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Australian banks still worthy of a place in most portfolios… despite what some commentators say 

 

Barring disasters, the banks should produce returns of the order of 10% per annum over the next decade. With a yield of 8% including franking credits, we need just 2% per annum growth to get us to a 10% per annum total return. Even if we get no growth in earnings, an 8% per annum return means that banks will be worth a place in most portfolios - barring disasters.

Disasters? What could possibly go wrong?

Anyone who follows the mainstream investment media will have no problem making some suggestions here. Ever increasing capital requirements, curbs on lending growth, new taxes, fines, Royal Commissions and other government interventions have been widely discussed. In addition, some outright disasters have been suggested, with a collapse in the residential property market the most common. And, of course, there is the possibility of an old fashioned, severe recession which inevitably would bring more pain for the banks.

Some of these scenarios are likely and should be factored into any forecast. Others may be unlikely but still are risks that we need to consider. Here, we want to put those risks in perspective particularly those that have been widely covered in the mainstream investment media and where we believe the impacts have been vastly overstated.

Increased regulatory and capital requirements

These are real and are happening right now and, accordingly, are in our base forecast. Most banks have around 10% of capital for each dollar of risk weighted assets – that should head towards 11% over time. This makes the banks safer but slightly less profitable. In addition, we have the bank levy which should slice around 2.5% off bank profits. Furthermore, we have threats of Royal Commissions, fines for bad behaviour, and so on. Collectively, we think these will reduce Earnings Per Share by about 10% over time. This slices just 1% per annum off returns over the next ten years. We include this impact in our forecast.

A slowdown in the growth of residential lending

We think this is highly likely and it is why we forecast future earnings growth at around 2% per annum. This is much lower than historical earnings growth and, in fact, this forecast is much lower than most other analysts' forecasts. And still it gets us to a 10% per annum return.

A recession is likely in the next decade and will hurt the banks

Our forecasts assume that Australia will experience a recession in the next decade. We also predict that, when the recession comes, the market will know about it before we do – and so the chances of getting out early will be small. Hence, the key question is how bad a recession might be, both in terms of depth and also in terms of how well prepared the banks are for that recession.

The depth of a recession is often depends upon the health of the banks to that recession. The more extended the banks, the more they cut lending, the more they harass existing borrowers, and the more they drive the economy into the ground. When banks enter a recession in better shape, the recession is generally milder. We saw that during the GFC where the Australian downturn was much milder than in other parts of the world because, at least in part, the Australian banks entered the recession in reasonable shape.

A 2015 RBA study found that the key drivers of bank lending losses during recessions were: rapid credit growth; high levels of building construction activity; falling bank lending standards; and, rising interest rates.

Today, we have modest levels of lending growth, normal levels of commercial building construction, tightening lending standards and no sign of a central bank with any interest in raising interest rates. Of those four loss drivers, the only one flashing a warning light right now is the high level of residential construction activity. Even there, the banks are scaling back their involvement and watching their risks very closely. In short, the banks are in good shape generally and in much better shape than prior to the GFC. This suggests that any recession in the next decade should be relatively mild so long as these indicators remain strong. If they turn south, caution will be required.

Our forecast assumes that a mild recession will occur and will result in a one-off reduction in profits of around a third and take around 0.5% per annum off 10-year returns.

Even mild recessions will cause short-term volatility

But before we get too comfortable, we should not forget that during a recession, bank share prices will probably fall by 50% or more. But the fall is unlikely to be permanent.

While this may seem dramatic, we would say the same thing about every other sector of the share market. All equities are volatile. All can fall dramatically during recessions. The banks are no different. As long-term investors, we should worry predominantly about a permanent loss of capital.

And that is a possibility if the recession is severe. Accordingly, no matter how attractive the prospects of Australian banks, all the normal rules of diversification still apply.

Impact of a collapse in the housing market

Now, this is where things hot up. The market is divided on this issue. There are those who consider that a collapse in housing prices and as a result, the banks, is almost certain; there are those who  aren't sure; and, there are those who are extremely sceptical that we will see a housing induced collapse in the banks at all.

Farrelly's considers a collapse in housing prices as possible but unlikely:

  • We still seem to have a shortage of housing that not even the residential building boom is meeting;
  • Bank lending practices are being tightened but not sufficiently to cause an out-and-out collapse.

