalments

Changes to the PAYG tax instalment system to be introduced by government will result in all large entities paying monthly tax instalments to the government. These changes will be an administrative nightmare and result in cashflow management issues for the entities affected.

The entities caught and timing of the changes have been summarised in the table below:

Entity Affected Date Monthly Instalments Begin
Companies with turnover greater than $1b. 1 January 2014
Companies with turnover greater than $100m. 1 January 2015
Companies with turnover greater than $20m and all other entities with greater than $1b turnover. 1 January 2016
All other entities with turnover greater than $20m. 1 January 2017

As shown in the table above these changes are far reaching in the number of taxpayers that will be impacted.

Foreign Non-Portfolio Equity Interests

Presently, the receipt of dividends from a non-portfolio investment of greater than 10% in a foreign company are treated as exempt from tax. These rules are going to be tweaked by the government to ensure they operate as intended.

This will include ensuring that the exemption flows through a trust or partnership correctly.

Interest Expenses Relating to Foreign Exempt Income

The government has announced that it will be amending the legislation to prevent an interest deduction being claimed with respect to the derivation of certain foreign exempt income.

Changes to Mining Concessions 

The generous tax concession available to the mining industry are being tightened to exclude acquired mining rights and information from those assets that can be claimed as an immediate deduction as part of the cost of assets first used for exploration. Affected assets will need to be depreciated over the shorter of their effective life or 15 years.

Only original costs of issue from government and genuine new exploration expenditure will qualify for outright deduction.

This does not apply to rights and information acquired from a government authority. These changes will apply from budget night.

Thin Capitalisation

As was expected by many advisers, the government has made the decision to tighten the thin capitalisation rules that apply to foreign companies that have operations in Australia and Australian companies that have operations overseas.

The government has increased the de minimis threshold from $250,000 to $2 million. This means that taxpayers with total interest expense below $2 million are not subject to the thin capitalisation rules. The rules broadly apply to disallow interest deductions where a taxpayer has more than $3 of debt to every $1 of equity. Interest deductions are reduced on proportionate basis.

The budget has proposed that this ratio be reduced to $1.50 of debt for every $1 of equity. This is a significant blow to both Australian companies that are looking to expand offshore and to international companies looking to invest in Australia.

For foreign multinational companies this is a significant change that makes Australia a less appealing place to carry on business. When the boards of these large foreign companies sit down to determine where to invest their capital, this is one extra reason to choose a country other than Australia.

The government has noted that these changes will apply to financial years beginning on or after 1 July 2014. These changes are significant and therefore it will be crucial to closely monitor the details of how these changes will be implemented and the drafting of the legislation surrounding these changes.

Other Changes Impacting Corporate Taxpayers

Other changes to note include the following:

  • Removal of dividend washing opportunities exploited by some taxpayers. This enables some sophisticated investors to claim franking credits twice by selling shares ex-dividend and re-purchasing other shares that carry a right to dividends.
  • R&D benefits have been scrapped for corporate groups that have greater than $20b turnover.
  • The changes previously announced by the government in the 2009/2010 budget with respect to the CFC and FIF provisions have been put on hold until the OECD has finished a review of international profit shifting. This announcement means that businesses with international operations face a longer period of uncertainty.
  • The Venture Capital regime will be amended to encourage ‘angel’ investors. This will be achieved through lowering the minimum invested capital requirement from $10m to $5m.
  • Various amendments are to be made to the tax consolidation provisions, to prevent taxpayers from obtaining unintended benefits, such as double deductions through shifting assets between groups and deducting liabilities twice.

 

CHARITIES AND NOT FOR PROFIT ENTITIES

Definition of Charity

A statutory definition will be applied to the term charity from 1 January 2014, rather than the reliance that is currently placed on common law principles. The statutory definition will however preserve these principles.

Not For Profit Tax Concession Changes

Planned changes to the tax concession that apply to commercial activities that are carried on by not for profit entities are to be delayed. These changes will commence from either 1 July 2014 or 1 July 2015 depending on when the activities commenced.

These changes will broadly mean that income tax concessions will not always be available for unrelated commercial activities carried on by not for profit groups. The availability of income tax concessions will only be available where the unrelated commercial activity profits are not directed back to the organisations altruistic purpose.

FBT, GST and DGR benefits will also not be available in relation to the unrelated commercial activities.

These changes could be far reaching for the not for profit sector and should therefore be considered in detail for clients that operate in this sector. This issue is further hampered by uncertainty surrounding what these provisions will actually entail when legislated.

 

SUPERANNUATION

Increase in concessional contributions cap

A temporary cap of $35,000 (up from $25,000) will apply from 1 July 2013 for individuals aged 60 and over. The increased cap will apply for individuals aged 50 and over from 1 July 2014.

