Welcome to our July newsletter and the start of a new financial year. With winter in full swing, it’s a great time to rug up by the fire, take stock of the year that was and make plans for the future.
June was a big month in an eventful year for the local and global economy, with inflation and interest rates continuing to dominate. The US Federal Reserve lifted official rates by 0.75% to a target range of 1.50-1.75% to combat surging inflation of 8.6% in the year to May, stoking fears of a US recession.
Australia faces similar but less acute challenges. With inflation sitting at 5.1%, the Reserve Bank lifted the cash rate by 0.5% to 0.85% in June and Governor Philip Lowe hinted at more to come in July. The Australian economy is still growing relatively strongly at an annual rate of 3.3%. Retail trade rose 10.4% in the year to May on the back of low unemployment and high household savings. Household wealth rose to a record high of $574,807 in the year to March, but since then there has been a global sell-off in shares, a slowdown in the Australian housing market and cost of living pressures are mounting. The ANZ-Roy Morgan consumer confidence reading remains weak at 84.7 points (100 is neutral).
Australia’s national average petrol price rose to 211.9c a litre in June, the second highest on record, on the back of a surge in global oil prices. Brent Crude rose almost 45% over the past year as the war in Ukraine disrupts supply. Despite a late bounce in shares, the ASX200 fell 9.6% in the year to June, while US shares were down more than 12%. The Aussie dollar lost ground over the financial year to finish below US69c.
A super window of opportunity
New rules coming into force on July 1 will create opportunities for older Australians to boost their retirement savings and younger Australians to build a home deposit, all within the tax-efficient superannuation system.
Using the existing First Home Super Saver Scheme, people can now release up to $50,000 from their super account for a first home deposit, up from $30,000 previously.
Another change that will help low-income earners and people who work in the gig economy is the scrapping of the Super Guarantee (SG) threshold. Previously, employees only began receiving compulsory SG payments from their employer once they earned $450 a month.
But the biggest potential benefits from the recent changes will flow to Australians aged 55 and older. Here’s a rundown of the key changes and potential strategies.
Work test changes
From July 1, anyone under the age of 75 can make and receive personal or salary sacrifice super contributions without having to satisfy a work test. Annual contribution limits still apply and personal contributions for which you claim a tax deduction are still not allowed.
Previously, people aged 67 to 74 were required to work for at least 40 hours in a consecutive 30-day period in a financial year or be eligible for the work test exemption.
This means you can potentially top up your super account until you turn 75 (or no later than 28 days after the end of the month you turn 75). It also opens potential new strategies for a making big last-minute contribution using the bring-forward rule.
Extension of the bring-forward rule
The bring-forward rule allows eligible people to ‘’bring forward” up to two years’ worth of non-concessional (after tax) super contributions. The current annual non-concessional contributions cap is $110,000, which means you can potentially contribute up to $330,000.
When combined with the removal of the work test for people aged 67-75, this opens a 10-year window of opportunity for older Australians to boost their super even as they draw down retirement income.
Some potential strategies you might consider are:
- Transferring wealth you hold outside super – such as shares, investment property or an inheritance – into super to take advantage of the tax-free environment of super in retirement phase
- Withdrawing a lump sum from your super and recontributing it to your spouse’s super, to make the most of your combined super under the existing limits
- Using the bring-forward rule in conjunction with downsizer contributions when you sell your family home.
Downsizer contributions age lowered to 60
From July 1, you can make a downsizer contribution into super from age 60, down from 65 previously. (In the May 2022 election campaign, the previous Morrison government proposed lowering the eligibility age further to 55, a promise matched by Labor. This is yet to be legislated.)
The downsizer rules allow eligible individuals to contribute up to $300,000 from the sale of their home into super. Couples can contribute up to this amount each, up to a combined $600,000. You must have owned the home for at least 10 years.
Downsizer contributions don’t count towards your concessional or non-concessional caps. And as there is no work test or age limit, downsizer contributions provide a lot of flexibility for older Australians to manage their financial resources in retirement.
For instance, you could sell your home and make a downsizer contribution of up to $300,000 combined with bringing forward non-concessional contributions of up to $330,000. This would allow an individual to potentially boost their super by up to $630,000, while couples could contribute up to a combined $1,260,000.
Rules relaxed, not removed
The latest rule changes will make it easier for many Australians to build and manage their retirement savings within the concessional tax environment of super. But those generous tax concessions still have their limits.
Currently, there’s a $1.7 million limit on the amount you can transfer into the pension phase of super, called your transfer balance cap. Just to confuse matters, there’s also a cap on the total amount you can have in super (your total super balance) to be eligible for a range of non-concessional contributions.
As you can see, it’s complicated. So if you would like to discuss how the new super rules might benefit you, please get in touch.
Taking your business to the next level
Growth is important when it comes to business. To remain viable most companies need to keep evolving, staying ahead of their competitors and innovating to meet the needs of a continually changing marketplace. It’s also personally gratifying to feel a sense of progression and be rewarded for the hard work that is part of running a successful business. There are some considerations, however when it comes to achieving growth as not all growth is created equal.
Business growth can be measured in a variety of ways. While there is inevitably a focus on turnover and revenue other metrics can be used to measure, manage, and communicate results. Alternative financial metrics that can be used to track growth include sales and earnings growth figures, while non-financial indicators can also be effective measures of growth such as market share, customer loyalty and product quality or range. It’s important to reflect on what growth means to you and what measures of growth apply to your business objectives.
Decoupling scale and growth
It can be common to think of growth in terms of size – larger premises, increased number of personnel or greater manufacturing capacity – but it’s important to recognise that bigger does not necessarily mean more profitable. Bridgestone is the largest tyre manufacturer in the world according to market share and manufacturing figures. However, German manufacturer Continental records profits that are triple that of Bridgestone. What it lacks in scale, it makes up for in lower manufacturing costs, standardised processes, and more lucrative customers.
