The release of the 2016 Budget has presented a range of issues that will require many individuals to take stock of their structures and ensure they act to meet the new changes being proposed, significantly within the Superannuation sector.
Small businesses should act before 30 June to consider tax planning strategies, but care must be taken to ensure cashflow is not being spent unnecessarily to gain a tax advantage without an effective cashflow advantage to the business.
The Reserve Bank has reduced interest rates again and the general media are claiming that another reduction is imminent given sluggish wage growth and spending. Now while this reflects a great time to borrow money, it also indicates a slowing economy and with a slowing economy comes smaller returns, tighter profit margins and reduced cash flow. Businesses need to be well aware of this situation and take precautions as appropriate.
A very important aspect of the world economy that has to be considered as well, is the level of borrowings that have now been reached. In many countries, the level of debt to GDP has now reached or exceeded levels not seen since the Second World War, these levels do not indicate an imminent disaster, but it does reflect that Governments cannot borrow much more to try to stimulate their economies and this means a further slowing down of economic activity around the world, excluding India it appears (however even here they are reaching limits on borrowings and they have massive infrastructure projects to undertake to continue to advance economically). What is interesting is that all Governments paid down this “War Debt” rapidly over the subsequent years in the 50’s and 60’s due to massive economic growth during what is known as the “Golden Age of Capitalism”. This was a time of development, with low levels of tax (no capital gains tax) and little legislative red tape – we wait to see which Government prevails in the impending elections and whether they can provide the same stimulus to the economy.
This debt position will have a knock on affect in nations all around the world, including Australia. An area where caution is required is the property market with all indications reflecting prices either stabilising or falling.
Negative gearing is an area to be watchful of, for two reasons –
- Increasing capital values are an essential aspect of a successful negatively geared investment and
- A change in government may well flag a change in negative gearing deductions and policy.
Simply, missing out on the current record low interest rates that show little upside danger, would be wrong, but caution is required on what to buy with the borrowed money.