Welcome to the January 2015 edition of the Spry Roughley Report.
As we are back into the New Year it is perhaps worth reassessing the economic underpinnings that will impact on our businesses. To that end here is an extract from the Economic Snapshot, published by our financial planning licensor – Paragem, with their take on what is happening.
2014 was a stuttering year which saw the global bull market in equities continue, but not without some sharp swings along the way - especially towards the end of the year as financial markets started to worry about the prospects of global growth. You may recall a stellar start to 2014 which appeared to set the year up for double digit returns, only to see negative returns occurring for much of the middle part of the year. This was followed by a staged recovery, such that a typical diversified portfolio across most asset classes most likely returned around 9%. Overall, a solid result following 2 years of double digit returns. Seasoned campaigners know only too well that forecasters rarely get it right and 2014 was no exception, with the majority of economists envisaging a disastrous year for bonds only to find this asset class achieving double digit returns. Perhaps 2015 will be their year of forecasting.
The message in all this is to remain focused on the medium to long term and accept that markets move in anticipation of events ahead of investors generally.
2015 is unlikely to be a straightforward year for global financial markets. On the plus side, the US economy is expected to continue to perform well, while Europe and Japan are expected to benefit from their quantitative easing programmes and weaker domestic currencies. Growth in China is expected to continue to moderate to around 7.0% while growth in India is expected to improve in the wake of some successful economic reforms.
On the negative side, some other emerging markets including Russia, Brazil, Argentina and Venezuela are likely to continue to struggle in the coming year.
Australia is at risk of having a year of flagging sentiment and muted economic activity unless effective government is restored in Canberra, or sufficient positive economic momentum from overseas translates into better activity here. At this stage the latter seems more likely than the former and the risk is that Australian markets underperform the rest of the world.
The big challenge though will come from the US Federal Reserve when it starts to increase interest rates. Opinions are mixed about when this will happen but consensus seems to favour the middle of the year. Bond yields are very low and financial markets are pricing a much softer pace of interest rate adjustment than the Fed has said it is likely to do. This suggests that the risk for bond markets is not only that yields rise, but that they rise more than currently expected.
Tax news is subdued at this time of the year but for a few special mentions read on………
- unless the Australian domestic unemployment rate moves sharply higher, the Reserve Bank is likely to leave the cash rate unchanged at 2.5% for some months to come and possibly for the whole of 2015; if the Bank does lift the cash rate in 2015 it would most likely be in the second half of the year;
- house price growth in Australia seems set to slow down in 2015 to a more moderate pace than seen in 2014;
- modest but nevertheless positive momentum of economic growth around the world in 2015 should support further gains in equity markets;
- the more bond-sensitive sectors of the equity markets which did so well in 2014 may have a less successful year in 2015;
- resource stocks may see some recovery from the substantial falls of recent months but in the absence of sustainable gains in commodity prices these stocks are likely to underperform again;
- in a world of low inflation, a stronger US dollar and the oil producing nations continuing to provide higher levels of supply, it seems unlikely that commodity prices can recover much of the ground recently lost;
- there is potential for the European and Japanese equity markets to beat the US on the back of their quantitative easing programmes and weaker currencies as long as their domestic economic statistics show some signs of improvement;
- the Australian equity market is likely to underperform unhedged developed equity markets in 2015, partly driven by further expected depreciation of the Australian dollar;
- emerging equity markets as a whole could underperform developed equity markets as bond yields and the US dollar rise; selected Asian markets including India could prove to be exceptions;
- China is likely to continue posting growth around the rates seen in the past year; the reform program will continue and the authorities will remain ready to provide support as necessary;
- the US dollar is expected to continue to appreciate and the Australian dollar is expected to fall towards US$0.75 – 0.70.
- Geopolitical factors will continue to create bouts of volatility in the coming year; the most immediate concern is the situation in Greece and speculation about whether the country will leave the Eurozone.
As usual, please do not hesitate to call us on (02) 9891 6100 should you wish to discuss how any of the points raised in the report specifically affect you, or click here to send us an email.
Martin Roughley, Director
Spry Roughley Services Pty Limited
The ATO has responded to fears expressed by some taxpayers that disclosing previously undeclared offshore income and assets could set them up for future tax investigations. The ATO has reassured taxpayers that disclosing under Project DO IT will not give them a "red flag". ATO Deputy Commissioner Michael Cranston said the ATO was far more concerned with taxpayers who don't disclose than those who do.