These companies have both pursued different growth strategies and while there are certainly benefits associated with increased scale of operations, it is possible to focus on growing revenue without scaling up much or even at all, by implementing efficiencies to reduce overheads.
There are also some advantages associated with being smaller. It can be easier to maintain a strong customer service focus and you tend to have greater autonomy and control, for example being able to be discerning about what projects you take on and make decisions without being answerable to a board or shareholders. One additional compelling advantage in today’s economic climate is being able to respond quickly to pivot and adapt to changing market conditions, something the big players can struggle with.
Many paths lead to growth
There are almost as many schools of thought as to the best ways to achieve business growth as there are businesses and it can be quite overwhelming trying to decide what’s right for you.
The primary types of growth a business can experience include:
Organic – focussing on increased products and services.
Strategic – looking at various measures to achieve longer term growth.
Internal – involving using currently available resources in a better way.
Partnership/ merger/ acquisition – can help businesses to enter, sustain and grow in a new market.
Considerations when pursuing growth
Growth that is not carefully managed can lead to resources being spread too thin, impacting staff morale, leading to customers feeling neglected and, in some cases, lower profits.
Pursuing growth can require investments in people, equipment, space, and suppliers. As these outlays occur before any potential increase in revenue, many businesses find themselves under pressure financially. On that note it’s important to manage your cashflow carefully. Effective credit management and tight control of overdue debts are essential.
Finally, one of the most powerful things you can do when aiming to grow your business is put your plan for growth down on paper. That takes business growth from being something that’s trickling away in the background to something you are actively and strategically pursuing.
Onwards and upwards!
When bankruptcy is the best way forward
As interest rates and debt levels rise, many individuals and small business owners are feeling the pinch. Most will make it through with some belt-tightening, but some may need to take further action.
As a last resort, a debt agreement or bankruptcy may be an option. But what are the implications?
Solutions to financial pressure
There are many reasons consumers and businesses are finding it harder to pay their bills, with pandemic closures, natural disasters and now an energy crisis piling on the pressure.
Figures from the Australian Financial Security Authority (AFSA) show in April 2022 there were 700 new personal insolvencies across the country, with the majority (61.4 per cent) being bankruptcies. Within these, 37.7 per cent were business-related bankruptcies.
But bankruptcy is not the only option. If you find yourself unable to pay your debts, you can also consider making a debt agreement, a personal insolvency agreement, or seeking temporary debt protection (TDP).
A TDP prevents creditors from seizing your assets or wages and gives you time to seek advice, while the other formal insolvency options (such as debt and personal insolvency agreements) are a longer-term answer for pressing financial problems.
Debt and declaring bankruptcy
The best-known formal insolvency option is bankruptcy. This is a legal process where you are released from most of your debts and can make a fresh start with your finances.
In 2020-21, around 6,800 Australians declared bankruptcy. This was 46.7 per cent down on the previous year, due largely to the special debt forgiveness rules in place due to COVID-19.
Although bankruptcy is tempting when you or your business are drowning in unpaid bills, it’s a serious step so please speak to us to understand the consequences before taking any action.
Once you file for bankruptcy, a Trustee is appointed to manage your ‘bankrupt estate’ and dispose of assets to pay your debts. If you earn over a set amount during your bankruptcy, you may be required to make compulsory ‘contributions’ from your income to your Trustee.
Impact of bankruptcy
Bankruptcy has serious consequences. Your name will permanently appear on the National Personal Insolvency Index, which is likely to affect your ability to obtain credit in the future. When applying, you must inform any credit provider you are bankrupt and credit reporting agencies will keep a record of your bankruptcy for five years from the date you become bankrupt.
You are required to request written permission from your Trustee to travel overseas, even if it’s for work. Travelling without permission could extend your bankruptcy or result in a prison sentence.
Bankruptcy doesn’t stop you from working and normally the AFSA doesn’t inform your employer, but there are limitations when operating as a sole trader. Court permission is required to be a company director or manage a company.
Your Trustee may sell your assets to help repay your debts, although you are able to keep ordinary household goods, tools up to a set amount used to earn your income and vehicles valued under a threshold.
Once you are discharged from bankruptcy (which usually lasts for three years and one day), your creditors can’t recover any remaining pre-bankruptcy debts.
Bankruptcy doesn’t, however, release you from all your debts. If you have secured debts (such as a mortgage over your home), creditors have the right to take possession of your property even if you are in bankruptcy.
While most unsecured debts (such as credit cards, personal and pay day loans, utility bills and unpaid rent) are covered by bankruptcy, some debts must be paid. These include court-imposed penalties, child support and debts incurred after your bankruptcy starts.
Tax and bankruptcy
If you declare bankruptcy, you still need to lodge a tax return and outstanding personal returns and Business Activity Statements must be filed.
The ATO ranks equally with other unsecured creditors, so if it’s one of your creditors, your Trustee will not necessarily pay this debt first. The only priority tax claims are unpaid Superannuation Guarantee Charge (SGC) debts if you have employees.
If your Trustee decides to sell some of your assets to clear your debts, this may create a capital gain or loss and the CGT event must be recorded in your annual tax return. The ATO may also offset any tax refunds you become entitled to against any tax, child support or family assistance debts.
If you are experiencing financial difficulties, please call us to discuss your options.
This Newsletter provides general information only. The content does not take into account your personal objectives, financial situation or needs. You should consider taking financial advice tailored to your personal circumstances. We have representatives that are authorised to provide personal financial advice. Please see our website www.evogroup.net.au or call 02 9098 5055 for more information on our available services.