This year more than ever it’s a great time to plan your finances for the year ahead, to rebuild or make the most of savings you have made during months of social isolation.
With an extraordinary financial year behind us, it’s a good time to take stock. After 28 years Australia’s record economic expansion ended due to the COVID shutdowns. Our economy contracted by 0.3% in the March quarter and looks set to contract 8% in the June quarter, confirmation that we are officially in recession. The Budget deficit for the 12 months to May was a record $65.5 billion or 3.3% of GDP, $61 billion higher than predicted just last December. Unemployment rose to 7.1% in May, the highest since 2001, with another 1.6 million Australians on JobKeeper payments.
Yet Australia is weathering the COVID storm better than most nations, with signs of building business and consumer confidence. Retail sales rose a record 16.3% in May, after a record 17.7% fall in April, while new vehicle sales fell 35% in the year to May. The ANZ/Roy Morgan consumer confidence index is up 42% on its record lows in March, while the NAB business confidence index rebounded to -20 points in May, up from a record low of -65 points in April.
Financial markets finished the financial year mixed, but in better shape than many feared. In the year to June, US shares rose 4.6% while Australian shares trimmed their losses to 10.8% after a partial rebound in the last quarter. Falling global demand hit crude oil prices (down 33%) and iron ore (down 14%). The Aussie dollar firmed 3.7% in June to finish the year at US69c as a mark of Australia’s sure handling of the COVID crisis.
With June 30 behind us and the economy slowly re-opening, most business owners are thinking about the challenge of repairing and rebuilding their finances after the COVID-19 lockdown.
Over the next few months, key tests will come with the withdrawal of government stimulus measures like JobKeeper and the return of your normal wages, rent and financing expenses.
An end to landlord rent deferrals and business loan repayment holidays, for those who had them, will make cashflow and debtor management increasingly important. Throw in closer scrutiny of on-going business viability by the banks and an end to higher debt amounts before creditors can issue statutory demands or initiate bankruptcy proceedings, and the future looks challenging.
Things to do now
Given the challenge, there are important actions you should consider in order to rebuild your business finances and get your tax affairs in order.
A great place to start is getting your Business Activity Statement (BAS) lodged promptly if you’re eligible for the Boosting Cashflow for Employers scheme.
Qualifying businesses will receive a second boost for the period July to September 2020 after you lodge your BAS. If you want to receive the stimulus you must lodge by the 28 July and 28 October quarterly due dates.
Check your tax compliance
It’s also important to ensure your Single Touch Payroll (STP) data remains correct, as the ATO is using it to actively review business entitlement for government support measures. Remember, the STP data is also likely to be audited in the future, particularly in relation to JobKeeper payments.
If you’re having payment or reporting difficulties, consider contacting the ATO as it’s offering tailored support plans for individual businesses. You may even be able to defer some of your tax obligations until later in the year.
Monitor your financial position
Key activities in the months ahead will be performing a detailed financial health check on your business and ensuring your budget matches current business conditions.
As the insolvency relief measures come to an end, regularly measure your solvency to ensure you do not accidentally trade while insolvent.
If you find yourself in financial difficulty, talk to us early on so we can develop a strategy to work through your problems.
Review your debtor management
You should also regularly check your debt position. Ensure you invoice promptly and follow up old debts.
If debtors have been severely affected by the pandemic, consider writing-off the debts. Debts can be written off against your income in the financial year in which they are written off, regardless of when you invoiced them.
Develop strong liquidity
During a recession, your cashflow and cash reserve positions need to be constantly monitored so you are forewarned of any potential problems.
You may also need to change your accounting processes. For example, changing your GST reporting cycle or moving to accounting for GST on a cash rather than accruals basis means you pay GST to the ATO when you actually collect it – not when you issue your invoice.
Consider asset purchases
If you are lucky enough to still have strong cashflow, you could take advantage of the government’s further extension to 31 December 2020 of the $150,000 instant asset write-off.
We can help you work out if your business has sufficient cashflow to make a purchase and whether it’s best to use the instant asset write-off or normal depreciation rules.
Review your business structure
A new financial year is also a good time to start long-term tax planning.
This could include looking at the appropriateness of your current business structure. The structure you started out with may no longer be the most tax effective if your business has grown, or for surviving a recession.
We can review your current business structure to see if it’s still the best option, or if changing it could help cut your tax bill. Restructuring from a sole trader to a company for example, could reduce your tax rate from 45 per cent to the flat 26 per cent company rate.
We can help you get your business back in business and ready for the future.
The start of the financial year is always an excellent time to take stock of your current situation and visualise where you’d like to be in the future.
It’s fair to say this year hasn’t been ‘business as usual’! While no-one could have predicted the first six months of 2020, nor want to repeat them, it’s likely there have been lessons learned. So as you review and set new goals, consider any takeaways from lockdown and how they have influenced your goals and path for the future.
Different priorities and new goals
Your priorities may have forcibly changed in response to the change of circumstances, or perhaps you realised that some things are more important to you than others. Do you now want to spend more time with family, improve your connection to your friends, help out in the community? Perhaps you have a reignited passion for your work or have been motivated to look for greater opportunities. Has not being able to travel in the short-term made you more determined to hit the road or jet off to a new destination?
