Finance & Investment

Morgans demonstrate what’s driving A$

EXTRA >> CONFUSION over what is driving the current behaviour of the Australian dollar has prompted Morgans Financial to issue a review of economic factors at play – and predict the ‘Aussie’ will settle at about  US70cents by year end.

According to Morgans research, often investors look at the wrong signals and must grasp the reality that surges in capital investment – such as what Australia experienced in the early stages of the mining boom – can act to drive both interest and exchange rates up or down, depending on stages of a cycle. 

“Over the last year, we have seen the Australian dollar fall and interest rates fall at the same time,” Morgans research director, Roger Leaning reported.

“Many people are used to the idea that falling interest rates lead to a falling exchange rate. Fewer people are used to the idea that surges in capital investment drive both interest and exchange rates up and down at the same time.

“Commodity price stimulated investment is a good example of how investment affects interest and exchange rates particularly in Australia,” he said.

“Back in 1998, commodity prices were at the end of a cycle of long term decline and low levels of mining investment in Australia leading to  low long term Australian interest rates relative to US 10 year bonds and a low Australian dollar exchange rate.

“However, cycles come and go and the low commodity prices of the late 90s turned into a multi-year commodity price boom.”

Mr Leaning said this had an unusual, but logical effect.

“By 2010 record high commodity prices attracted record high Australian investment, which in turn led to long term Australian interest rates increasing to a level 2.5 percent higher than US 10 year bonds and a substantial rise in the value of the Australian dollar,” he said.

“Since 2010, the cycle has rolled over again. A big investment in mining has led to global increases in commodity supply and downward pressure on prices.

“The subsequent decline in mining investment means that long term Australian rates are now falling relative to the US,” Mr Leaning said. “In February 2015, Australian 10 year bond yields were just 0.5 percent higher than US 10 year bonds.

“So it is no great surprise that the Australian dollar is depreciating. Indeed by the end of this year (2015), we forecast Australian cash rates to be 2 percent or lower (currently 2.25%) and expect the Australian dollar to bottom around US$0.70.  

“And then, yet another investment cycle will slowly emerge …”

* Morgans Financial Ltd is an industry expert member of Queensland Leaders, the organisation fostering and mentoring the state’s next generation of leading companies.

www.morgans.com.au

www.queenslandleaders.com.au

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Morgans demonstrate what’s really driving A$

CONFUSION over what is driving the current behaviour of the Australian dollar has prompted Morgans to issue a review of economic factors at play – and predict the ‘Aussie’ will settle at about  US70cents by year end.

According to Morgans research, often investors look at the wrong signals and must grasp the reality that surges in capital investment – such as what Australia experienced in the early stages of the mining boom – can act to drive both interest and exchange rates up or down, depending on stages of a cycle. 

“Over the last year, we have seen the Australian dollar fall and interest rates fall at the same time,” Morgans research director, Roger Leaning reported.

“Many people are used to the idea that falling interest rates lead to a falling exchange rate. Fewer people are used to the idea that surges in capital investment drive both interest and exchange rates up and down at the same time.

“Commodity price stimulated investment is a good example of how investment affects interest and exchange rates particularly in Australia,” he said.

“Back in 1998, commodity prices were at the end of a cycle of long term decline and low levels of mining investment in Australia leading to  low long term Australian interest rates relative to US 10 year bonds and a low Australian dollar exchange rate. 

“However, cycles come and go and the low commodity prices of the late 90s turned into a multi-year commodity price boom.”

Mr Leaning said this had an unusual, but logical effect.

“By 2010 record high commodity prices attracted record high Australian investment, which in turn led to long term Australian interest rates increasing to a level 2.5 percent higher than US 10 year bonds and a substantial rise in the value of the Australian dollar,” he said.

“Since 2010, the cycle has rolled over again. A big investment in mining has led to global increases in commodity supply and downward pressure on prices.

“The subsequent decline in mining investment means that long term Australian rates are now falling relative to the US,” Mr Leaning said. “In February 2015, Australian 10 year bond yields were just 0.5 percent higher than US 10 year bonds.

