It’s January and the start of a new year. Whether you are back at work or enjoying a summer break, we wish you all a Happy New Year and a return to normal life in 2022.

The global economy and financial markets ended the year as they began, all over the place, as the world grappled with a new wave of COVID-19. In December, speculation about interest rate hikes grew on the back of rising inflation. US Federal Reserve chair, Jerome Powell said the Fed would not lift rates until it finished scaling back/tapering bond purchases in March. Fed officials expect three increases in the federal funds rate this year from the current 0-0.25% target to around 1.0%. In Australia, Reserve Bank governor Philip Lowe said he would not consider further scaling back bond purchases until the bank’s next meeting in February. He insists the cash rate will remain on hold at 0.1% until 2023, but the market anticipates a rate rise later this year.

Australia’s economic growth fell 3.9% in the year to September, as household spending fell during extended lockdowns. As lockdowns ended and businesses began hiring, the unemployment rate fell from 5.2% to 4.6% in November. The ANZ-Roy Morgan consumer sentiment index hit a six-week high of 108.4 in the lead up to Christmas. One cause for optimism may have been rising house prices, which were up 1% in December and 22% over the year.

Consumers also enjoyed some relief at the petrol bowser ahead of Christmas, but global oil prices remain volatile as markets weighs up reduced travel and falling demand for fuel due to Omicron and uncertain supply from OPEC producers. The Aussie dollar finished 2021 at US72.5c, a big drop from where it started at US77c.

2021 Year in Review

Two steps forward, one step back

For the second year running, the pandemic was the focus for policy makers, markets, businesses, and individuals alike.

The year began with hopes that the rollout of vaccines would stem the spread of COVID-19 and allow economies to reopen. Instead, most countries were hit by wave after wave of the virus, periodic lockdowns, and ongoing disruption to lives and livelihoods.

Yet there were also positives. Australia’s vaccination rate exceeded all expectations while property and share markets soared. Investors who stayed the course enjoyed double digit returns from their superannuation, with the median growth fund tipped to return more than 12 per cent for the year.ⁱ

The big picture

If the pandemic has taught us anything, it is to expect the unexpected as new variants of the coronavirus – first Delta and now Omicron – hampered plans to return to a ‘new normal’.

Yet through it all, the global economy picked up steam. In the year to September the two global powerhouses the US and China grew at an annual rate of 4.9 per cent, while the Australian economy grew by 3.9 per cent.

The Australian economy is estimated to have grown by more than 4 per cent in 2021, with unemployment falling to 4.6 per cent ahead of the Christmas rush.

But challenges remain. As global demand for goods and services picked up, ongoing shutdowns disrupted manufacturing and supply chains. The result was higher prices and emerging inflation.

Inflation and interest rates

Australia’s inflation rate jumped from less than one per cent to 3 per cent in 2021. This is lower than the US, where inflation hit 6.8 per cent, but it still led to speculation about interest rate hikes.

The Reserve Bank insists it won’t lift rates until inflation is sustainably between 2-3 per cent, unemployment is closer to 4 per cent and wages growth near 3 per cent. (Wages were up 2.2 per cent in the year to September.) The Reserve doesn’t expect to meet all these conditions until 2023 at the earliest, but many economists think it could be sooner.

While Australia’s cash rate remains at an historic low of 0.1 per cent, bond yields point to higher rates ahead. Australia’s 10-year government bond yields rose from 0.98 per cent to 1.67 per cent in 2021.

Shares continue to shine

Global sharemarkets made some big gains in 2021 on the back of economic recovery and strong corporate profits. The US market led the way, with the S&P500 index up 27 per cent to finish at near record highs.

European stocks also performed well while the Chinese market suffered from the government’s regulatory crackdown and the Evergrande property crisis.

In the middle of the pack, the Australian market rose a solid 13.5 per cent in 2021. The picture is even rosier when dividends are added, taking the total return to 17.7 per cent.ⁱⁱ

Volatile commodity prices

As the global economy geared up, so did demand for raw materials. Commodity prices were generally higher but with some wild swings along the way.