 

Nonetheless, it would be foolish to say that a collapse in housing prices couldn't happen. Accordingly, we consider the impact of an extreme example - a 35% fall in the prices of houses nationwide and an accompanying recession that sees soaring unemployment and a 10% default rate amongst mortgagees.

Helpfully, the major banks produce detailed reports showing the Loan to Valuation Ratios (LVRs) of their mortgage lending books. This is all we need to do our own stress test.  Consider two loans, one has a LVR of 50% (in other words, $50 worth of loan for every $100 worth of house), while the other has an LVR of 90% ($90 worth of loan for every $100 worth of house.) Now assume that property prices fell by 35%.

Post the fall, the first loan now has $50 worth of loan for $65 worth of house, while the second has $90 of loan for every $65 worth of house. If the first borrower loses their job and can't repay the loan, the bank has the option of putting the property on the market, recouping their $50 loan and sending whatever is left back to the unfortunate borrower.

The second borrower would be a problem for the bank. Here, a default potentially costs the bank a loss of $25 for every $90 of loan.

Now let's assume that 10% of all mortgages default. The results for the major banks are shown in Figure 1 on the following page.

Figure 1: Bank stress test (35% downturn in property prices & 10% default rate)

 

ANZ

CBA

NAB

WBC

Size of loan book ($ bill)

274

436

285

414

Loss as a % of loan book if 10% default

-0.5%

-0.6%

-0.6%

-0.4%

Loss In $mill

-1,479

-2,660

-1,807

-1,482

Loss as a % of 2017 pre-tax profits

-15%

-19%

-19%

-13%

Pre-tax profits 2017 ($mill)

9,704

14,114

9,306

11,050

Source: Bank reports, farrelly's analysis

 

That's right. A perfect storm of a 35% fall in residential property prices and a 10% default rate would result in the banks' profits falling by about 17% on average. While this is clearly not a great result, it falls a long way short of a disaster.

In a year or two, profits would rebound and normal business would resume. Farrelly's calculations suggest that the whole episode would reduce 10-year average returns by around just 0.5% per annum.

Now, a much more likely scenario is that if residential property prices do fall that it will be more like a fall of around 20% (rather than 35%). This causes a one-off reduction in profits of closer to 4%. It's a blip.

Residential property lending makes the banks safer, not riskier

The bottom line is this: residential property lending is actually an extremely profitable and safe activity for the banks. The fact that the Australian banks' lending books are highly concentrated in home loan lending should be a source of comfort rather than concern. It's the equivalent of having 70% of a portfolio invested in government bonds – the concentration, in this instance, makes the portfolio safer, not riskier.

Disclaimer: This article is not legal advice and should not be relied on as such. Any advice in this document is general advice only and does not take into account the objectives, financial situation or needs of any particular person. You should obtain financial advice relevant to your circumstances before making investment decisions. Where a particular financial product is mentioned you should consider the Product Disclosure Statement before making any decisions in relation to the product. Whilst every care has been taken in the preparation of this information, Australian Unity Personal Financial Services Ltd does not guarantee the accuracy or completeness of the information. Australian Unity Personal Financial Services Ltd does not guarantee any particular outcome or future performance. Australian Unity Personal Financial Services Ltd is a registered tax (financial) adviser. Any views expressed are those of the author and do not represent the views of Australian Unity Personal Financial Services Ltd. If you intend to rely on any tax advice in this document you should seek advice from a tax professional. Australian Unity Personal Financial Services Ltd ABN 26 098 725 145, AFSL & Australian Credit Licence No. 234459, 114 Albert Road, South Melbourne, VIC 3205. This document produced in October 2017. © Copyright 2017

Once upon a time, the most asked questions I would get were, firstly, when will interest rates rise and should I fix now? Secondly, do I think there will be a house price collapse? But now all I get is bitcoin questions and it reminds me of that old line: "When the shoeshine boys talk stocks, it's time to get out of the market."

Legend has it that JFK's dad, Joseph Kennedy, exited the stock market in 1929 because he didn't want to invest with shoeshine boys and bellhops!

When it came to bitcoin and whether I wanted to punt on it, I went to the TAB website and checked out the Futures section to see what Winx's price was for next year's Cox Plate. For those who like long-run punts, it's 3/1 and Rekindling is 21/1 for the Cup!

The current bitcoin price is over $US11,000, and was $US10,000 yesterday, and while I suspect cryptocurrencies are like most things modern and seemingly illegal, think Uber, Airbnb, etc. (which seemingly break laws that incumbent rivals have to adhere to) they will be here to stay. But the bigger question is: at what price?