“So it is no great surprise that the Australian dollar is depreciating. Indeed by the end of this year (2015), we forecast Australian cash rates to be 2 percent or lower (the Reserve Bank reduced the rate to 2.0% in May) and expect the Australian dollar to bottom around US$0.70.  

“And then, yet another investment cycle will slowly emerge …”

For an analysis on the Greece-Eurozone challenge, see the video report by Morgans chief economist, Michael Knox here.

Morgans Financial Ltd is an industry expert member of Queensland Leaders, the organisation fostering and mentoring the state’s next generation of leading companies. Morgans is Australia's largest national full-service retail stockbroking and wealth management firm, with more than 300,000 clients, 500 authorised representatives and 850 staff, operating from more than 60 offices in all states and territories.

www.morgans.com.au

www.queenslandleaders.com.au

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End of financial year is the start of looking for better ways forward

JUNE 30 is rapidly approaching and Intuit Australia’s leading accounting and bookkeeping partners are encouraging small businesses to prepare ahead for tax time and set strong foundations for next year.

The end of financial year (EOFY) marks a real pain point for many small businesses, particularly those yet to discover the benefits of cloud-based financial management software, according to Intuit Australia managing director, Nicolette Maury.

“Cloud accounting solutions like Intuit QuickBooks Online help make year-end compliance seriously easy,” Ms Maury said.

“Transactions are always up to date, payroll is automatically calculated and integrated, all invoicing elements are captured, and debtors and creditors are a breeze to track. You can work on the move, accessing your data anytime, anywhere and on any device.

“This means you always know where you stand financially, saving valuable time come EOFY.”

AS Partners director Sam Rotberg, with 30 years’ experience in business and taxation advisory roles, said planning ahead was key to easing tax season stress.

“Preparing and evaluating your tax position early will give you the time to work with your financial advisor on a strategy that will optimise your business position,” Mr Rotberg said. “The Federal Budget announcement in May could also affect small businesses.” (Since he made this comment, the Federal Budget has brought through a range of tax offsets for small businesses under $2 million turnover a year, which may need to be be taken into account).

EOFY TAX TIPS

Ms Maury said Intuit Australia had developed a range of tips to help businesses “get set for the EOFY and ensure your accountant or bookkeeper loves you”

She advised business leaders to speak to a qualified accountant and/or the Australian Tax Office (ATO) if there were areas beyond their current knowledge, as the way some items were treated could have a big effect on tax liabilities.

Intuit Australia has collected a body of advice:

Reconcile...everything. This doesn’t just mean bank accounts and credit card accounts, but also reconciliation of your wages to the general ledger, as well as your balance sheet accounts, including pre-payments, payroll liability accounts, ATO Integrated accounts and GST accounts.

Alee Cochrane, an experienced accountant and Director of Total Bookkeeping & Business Solutions, advises to also: “check your suspense account if you use one, to ensure that all transactions have been allocated to the relevant expense or balance sheet accounts.”

Prepare your paperwork. Collect all receipts and have supporting documents to hand for significant purchases such as insurances, registrations and finance arrangements. Remember to provide a copy of the paperwork even if you are unsure your purchase is an asset.

If you are using cloud accounting software, you can easily scan or take a photo from a mobile device and attach your receipts directly to the relevant transaction and it will be stored forever.

Order your assets. Tell your financial advisor if any assets were sold, stolen or written off during the year, and review last year’s asset register (found near the back of your financial statements), marking any that are no longer relevant to your business. This will help keep your business asset register and depreciation schedule in order.

Provide statements ASAP and review un-cleared transactions. Bookkeepers and accountants love clients who provide bank and credit card statements that cover end of June, and do it as soon as possible, according to Diane Lucas, a certified bookkeeper, BAS agent and founder of Direct Management.

“Another good exercise is to create a list of un-cleared transactions such as unpresented cheques that demonstrate why your bank register may have a different balance to the bank statement. This is a real time saver and will ensure an easy reconciliation process,” Ms Lucas said.

Get your super and payroll sorted. Lielette Calleja, an accountant with 15 years’ experience and director of bookkeeping consultancy allthatcounts, advises businesses to pay any super liability balances due before June 30 so they can be taken up as a tax deduction this financial year.

