May is here and in cooler regions the colours of autumn are all around. In Canberra, Treasurer Josh Frydenberg is putting the finishing touches to the May 11 Federal Budget which will no doubt dominate the national conversation in coming weeks.
Australia’s economic recovery gathered steam in April, despite a spike in coronavirus cases overseas and vaccine delays. Australia’s trade surplus stood at a healthy $8.5 billion in March, underpinned by strong export prices for our commodities. Iron ore prices rose 16% in April and 21% over the year to date, due largely to renewed demand from China. China’s economic growth rebounded an extraordinary 18.3% in the year to March. Prices for our oil, copper, coal and beef have also recorded strong gains.
Higher commodity prices pushed the Aussie dollar up 2.4% in April to US77.72c, although record low interest rates are keeping stronger gains in check.
Australian consumers are gaining confidence in the recovery, despite the winding back of government stimulus payments. The Westpac-Melbourne Institute Index of Consumer Sentiment rose 6.2% in April to its highest level since 2010. One reason could be booming house prices, up 2.8% in March and 6.2% over the year, according to CoreLogic. Not so welcome are rising petrol prices which hit a 13-month high in April. While higher prices lifted inflation by 0.6% in the March quarter, it is still running at a low annual rate of 1.1%.
Rising employment is also a cause for optimism. The jobless rate fell from 5.8% to 5.6% in April and the Federal Government has announced it is targeting a rate beginning with a 4, supported by big spending initiatives in its upcoming Budget.
Keeping your cool in a hot market
After reeling from the impact of COVID-19 lockdowns in 2020, property values throughout Australia have strongly rebounded, rising at their fastest pace in 32 years. These exceptionally strong conditions are now being seen across all major capital cities, following the trend set by regional areas during the latter half of 2020.i
If you are in the market to buy property in the near future, no matter where you are looking in Australia, you are likely facing a market that favours the seller over the buyer, under quite competitive conditions. So, let’s look at the measures you can take to buy well and keep your cool under the current conditions.
Do your homework
It’s a good idea to be very familiar with the areas you are looking at buying in and physically inspect as many properties as possible, both so that you get a sense of your ‘must haves’ and ‘nice to haves’ and so that you can keep your finger on the pulse and know what represents good value in your preferred suburbs.
Be prepared to act fast!
If you have found a property that meets your criteria, try to view it as soon as possible by making an appointment with the agent, rather than waiting for open for inspections.
It’s also important to be prepared for a purchase and make sure you can respond quickly if a property ticks all (or even most of!) the boxes. Ensure you are familiar with the process of buying property and your rights and obligations as a buyer. Line up the necessary assistance you need including selecting a solicitor, as well as touching base with the relevant contacts for building or pest inspections so that you can call on them as required.
Buy with your head – not your heart
It’s important to keep your emotions in check and not make rash decisions just because the market is strong. Due diligence remains vital during the home buying process, speeding things up and acting rashly can end up costing you much more down the track.
The fact that you’ve missed out on properties you are keen on, does not need to be the reason you lower your standards drastically and make significant sacrifices in order to get a foothold in the market. Although it is important to be realistic about what you can and can’t afford and maintain a longer-term view in terms of your property purchase.
Strategies for success
In a seller’s market you should assume you are competing against other offers. One way of getting an edge on the competition is to be flexible when it comes to settlement. It’s worth asking the seller if they need a shorter or longer settlement and if you are able to meet their needs in this area, it may give you an advantage over other bidders.
Pre-auction offers need careful consideration. Making an offer prior to an auction can work in your favour by enticing the seller and you may pick up the property for less than it would sell at auction. Equally, a prior offer may work against you by reinforcing to the seller that the property is highly sought after, encouraging them to ‘hold out’ for the auction.
And last but certainly not least, having your finance pre-approved will help you to jump in when you need to and also to know your budget and what you can afford. Being pre-approved by a mortgage lender is a great way to show sellers that you’re not only serious about buying, but that you have the funds for the purchase ready to go.
We can help you review your finances, budget and repayments and get you sorted with the best loan for your circumstances so you are set for success in a competitive market.
Salary packaging – worth the sacrifice
The principle of ‘salary sacrificing’ may not sound very appealing. After all, who in their right mind would voluntarily give up their hard-earned cash. But it can have real financial benefits for some in terms of reducing your taxable income, which could see you pay less at tax time.
As we nudge ever closer to the end of financial year, it’s worth taking a look at salary sacrificing to see if it’s a worthwhile strategy to put into place for you.
A salary sacrifice arrangement is also commonly referred to as salary packaging or total remuneration packaging. In essence, a salary sacrifice arrangement is when you agree to receive less income before tax, in return for your employer providing you with benefits of similar value. You’re basically using your pre-tax salary to buy something you would normally purchase with your after-tax pay.
How does salary sacrifice work?
The main benefit of salary sacrificing is that it reduces your pre-tax income, and therefore the amount of tax you must pay. For example, if you’re on a $100,000 income, you may agree to only receive $75,000 as income in return for a $25,000 car as a benefit.