To buy bitcoin now is a punt and you could do OK but I'm more an expert on investment and that's why I won't invest in bitcoin at these prices.

Arguably, the greatest investor of all time is Warren Buffett of Berkshire Hathaway and one of his foundation rules of investing is "Never invest in a business you cannot understand." He has not watered down his stock and it's now worth $285,080 this morning. Buffett made his fortune backing businesses he suspected would resonate with Americans, such as McDonald's, American Express and Gillette.

He also told us "Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can't buy what is popular and do well."

Right now, governments and central banks are at sixes and sevens about how to handle bitcoin. The CEO of JPMorgan, Jamie Dimon, says people who buy bitcoin are "stupid" and was criticised by experts on the cryptocurrency for not understanding it. However, to date, a lot of 'stupid' people have made money out of their punt. Be clear on this: at $11,000 bitcoin looks like a punt and not an investment.

Someone who is not stupid is Nobel Prize-winning economist, Joseph Stiglitz, who says it should be "outlawed" as it "doesn't serve any socially useful function."

I was asked to explain bitcoin on my 6:45 am spot on the Talking Lifestyle radio programme today and I understand the basics of bitcoin but there are grey areas that worry me.

A Bloomberg piece out today tells us: "Bitcoin has risen by about 75 per cent since October alone, after developers agreed to cancel a technology update that threatened to split the digital currency."

What? Those 'investing' in bitcoin are in the hands of "developers"! Who in the hell are they? I can handle having my investments in the hands of central banks but I worry about investing in oil because of that rag tag mob called OPEC and the non-OPEC countries spearheaded by the likes of Russia, Sudan, Oman and Azerbaijan.

Sure, I'll invest in oil when the price gets silly and low but as it climbs, I worry about those who control the price.

I know madness could push the price of bitcoin higher and that could make me look like a luddite, scaredy cat, who has no idea but that's the problem, I don't have an idea about "developers", who apparently can split the currency!

I say good on those who have taken a punt on bitcoin and own it big time but, in good faith, I can't say this is a buy here at $11,000 but here's another point made in the Bloomberg story: "There's no agreed authority for the price of bitcoin and quotes can vary significantly across exchanges."

It's the bubble price that sounds off alarms for me and that's my job to look for flashing sirens and red flags.

"This is going to be the biggest bubble of our lifetimes," hedge fund manager Mike Novogratz said at a cryptocurrency conference Tuesday in New York.

Novogratz, who says he began investing in bitcoin when it was at $US90, told Bloomberg he is starting a $US500 million fund because of the potential for the technology to eventually transform financial markets.

Bitcoin looks like it's here to stay but I don't think its current price is.

Extract from Switzer Daily Published Thursday, November 30, 2017

Can your SMSF invest in cryptocurrencies?

 

Arguably, an SMSF can invest in cryptocurrencies but there are several factors to take into account before investing. Cryptocurrencies are a high risk product as they are blockchain driven and unregulated. While there have been numerous stories in the media about massive gains made on the currency by early investors, the price fluctuates, cryptocurrencies face new competitors, and "hard forks" occur - where the blockchain is split and forms a permanent divergence from the original. Bitcoin, for example, has broken into Bitcoin, Bitcoin Cash and now Bitcoin Gold. The danger is that you end up on the wrong fork. There is also the danger of hacker's breaching your fund's digital wallet and stealing your investment.

Trustees of the fund need to ensure that any investment in cryptocurrency is in line with the investment strategy of the fund, the Trust Deed allows for it at the time the investment is made, and it is an appropriate investment. In particular, the sole purpose test in the Superannuation Industry (Supervision) Act 1993 requires that the fund is maintained for the sole purpose of providing retirement benefits to your members, or to their dependants if a member dies before retirement. Trustees need to ensure that the risk associated to these currencies is in the best interests of the fund. A minute documenting the decision to invest in the cryptocurrency would be beneficial.

For tax purposes, gains and losses in the fund are treated in the same way as other assets in the fund. That is, CGT may apply to any gains made on the sale or exchange of the currency.

If your fund invests in cryptocurrency, there are a few practical issues. Your SMSF auditor needs to confirm the ownership, existence, and value of the cryptocurrency. As a result, the digital wallet for your currency should be in the name of your fund or the corporate trustee. You need to ensure that your personal assets, and the assets of your fund, are kept separate at all times. 