Oil prices rose around 53 per cent, thermal coal prices soared 111 per cent and coking coal rose 37 per cent. Australia’s biggest export, iron ore, fell 25 per cent but only after hitting a record high in May.

Despite demand for our raw materials and a sound economy, the Aussie dollar fell from US77c at the start of the year to finish at US72.5c, providing a welcome boost for Australian exporters.

Property boom

Australia’s residential property market had another bumper year, although the pace of growth shows signs of slowing. National home prices rose 22.1 per cent in 2021, according to CoreLogic. When rental income is included the total return from property was 25.7 per cent.ⁱⁱⁱ

Regional areas (up 25.9 per cent) outpaced capital cities (up 21.0 per cent), as people fled to the perceived safety and affordability of the country during the pandemic. Even so, prices were up in all major cities.

Looking ahead

The pandemic is likely to continue to dominate economic developments in 2022. Much will depend on the supply and efficacy of vaccines to protect against Omicron and any future variants of the coronavirus.

Financial markets will also keenly watch for signs of inflation and rising interest rate. In Australia, inflation is unlikely to be constrained while wages growth remains low, and the Reserve Bank keeps rates on hold.

The wild card is the looming federal election which must be held by May. Until the outcome is known, uncertainty may weigh on markets, households, and business.

i https://www.chantwest.com.au/resources/remarkable-a-10th-consecutive-positive-year

ii https://www.commsec.com.au/content/dam/EN/Campaigns_Native/yearahead/CommSec-Year-In-Review-2022-Report.pdf

iii https://www.corelogic.com.au/news/housing-values-end-year-221-higher-pace-gains-continuing-soften-multi-speed-conditions-emerge

Unless otherwise stated, figures were sourced from Trading Economics on 31/12/21

Tax deductions for your home-based business

Using your home as the base for your business is increasingly popular, particularly due to COVID-19, with many of Australia’s 2.1 million enterprises with four or less employees now based at home.

As a result, the ATO is busy revisiting the rules on the tax deductions you can claim for a home-based business.
Your claimable expenses will depend on how you operate your business, so it’s worth checking the current rules to ensure you know what’s what.

Your business structure matters

The structure (sole trader, partnership, trust or company) you use to operate your business affects your entitlements and obligations when claiming expense deductions.

Sole traders and partnerships can claim a deduction for the costs of running their business from home. What you can deduct is governed by whether or not you have an area of your home set aside as a ‘place of business’.

Trusts and companies, however, must have a genuine market-rate rental contract or agreement in place with the property owner covering which expenses the business is responsible for paying.

Different types of expenses

For home-based sole traders and partnerships, there are two main types of claimable expense.

Running expenses are the increased costs from using your home’s facilities for your business, such as heating, cooling, cleaning, landline phone and internet, equipment and furniture depreciation, and equipment repairs.

These can be claimed if you have a separate study or desk in a lounge room, even if the area doesn’t have the character of a place of business.

You can only claim deductions for the portion of your expenses related to running your business. Any part of an expense related to personal use cannot be claimed.

You may also be able to claim motor vehicle expenses between your home and other locations if the travel is for business purposes.

Claiming your business costs

When you calculate your running costs, you can choose the actual cost, fixed rate or temporary shortcut method. Each one is acceptable provided it’s reasonable for your circumstances, excludes your private living costs and there are appropriate records for your calculations.

With the actual cost method you use the real cost of the expense, while the fixed rate uses a set cost of 52 cents for each hour you operate your business. This covers heating, cooling, lighting, cleaning and depreciation. Other expenses need to be worked out separately.

The temporary shortcut method (available until 30 June 2022), is an 80 cents per hour rate covering all your expenses.

Occupancy expenses can’t always be claimed

Your business can claim occupancy expenses (such as mortgage interest, council rates, and home and contents insurance) if the area in your house set aside for your business has the character of a place of business (even if most of your business is conducted online).

