ECONOMY

26th June, 2017

With the annual inflation rate back below the Reserve Bank’s 2-3 per cent target, analysts have concluded the RBA is sidelined from moving interest rates, up or down.

The annual inflation rate dipped from 2.1 to 1.9pc, below the RBA 2-3pc target. Consumer prices rose just 0.2 per cent in the June quarter, pushing the annual rate of inflation down to 1.9 per cent, below the Reserve Bank’s target.

The latest official ABS inflation reading was below the previous reading of 0.5 per cent for the March quarter and 2.1 per cent for the year.

The headline number has come in below expectations, a big part of it was food.  Clothing, communication and recreation prices all fell over the quarter and the past year. The softness in clothing and footwear is a bit of a surprise as well.

While strong price rises were recorded for select fruit and vegetables such as tomatoes, beans, cucumbers, melons, berries and bananas in the June quarter 2017, these rises were offset by falls in seasonally available fruits such as oranges, mandarins and apples.

The Bureau of Statistics’ chief economist Bruce Hockman said price rises related to Cyclone Debbie’s damage to certain fruit and vegetables had been offset by falls elsewhere.

With food prices remaining surprisingly steady, it was fuel and clothing price cuts that lowered headline inflation. Price falls for automotive fuel and ongoing competition in the clothing and food retail markets has contributed in keeping inflation under control.

The Reserve Bank’s preferred measures of core inflation averaged 1.8 per cent, also remaining below its 2-3 per cent target range. Inflation isn’t rapidly moving below the target band, nor is it rapidly lifting back into the target band, so the Reserve Bank can stay on the interest rate sidelines.

The Australian dollar eased on the weaker-than-expected figures, as traders further pushed back already modest expectations of an interest rate rise, with the currency falling to 79.08 US cents.

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24th July, 2017

The government has announced some welcome changes to the tax rules affecting foreign investors in Australian funds management products, but reforms are still needed to the non-resident withholding tax regime to help the industry attract global capital.

It is now two years since Treasury launched the investment manager regime (IMR) on July 1, 2015. This is the framework foreign investors rely on to avoid uncertainty in their exposure to Australian taxes when investing directly or with the assistance of an Australian manager or adviser.

The IMR is a key part of Australia’s armoury to compete against the likes of global financial centres in attracting foreign investors to local fund managers. Without an IMR, foreign investors are taxed on all the income they earn from a fund Australians manage, regardless of whether the income is from Australian-based investments such as property or businesses or investments located offshore.

However, there was lack of clarity around the technical application of our tax laws that was making foreign investors nervous. Not only was this deterring future investment, but it was also creating a real risk that some major global investors might pull their money out of Australian-operated managed funds.

Therefore, Australia’s path to becoming a formidable global financial services powerhouse was given a crucial boost last week when the government stated it would take swift action to clarify that foreign investors are protected from tax residency issues that can arise simply because they use an Australian-based manager.

This is critical, because, like all countries, Australia has a right to tax income earned from activities that occur on its soil, meaning earnings from businesses and property that are physically located here. But it doesn’t, and shouldn’t, tax income earned from assets in a third country.

For example, an investor from Germany who is investing in a US toll road using an Australian-based manager. Without the IMR, the German investor would be taxed on all US income as if it were generated on Australian soil.

An IMR prevents this bizarre outcome from occurring and ensures that the investor pays only the relevant US-based tax.

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7th July, 2017

The Australian Taxation Office (ATO) estimates that the corporate tax gap for large businesses is around six percent, according to Commissioner Chris Jordan.

In August, the ATO will formally release the findings of its investigation into the corporate tax gap. Later in the year, it will report on the personal income tax gap.

However, in advance of the formal release, Jordan told the National Press Club that, based on 2014-15 data, the “large market” corporate tax gap is approximately AUD2.5bn (USD1.9bn). This is equivalent to about six percent of the collections for that market.

The gap tells us that we are getting around 94 percent of the corporate tax we should from this market – approximately 91 percent coming in voluntarily and three percent through compliance interventions. From all indications, 94 percent is around global best practice, and many countries aspire to this level of compliance.

Jordan added that the ATO is now better placed to “ensure that what is earned here is taxed here,” following the introduction of the Multinational Anti-Avoidance Law, the Diverted Profits Tax, Anti-Hybrid Rules, and new exchange of information systems. He said that in the last year the ATO raised AUD4bn of additional liabilities against businesses and multinationals, with AUD2.9bn of this from seven large groups in the e-commerce and energy and resources sectors.