Once money is deposited into your fund, it may not simply be a case of being able to withdraw these amounts, and they may be 'stuck' in the fund until a condition of release is met. 

In most cases this means attaining retirement age. And, you need to be able to trace your transactions to identify trades, the value of the trade, and the time and date they occurred. 

How are cryptocurrencies taxed?

 

Cryptocurrencies, like Bitcoin, are independent and not regulated by any central authority. Until recently, these digital currencies were not treated in the same way as cash for tax purposes in Australia. New legislation passed by Parliament last month seeks to change all of that by removing GST from currency exchanges.  Let's take a look at the tax implications of cryptocurrencies.

How are cryptocurrencies taxed?

Under GST law, a 10% GST applies to supplies of goods and services. Money receives special treatment because it's a medium of exchange and not something for final private consumption. Up until recently, the Australian Taxation Office (ATO) took the view that cryptocurrencies did not meet the definition of 'money' because they have an independent value rather than being a debt, credit or promise to make a payment, and they don't meet the definition of money under GST law. The impact was that when people used digital currencies as payment, this could trigger GST twice; once on the goods or services being purchased, and also on the supply of the digital currency to the other party. So, the Government has changed the definition of money for GST purposes from 1 July 2017. Now, trades of cryptocurrency are disregarded for GST purposes, unless the trade is for a payment of money or digital currency (for example you are in the business of trading cryptocurrencies). Cryptocurrencies are now taxed in a similar way for GST purposes to foreign currency.

But it's not just GST to consider. Income tax and capital gains tax (CGT) issues might also arise in transactions involving cryptocurrency depending on how and why you are using it.

 

Individuals trading in cryptocurrencies

If you hold cryptocurrency for your own personal use and you paid $10,000 or less to acquire the digital currency, then there is generally no tax impact when you dispose of the currency. However, if the cryptocurrency is not held for your personal use and enjoyment then there are some tax issues that can arise. 

 

 

If the cryptocurrency is held as an investment (i.e., not for personal use and enjoyment) or the cost is more than $10,000 then CGT might apply when you sell or exchange the currency. At the time of writing the price of Bitcoin was just under US$6,000 – up from just under US$1,000 at the beginning of 2017 (and just over $13 at the start of 2013). The taxing point for CGT purposes is normally when a contract is entered into. If there is no contact (which is often the case with digital currencies) the taxing point is when ownership changes.

 

The line between personal use and investment can be very thin. It will be difficult to argue that you hold cryptocurrency for personal use if you use it irregularly to purchase goods and services and you made a large gain from holding and trading it.

 

Businesses trading in cryptocurrencies

If your business accepts cryptocurrency as payment for goods or services, these payments are treated in the same way as any other. That is, if your business is registered for GST, the price paid by the person paying in the digital currency should include GST. Likewise, if you purchase goods or services for use in your business then you should generally be able to claim GST credits on the transaction in your activity statement, even if you used digital currency to make the purchase.

If you are in the business of trading cryptocurrencies and your business is registered for GST, you charge GST on the exchange of the currency and claim the GST credits in your activity statement. The new legislation does not prevent GST from applying to the supply of cryptocurrencies in exchange for a payment of money or digital currency. 

It is also possible that someone could hold cryptocurrency as trading stock if it is held for the purpose of sale or exchange in the ordinary course of a business.  Any gains from the trades are then taxed in the business's income tax

return (or individual tax return for sole traders).

 

CGT concessions and exemptions are not generally available in this case. If you are in the business of trading cryptocurrencies, that is, you approach the trading in a business-like manner, then you can generally claim losses and other business expenses.

 

The tax laws can be complex in this area and it's important to ensure that you get the right advice. Contact us.

 

Interested in the impact on SMSFs?  See our article Can your SMSF invest in Cryptocurrencies?

 

CPA Australia interviewed more than 2900 small business owners in eight markets in its annual survey of small businesses in the Asia-Pacific and the findings provide some quick reference points for the DOs and DONT's in growing a small business.

The factors that had the most positive impact on businesses over the past 12 months were strongly   "people-focused" with the categories of  'customer loyalty', 'good staff' and 'improved customer satisfaction' showing a rating of 38% or higher, whether or not the business grew.

However, the businesses that grew strongly were significantly more likely to say that 'improved customer satisfaction', 'improved business strategy' and 'improved business management' had a major positive impact on their business.