The opportunity to disclose under Project DO IT has now closed. For those who came forward under Project DO IT, a last chance opportunity was available to declare their overseas assets and income to the ATO if they had not done so previously to avoid steep penalties and the risk of criminal prosecution for tax avoidance. As at 6 November 2014, some 1,000 individuals have made disclosures worth more than $190 million in income and over $1.1 billion in assets.
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The ATO has issued a statement on a Full Federal Court case in which the ATO Commissioner was successful in arguing that a supply made by an Australian inbound tour operator (ITO) to overseas customers was fully subject to GST.
Although the decision relates to specific facts, the ATO said the Commissioner remains of the view that the decision applies to all ITOs that:
The ATO was of the view that, under the Court's reasoning, the supplies made by the ITOs to their non-resident travel agent clients are properly characterised as supplies of promises to ensure products are provided, and the supplies are wholly taxable.
- transact as principal (and not as an agent of a non-resident travel agent); and
- are engaged by non-resident travel agents to enter into contracts with Australian providers for the provision of products to non-resident tourists.
The Commissioner requested that all ITOs that have transacted as principal and have an outstanding amount due to the ATO to contact the ATO to discuss payment of the amount owed. ITOs that consider that they are not affected by the decision on the basis that they operate as an agent were also asked to contact the ATO.
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The ATO has issued a statement in response to a decision of the Administrative Appeals Tribunal (AAT) which ruled that a taxpayer that owns and manages a number of retirement villages was entitled to a deduction for payments it was contractually required to make to "outgoing residents". The AAT concluded that such payments were properly characterised as an ordinary part of carrying on the business, and were not capital or of a capital nature and therefore deductible under the tax law.
The ATO said it will amend Taxation Ruling TR 2002/14 to reflect the Tribunal's decision. It said the amendment will confirm that, where a retirement village operator makes a payment to an outgoing resident (or to their legal personal representative) that represents a share of any increase in the entry price payable by a new resident (ie the difference between the initial entry price paid by the outgoing resident and the entry price payable by the new resident), such payments will be deductible. In the meantime, the ATO said taxpayers may request that the Commissioner amend an assessment.
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The ATO has released information on its views on the GST treatment of crowdfunding. Crowdfunding involves using the internet and social media to raise funds for specific projects or particular business ventures. Typically the promoter of the project or venture will engage an intermediary to operate an online platform that allows the promoter to connect to potential funders. Various models are used to attract funding.
For example, in a "donation-based" model, where funders receive nothing apart from having their contribution to a project or business venture acknowledged by the promoter, the promoter will have no GST liability. However, the intermediary will be treated to have made a taxable supply of services to the promoter that is subject to GST. But in this case, the promoter will be entitled to a GST credit for the services he or she acquires from the intermediary.
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The AAT has recently affirmed a decision of the Tax Commissioner refusing a couple's request to apply a capital gains tax concession in relation to the sale of their business.
The husband and wife were the sole shareholders and directors of a private healthcare company which they had sold, via their shareholding, for some $14 million in the 2007 income year. They claimed they were entitled to the tax concession in respect of the capital gain they made on the sale of their shares. In particular, they claimed they satisfied that relevant asset test to be eligible for the concession on the basis that the company had a liability just before the sale to pay them eligible termination payments totalling some $2.75 million.
In rejection of the couple's argument, the AAT confirmed that the eligible termination payments paid to the couple were not to be taken into account for the purposes of the relevant asset test in determining whether they qualified for the small business CGT concession. The couple have appealed to the Federal Court against the decision.
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The Government is reforming the taxation of employee share schemes to bolster entrepreneurship in Australia and support innovative start-up companies. It said the changes to the tax treatment of employee share schemes that were introduced by the former Government in 2009 have effectively brought to a halt the use of such schemes for start-up companies in Australia.
The Government said it would unwind those 2009 changes, beginning with reversing the changes made to the taxing point for options, to ensure that employees may opt to have "discounted" options taxed when they are exercised (ie converted to shares), rather than upon acquisition by the employee. This change would apply to employees of all companies.
The Government also announced that it will allow employee share scheme options or shares that are provided to employees at a small discount by eligible start-up companies not to be subject to upfront taxation, provided that the shares or options are held by the employees for at least three years.
Options issued to employees by eligible start-up companies under certain conditions will have the employee's taxation events deferred until the sale of the shares. In addition, shares issued to employees by eligible start-up companies at a small discount will have those discounts exempted from tax for the employees.
The Government will also extend the maximum time for tax deferral on discounted options and shares issued to employees by eligible start-up companies from the current seven-year period by a further eight years – that is, a 15-year deferral period.
The Treasurer is expected to consult widely on the draft legislation. The legislation is proposed to come into effect from 1 July 2015.