December 2018 Newsletter

December is upon us and summer has arrived with bushfires in Queensland and flooding rains in NSW. Our best wishes go out to all those affected as well as our brave emergency services workers. And to all our clients, we wish you a safe and happy holiday season.

November was a month of surprises. Oil prices plunged 22 per cent to US$58.73 a barrel after US President Donald Trump’s decision not to sanction Saudi Arabia over the murder of Jamal Khashoggi. British Prime Minister Theresa May reached agreement with the European Union on a plan for Brexit but getting the deal through the UK parliament will be difficult.

In Australia, the Victorian Labor Party won a landslide victory and Prime Minister Scott Morrison announced an early April 2 Federal Budget before a May election. The result of all this uncertainty was ongoing market volatility. Wall Street fell with oil prices but finished on a positive note after US Federal Reserve Chair Jerome Powell seemingly indicated that US interest rates may not rise much further. The S&P500 finished the month 2 per cent higher.

Locally, the economic news was positive. The Reserve Bank lifted its growth forecast for 2018 to 3.5 per cent from 3.25 per cent. The Federal Budget edges closer to surplus, with a lower-than-expected budget deficit of $2.35 billion in the year to October, the best in a decade. Unemployment held steady at 5 per cent in October, while petrol prices dropped 22 per cent in November to a national average of $1.37 a litre, the biggest fall in a decade. The Australian dollar is trading around US73c, up from US70- 71c at the start of November. Australian consumers responded positively, with the ANZ/Roy Morgan Consumer Confidence rating firming slightly to 118.6 points.

Protecting your family

The holidays are traditionally a time to relax and reflect on the importance of family. They are also an opportune moment to think about how you can care for and protect your family all year round.

When you are enjoying the summer break with your loved ones, it can be hard to imagine anything could ever go wrong. But life is unpredictable, which is why life insurance is so important, particularly when you have people who depend on you.

Whether you are a young couple starting out, a growing family with kids at school and a mortgage, or empty nesters with debts to clear before retirement, having the right insurance cover could make a world of difference if the unthinkable happened.

Life insurance is not one product but many, to cover a range of needs. If you are unsure which cover is right for your family, begin by asking yourself a series of ‘what ifs’.

What if you get sick or injured and are unable to work?
You probably insure your car and your home, but the impact on your family is potentially much greater if you lose the ability to earn an income. Whether you are out of action for months or years, few families have enough savings to tide them over until you recover and return to work.

The solution is Income Protection insurance, also called Income Replacement or Salary Continuance cover. This replaces up to 75 per cent of your current income if you are unable to work due to illness or injury. Depending on the policy, it can cover you for short or long periods, sometimes up to age 65, after various waiting times.

What if you suffer a major illness?
The survival rates for critical illnesses such as heart attack, cancer and stroke are improving, but recovery can take a long time and the financial and emotional toll on your family can be high.

The solution is Trauma insurance, also called Critical Illness. This pays a lump sum if you are diagnosed or suffer one of a specific list of illnesses. You could use the money to reduce your working hours, spend time recovering with your family, or to pay for treatment, rehabilitation or a carer.

What if you become permanently disabled and unable to work?
A serious injury or illness can come out of the blue, leaving you unable to provide for your family. A government Disability Pension is unlikely to fully replace your previous salary. And the National Disability Insurance Scheme, while providing care packages, does not pay regular income or a lump sum.

The solution is Total and Permanent Disability (TPD) insurance. This pays a lump sum which you can use to pay off debts, cover medical costs or invest to provide regular income to help maintain your family’s lifestyle.

What if you fall critically ill or die?
It’s a sad fact that any of us could be diagnosed with a terminal illness or die prematurely in an accident. If this happened to you, how would your partner and children cope emotionally and financially? The kids still need to be fed, clothed and educated, the mortgage or rent must be paid, and your partner may need time off work for extra caring duties, adding to the financial pressure. If you don’t have kids or they have left home, your partner could be left with a mortgage and other debts.

The solution is Life cover, also called Term Life or Death cover. This pays a lump sum on your death or the diagnosis of a terminal illness, allowing your family to focus on supporting each other, secure in the knowledge that the bills will be paid.

All these policies can be bought separately or bundled together as often happens with Death and TPD cover.

You may already be covered for some level of insurance via your super fund, however it might not be adequate for your needs. It’s important to have insurance that is tailored to your personal circumstances, that will protect your family’s financial and emotional well-being come what may. We are here to help.

How to avoid unwanted ATO attention

Nobody wants to attract unwanted scrutiny from the ATO. Tax audits can be stressful and potentially costly. They are also increasingly well targeted, now that the ATO’s data matching capabilities are making it easier to pick up discrepancies. The best way to avoid an audit is to know how to stay out of trouble in the first place.

Whether it’s not declaring foreign or business income, claiming too much for work-related deductions, or not paying your employees’ superannuation, some activities are likely to attract the tax man’s interest.

Here are some simple steps you can take to reduce the likelihood of the ATO taking a closer look at your personal or small business return.

Declare all your income
For individuals, it’s important that you include all your taxable income in your return. Ultimately, the responsibility for including all your income rests with you, so ensure you report everything as the Tax Office will use a wide variety of information sources to cross check.

Common mistakes are not including capital gains you received when selling shares or property or forgetting income from overseas sources such as a business, rental property or shares.