Among those small businesses showing significant growth, the focus tended to be on innovation, e-commerce, social media, training and exporting and were more likely to reach out to existing and potential clients through social media and e-newsletters and thereby make it easier for consumers to buy online.

Those businesses were also prepared to invest in staff and increased training as their firms expand.

Following on from the survey, we've prepared a quick list of the DOs and DON'Ts for growing your business:

DO

Innovate - offer new technology and products or services

Ask for outside advice - Consult your financial adviser a couple of times a year

Plan and measure your progress - Map out the future

Hire the best and keep them engaged - Offer stimulating work and a positive culture

Build strong relationships - Work out where yours are and nurture them

 

DON'T

Don't rely on too few customers - reach out through social media

Don't underestimate the importance of effective financial management - Use your accountant and adviser to best advantage

Don't leave contingency planning too late - Plan for the slow times during the good times

Don't ignore what is happening in your market - keep up with technology and production advances

Don't wait too long to get help - Seek assistance from accountants, planners and bankers

 

In short, confident businesses are significantly more likely to undertake the activities that will help them grow over the long term.

 

For a confidential discussion about how your business might benefit from advice, contact us or book a consultation.

The Australian Taxation Office (ATO) is warning self-managed superannuation fund (SMSF) trustees and retirees about the risks of some emerging retirement planning arrangements that they may consider, or be approached about.

ATO Deputy Commissioner James O'Halloran said the ATO knows most people do the right thing and work hard to save for their retirement.

"If a taxpayer becomes involved in any illegal arrangement, even by accident, they may incur severe penalties, jeopardise their retirement savings and risk losing their rights as a trustee to manage their own fund.  For this reason, today we are releasing further information on these arrangements through our Super Scheme Smart program."

Super Scheme Smart is designed to give taxpayers access to relevant case studies and information packs to ensure they are well-informed about illegal arrangements, explain the significant risks associated with those arrangements, what warning signs to look for and where to go for help.

Mr O'Halloran said, "We are working hard to shut down illegal arrangements quickly, but the best defence for taxpayers and their advisers is to be aware. Promoters of the arrangements may overtly target SMSF trustees and self-funded retirees, including small business owners and those involved in property development with significant assets."

"The arrangements may be cleverly disguised to look legitimate, involve a lot of paper shuffling and framed as being designed to give a taxpayer a minimal or zero amount of tax or even a tax refund or concession" Mr O'Halloran said.

"Just because an arrangement is structured in a way which appears to satisfy certain regulatory rules does not mean it is legal. Such arrangements can put SMSFs at significant risk of breaching the superannuation regulatory rules as well as the taxation law."

The ATO has previously raised concerns about dividend stripping arrangements and contrived arrangements involving diversion of personal services income to an SMSF.

There are some emerging arrangements the ATO also wants to bring to people's attention, including:

- Artificial arrangements involving SMSFs and related-party property development ventures.

- Arrangements where an individual or related entity grants a legal life interest over a commercial property to an SMSF. This results in the rental income from the property being diverted to the SMSF and taxed at lower rates whilst the individual or related entity retains legal ownership of the property.

- Arrangements where individuals (including SMSF members) deliberately exceed their non-concessional contributions cap to manipulate the taxable component and non-taxable component of their fund balance upon refund of the excess.

Mr O'Halloran said "Remember, if it looks too good to be true, it usually is."

If you are concerned about the legality of an arrangement do not hesitate to contact us before entering into a venture. 

#dividendstripping   #SMSFbeware   #clarkemcewan   #SMSFatrisk

How to Get More Done in Less Time

Have you ever spent all day working, but at the end, after at least eight hours of straight desk time, you have nothing to show for it? How is that even possible? And how can you fix it?

By doing something unexpected: working for less time. It sounds backwards, but working less can up your productivity. As more demands are placed on you and your life gets busier, you often compensate by working harder and for longer periods of time. Instead, you need a smarter system that allows you to get more work done per hour. And to do that, you need to remove the activity that clouds your mind and slows you down: multitasking.

The human brain is not built to multitask. Ask someone to walk fast in a straight line and solve a difficult math problem; their walking speed will slow down while they try to calculate the answer.

When you do two things at once, your brain is "context switching." When you stop doing task #1 to start task #2, you have to mentally bookmark what you were doing and where you were to then come back after you finish task #2 to start task #1 again. This confusing chain of events is called a context switch-and just like a computer, your brain slows down when you give it multiple commands at once.