“When it comes to payroll and preparing annual payment summaries, little things count so ensure staff details are up to date including date of birth, email addresses, super information and tax file numbers. With cloud accounting solutions like QuickBooks Online, a great benefit is that payroll is also automated and integrated into your file, which helps simplify the business of EOFY,” Ms Calleja said.

Plan now for a cloud transition. Qualified accountant, advisor to accounting professionals and chief solutions officer at QA Business, an IT consultancy focused on small business efficiency, Clayton Oates, noted: “The start of the financial year is a logical timeframe for a move to cloud accounting and if you are aiming for a July 1 blast off, now is the time to prep. Take the time to review your options personally to ensure the cloud solution selected works for your business.”

Mr Rotberg of AS Partners said, “Now is the time for business owners to get their heads into the cloud and out of the sand. Get your accountant or bookkeeper involved in the process and make use of free trials, online resources and training where possible to help select the right program for you and ensure a smooth transition.”

Ms Maury of Intuit noted ease of use was critical to making the 'cloud' switch.

“QuickBooks Online has been designed for SMBs and according to a recent study, eight in 10 small business owners and employees found our software easy to use compared to just five in ten for Xero.

“That, combined with the fact it is the world’s leading online accounting solution, makes it a must-review option for those thinking of moving to the cloud.”

www.intuit.com.au

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Govt backs crowd-sourced equity funding

THE Federal Government has come out in support of new crowd funding systems that help business development and is formalising rules around the process, including how the system if viewed from an equity and taxation standpoint.

The government is releasing a discussion paper on the characteristics of regulatory frameworks to facilitate crowd-sourced equity funding, including the model put forward by the Corporations and Markets Advisory Committee in a report released in June 2014 and a model similar to that recently implemented by New Zealand. 

“Crowd-sourced equity funding is an innovative type of online fundraising that allows a large number of investors to make small equity investments in a company,” said Federal Finance Minister, Mathias Cormann.

“The development of crowd-sourced equity funding has the potential to increase the funding options available to entrepreneurs to assist in the development of their businesses and contribute to the development of a more dynamic, competitive Australian economy.

“We are keen to ensure that any crowd-sourced equity funding model appropriately balances supporting investment, reducing compliance costs – including for small business – and maintaining an appropriate level of investor protection,” Mr Cormann said.

“Small business and entrepreneurs are a crucial driver of productivity and economic growth.  The release of the discussion paper progresses our election commitment to improve small businesses’ access to affordable finance.”

Mr Cormann said the government was “committed to creating the right conditions to drive economic growth, support innovation and create jobs by improving Australia’s competitiveness”. 

The recently released Industry Innovation and Competitiveness Agenda called for consultation on a potential regulatory framework for crowd-sourced equity funding. 

The discussion paper is now available for comment on the Treasury website (www.treasury.gov.au ). 

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Insurance disruption comes to Australia

OF ALL the financial markets, insurance has surely been one of the least disrupted by modern innovation. So far.

How disruptive would it be if an insurance broker not only established business insurances at rates lower than the incumbents, but also gave the insured company back the commission to which they would have been entitled?

And how disruptive would it be if an insurance expert could demonstrate how the group life insurance premiums of the major banks, and big insurers like AMP, were pumped up higher than the independent life insurance companies – who need to compete in the open market.

Australia’s insurance industry is about to find out, with the innovative new system developed by insurance industry adviser, Johnny Grohovaz, finding favour out in the market.

Mr Grohovaz’s research has shown that the ‘big four’ banks and AMP control between 60-80 percent of life insurance distribution via advisers in Australia.

“As such, it seems that they do not compete on price as much as independent life insurance companies have to,” Mr Grohovaz said. “The independent companies are more cost-efficient because they have to compete in the open market.”

To prove his point, Mr Grohovaz has compiled a table of quotes, based on an average customer who is an accountant by occupation and compared them with quotes for similar occupations off Life Risk Online, which is an independent provider of life insurance quotes for advisers.

“There is around an 11 percent difference between the average top five prices – all from bank  or AMP-owned providers, to best premiums from more competitive life insurers,” Mr Grohovaz said.

He pointed out from the table that both ANZ’s One Path and Suncorp’s Asteron proved to be more competitive in price.  