ATO is targeting small businesses that are failing to report all their income or none at all. Turning to individual income tax, Jordan said that the ATO’s research has so far shown the main risks of non-compliance center around deductions. He noted: “The results of our random audits and risk-based audits are showing many errors and over claiming for work-related expenses – from legitimate mistakes and carelessness through to recklessness and fraud.”

While each of the individual amounts over-claimed is relatively small, the sum and overall revenue impact for the population involved could be significant or even higher than, the large market tax gap of AUD2.5bn.

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14th July, 2017

Under the proposed changes, travel deductions for individual investors with residential investment properties, including travel costs associated with inspecting and maintaining properties, will no longer be deductible. However, investors will still be able to claim a deduction for the expense of engaging third parties (such as real estate agents) to provide property management services for investment properties. Providing the legislation is carried, the change would apply from July 1, 2017.

The Australian Government has published draft legislation that will tighten the rules around travel expenses for property investors and limit depreciation deductions for certain plant and equipment used in residential investment properties.

According to a press release from Revenue Minister Kelly O’Dwyer, “There are concerns around the abuse of deductions for travel expenses that do not represent a legitimate commercial need.”

The tax system currently creates opportunities for plant and equipment to be depreciated by multiple owners of a property in excess of its actual value. Significant abuse of the tax system has been witnessed in relation to property investors and advisers claiming excess deductions.

The Government intends to limit plant and equipment depreciation deductions for investors in residential investment properties to assets not previously used. Plant and equipment items are usually mechanical fixtures or those which can be easily removed from a property, such as dishwashers and ceiling fans.

If the legislation is carried, the measure would apply from July 1. Plant and equipment used or installed in residential investment properties as of May 9, 2017, (or acquired under contracts already entered into at 19:30PM AEST on May 9) will continue to give rise to deductions for depreciation until the investor no longer owns the asset, or until the asset reaches the end of its effective life.

A consultation on the draft legislation is open until August 10

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26th July, 2017

Australians are increasingly taking a second or third job to make ends meet, new numbers put out by the Australian Bureau of Statistics (ABS) show.

The issue has been highlighted in a new release from the ABS called the Labour Account. It estimated that 763,000 Australians were holding a second job, a 9 per cent jump in the six years to June 2016.

The labour account gave a broader view of the number of jobs in the economy, reporting that there were 13.2 million jobs in June 2016. But it found the number of employed people was short of that figure, at 12.5 million — meaning a lot of people were working on a second job.

That number was up 3.7 per cent on the previous year, and up 9.2 per cent over six years.

Overwhelmingly the secondary jobs are in essentially two industries — which is admin support, and in health and social assistance. The issue of underemployment and the problem of multiple-job holding are getting worse.

The ABS expects the labour account will eventually be released each quarter, a week after the national accounts. While the most recent jobs figures did show a surge in full-time employment, the Reserve Bank said the trend toward part-time work will stay.

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BANKING

19th July, 2017

The target for major Australian banks’ equity capital ratio has been lifted by prudential regulator by at least 10.5 per cent – up from the level of common equity tier 1 capital (CET1) of around 9.5 per cent as of December – in order to meet the “unquestionably strong” benchmark set down by the financial system inquiry.

This will require the banks to raise billions of dollars of additional equity, although this may be able to be achieved by building more equity organically via retained earnings rather than conducting equity capital market raisings.

APRA will also consult with the market later in the year on new prudential standards including potential changes to the framework for risk weightings for mortgages that will incorporate global changes.

However, APRA said it expects that any changes to the capital framework that may eventuate from the finalisation of international reforms will be able to be accommodated within the calibration set out in this paper, and will not necessitate further increases to requirements at a later date.

No additional dollars of capital will be required even with increases to risk weightings in the second half of the year if banks hit the CET1 target of at least 10.5 per cent.

APRA said banks should implement the changes “in a timely manner” and consider whether they can achieve the new benchmark more quickly than its official deadline of January 2020.

APRA’s changes to the common equity tier 1 (CET1) capital will increase the minimum requirement for all the major banks by around 150 basis points, from a current target of 9 per cent.

Given banks are already operating above their current minimum CET1 in anticipation of APRA’s changes, the new requirements will translate to the need for an increase in CET1, on average, of around 100 basis points above December 2016 levels, APRA said. Since then, the major banks have added around an additional 50 basis points, on average, to their capital ratios, bringing them closer to 10 per cent.

