|Summary: Investors will need to stay alert to domestic and global economic conditions as they plan out their strategies for 2014-15. On the domestic level, look for ways to leverage upcoming tax and superannuation changes. And, on the global level, watch for signs from the Middle East, China, the US and Europe.|
|Key take-out: High-income earners should take advantage of income splitting where possible – a strategy that can be used to reduce tax in general and to maximise superannuation contributions. Meanwhile, while property prices will struggle in some areas, expect new opportunities from infrastructure development.|
|Key beneficiaries: General investors. Category: Economics and investment strategy.|
We have just about reached the end of the 2013-2014 financial year and it is time to prepare for 2014-2015. So this week I am going explore a variety of challenges we face and measures that might be taken.
At some point global interest rates are going to rise, and my belief is that the move up will start in the US. But the weight of money looking for a home is huge and even when good economic news comes out of the US which points to higher rates, bonds hold their value.
Accordingly, I don’t think US rate increases are going to be early in the 2014-15 year and locally the problems in the Australian community are such that there is no immediate rise in rates on the horizon. There is even a possibility of a rate cut. So the yield boom conditions I have been describing remain intact for at least the first half if 2014-15, and possibly for the whole year.
But for higher-income earners there is a tax increase in 2014-15 – not pleasant in this time of low interest rates – and there is an increasing difficulty of gaining wage rises in so many areas of the country. Accordingly, you need to look more closely at ways to legally lower your tax.
So let’s do a quick checklist of some of the straight-forward ways of reducing your tax bill. If your family or business circumstances allow, the best method is to have a dual income. Families where there is only one high income not only lose their benefits, but on earnings above $180,000 the 2014-15 tax rate is a whopping 49%. Dual income becomes very tax efficient. In some situations it may be possible to switch from a salary to an independent contracting situation, which allows a degree of income splitting – but I emphasise such a move requires good advice.
It may be better for the main income earner to work a little less and have the spouse take up some of the slack.
But if you are aged over 49 in 2014-15 (not 2013-14) you can invest $35,000 tax deductible into your superannuation fund. That means that you can earn $214,000 and keep your taxable income below $180,000. And you will almost certainly have other deductions as well. Of course, if you need the money for your mortgage, school fees and other living expenses, cash for that superannuation contribution option may not be available to you. But, on present rules, you can access that money when you are aged 60 and it is not going to be easy for politicians to change that rule without some degree of grandfathering.
For those who are fortunate enough to have spare cash which they have invested in their own name, they can make a non-concessional contribution to superannuation of invest $180,000 a year out of tax paid dollars (2013-14 $150,000).
There is no contributions tax on this money, and returns are taxed at 15% – a lot lower than income tax rates. And, if you are aged over 60, you can put your superannuation fund into pension mode and the returns are tax free. For those aged over 60 who are investing in interest-bearing securities, the fact that returns can be tax free means it is possible to earn above the inflation rate, even on bank deposits.
Gearing and property
The 2013-14 year has been the year of personal negative gearing on buying a dwelling and for borrowing on superannuation funds to have a house as the key asset in your fund.
And house prices have increased in most centres, so it has been a worthwhile exercise. I think that going forward the clamps on income will mean that house prices will struggle in places like Melbourne and Adelaide; they will be OK in Sydney and a little better in Brisbane.
However, there is increasing Chinese money in the eastern parts of Australia that could continue to boost prices. But we are building a vast number of one and two-bedroom apartments in our major cities, and while there is strong demand for these dwellings, in time we are going to get an oversupply that will hold back the housing market. If you do have a negatively geared property, consider paying interest in advance to keep your income level below the trigger for the 49% tax rate.
The tax man is putting out bulletins saying he is going to check expenses in independent contracting businesses, sales and marketing managers, real estate employees, building and construction employees, cafes and restaurants, plasterers, carpentry businesses beauty services and cash-based businesses. There will be extra scrutiny of business activities based at home, so make sure you can justify every claim that you make and watch your receipts. One way of insulating yourself against expense pressure from the taxation department is to have as many expenses as possible to be paid by the group that supplies the income – either your employer or the group with which you have the contract. But be careful on the expenses front if you are independent contracting so that you don’t endanger your status as an independent contractor.
However, I think that during 2014-15 the Small Business Minister Bruce Billson will make it easier for independent contracting, in line with his promise in the election campaign. He has had difficulty with the deputy commissioner of taxation, but Billson wants a better deal for those that want to independently contract.
If you are running a retail business or restaurant and find you can’t open on a Saturday or Sunday because of shift allowances or penalty rates, at least consider leasing your premise to a family on Saturday or Sunday. Families don’t pay each other penalty rates and are far more efficient in running weekend businesses than those using conventional employee/ employer structures. However, even families need to be careful in how they organise themselves tax wise.
We have seen a very sharp fall in consumer confidence in the wake of the federal budget. I think it will improve in the early months of 2014-15, but I am not sure it will be maintained into 2015 as we see the retrenchments from the motor and retail areas start to bite. Australia increases its retail shift and penalty rates as of July 1 and some larger retailers will pay more attention to online trading and reduce their in-store staff.
Building and infrastructure
However, it is not all gloom. The Abbott Government is promoting a level of infrastructure investment around the country that is unparalleled in recent decades. That is going to cause a lot of activity in the commercial building area, and if the government can hold the line on its new building code it can get 15% to 30% more building for its dollar, which is a fantastic boost for this country. The employment on these building sites and among suppliers will be a huge boost and, to the extent they involve road and rail projects, property in certain areas of our capital cities will be major beneficiaries. It is possible that towards the end of the financial year the government will offer securities that help finance these infrastructure projects. If the security is good, there will be some attractive investments.
And finally, the events in the Middle East are likely to delay the emergence of Iraq as a major oil producer, which will help oil prices and therefore our gas revenues. I think the US will continue its momentum while China will operate in a zig-zag fashion, which will see spurts of recovery followed by tougher times. It has a deep problem in its banking sector and consistency in maintaining employment, and it wants to lessen its big emissions industries like steel.
I expect the US to continue its slow recovery. I think that by the end of the next financial year Europe will abandon austerity, which will boost its economy – but there will be long-term hazards.