Many people live in a "mixed mode"-they're not fully focused on work, but they're not completely switched off, either.

It slows them down, burns them out and drains them of all their energy.

Signs You're Stuck in Mixed Mode:

1. You work until you're distracted. You work on one task until you get side-tracked, then you start a new task until your attention is diverted again. You have trouble focusing.

2. You are always multitasking and never fully disconnecting. You're at a social dinner but you talk about work, or you're at home with your family but you check emails constantly. You never completely relax and recover, so you feel tired all the time.

3. You don't tend to work on tasks until they are 100 percent complete. By ignoring the mental cues that you need to take a break, you run down your mental energy faster. When your concentration evaporates, you don't have the energy to reboot, so you get stuck in mixed mode.

Our bodies have natural "work and rest" cycles built into them. A runner who runs without rest will damage their body, but a runner who over rests will become weak. The solution? To run and cause a little stress to the body, then have a period of rest where the body recuperates and makes itself stronger.

The secret to personal performance is to work in a similar way. If you work without breaks, you will burn out-mentally and physically. But if you unplug too often, your performance will weaken. So to maximize your output, you need to focus your working time in 90-minute chunks ("focus mode") and follow up with 30-minute breaks ("stop mode").

You should try to get your first "focus mode" completed as early in the day as you can-logging 90 minutes of focused, uninterrupted work first thing will give you something substantial to show with just one session.

Next up will be your first "stop mode"-that 30-minute period where you're completely disconnected from work. The idea is to switch gears, to switch modes. So get away from your desk. Don't even think about work. Unplug and unwind. When you come back to your work, you should feel recharged.

If you run the "focus mode" session four times a day, you'll get six solid hours of work done, which is much better for you than working eight straight hours. And it's definitely better than eight straight hours of being in the "mixed mode."

Your thoughts will feel clearer because you're focused. You'll feel more energetic because you're not wasting your energy in the mixed mode any more. And you'll get more work done in less time.

Getting out in front with your business

Remember when you were excited about running your own business because you got to do the type of work you always wanted to do?  

Have you turned into the night owl who stays up until all hours balancing the books and spreadsheets?  If you want to escape, read on...

 

It's a scenario we often see when a business owner first comes to see us for advice.  They tell us that they absorb some of the expenses of running their own business by handling the accounts themselves, but there is a big cost in taking this approach because the very person who should be out there "front and central" as the face of the business is stuck in the back room with the spreadsheets.  

According to a report based on research from the International Federation of Accountants, using accountants is linked to better performance and higher profits for business. Those business owners who are doing their own accounting are not only adding frustration (and sleepless nights) to their lives but compromising their bottom line profitability as well.

Too often people associate accountants only with tax returns. However, Clarke McEwan prides itself on its business advisory role.  With regular financial "check-ups" about business performance we can analyze your accounts and see trends that might identify opportunities that would otherwise be missed, or prevent risks before they lead to disasters.

 

We have also found our clients can benefit from accounting and tax advice that has proven to work for similar businesses. 

 

Then there is the benefit of another point of view:  once you come on board we know your objectives and we can quickly see when your business practices are getting off track or are no longer aligned with your goals.

 

We also communicate with your staff and managers about how to improve business performance by developing inherent and sustainable values.

Expert analysis of your business leads to better decision-making and helps you to apply your vision more effectively. Global trends in every field have shown that businesses of all sizes, and even in all places, have better performance when using an accountant.    Accountants are experts in financial management, not just taxes, and this expert knowledge can be used to help your business thrive. 

If you are looking for ways to apply your goals and values to your business's financial decisions, we are here to help. Our Business advisory service gives you the advantage of having an expert on-board, while allowing you to focus on your vision for your business.

Talk to Clarke McEwan about how we can increase your performance and help you get out from underneath your spreadsheets.

Given the state of the property market in Australia these days, a not-uncommon situation can arise where a residential property owner seeks to demolish and subdivide the block containing the family home and build residential units.T implications of subdividing and building on the family property.

If a taxpayer has the available land of course, this can be a solid strategy. However it can cause headaches from a tax perspective - and in some cases the ability to access the main residence exemption and even the CGT discount can be lost.

Divvying up the backyard
A question that arises every now and then concerns the effects on the CGT main residence exemption where the owner decides to subdivide the land containing their principal place of residence, in some cases demolishing the existing home, and build residential units.