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CURRENCY

18th July, 2017

After the Reserve Bank of Australia issued an upbeat assessment of the economy, the Australian dollar has surged to its highest level in more than two years

The local currency was worth 78.64 US cents, its highest level since May 2015, after soaring on the release of minutes from the RBA’s July monetary policy meeting.

 

The RBA issued a markedly optimistic economic assessment in the minutes of its July policy meeting, sending the currency soaring.

“Some of the commentary in the RBA minutes indicated that relatively positive assessment about the outlook for wages growth and the labour market,” Commonwealth Bank chief currency strategist Richard Grace said.

“Also the narrowing in Australia’s current account deficit is giving the Australian dollar a higher valuation.”

The Australian dollar is also being supported by a decline in the US dollar and rising commodity prices, Mr Grace said.

EMPLOYMENT FIGURES BOUNCE BACK

A patchy housing market and an elevated level of underemployment were among the reasons the RBA decided to leave the cash rate unchanged for an eleventh consecutive month in July.

But the RBA noted a broad-based global recovery, and overseas central banks becoming more inclined to raise rates in future.

It was also pleased with recent improvements in the Australian jobs market, pointing to a fall in the unemployment rate to a four-year low of 5.5 per cent.

“Members noted that the strength of recent labour market data had removed some of the downside risk in the bank’s forecast of wage growth,” the minutes said.

RBA is not expected to raise the cash rate until well into 2018, considering weak inflation and wages growth.

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REAL ESTATE MARKET

21st July, 2017

The Australian Government has unveiled a package of housing tax breaks, including a new scheme for first-time buyers, a superannuation incentive for downsizers, and tighter rules for foreign residents.

The Government has published draft legislation to establish a First Home Super Saver Scheme (FHSS). This will allow first-time buyers to save for a deposit inside their superannuation account, attracting the tax incentives and earnings benefits of superannuation. Savers will be able to contribute AUD30, 000 (USD23, 714) (up to AUD15, 000 a year within existing caps), and be able to withdraw the contributions, along with deemed earnings, in order to help fund a deposit on their first home.

The FHSS will apply to voluntary contributions made from July 1, 2017. The contributions can be withdrawn for a home deposit from July 1, 2018. Pre-tax contributions are taxed at 15 percent; withdrawals will be taxed at marginal tax rates, less a 30 percent offset.

Buyers would have 12 months after releasing the savings to sign a contract to purchase a qualifying home, but would be able to ask the Australian Taxation Office (ATO) for a 12-month extension. The buyer(s) would have to occupy the premises as soon as practicable, and for at least six months of the first 12 months.

The Government also intends to introduce legislation to allow Australians aged over 65 to make an exempt contribution to their superannuation after downsizing their property.

From July 1, 2018, people aged 65 and over will be able to make a non-concessional (post-tax) contribution into their superannuation of up to AUD300, 000 from the proceeds of selling their property. Existing contribution caps and restrictions will not apply to this downsizer contribution at the time. However, the AUD1.6m superannuation transfer cap and Age Pension means test will continue to apply, and the downsizer contribution will count towards total superannuation balance tests in later years.

The measure will apply to homes held for a minimum of 10 years, and both members of a couple may take advantage of it (up to AUD300, 000 each). The measure would only apply to home sales where the contract sale is entered into on or after July 1, 2018.

Homeowners would not actually have to “downsize” – they would not be required to make any subsequent property purchase, and could move into any living suitable living situation.

The last element of the package is a proposal to prevent foreign tax residents from claiming the main residence capital gains tax (CGT) exemption when they sell property in Australia. The exemption disregards a taxpayer’s capital gain or loss for CGT purposes, providing that taxpayer is an individual and the dwelling was their main residence throughout the ownership period.

The measure will apply from Budget night 2017 (May 9). Foreign tax residents who held property on Budget night can continue to claim the exemption until June 30, 2019.

The legislation will also modify the CGT principal asset test to apply on an associate inclusive basis. This is to ensure that foreign tax residents cannot avoid a CGT liability by disaggregating indirect interests in Australian real property.

A consultation on the proposed superannuation measures will close on August 4. A separate consultation on the CGT proposals will close on August 15.

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24th July, 2017

If the country’s central bank raises rates by too much or too quickly, the Australian housing market could crash according to researchers at the Swiss bank, UBS.

Property in Australia has boomed and the most recent government data marked growth in residential property prices at 10.2 percent year on year for the 2017 March quarter.