Mr Grohovaz’s system takes finding the lowest quote to a new level as he has introduced commission premium rebates to clients – money that would ordinarily go to the advisers.

“With the level of research we can access to find lower premiums in the first place – and our commission refund policy, there is fair scope to reduce costs,” he said.

“For example, an organisation paying $1000 a month at the moment from one of the big banks’ insurers would be able to get the same level of cover from independent insurers for $891. That works out to be an annual insurance premium reduction of $1302.

“However, that combines with a commission refund from us that takes another $1605 from the annual payment. That is an effective annual reduction of $2907, or 24 percent saving.”

As an example, Mr Grohovaz has prepared a table to illustrate the reductions in monthly premiums that are possible through the new system:

www.youfin.com.au

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Treasurer delivers mid-year Economic and Fiscal Outlook

FEDERAL Treasurer Joe Hockey has released the 2014-15 mid-year Economic and Fiscal Outlook in Canberra, outlining the government's strategies to counter dramatic revenue shortfalls created largely by precipitous commodity prices internationally.

A digest of Mr Hockey's delivery on December 15, 2014: 

"Over the last 12 months the Australian economy has continued to strengthen despite significant offshore headwinds.

Economic growth has increased over the last twelve months from 1.9-2.7 percent.

Export volumes have increased significantly.

Job creation across the economy is running at around 15,000 new jobs a month. This is three times larger than the average of around 5,000 jobs a month last year.

Despite many challenges the Government has made a good start on Budget repair.

There is more work to be done but we are on the right track.

As a result we have better jobs growth and greater prosperity.

And a more resilient Budget helps us to better cope with unexpected adversity.

So we need a strong Budget to help us have a strong economy.

In the last six months unforeseen events have hit the Australian economy.

In particular, we are now witnessing the largest fall in the terms of trade since records began in 1959.

This has been faster and deeper than anyone expected.

Our nation’s export income has not been what we expected. For example iron ore, which is one fifth of our nation’s export dollars, has fallen from $120 a tonne at the beginning of this year to around $60 a tonne today.

The price of wheat, which is one of our largest agriculture exports, has fallen 20 percent since the Budget.

In agriculture and resources, Australians produce far more than we consume.

So we use the export of excess produce and services to build our nation’s income.

Income volatility from exports can however have a negative impact on our economy and on the Budget bottom line.

When external events turn against us our domestic Budget strength needs to cushion the blow.

As a result of these recent events tax receipts are expected to fall by $6.2 billion this year and a total of nearly $32 billion over the next four years.

Company tax receipts are expected to be $2.3 billion less this year ($14.4b over four years).

Income tax is expected to be $2.3 billion less this year ($8.6b over four years).

To try and recover these falling revenues now, through new or higher taxes would unquestionably harm the Australian economy.

Falling wage growth has also had an impact on both revenue and expenditure.

Means tested payments such as Family Tax Benefits ($3.2 billion)  and income support payments ($1 billion) have had larger than expected increases as families remain in lower income thresholds and therefore claim more benefits.

Child care payments ($2.4 billion) have also increased on the back of more parents looking to participate in the workforce.

We will announce a comprehensive families’ package in the new year, including child care and parenting leave initiatives. This package will deliver greater work participation opportunities for parents.

Although the Senate has passed the great majority of the Government’s Budget (75 percent of the over 400 measures) there are still a number of outstanding structural savings.

These initiatives in health, education and welfare are essential for the medium and long term benefit of the Australian people.

Negotiations in the Senate this year for the repeal of the Mining Tax package have cost $6.6 billion over the next four years but the costs are more than recovered by the end of 2023.

The failure of the Senate to accept all the Government’s policies has cost the Budget $10.6 billion. There is a further $34 billion still to be legislated including $5 billion of savings announced by the previous Government.

Where the Government has made new spending decisions we have more than offset the costs with new savings.

In particular, Defence and national security commitments totalling $1.3 billion are more than offset by savings in our foreign aid Budget of $3.7 billion.

Where we have made savings we have worked hard to ensure that there will be no negative impact on the Australian economy.

The Commonwealth Budget is stronger today than it was last year.

This is despite a fall in expected revenue of around $100 billion since the 2013/14 Budget.

Debt is projected to be almost $170 billion less than expected one year ago.