The scenarios that are typically raised involve one of the following choices:

  • demolish the main residence, subdivide the land, build two home units, sell one and live in the other
  • subdivide the land, build a home unit on the newly created previously vacant portion, and sell the new unit (with the original residence staying intact)
  • subdivide the land and sell the non-main residence block (with original dwelling staying intact on the remaining block).
  • When dealing with these situations, the following pertinent tax questions may need consideration:

    1. Whether demolition of the original main residence would trigger a capital gain or loss (if any)?
    2. What are the CGT implications of subdividing the property?
    3. Is the sale of the home unit or vacant land a "mere realisation" or is there is a profit-making activity conducted?
    4. How would the original dwelling/unit, retained and lived in by the taxpayer, be treated for CGT purposes?

    Note that there may be some GST implications that are not dealt with in detail here. Suffice to say that any venture undertaken by home owners in building units for the purposes of sale would, from the ATO's viewpoint, most likely constitute an "enterprise" and in some cases, depending on the circumstances, may necessitate an ABN and registration for GST.

    For a consultation about building on the family property and the possible tax implications contact us or  Book an Appointment.

     

    Three significant factors are shaping the profession of the future, Cathy Engelbert, CEO of Deloitte, told a gathering of accountants recently: the impact of new technologies, new demographics, and new client demands.

    "We're living in a time of unprecedented change and innovation," the Big Four firm CEO told the 110th annual meeting of the National Association of State Boards of Accountancy. "The future will evolve in ways we can't even imagine."

    Driving that evolution will be three particular shifts: the way in which technology is reshaping how we work, the way in which demographics and innovation are reshaping the workforce of the future, and the ways in which the needs of investors and shareholders are changing.

    The technology trend

    "Accountants have been around for just about every technology change that's ever happened -- starting with clay tokens thousands of years ago," Engelbert said, but the coming changes are unlike any in recent memory, comprising what she described as "the fusion revolution -- the fusion of work and technology and biology."

    "The proliferation of advanced technology can fundamentally change how we do audits, conduct accounting and serve the capital markets," she continued. "Now we have predictive analytics, automated workflow technologies. Last year was 'The Year of Cognitive Tech' at Deloitte," with the firm exploring and innovating new ways to apply the technology to its work. "We're doing better risk analysis. That is driving more real-time and forward-looking insight."

    "Imagine the day when technology allows us to audit 100 percent of a company," she urged. "Imagine the day when robotics is used to automate manual tasks like invoice processing. That day is coming. It's not totally here yet, but it's not science fiction, either."

    And while some in the profession may be concerned about technology automating accountants out of work, she pointed out that the field has already undergone intense automation over the past 30 years -- and has only grown.

    "Only one job out of the 200 listed in the 1950 census has been automated away. But the nature of jobs will change -- and new jobs will be created," she explained, citing a study that says 65 percent of current grammar school students will have a job that doesn't exist yet."

    What's more, no matter how much work computers and software may be created to do, "Humans will still be necessary for empathy, curiosity, creativity, intelligence and more. These are the hardest things to automate and replicate," she said.

    Demographics and innovation

    "The how, where and what of work is changing, and we need to adapt quickly," Engelbert said, citing the rise of the "open talent" economy exemplified by Uber drivers and Airbnb owners.

    Millennials are much more willing to change jobs and to create their own pathways to success. "Younger, digitally connected workers are managing their careers much more intensively," she explained, and the profession needs to support them. "How are we empowering our younger accountants? How are setting them up for success?"

    Almost as important is the need to make accounting attractive. "We need to tell our story to younger and younger people -- and we're not doing that very well," she warned. "We need to get on the radar of college freshmen before they decide on their majors -- when they're juniors and seniors in high school."

    "We have a dynamic, exciting profession -- we just don't talk about it that way," she continued, advising, "Whatever you find energizing about the profession -- talk to young people about that."

    Changing clients needs

    Just as new technologies are reshaping how accountants work, the firehose of data that's now available is changing what clients, investors and other stakeholders are looking for from accountants.

    "The volume, velocity and veracity of information that's coming out now makes for difficulties," Engelbert said. "We need broader insights that go outside the bounds of the traditional financial reports."

    "We need to fuse talent and technology," she said. "We can evolve this profession to much, much greater heights."

    In the end, she concluded, accounting faces sweeping, unprecedented changes -- but they come with tremendous opportunities.

     


    Contact Clarke McEwan