“Any rash interest rate action from the Reserve Bank of Australia (RBA) could trigger a crash. We still see rates on hold in the coming year, amid macro prudential tightening on credit growth and interest only loans. Hence we still see a correction, but not a collapse, but if the RBA hikes too early or too much (as flagged by its minutes), it risks triggering a crash,” Tharenou warned.

Housing stocks fell 19 percent in the first quarter of the year and May’s mortgage approvals also slid 20 percent. After a multi-year boom, the cost of an average home in the country now sits at 669,700 Australian dollars ($532,000) but Tharenou said price growth is certain to slow.

Despite weaker activity, house prices just keep booming with still strong growth of 10% y/y in June. However, this is unsustainably 4-5 times faster than income. Looking ahead, we still see price growth slowing to 7% y/y in 2017 and 0-3% in 2018, amid record supply & poor affordability,” the economist added.

Although the Australian economy looks robust as its population surges but home buying sentiment has dipped to a level, not seen since the 2008 financial crisis.

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SUPERANNUATION

25th July, 2017

The Government has announced superannuation reforms aimed at giving consumers, and APRA, more power in the superannuation system.

The Minister for Revenue and Financial Services, Kelly O’Dwyer, said the Government would introduce legislation to “give every day Australians more power over their superannuation providers and strengthen the prudential framework to deliver a more transparent and accountable compulsory retirement savings system.”

“This comprehensive package will help deliver all Australians a strong and modern superannuation system that is solely focused on outcomes for all Australians who rely on these funds to secure their retirement,” said Minister O’Dwyer.

 

“The package has been developed with a clear objective to improve outcomes for consumers. The Turnbull Government believes that, given the compulsory nature of superannuation, Australians rightly expect the industry to be held to the highest standards of transparency and accountability. These reforms will ensure the superannuation system has a strong foundation today and into the future,” said the statement announcing the changes.

Some of the changes announced include:

  • Introduce annual member meetings for super funds
  • Requiring super funds to publish annual information on how the fund is managed, how fees are set, and “the way it spends members’ money”
  • Making directors of super funds who breach their duties to members subject to the same civil and criminal penalties are directors of managed investment schemes
  • A stronger annual assessment of MySuper product outcomes, “to ensure the investment and insurance strategies, fees, scale and returns are promoting the financial interests of MySuper members”.
  • Give APRA more power to take “preventive and corrective action if it has prudential concerns about a fund or if a fund is not acting in the best interests of members”

Give APRA more power to refuse or cancel a MySuper authorisation where it believes a licencee will fail to meet its obligations

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17th July, 2017

The Australian Government has said it intends to close a superannuation guarantee (SG) loophole that affects employees who make salary sacrifice contributions into their superannuation accounts.

Revenue Minister Kelly O’Dwyer said that the Government will introduce legislation later this year to ensure that an individual’s salary sacrifice contributions do not reduce their employer’s SG obligation.

If Australians are to continue to have confidence in the integrity of the superannuation system, the government must ensure employers are paying workers their full entitlements, whether they are wages or superannuation.

The loophole was of one of a number of issues identified by the Superannuation Guarantee Cross-Agency Working Group. Set up in December 2016, it has now released its final report.

Generally, if an employer pays an employee AUD450 (USD349) or more before tax in a calendar month, they must pay a minimum amount in superannuation. The SG is currently 9.5 percent of an employee’s ordinary time earnings.

The Working Group said that the Superannuation Guarantee (Administration) Act 1992 should be amended to include in the base for calculating an employer’s SG guarantee obligations those salary or wages sacrificed to superannuation as part of salary sacrifice arrangements. It also argued that employers should not be able to use a sum sacrificed by an employee to superannuation to satisfy their SG obligation.

The Working Group also made the following recommendations:

  • All businesses (including small businesses) should be required to comply with the ATO’s Single Touch Payroll legislation, which is due to commence for businesses with 20 or more employees from July 1, 2018;
  • Superannuation funds should be required to report detailed contributions payment information more frequently than the annual reporting currently required;
  • Enhancements should be made to the Director Penalty Notice regime and to the Security Bonds regime, to improve the framework for SG compliance and the collection of SG charge debts;
  • The Government should ensure that the penalty framework surrounding SG is sufficiently flexible to deal with the spectrum of employer culpability in non-compliance; and
  • The ATO should inform employees of its actions to collect their SG.

The Government is considering the Working Group’s recommendations.

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