This means $6,000 less Government debt for every man, woman and child in Australia within 10 years.

Rather than never ending deficits the Budget is on track for a credible surplus.

Deficits will decline each and every year at the same pace that we expected in the May Budget (an average 0.6 percent fiscal consolidation each year).

We continue to be disciplined on spending with real spending growth limited to just 1 percent per year over the next four years.

Our response to the current economic challenges is not to spend more money but to spend what we have carefully.

2014 has been a better year for the Australian economy than last year. We have more jobs and greater wealth.

We need to lift economic growth to 3 percent and beyond to create more jobs and reduce unemployment.

We need to pursue structural reform to lift our growth rates to levels that Australians expect.

2015 will be a better year for the Australian economy.

Lower energy prices, a lower Australian dollar and interest rates at historic lows continue to facilitate stronger economic growth.

Massive investment in new and upgraded roads, and in transport and business infrastructure, will strengthen the productive capacity of the Australian economy.

In addition new trade deals with Korea, Japan and China will deliver broader and deeper market access, particularly for Australian small businesses.

We also expect housing construction to strengthen which will further boost economic activity.

I say directly to the Australian people that whilst we have faced many challenges we have made a good start fixing the Budget.

There is still much work to do but we are on the right track.

Over the months and years ahead, we are determined to strengthen the Budget and the economy so that all Australians benefit through more jobs and greater prosperity."

* The 2014-15 Mid-Year Economic and Fiscal Outlook is available on the Budget website.

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Is an SMSF the way to pump up retirement funds?

INVESTMENT By Boyd Brown >>

HOW can you best set yourself up for retirement? This is a question we are asked constantly in our InvestorWise Financial business.

Refreshingly though, it is not just the baby boomers and ‘generation-X’ considering how they will finance and structure their retirement. We are seeing an increase in younger people, particularly members of ‘generation-Y’ contemplating their financial futures and looking for non-mainstream solutions.

A topical and increasingly popular option is a Self Managed Super Fund (SMSF). With the subject constantly featuring in finance industry news, with statistics about successful and sometimes not-so-successful results, I thought it best to get down to the basics of what an SMSF is all about. 

By definition, an SMSF is a form of superannuation fund allowing its members greater control over their retirement savings. The members run their fund for their own benefit and are responsible for complying with superannuation and tax laws.

In comparison, a traditional retail or industry super fund is managed on behalf of the member.

Establishing an SMSF is fast becoming one of the ‘must-have accessories’ as the baby boomer generation begins to exit the workforce en masse to enter retirement.

At our financial planning and consulting business, we are regularly approached with questions on whether an SMSF is a viable alternative for retirement savings.

The short answer is, it can be viable in the right circumstances, however it isn’t suitable for everyone.

INVEST TIME AND MONEY

As with any investment that can provide a successful result, managing an SMSF takes time and money – and you need to ensure you have both.

An increasing number of people are taking control of their super and the Australian Taxation Office (ATO) revealed at the end of June 2014 there were around 534,000 SMSFs in Australia. This represents a significant 25 percent growth in the past five years, equating to around $557 billion in assets and nearly one-third of all superannuation money held by Australians.

This makes SMSFs the largest sector based on assets, exceeding retail, industry and public sector funds.

This growth has been influenced by people wanting to ascertain an element of control through having a greater degree of involvement in the decision making process of their retirement fund.

Another reason people might consider an SMSF is if they have a desire to fund retirement using specific assets, such as direct shares or property, that are not available in more traditional super funds.

An SMSF can have up to four members and combining assets allows for greater flexibility and economies of scale.

Transparency of tax arrangements and succession or estate planning considerations also figure prominently as key factors in the decision making process. Inter-generational transfer of wealth is becoming a hot topic and an SMSF can offer greater certainty, especially when an insurance payout is made to a non-fund member.

In our business we dedicate time to counselling people to uncover their motivations and objectives, to ensure they are making an informed decision and not getting caught in the hype, or just wanting to keep up with their friends.

Acting in the best interests of our clients, we ensure they are fully aware of the pros and cons and all the alternatives.

First of all, to be eligible for the tax concessions available to a complying super fund, the trustees must ensure their fund complies with the ‘sole purpose test’. This means the SMSF must be maintained solely for the purpose of providing retirement benefits for its members.

