Make sure you claim your working from home tax deductions

Make sure you claim your working from home tax deductions

While it’s difficult to find any real positives during COVID-19, as a result of the quarantine requirements forcing so many people to work from home the ATO has introduced a new shortcut method for calculating related tax deductions.

The method is very straightforward. All you do is calculate the total number of hours you’ve worked from home during the COVID-19 period and multiply those hours by $0.80. The final amount is your tax-deductible expense claim. If there are two people working from home, you can both claim the $0.80 per hour. Record keeping is fairly basic, all you need to do is keep a record of the hours you have worked from home.

Ian Alabakis, of Alabakis Chartered Accountants, told us the shortcut method is a special arrangement for COVID that was originally due to finish in June, but it can now be applied up until 30 September 2020.

This means, you will be able to use the shortcut method to calculate your working at home expenses for the period from:

  • 1 March 2020 to 30 June 2020 in the 2019–20 income year, and
  • 1 July 2020 to 30 September 2020 in the 2020–21 income year

Ian says the ATO may extend this period, depending on when work patterns return to normal and added that in most cases, if you are working from home as an employee, there will be no capital gains tax (CGT) implications for your home.

What you can’t claim

If you’re working from home because of the COVID-19 lockdown, you generally can’t claim:

  • Expenses such as mortgage interest, rent, insurance and rates
  • Coffee and other general household items
  • Costs related to children’s education

More details are available from the ATO.

Could it be Europe’s time to shine?

Could it be Europe’s time to shine?

Over the past 10 years, US shares have delivered more than double the returns of European shares. That relative outperformance has become so extreme it is currently four standard deviations above the 50-year average, with 17% of the 102% outperformance coming in just the four months since the end of February.

Chart 1: The outperformance of US vs European share market returns has reached extreme levels

Why the outperformance?

 Earnings growth: over the long-term share markets are driven by earnings, so it should come as little surprise that US companies have delivered more than double the earnings growth of their European counterparts over the past 10 years.

Chart 2: US earnings growth has been more than double Europe ex-UK over the past 10 years

Growth stocks vs value stocks: the past 10 years has seen the greatest performance gap on record between ‘growth stocks’, which include companies with higher revenue and earnings growth forecasts, and ‘value stocks’, those companies that tend to have lower forecast growth for revenue and earnings and therefor trade on lower price to earnings (PE) ratios. This is in large part explained by record low interest rates making anything with growth look extraordinarily attractive.

Chart 3: growth stocks have outperformed value stocks by the greatest margin on record over the past 10 years

Europe’s weighting to ‘value sectors’, (in this case consumer goods, financials and industrials), is a hefty 52%. In the US, those three sectors have a total index weighting of 29%.

The tech stocks: the best performing growth sector has been technology and most of the world’s leading IT and social media companies are, of course, based out of the US. As a consequence, the S&P 500 has a 27% weighting to the IT sector, and Vanguard’s US IT ETF has returned 20.3% per annum for the past 10 years.

By contrast, not only is Europe’s weighting to IT a mere 6%, but the iShares Europe Technology ETF has returned only 12.6% per annum for the past 10 years. So Europe cops the double whammy of a smaller weighting and lower returns..

Higher GDP growth: in the wake of the GFC, European leaders became obsessed with an austerity-driven approach to re-establishing economic order and fiscal spending was constrained in an effort to reduce public debt. Meanwhile, although the US talked about fiscal restraint, there were huge spending programs soon after the GFC and then the Trump administration pushed through tax cuts on top of that.

The upshot is that over the past 10 years, at almost 5%, the US’s average budget deficit as a proportion of GDP was close to double that of Europe’s, and GDP growth has been 50% higher at 2.3% vs 1.6%. Of course, there were other factors involved, but economies face a real headwind when government spending is low and companies’ and households’ willingness to borrow isn’t high enough to offset it.

Valuations

Having risen so strongly for 10 years, the US share market is now a lot pricier than almost all other markets. The Cyclically Adjusted PE Ratio (CAPE), which aims to account for inflation and the business cycle, for the US currently sits at 30 and for Europe it’s 19.

It’s important to remember the CAPE ratio provides absolutely no help about when, or arguably even if, a market will rise or fall, it’s simply an indicator of relative value. However, Damien Hennessy of Heuristics Investment Systems says, “We’ve been advising our clients to consider a tactical overweight position in favour of European shares over US on the basis that the US’s economic tailwinds may have played out, together with the uncertainty of the approaching election.”

A catalyst

Trying to forecast what the catalyst might be to cause the US and European share markets to converge is pure guesswork, but there are a couple of clear candidates.

Last week the European Union had what has been described as a breakthrough moment when a A$1 trillion recovery package was approved. There are still some hoops to jump through before final approval, but the fact it has even been proposed is a huge step toward finally using fiscal policy to support growth rather than relying on lower and lower interest rates.