Doing this would reduce your taxable income to $75,000 which could lower your tax bill because you’re essentially earning less as far as the tax office is concerned.*
This arrangement must be set up in advance with your employer before you commence the work that you’ll be paid for and it’s advisable that the details of the agreement are outlined in writing.
What can you salary sacrifice?
According to the Australian Tax Office (ATO), there’s no restriction on the types of benefits you can sacrifice, as long as the benefits form part of your remuneration. What you can salary sacrifice may also depend on what your employer offers.
The types of benefits provided in a salary sacrifice arrangement include fringe benefits, exempt benefits and superannuation.
Fringe benefits can include:
- property (including goods, real property like land and buildings, shares or bonds)
- expense payments (loan repayments, school fees, childcare costs, home phone costs)
Your employer pays fringe benefit tax (FBT) on these benefits.
Exempt benefits include work related items such as:
- portable electronic devices and computer software
- protective clothing
- tools of the trade
Your employer typically does not have to pay fringe benefits tax on these.
You can also ask your employer to pay part of your pre-tax salary into your superannuation account. This is on top of the contributions your employer is already paying you under the Superannuation Guarantee, which should be no less than 9.5% of your gross (before tax) annual salary, though this may rise in the near future.
Salary sacrificed super contributions are classified as employer super contributions rather than employee contributions. These contributions are called concessional contributions and are taxed at 15 per cent. For most people, this will be lower than their marginal tax rate.
There is a limit as to how much extra you can contribute to your super per year at the 15 per cent tax rate. The combined total of your employer and any salary sacrificed concessional contributions cannot exceed $25,000 in a single financial year. If you exceed the cap, you could be charged additional tax on any excess salary sacrifice contributions.
Most employers allow employees to salary sacrifice into super, but not all employers will allow salary sacrificing for other benefits.
Is salary sacrifice worth it?
Salary sacrifice is generally most effective for middle to high-income earners, while there is little to no tax saving for people who are already in a low tax bracket.
If you are a middle to high-income earner, then it may be worth considering salary sacrifice to reduce your taxable income and to take advantage of some of those benefits.
Before you do, make sure you talk to us so we can help ensure it is an appropriate strategy for your circumstances.
*Note: This example illustrates how salary sacrifice arrangements can work and does not constitute advice. You should not act solely on the information in this example.
Source for all information in this article: https://www.ato.gov.au/General/Fringe-benefits-tax-(FBT)/Salary-sacrifice-arrangements/
The missing link in the Bitcoin boom
Whether it’s the booming price of Bitcoin, or record-breaking prices for investments paid for in digital currencies, cryptocurrencies continue to feature in the media and in dinner conversation. This has reignited debate about whether we are witnessing an old-fashioned bubble about to burst or a new asset class in the making.
The price of Bitcoin has gone from around $13,800 a year ago to a recent high of $84,350.i Undoubtedly, some people have made money on the way up, but experts urge caution. While cryptocurrencies are being accepted more widely, the Australian Securities and Investments Commission (ASIC) warns they are high risk, difficult to value and unregulated*.ii
You may also have seen recently that a digital artist known as Beeple sold a work at auction for $89 million, while Twitter founder Jack Dorsey sold his first tweet for $3.8 million. Both were paid for in cryptocurrencies in a trend called non-fungible tokens (NFTs).iii NFTs are a unique bit of digital code that cannot be duplicated or counterfeited, making them particularly attractive for collectors.
Cryptocurrencies and NFTs have one thing in common – they are both enabled by a technology called blockchain.
What is blockchain?
Blockchain is a system of recording and storing information that helps keep track of ownership securely and transparently.
It is essentially a digital ledger of transactions stored in blocks that is duplicated and distributed across a network of computer systems forming a blockchain. Every new transaction that occurs on the blockchain is added to every participant’s ledger.
This means if one block in the chain is changed, it would be immediately apparent that it had been tampered with, making it near impossible to change, hack or cheat the system.
History teaches us that fortunes are more likely to be made selling shovels to miners in a goldrush, than buying a shovel and joining them. So could it be that long-term value is more likely to come from investing in the underlying blockchain technology than chasing quick profits from the likes of Bitcoin and NFTs?
Given rising concerns about hacking and data breaches, it’s no surprise that blockchain is being embraced by government and businesses alike.
Government backs digital technologies
In the 2020 Federal Budget, the Australian government set aside $800 million to invest in digital technologies, including blockchain technology pilots to cut business compliance costs.iv
This followed the launch two years ago of the government’s National Blockchain Roadmap, developed in collaboration with industry and universities to highlight the technology’s potential to save businesses money and open new business and export opportunities.
According to the Roadmap, blockchain technology is predicted to generate an annual business value of over US$175 billion by 2025. By 2023, blockchain will support the global movement and tracking of US$2 trillion worth of goods and services annually. By next year, it is predicted to save the financial services industry US$15-20 billion annually.v
Practical uses of blockchain
In Australia, the biggest user of blockchain is the financial services industry. For example, the Australian Securities Exchange (ASX) is working on a new blockchain system to finalise local equity trades which will replace the old CHESS system in early 2022.