Trustees must adhere to the Superannuation Industry (Supervision) Act (SIS Act). Separate to the sole purpose test, binding rules of this Act require trustees to always act honestly, money and assets of the fund must be kept separate from all other personal or business money and assets (this includes loans to members or their relatives) and must keep accurate records and lodge annual tax statements.

SMSFs are generally prohibited from acquiring assets from related parties. There are exceptions to the rules and they relate to business real property, used wholly for business purposes and listed securities.

While trustees can engage the services of other professionals, ultimate responsibility remains with the trustees. In cases of significant or sustained breaches, the ATO has the power to impose severe punitive penalties.

WHO SMSFS WORK FOR

Experience tells me there are two types of people who want to establish their own super funds.

First, there are those who have the time, knowledge and experience to manage their own monies. In most cases these people take on a more ‘hands on’ role with the management of their affairs by doing what is required to educate them.

Second, there are those who understand the benefits of running their own fund but do not have the time or desire to do it themselves. These people see the benefits in outsourcing assistance to manage some or all of the administration and investment process from a qualified professional such as a financial adviser, accountant or administrator, who will work in partnership with them.

It is difficult to quantify how much time is needed to manage each SMSF as it depends on the assets owned by the fund and whether the members are in accumulation or pension phase.

For example, if an investment property is an asset of the fund there will be management of tenants, rent and expenses.

Members need to establish how regularly they should review the fund, with an important consideration being liquidity or the ability to cover all expenses.

In our business, we mainly work with the second group, providing a total solution administration and investment service. Clients deal directly with our office and we coordinate all aspects of the process including the initial set up, preparation and implementation of the fund’s investment strategy.

We provide tailored investment advice, open bank accounts and liaise with the fund administrator and auditor on all issues, including the preparation and delivery of end-of-year tax statements for the fund.

Our services include undertaking a risk profiling exercise with each member of the fund, to determine his or her individual risk tolerance, before preparing an investment strategy. This should not be a ‘set and forget’ process and is revisited at least once a year.

TRENDING YOUNGER

As mentioned earlier, we are seeing an increase in interest from our ‘generation-Y’ clients who are placing more consideration into their retirement fund. They want to take back control of their super, which means we are seeing the minimum amount to establish an SMSF reduce.

While $250,000 seems an optimal level where there can be economies of scale, the establishing amount can be less.

We recently established a new fund with $100,000 for a couple where they undertook an aggressive contribution strategy over a short time frame to boost their fund balance.

One of the attractions of an SMSF is how you can use some funds to invest in property.

This can be done using what is called a Limited Recourse Borrowing Arrangement (LRBA). These arrangements have been growing in popularity as they can enable an SMSF to acquire investments it may not have the money to purchase outright.

There are some technical rules that make this type of borrowing different from any other type of lending and these need to be understood before implementing this strategy.

When considering using an SMSF for this purpose, the same questions need to be asked as you would with any other form of borrowing: Is it a worthwhile investment? Can the debt be fully serviced? Is there a borrowing strategy in place? And, most importantly, will it meet the retirement objectives of the members?

The opportunities, responsibilities and challenges that come with establishing an SMSF may be daunting for some people, so it is important to seek professional advice before you decide whether or not it is right for you.

As with all investment decisions, doing your homework is the key.

An SMSF is an investment in your financial future, so if you are prepared to take the time to understand how it can work for you and you follow the rules, the benefits should follow.

www.investorwise.com.au

 

Boyd Brown is the principal and financial adviser of Brisbane-based InvestorWise Financial. For 23 years InvestorWise has focused on helping individuals, families and business owners achieve financial freedom. Boyd Brown is an authorised representative of Financial Wisdom Limited and an associate member of the SMSF Professionals Association of Australia.

*

Note: The information contained in this article by Boyd Brown of InvestorWise is general in nature. While care has been taken in its preparation, no liability is accepted by Financial Wisdom, its related entities, agents and employees for any loss arising from reliance on this document. This document contains general advice. It does not take into account readers’ individual objectives, financial situation or needs. Readers should consider talking to a financial adviser before making a financial decision.

 

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