Meanwhile, in the US, the Whitehouse and Congress are still negotiating some kind of extension to the government support programs that have underpinned a bounce back in consumer spending, but which are set to expire at the end of July. Given Trump faces an election and is trailing in the polls, he will presumably stop at nothing to make sure there is an extension of some kind, but it’s already so late there will almost certainly be a gap in household payments. This is very likely to show up in consumer confidence and spending.

Finally, as Hennessy point out, in past recoveries following a bear market, value stocks have tended to outperform growth by 5-7% over a 6-12 month period.

As always, when things look this extreme, it doesn’t mean you sell all your US exposure and switch it into Europe. You could have said they were extreme two years ago and you’d have missed out. It does mean, however, you might consider reweighting to reflect that four standard deviations is an awful lot.

Bubble Trouble Brewing

Bubble Trouble Brewing

This article by Jason Todd, a strategist at Macquarie Wealth, takes a measured look at whether the Australian share market is overvalued, and whether the tech sector is in a bubble.

The bulls versus the bears

When equity markets began to rise back in late March, we had no problem thinking that liquidity would do the ‘heavy lifting’ as long as COVID-19 cases were not still rising and economic expectations were not still falling. It was right to take this stance. Now the equation seems much harder to solve. COVID-19 cases are rising again but markets do not seem particularly concerned even though valuations have expanded by an extraordinary amount. There appears to be two schools of thought emerging to explain the current backdrop.

The first, suggests that markets are becoming irrational and are in the midst of a liquidity-fuelled rally that is fast taking on bubble-like characteristics. This view argues that investors are being driven by the fear of missing out (FOMO), paying an unjustified scarcity premium for earnings growth and that momentum rather than fundamentals matter. 

The alternative view is that markets are pricing in a combination of record low bond yields, an unwavering commitment by policy makers to keep economies and the financial system afloat and the willingness to pay a premium for structural growth. This is pushing valuations higher in areas where COVID-19 has accelerated change such as technology while pushing valuations lower in areas under downward pressure such as traditional retail and property.

It is hard to say which view will ultimately prevail as we think there are elements of truth to both sides. The risk-reward for certain pockets of the market are becoming hard to justify, but in general, we do not see broad signs of “bubble trouble” across equities. Traditional warnings signs such as speculation activity are not broadly evident even if tech valuations are looking troublesome.

Are equities in a bubble?

A ‘bubble’ is defined as a rapid rise in the price of an asset that is not supported by fundamentals. A typical sign of a bubble is a sharp increase in valuations to extreme levels. For the Australian market, valuations are high but outside of a reversion in the drivers supporting risk assets in general, we don’t think they have reached a self-correcting level.

The 12-month forward P/E multiple for the Australian market has risen sharply since 23rd March and now sits at a near-record high of 19.1x. However, the P/E multiple has been boosted by the COVID-19 induced collapse in earnings which we think is not a permanent hit. In addition, the CAPE is only 15.9x. This is well below previous peaks and is below its long run average of 16.6x. So far so good…right?

Bubble Trouble Brewing image1
Source: Factset, IRESS, MWM Research, July 2020

Is there bubble trouble in pockets of the market?

We do not think Australian equity valuations are anywhere near bubble territory and nor do we think other traditional indicators of bubble-like behaviour are evident. However, we cannot say the same for Australian technology stocks which are now trading on an eye watering 60x forward earnings!

These valuation metrics look even more concerning when only the WAAAX stocks are considered (Wisetech, Afterpay, Appen, Altium and Xero). These 5 stocks have seen prices rise more than 500% over the past 3 years versus the broader ASX200 index which has barely risen above 0% over the same period. This has pushed 12-month forward P/E valuations for WAAAX to a new all-time high of 168x versus a paltry 19x for the ASX200.

Bubble Trouble Brewing image2
Source: Factset, IRESS, MWM Research, July 2020

Part of the extraordinary price appreciation and valuation re-rating has been due to a much stronger and less cyclical earnings outlook, but it has also been fuelled by record low interest rates which disproportionately benefit high multiple/long earnings duration stocks. In fact, the WAAAX stocks have seen earnings grow 2.5x over the last 3 years – an impressive outcome versus the broader market which has seen earnings decline. However, this has been dwarfed by the near 6-fold increase in share prices over the same period!

Bubble Trouble Brewing image3
Source: Factset, IRESS, MWM Research, July 2020

To put this in context, the WAAAX stocks have seen earnings increase by A$181m and their market cap expand by a staggering A$41bn. Back in 2017 investors were willing to pay 71 for each $1 of earnings and now these same stocks are commanding 168 for each $1 in earnings. In other words, investors have been willing to ‘pay up’ for the superior earnings performance of WAAAX stocks but at an increasingly higher and higher rate.  