Indicators of a place of business include identification (such as an external sign) it’s a place of business, the area is not easily adaptable for domestic use and is almost exclusively used for your business, or you receive regular client visits.

If you are eligible to claim occupancy expenses, they must be apportioned based on the share of the year your home is used for business and the portion of the floor plan.

Recordkeeping is essential

The ATO expects you to keep records for at least five years to show your business actually incurred the claimed expenses.

You must be able to substantiate your claims with written evidence or receipts for all running costs. If you claim occupancy expenses, you need to substantiate your mortgage interest, insurance, council rates and rental agreement with the homeowner.

The ATO also requires you to demonstrate how you calculated your expense claims and separated them into business and private use.

Capital gains implications

A word of warning though. If you claim deductions for the cost of using your home as your main place of business, there may be capital gains tax (CGT) implications when you sell.

If you claim occupancy expenses, the usual main residence exemption may not apply to the proportion of your home and the periods you used it for your business.

If you have recently started working from home or plan to do so, we can help you work out the best method of claiming deductions for your home-based business.

Tips to help you achieve your professional goals in 2022

As we ring in the New Year, you’ve probably set yourself a few personal new year resolutions. What is the likelihood of you sticking to them long-term? Interestingly, most of us will have failed to achieve these resolutions within a few months (if not sooner).

They’ve either become so onerous that we don’t care anymore, or we simply don’t have the time – life and work often get in the way.

How about professional targets, do you set yourself professional goals as well as personal? Do you consider how you’re going to work smarter this year, is work-life balance something you want to improve upon in 2022, or is your objective to spend more time focussing on your clients and less time doing admin?

Goal setting to achieve an objective

To be successful at setting goals and actually achieving them, you must be clear on what your objective is. Goals cannot be put in place until you’ve set your objective. Once this has been decided, only then can you put steps in place to achieve it.

For example, your main objective for 2022 might be to spend more face-to-face time with clients. Ask yourself the right questions – how you currently spend your day versus how you would like to spend your day. Look at areas where you could potentially create efficiencies within the business to free up your time.

Are you spending more time managing the business’s finances or working on the administration side of things as well as trying to market to your existing clients or reach potential clients each month?

That is a lot to juggle on any given day, so you should consider whether any of these tasks could be outsourced to people who can do it in half the time. Obviously, there will be costs associated with outsourcing these jobs, but you must weigh up the benefit to the business as well as your clients.

How to set attainable goals

The key to success here is to break down your goals so they are achievable. You could begin with a monthly goal, which is broken down to a weekly target and then into a daily task – what individual steps do you need to take to achieve your overall goal.

By breaking it down into individual tasks, you’ll take the pressure off, especially if you don’t manage to tick something off your daily ‘to do’ list. You can just move it to the following day.

Tips for success in 2022

• Understand your overall objective (what does success look like?)
• Develop a strategy
• What tasks can be outsourced/delegated/or automated
• Create a monthly and weekly schedule
• Break it down and create a daily ‘To Do’ list
• Stop multi-tasking – pay full attention to the task at hand
• Exercise and a good night’s sleep are also important!!

Another strategy you could implement is the SMART strategy. You must ensure the goals you set are specific, measurable, attainable, relevant, and timely.

Accomplishment

Imagine finishing your workday with a sense of accomplishment, knowing that you’ve been productive and ticked everything off your ‘to do’ list as well as continually working towards your main goal.

There will be occasions where something unexpected will pop up and interfere with your day, so you must allocate time in your day to be able to deal with these situations.

Here are some useful productivity apps to help with your ‘to do’ list:

• Trello: Collaborate and manage projects in a very visual way.
• Evernote: Record and remember everything to tackle projects with your notes, tasks and schedule all in one place.
• Friday: Plan your day, communicate as a team and to keep all your most important work together in one place.

We can help

If your objective is to work smarter this year, then we’re here to help. One of our objectives is to help our clients with their finances so they’re able to continue to do what they do best. Call us today to see if we can free up some of your time and assist you in achieving your goals in 2022.