When it comes to tax deductions, the ATO is particularly interested in your workrelated expenses. If your deduction claims are unusually high compared to other people in similar industries, the ATO will want to know more. A good tip is to check out the ATO’s guides to deductions for specific industries.i

Take care with property investments
Tax deductions claimed on your rental property are another red flag for the ATO, so it’s important to follow the rules.

Ensure you understand the difference between claims for depreciation and capital works, and only claim expenses for periods when the property is rented, or genuinely available to tenants. And don’t forget you can no longer claim travel expenses for inspecting your property or undertaking maintenance.

The ATO is also interested in any noncommercial rental income received from a holiday home, so if you let your property at a discounted rate to relatives or friends, you need to limit the amount of deductions you claim to avoid problems.ii

If you have a loan for an investment property and are claiming for the cost of interest on the loan, you need to split your deduction into private and business purposes.

Watch your business reporting
When it comes to small business, the ATO looks for enterprises that incorrectly or under report their sales (both cash and electronic payments) or fail to register, so ensure you keep good business records and lodge accurate business activity statements.

Another warning signal for the ATO is businesses that report outside the normal small business benchmarks for their industry.iii These benchmarks are helpful for comparing your business’s financial performance against similar businesses, but they also provide the ATO with a useful tool for comparing tax payments and deductions claimed by businesses across the industry.

As more customers pay electronically, the ATO is also increasingly interested in cash-only businesses which it views as more likely to be avoiding tax. If your business operates and advertises as being ‘cash-only’, or does not accept electronic payments, you will need to keep detailed records of your takings and payments, as the ATO will be extremely interested in your tax returns.

Pay your staff correctly
If your business employs staff, ensure you are deducting Pay As You Go (PAYG) withholding from their wages and regularly forwarding it to the ATO. Making regular Superannuation Guarantee (SG) contributions to your employees’ super funds is also important if you want to avoid ATO scrutiny.

Not paying the correct amount of Fringe Benefits Tax or incorrectly accessing FBT concessions are also red flags, so ensure you are complying with the rules.iv

If you are registered for Goods and Services Tax (GST), ensure you are actively carrying on a business or you may find yourself talking to an ATO auditor.v

The key to ensuring your tax return is correct is to get professional help. We can help you to maximise your tax return, while ensuring that it is correct and compliant.

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Opportunities in the cooling property market

Things are looking up for first home buyers for the first time in years as house price growth begins to slow across the country. While prices have been on the slide for some areas in the West and the North since the end of the mining boom, the housing market in Sydney and Melbourne also appears to be losing steam.

At a national level, house prices were unchanged in October and up just 0.3 per cent over the quarter according to the latest figures from property research group CoreLogic. Significantly, the over-heated Sydney market fell 0.6 per cent over the three months to October, joining Perth and Darwin which have been falling since 2014.i

Hobart is the top performing market, fuelled by mainlanders searching for more affordable housing. Prices for Hobart dwellings rose 12.7 per cent over the past year, although price growth slowed to 0.09 per cent in October. It’s easy to see why people are flocking to the Apple Isle; the median dwelling value of $396,393 in Hobart is less than half what you can expect to pay in Sydney ($905,917) where prices are up 74 per cent since the boom began in early 2012.

Melbourne is the second most expensive city, with an average dwelling price of $710,420. And while the Melbourne market isn’t falling, it also shows signs of cooling with growth of 1.9 per cent in the three months to October and annual growth of 11 per cent. Other capital cities show little change with Brisbane up 0.6 per cent over the quarter while prices in Adelaide rose just 0.1 per cent.

Tighter lending begins to bite
The Australian housing market is a tale of many markets, each with their own supply and demand issues. But there are some common factors at play. At a national level, concerns about rapidly rising prices, risky lending practices and worsening housing affordability prompted regulators to act.

In late 2014, the Australian Prudential Regulatory Authority (APRA) announced that lenders were to limit housing finance to investors to 10 per cent of their total home lending. Then in March 2017 APRA announced a 30 per cent limit on new, interest-only home loans to dampen risks in the housing market.

In April the Australian Securities and Investments Commission (ASIC) signalled a crackdown on lenders and mortgage brokers recommending more expensive, interest-only loans to customers who were often unaware of the risks.

Investors paying more for credit
Lenders responded to the regulators’ concerns by lifting interest rates on interest-only and investor loans. According to comparison site Canstar, the average standard variable rate for investors has grown to around 0.5 per cent higher than the equivalent rate for owner occupiers.

And it seems these measures are working. The number of investor home loan approvals dropped sharply in 2015 and again in 2017, while owner occupier loans have shown a significant uptick in 2017.ii

While tighter lending policies have undoubtedly taken some of the heat out of the housing market, other forces may also be playing a role.

Understanding supply and demand
So far there is little sign of a housing bust in Australia, with significant unmet demand from first home buyers, high levels of migration and land shortages in major urban areas. But when house prices rise as far and as fast as they have in markets like Sydney and Melbourne, it’s natural to expect periodic corrections.

Commentators have been warning of an oversupply of apartments in Melbourne as well as in Brisbane. The Brisbane market has been cooling for some time, and now property values in Melbourne are rising at their slowest quarterly pace since 2016.

Despite the slowdown in price growth, Australian housing is still far from cheap. But with tighter controls on investor lending and continuing low interest rates for owner occupiers, the tables may be finally turning in favour of first home buyers.

If you would like to discuss your property strategy, give us a call.

i All price data from CoreLogic, 1 November 2017,