Is there a global growth stock bubble?

The re-rating of growth stocks is not unique to Australia. The WAAAX ‘bubble’ is part of a larger issue relating to the willingness of investors to bid up stocks which have a strong, structural, and/or transparent earnings growth outlook. ‘Growth’ stocks (of which WAAAX is a component) have been fiercely bid up as one of the few sources of structural earnings growth in the Australian market.

In other words, in a world where earnings growth is scarce, any earnings growth has become more valuable. This has also been seen in the recent performance of the FAANG’s (Facebook, Apple, Amazon, Netflix and Alphabet – formerly Google). This collection of stocks has also seen valuations ratios explode in recent years with momentum rising even faster in recent months because of an acceleration in their earnings outlook thanks to COVID-19. 

Bubble Trouble Brewing image4
Source: Factset, IRESS, MWM Research, July 2020

The other big factor, ultra-low interest rates, has also played a part. All other things equal, a lower discount rate would not only increase the fair value P/E multiple of the market generally but would also increase the dispersion between high and low P/E stocks. However, the current unprecedentedly high P/E dispersion exceeds the extremes seen during the Tech bubble of late 1999/early 2000, which suggests caution may be merited.

What’s the right price for “scarcity” value?

In a world where earnings growth is scare, what is the right price for the rarest of structural earnings stocks like technology, which the market is assuming can access that growth? Is it 50x future earnings, 100x future earnings, an eye watering 168x future earnings or something even higher? Only time will give us the right answer, but we think it is worthwhile trying to determine what conditions would need to prevail in order for these stocks to maintain these multiples (or the alternative – what would need to change for these stocks to suddenly lose their scarcity premium?). Gavekal’s Louis Gave believes there are 4 factors that would drive this reassessment:

  • An improvement in the macroeconomic growth outlook and higher interest rates.
  • Markets stop seeing technology companies as having scarcity value (i.e. government regulation).
  • Another scarce asset becomes popular (i.e. gold? Bitcoin?); and
  • Technology stocks disappoint.

We think equity markets are optimistically priced and waiting for economic fundamentals to catch up, but they are not at an extreme (bonds are even more expensive). Similarly, retail sentiment is bullish but not exuberant, cash levels have come off their highs, but remain exceptionally elevated and capital raisings are still being gobbled up (predominately by institutional and not retail money). On the other hand, there have been some anecdotal signs of rising market ‘madness’ in the US with investors fiercely bidding up bankrupt companies, retail account openings have exploded (in part because many have been stuck at home) and some daily price moves have been extreme.

The technology sector is another kettle of fish. In the US, valuations are high but nothing in comparison to our own WAAAX stocks. On the other hand, there are still few signs of speculative activity stretching more broadly into financial assets and the scale of global (and domestic) liquidity injections is nothing we have seen before. We are not saying that fundamentals don’t matter because in the end they always do, but it is quite possible that the combination of easy money and a slightly better cyclical outlook push multiples for both technology and the broader market even higher!

Over the coming 12 months, we think investors should maintain a pro-growth portfolio allocation (overweight equities versus bonds and cash) and be prepared to look through any near-term fluctuations or use weakness to reallocate back into the equity market. Despite near-term risks, we think the downside risks are more likely to slow the recovery rather than put the cyclical recovery at threat. This could lead to a more drawn out rebound, but if economic growth and corporate earnings continue a path back to trend, then, in combination with record low interest rates, this will be sufficient to propel markets higher. In addition, while valuations for equity markets are not overly appealing, they are even worse for the bond market with yields not far from their lower bound and as a result bonds continue to give away a substantial yield premium to equities.

Jobkeeper Payment

Jobkeeper Payment

The Federal Government last night announced its 3rd, and largest, round of stimulus with a $130 billion package aimed at businesses impacted by the COVID-19 pandemic. Eligible businesses will receive a fortnightly wage subsidy up to $1,500 per eligible employee as part of a Federal Government action to prevent the significant jobs losses due to the COVID-19 pandemic. 

 The Government has released a helpful Fact Sheet detailed below.  

OBLIGATIONS ON EMPLOYERS

To receive the JobKeeper Payment, employers must:

  • Register an intention to apply on the ATO website and assess that they have or will experience the required turnover decline.
  • Provide information to the ATO on eligible employees. This includes information on the number of eligible employees engaged as at 1 March 2020 and those currently employed by the business (including those stood down or rehired). For most businesses, the ATO will use Single Touch Payroll data to pre-populate the employee details for the business.
  • Ensure that each eligible employee receives at least $1,500 per fortnight (before tax). For employees that were already receiving this amount from the employer then their income will not change. For employees that have been receiving less than this amount, the employer will need to top up the payment to the employee up to $1,500, before tax. And for those employees earning more than this amount, the employer is able to provide them with a top-up.
  • Notify all eligible employees that they are receiving the JobKeeper Payment.
  • Continue to provide information to the ATO on a monthly basis, including the number of eligible employees employed by the business.