Work/life balance remains a top priority for many people, yet it can feel elusive at the best of times. By identifying what is important to you and what you want more (or less) of, you’ll be better placed to make changes to reach more of a balance.
You might have also discovered a new hobby. If you’re a gym junkie, you might have made the shift to exercising outdoors and discovered a love of trail running or mountain biking. If you love visiting restaurants and cafes, perhaps you started to enjoy more time in the kitchen, trying to replicate your favourite chef-cooked meals. Whatever hobby you’ve picked up or re-sparked, think about how you can keep it up when life returns to a new normal. Perhaps this hobby could even be a side business or has ignited an idea for a new career path?
Awareness of your finances
It’s likely your financial situation has changed in 2020. Your income and expenditure may have altered during the period of lockdown, and while we were all impacted in different ways, the period presented a degree of uncertainty for everyone, highlighting the need for financial security.
The financial goals you established last financial year or in January are likely to have shifted due to the year’s upheaval. And you may also have new goals following the COVID-19 pandemic. Review your finances and your budget to set new objectives, working with your current situation to build a financial safety net and work towards your future goals.
Setting and achieving your goals
The first half of the year has shown us that plans can and sometimes, must change. But don’t let this stop you from setting goals and working towards your vision of the future.
Ensuring your goals are smart, or specifically SMART – Specific, Measurable, Assignable, Realistic and Time-related, will make it easier for you to follow through and achieve them. Whether they’re related to finances, your career or spending more time with family and friends, drill down into the details.
The SMART framework strengthens your goals by making sure they are thought through. For instance, if this has been a time of financial instability for you, your priority could be having more savings behind you. But how much money will you put away and how often, who will make this happen, and is this feasible? With increased uncertainty, it may be beneficial to set micro goals with shorter time frames. This will allow you to be adaptable while still progressing towards your larger goals.
This tumultuous year has also highlighted the importance of reaching out for support. This may be a coach, friend or mentor who provides guidance, encouragement and keeps you accountable on your journey. When it comes to establishing your financial goals and working through concerns, you don’t have to go it alone.
We can help keep you on track to achieving your objectives and guide you through the process, so feel free to get in touch today.
With Australia in a COVID-induced recession, residential property is not immune to falling economic activity. Yet housing prices are proving surprisingly resilient.
Only months ago, economists were forecasting a housing price slump of 20 per cent or more. Now, most have revised their forecasts to price falls of between five and 10 per cent.
The more optimistic predictions are due to Australia’s success at containing the coronavirus, the gradual lifting of restrictions and government stimulus aimed at keeping Australians in work. The most recent of these measures is the HomeBuilder package.
The Morrison Government’s HomeBuilder package, announced on June 4, offers homebuyers a grant of $25,000 to build a new home worth less than $750,000. The grant can also be spent on renovations valued between $150,000 and $750,000 to an existing home valued at no more than $1.5 million.
The scheme is limited to owner-occupiers (not investors) on incomes below $125,000 for singles and $200,000 for couples. The amount of money on offer is uncapped, but the government expects it to cost about $688 million for roughly 27,000 grants.
To be eligible, renovators must sign a contract with a builder by the end of 2020. They will need to have plans drawn up, finance approved, and any building and development approvals secured.
The package has been well-received by the housing industry, which hopes it will encourage buyers to bring forward purchases and support construction jobs. While critics argue the HomeBuilder package is too limited in scope and time to make a significant impact, it is more likely to support house prices than harm them.
House prices marking time
According to CoreLogic, national home prices edged up 0.6 per cent in the three months to the end of May, at the height of the economic shutdown. Melbourne was the only market to lose ground during that period (-0.8 per cent) but all regions lost momentum.
However, sales activity bounced back by an estimated 18.5 per cent in May after a drop of 33 per cent in April. The rise in sales coincided with an easing of social distancing restrictions, the arrival of JobKeeper payments in people’s pockets and growing consumer confidence.
On an annual basis, national home values rose 8.3 per cent in the year to May with Perth (-2.1 per cent) and Darwin (-2.6 per cent) the only capital cities where prices are still lower than a year ago.i
Rents and yields falling
Rents in every capital city except Perth fell in the two months to May. Falling rents are welcome news for renters, especially in cities like Hobart where a booming property market and the conversion of long-term rentals into short-term Airbnb lets had priced many out of the market.
However, falling rents are not so good for property investors. Rental yields were 3.8 per cent nationally in May, although higher in regional areas (4.9 per cent) than capital cities (3.5 per cent).
According to CoreLogic, there is a strong chance that rents will fall more than housing values, putting further pressure on rental yields, with yields in Sydney and Melbourne already at or near record lows.i
While the outlook for the property market is brighter than feared, there are still challenges ahead.
One test will come after September when JobKeeper payments and loan repayment holidays are removed. There is a risk that mortgage arrears and distressed sales could increase at that time. While unemployment is now expected to peak at around 8 per cent, not 10 per cent as previously forecast, it is not expected to return to pre-pandemic levels for at least two years.ii
On the positive side, interest rates remain at record lows and the OECD expects the Australian economy will bounce back by 4.1 per cent next year (if the coronavirus is kept under control), after a contraction of 5 per cent in 2020. This is a better economic performance than almost any other nation.iii
While the outlook for property is still uncertain, the stirrings of economic activity are encouraging. If you would like to discuss your property strategy in the light of current market developments, please get in touch.