The government will index the general cap of $25,000 that applies to everyone else from the 2015 financial year onwards. The increase in the cap to $35,000 will apply as follows:

Start Date Age Requirement
From 1 July 2013 60 and over
From 1 July 2014 50 and over
From 1 July 2018 No age requirement 

Example

Tony’s birthday is 12 May 1954. He is 59 years old on 30 June 2013. For the 2013-14 financial year, Tony’s concessional contributions cap is $35,000, and his non-concessional contributions cap is $150,000 (where the general concessional contributions cap is $25,000).

Removal of $500,000 superannuation balance test 

As a result of the above-proposed increase in the concessional contributions cap, the previously announced concessional contribution limit of $50,000 for individuals with superannuation balances below $500,000 will be removed.

Taxation of earnings on superannuation assets supporting income streams 

From 1 July 2014, future earnings (such as dividends and interest) on assets supporting income streams will be tax free up to $100,000 a year (to be indexed in $10,000 increments), and the balance of earnings will be taxed at 15%.

Under the current law, all superannuation earnings on assets supporting superannuation pensions and annuities are tax-free.

The change to the taxation of superannuation funds in pension phase will undoubtedly punish good investment performance. For example, the Government announcement points out that “assuming a conservative estimated rate of return of 5%, earnings of $100,000 would be derived from individuals with around $2 million in superannuation”. However, if a superannuation fund earns 10%, then it will be subject to tax for assets that are at the $1 million level.

Special transitional rules for capital gains

  • Special arrangements will apply for capital gains on assets purchased before 1 July 2014:
    • For assets that were purchased before 5 April 2013, the reform will only apply to capital gains that accrue after 1 July 2024;
    • For assets that are purchased from 5 April 2013 to 30 June 2014, individuals will have the choice of applying the reform to the entire capital gain, or only that part that accrues after 1 July 2014; and
    • For assets that are purchased from 1 July 2014, the reform will apply to the entire capital gain.

The government is yet to release draft legislation with respect to this measure but the flow-on impact, if legislated, is likely to impact other areas. For example, if after 1 July 2014 you buy a capital asset in your superannuation fund, sit on it for 10 years, and then realise a $1 million gain to fund your pension as a one-off.

Without further clarification from the government, it might be that averaging will apply to the capital gain, that is, $100,000 gain each year that the asset was held, thereby limiting tax exposure. Alternatively, $900,000 of the capital gain could potentially be taxed at a higher tax rate.

Tax relief for excess contributions

Many innocent people have been subject to a punitive rate of tax if they accidentally exceed their concessional contributions threshold. Individuals are taxed at 46.5% even if their personal tax rate is lower, where they have exceeded the cap. Moreover, if the excessive contribution was accidental, it has not been possible to withdraw the excess contribution and correct the error.

Pleasingly from 1 July 2013, it will be possible to withdraw the excessive contributions, be taxed at your ordinary rate with an interest charge on the benefit of a tax timing difference that arises because of the different tax payment dates of the superannuation fund.

Changes to government co-contributions

The government has introduced legislation to halve the co-contribution to $500 for eligible taxpayers.

The superannuation co-contribution matches eligible (after-tax) personal superannuation contributions made to a superannuation fund up to the maximum amount of $500. However, the government has recognised that this benefit is not as popular with the targeted group – lower income earners.

Increase in Superannuation Guarantee

The Superannuation Guarantee rate is gradually increasing from the current 9% to 12% by 1 July 2019 in 0.25% increments each financial year. From 1 July 2013, employer will be required to contribute 9.25% to superannuation.

The government has also increased the maximum age limit to 75 for when employers are required to make superannuation guarantee contributions for employees. Previously, employers were not required to make superannuation contributions on behalf of employees over the age of 70.

 

INNOVATION AND RESEARCH

While not specifically a budget measure, one of the key developments in 2013 was the announcement of the 1 billion dollar “Industry and Innovation Statement” in February 2013. Financials of this package were re-announced in the budget.  There are some beneficial elements which apply from 1 July 2013 in this package.

Research and Development

Following the announced changes, there are now three tiers of research and development support:

  • A 45% refundable tax offset for those businesses with an aggregated assessable income turnover of less than $20 million.
  • A non-refundable 40% tax offset which is available for businesses with turnover between $20 million and $20 billion.
  • Access to the ordinary dollar for dollar tax deduction rules, capital allowance rules and blackhole expenditure rules for large businesses that have a turnover of more than $20 billion.

Essentially, the message is that research and development incentives are not for the top end of town.

For businesses that are not yet cash flow positive and that have a turnover of less than $20 million, an important improvement in the refundable tax offset system is the ability to opt in for a quarterly refund from 1 July 2013. The refund for each quarter will be physically paid 28 days after quarter end. In theory, this means that the first payment of a quarterly refund would be 28 October (i.e. after the next Federal election).