But it also has applications across the economy in sectors including trade, logistics, real estate, energy, water, resources and agriculture. The cost to Australian food and wine producers of direct product counterfeiting and substitution was estimated to be over $1.7 billion in 2017 alone.v
Take the example of the wine industry. Blockchain can help with inventory tracking, facilitate automated payments between supply chain members, and reduce counterfeiting through provenance transparency.
Thanks to government and industry support, a growing number of blockchain companies are listing on the ASX. There are companies using blockchain to:
- Keep track of financial data and identity documents for compliance
- Verify human engagement on social media to prevent interaction with bots and fake profiles
- Make supply chains transparent in combination with artificial intelligence technology.vi
Other companies have integrated blockchain into parts of their business to enhance security on digital platforms or to accept and settle payments.
While the local ASX-listed technology sector is still relatively small and high risk, it does offer investors increasing opportunities to invest in cutting-edge technologies with real world applications.
If you would like to discuss your overall investment strategy, don’t hesitate to get in touch.
*Disclaimer: We cannot advise clients on investments in Bitcoin or any other cryptocurrency as they are not regulated financial products.
Property prices are rising, will interest rates be next?
Many Australian homeowners haven’t seen anything like it – values rising at their fastest pace in 32 years, property searches hitting record highs and selling at unprecedented speeds.i,ii Throw in historic low interest rates, and all signs point to a market with no signs of slowing down.
Despite Philip Lowe, the Reserve Bank of Australia (RBA) Governor, maintaining that rates will remain at 0.10% until 2024, a hot housing market has led to speculation of an imminent official cash rate rise.
A timely message from the RBA
In March, Governor Lowe said the outlook for the global economy had improved over the first few months of 2021, largely due to the rollout of COVID vaccines.
“There has been strong growth in employment and a welcome decline in the unemployment rate to 6.4%. Retail spending has been strong and most of the households and businesses that had deferred loan repayments have now recommenced repayments. GDP is expected to return to its end-2019 level by the middle of this year,” he added.
However, Mr Lowe sited that although house prices were increasing and housing credit growth to owner-occupiers had picked up – investor and business credit growth remained weak. Basically, it doesn’t matter if our post-pandemic economy is improving because the RBA still has a “to do” list it wants to check off before a rate rise is on the cards. There will be no movement – according to the RBA – until it sees sustainable changes in three traditionally slow-moving components of our economy; jobs, wages and inflation.
“The Board will not increase the cash rate until actual inflation is sustainably within the 2 to 3% target range,” Mr Lowe said, adding that the unemployment rate needed to sit in the low 4% range.
“The Board does not expect these conditions to be met until 2024 at the earliest,” he said.
Alternatives to rate rises
Lifting the cash rate is not the only tool in the RBA’s arsenal to combat skyrocketing house prices. The board is tipped to set its sights on lending standards before anything.
“Through previous housing cycles, the factors that generally slowed the housing market were either rising interest rates, worsening economic conditions or tighter credit conditions. Looking at each of these factors, we aren’t expecting a lift in short-term mortgage rates any time soon, and the economy has some positive momentum, so the most likely factor that will slow housing conditions is a new round of credit tightening along with housing affordability becoming more of a challenge, especially for first-home buyers,” Tim Lawless, CoreLogic’s Asia Pacific head of research, wrote in his April blog.
Mr Lawless added that the introduction of stricter macroprudential policies is a matter of “when, not if”. Such controls, where the Australian Prudential Regulation Authority (APRA) directs lenders to restrict credit, could include a clamp down on new interest-only loans or a reduction in the debt-to-income ratio for new borrowers.
“Tighter credit conditions would probably have an immediate dampening effect on housing market activity, while continuing to let record low interest rates support the ongoing economic recovery,” Mr Lawless said.
What goes down, will eventually go up
While the RBA looks unlikely to budge the official cash rate anytime soon, that doesn’t mean lenders won’t put up both fixed and variable rates independently – a move that could potentially create a financial shock for many new loan holders.
According to comparison site RateCity.com.au, there are approximately 1 million homeowners in Australia who have never even experienced an interest rate rise.
Sally Tindall, research director at RateCity, said it was concerning that some people, who are financially stretching themselves to get into the property market today, haven’t considered if they could meet their repayments when either rates rise or they come out of a fixed loan scenario. “The next hike might still be three years away but when it comes to a 30-year mortgage, you need to think long term,” Ms Tindall explained.
“When applying for a mortgage, banks factor in a 2.5% buffer on the ongoing rate. However, people should stress-test the loan for themselves. If you’re taking out a fixed home loan today, make sure you can afford the repayments when the revert rate kicks in, factoring in potential RBA hikes and a safety net,” she added.
To know how you can make the most of record-low interest rates, and better understand tightening lending conditions, contact us today.
Daniel Grusd and Onelife Wealth Management Pty Ltd (ACN 139 437 513) are authorised representative of Synchron, AFS Licence No 243313. Trading as Onelife Financial, Suite 806, 251 Oxford St, Bondi Junction NSW 2022. Unless specifically indicated, the information contained in this newsletter is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where necessary, seek personal advice from a financial adviser’.