Taxpayers can either choose to adopt a “safe harbour” instalment credit based on last years R&D claim. Alternatively, a reasonable assessment can be made. There are two key requirements in order to get the quarterly credit. The first is that the taxpayer must have a reasonable expectation of qualifying for the credit in this years income tax return. The second is that the taxpayer must have complied with all its obligations for the last five years and it must be reasonable to expect it will continue to comply. The ATO has a discretion to waive certain types of non-compliance.

Australian Industry Participation Authority

A non-revenue measure which has been announced by the government is that businesses that plan to initiate projects with a cost of greater than $500 million will be required to create an Australian Industry Participation Plan in the early stages of project planning to outline opportunities for local industry to participate in the project. The Australian Industry Participation Authority will then coordinate with industry to improve supply of local production, creating local jobs.

Projects which have a value of more than $2 billion will be required to “embed” Australian Industry Participation Officers.

Innovation Precincts

The government also announced plans to create up to 10 “innovation precincts”. The first two precincts have been announced in the manufacturing and food industries with hubs based around Melbourne. Participation in the precinct also opens access to a $50 million Industry Collaboration Fund which is aimed at getting different businesses aligned around common technology and process solutions required to drive that particular industry segment forward.

Venture Australia

An additional $350 million has been made available for new “Infrastructure Investment Funds”. In summary, approved managed fund operators will have the opportunity to place strategic investments in applicant businesses from this fund subject to the investment rules specified by government.

Enterprise Connect and Enterprise Solutions

The enterprise connect program has been expanded to include additional industry categories of professional services, information and communication technologies, and transport and logistics. This gives qualifying businesses the opportunity to work with a business coach to develop an appropriate business plan and is to apply for grant funding from the government to implement recommendations that are specified in that business plan. This can release $20,000 or in some cases more for businesses to address improvements to systems and processes.

Additionally, the government intends to proceed with a program to assist growing businesses to develop their capabilities to meet the standards for supply required by government.

Finally, qualifying businesses will gain access to “Gold” Executive Training (Growth Opportunities Leadership Development). This is a new executive training program aimed at building the next generation of leaders in future industry employers.

Economic Update – September 2012

Following consecutive cuts in April and May, the Reserve Bank of Australia (RBA) left the overnight cash rate unchanged at 3.50% in July and in August.   Many economists are speculating that rate cuts will now be seen in the race towards Christmas. 

The Reserve Bank Board was of the view that global GDP will grow at average pace for the remainder of 2012 but believes there are clear potential downside risks that need to be monitored. The key concerns cited were contracting growth in Europe and weaker economic indicators in China.

Locally, it has been commodities that have caused the greatest short term pain for our economy and financial markets, with iron ore spot prices falling to below $US90 and coal prices having slumped by up to 30% in some categories during the month of August and in early September.

Bond markets were volatile during August but most markets reversed intra-month trends to end close to their starting values. The Australian 10-year government bond yield was a strong case in point, increasing sharply in the first half of August hitting a high of 3.44%, before falling back to its starting value of 3.01% by the end of the month.

Equity markets generally continued to rise through August on rising hopes for another round of Quantitative Easing from the Federal Reserve and bond buying from the ECB. The Materials sector underperformed its global counterparts and was one of the worst performing sectors domestically due to the sharply falling iron ore price.

The best performing Australian large-cap stocks during the month included Bluescope Steel (+26.4%), Primary Health Care (+23.5%) and Resmed (+20.8%). The worst performers came from commodity and resource services sectors, Boart Longyear (-38.4%), Atlas Iron (-21.7%) and Lynas Corporation (-20.5%).

U.S. and European stock markets posted strong returns in August, with investors gaining confidence that the ECB will intervene in government bond markets to stabilise the region.

Chinese stocks were weaker market performers in August, falling 3.10%, as the government continued to deploy mechanisms designed to slow the economy. Asia ex-Japan also declined as a result of the slowing trade links, to end the month 0.41% higher, underperforming the global benchmark by 4.91%.

The Australian dollar fell against most major currencies, largely due to the falling price of iron ore, of one of our major commodities. In particular, the AUD declined by 3.93% against the Euro as investors garnered some confidence due to the increasing possibility of ECB stabilisation mechanisms.

The S&P/ASX 200 Property Accumulation Index was down 0.14% in August underperforming the broader Australian sharemarket.

At a stock specific level Goodman Group (6.12%) was the strongest performer on the back of the corporate restructuring by adding Goodman Logistics (HPK), the Lend Lease Group (4.81%) also performing strongly. The Aspen Group (-23.29%) was the poorest performing security, with the resignation in August of their managing director being a contributing factor to this loss. The Stockland Trust (-5.07%) also fell due to poorly received 2011/12 Financial Year results.

Gold (+4.81%) and Oil (+9.55%) were up strongly in August, while the more broad CRB Spot Commodity Index was up 2.05%.

Volatility fell in August by 1.46% as measured by the VIX Index.

 

Looking Ahead

Our Advisers are looking for the following activity in coming months:

– Financial Markets have rallied on (fulfilled) expectations that major central banks would take action to stimulate their economies, further progress will require a confirmation of recovery. It could take several months for economic data to do this.

– The European Central Banks proposal to buy the bonds of troubled countries reduces the risk of disaster in the Eurozone. This financial support has however only come in return for increased austerity.

– Commodity prices did surge on the long awaited QE3 announcement however the long term resources prices will be determined more by China QE3.
Article by John Manuel, Director, Prosperity Wealth Advisers Pty Ltd. John and our other Advisers provide Financial Planning and Family Office services to our clients from offices in Brisbane, Sydney and Newcastle.  

Top Ten Tips for Growth: Growthstar eguide

The Top Ten Tips for Growth is a strategic eguide outlining the top ten habits that have been demonstrated to time and again multiply cash, profitability and enterprise value in business. Get your business off to a head start in 2013 with Prosperity Advisers’ Growthstar program’s “Top Ten Tips for Growth” guide.

Please submit your email address to receive the download. 

Your Email (required)

 

Prosperity Advisers Growthstar - Top Ten Tips for Growth eGuide

 

Enter the Dragon


The economic Gods have favoured Australia with some fortune that has sheltered us from the depths of the GFC.  The westernisation of Asia, our proximity to the region and the resultant minerals boom have been well recognised, as have the opportunities for Asian Investment. At last month’s meeting of the Managing Partners of our Asia Pacific Accounting Alliance, held in Kuala Lumpur, the opportunities for investment to and from Australian businesses were driven home.

Our Asian colleagues reaffirmed their strong interest in the west and Australia in particular, and were keen to showcase their well-educated and low cost workforces ready to support businesses expanding to and from the Asian region.

Bruce Lee’s epic last film, Enter the Dragon portrays the quietly confident and disciplined Lee introducing his concept of ‘fighting without fighting, using the strength of his opponents to his benefit’. In much the same way and fittingly in 2012 the Chinese year of the dragon, we can capitalise on the great strength of our Asian neighbours.

Have you thought about how the seismic shift of power in Asia will affect your business and considered what you should do to capitalise on the opportunities presented in this changing economy?

Inward Investment from Asian Markets
Strong Asian investment interest continues in resources, property and agriculture. If you are holding these assets its important you are positioning yourself with the right organisations to ensure you are on the potential shopping list. These asset classes are the first wave with asian investment in operating businesses gathering pace. There is also activity in the smaller end of the market with one recent Asian entrepreneur we met with pledging to invest $10 million per year in various Australian businesses.

Business Restructure/Outsourcing
A sensitive topic I know but my Asian visit confirmed we have to rethink our business models. Smart, well-educated, eager and cost effective labour from Asia will continue to have an impact on all our businesses. The challenge for each of us is to use the opportunity to focus our people on becoming customer facing knowledge workers while evaluating opportunities to outsource more rudimentary tasks.

Australia as an ‘Asian Investment Entry Point’
Over the last year, we have noticed a strong increase in enquiry and referrals from our International Alliance partners from around the globe. With limited growth opportunities in Europe and North America, western businesses with an eye on the emerging Asian Century are seeing expansion into or acquisition in Australia as a good first step Asia Pacific option for two reasons. Firstly, they are more comfortable with the regulatory and cultural fit that Australia provides; secondly, our solid growth prospects from our proximity and increasing connectivity to Asia gives their start up or acquisition a greater chance of success.

Get Asia on the radar and make the effort
Whatever your business, it is unlikely you will be untouched by this continuing phenomenon. I recommend that you make the effort and get connected. There are a number of Asian focused business groups as well as printed and online publications that will assist you to understand the opportunities. Some time back our firm established an Asia Desk following our analysis of the opportunity.

We appointed a Director, seconded two Mandarin speaking staff and increased our contact with our Asian Alliance partners and local Asia business groups.We translated our material, including business cards and have now held several business meetings solely in Mandarin. Through building this expertise we have advised private and State Owned Asian enterprises on an increasing number of transactions and plan to continue the growth of this area in our business.
Expanding into Asian Markets
You may also consider expanding your business into Asia. The increasingly wealthy population provides attractive opportunities. However it is important to tread carefully. A thorough knowledge of the market, culture and regulatory environment for the products and services you work with is critical. A smarter way can be to consider joint ventures and ensure you have advisers with on the ground local knowledge.
Investment in Asian Markets
Investment in Asia via equity markets may also seem attractive; however individual stock picking is fraught with risk as the markets are still to mature. Diversified funds with more widespread Asian and international exposure may give you upside benefit while spreading the downside risk.

Allan McKeown is Chief Executive of Prosperity Advisers Group