BACKGROUND ON JOBKEEPER PAYMENT

Under the JobKeeper Payment, businesses impacted by the Coronavirus will be able to access a subsidy from the Government to continue paying their employees. Affected employers will be able to claim a fortnightly payment of $1,500 per eligible employee from 30 March 2020, for a maximum period of 6 months.

Eligible empyloyers

Employers will be eligible for the subsidy if:

  • their business has a turnover of less than $1 billion and their turnover will be reduced by more than 30 per cent relative to a comparable period a year ago (of at least a month); or
  • their business has a turnover of $1 billion or more and their turnover will be reduced by more than 50 per cent relative to a comparable period a year ago (of at least a month); and
  • the business is not subject to the Major Bank Levy.

The employer must have been in an employment relationship with eligible employees as at 1 March 2020, and confirm that each eligible employee is currently engaged in order to receive JobKeeper Payments.

Not-for-profit entities (including charities) and self-employed individuals (businesses without employees) that meet the turnover tests that apply for businesses are eligible to apply for JobKeeper Payments.

Eligible employees

Eligible employees are employees who:

  • are currently employed by the eligible employer (including those stoo down or re-hired);
  • were employed by the employer at 1 March 2020;
  • are full-time, part-time, or long-term casuals (a casual employed on a regular basis for longer than 12 months as at 1 March 2020);
  • are at least 16 years of age;
  • are an Australian citizen, the holder of a permanent visa, a Protected Special Category Visa Holder, a non-protected Special Category Visa Holder who has been residing continually in Australia fro 10 years or more, or a Specia Category (Subclass 444) Visa Holder; and
  • are not in receipt of a JobKeeper Payment from another employer.

If your employees receive the JobKeeper Payment, this may affect their eligibility for payments from Services Australia as they must report their JobKeeper Payment as income.

APPLICATION PROCESS

Business with employees

Initially, employers can register their interest in applying for the JobKeeper Payment via ato.gov.au from 30 March 2020.

Subsequently, eligible employers will be able to apply for the scheme by means of an online application. The first payment will be received by employers from the ATO in the first week of May.

Eligible employers will need to identify eligible employees for JobKeeper Payments and must provide monthly updates to the ATO.

Participating employers will be required to ensure eligible employees will receive, at a minimum, $1,500 per fortnight, before tax.

It will be up to the employer if they want to pay superannuation on any additional wage paid because of the JobKeeper Payment.

Further details for businesses for employees will be provided on ato.gov.au

Businesses without employees

Businesses without employees, such as the self-employed, can register their interest in applying for JobKeeper Payment via ato.gov.au from 30 March 2020.

Businesses without employees will need to provide an ABN for their business, nominate an individual to receive the payment and provide that individual’s Tax File Number and provide a declaration as to recent business activity.

People who are self-employed will need to provide a monthly update to the ATO to declare their continued eligibility for the payments. Payment will be made monthly to the individual’s bank account.

Further details for the self-employed will be provided on ato.gov.au.

Employer with employees on different wages

Adam owns a real estate business with two employees. The business is still operating at this stage but Adam expects that turnover will decline by more than 30 per cent in the coming months. The employees are:

  • Anne, who is a permanent full-time employee on a salary of $3,000 per fortnight before tax and who continues working for the business; and
  • Nick, who is a permanent part-time employee on a salary of $1,000 per fortnight before tax and who continues working for the business

Adam is eligible to receive the JobKeeper Payment for each employee, which would have the following benefits for the business and its employees:

  • The business continues to pay Anne her full-time salary of $3,000 per fortnight before tax, and the business will receive $1,500 per fortnight from the JobKeeper Payment to subsidise the cost of Anne’s salary and will continue paying the superannuation guarantee on Anne’s income;
  • The business continues to pay Nick his $1,000 per fortnight before tax salary and an additional $500 per fortnight before tax, totalling $1,500 per fortnight before tax. The business receives $1,500 per fortnight before tax from the JobKeeper Payment which will subsidise the cost of Nick’s salary. The business must continue to pay the superannuation guarantee on the $1,000 per fortnight of wages that Nick is earning. The business has the option of choosing to pay superannuation on the additional $500 (before tax) paid to Nick under the JobKeeper Payment.

Adam can register his initial interest in the scheme from 30 March 2020, followed subsequently by an application to ATO with details about his eligible employees. In addition, Adam is required to advise his employees that he has nominated them as eligible employees to receive the payment. Adam will provide information to the ATO on a monthly basis and receive the payment monthly in arrears.

Employer with employees who have been stood down without pay

Zahrah runs a beauty salon in Melbourne. Ordinarily, she employs three permanent part-time beauticians, but the government directive that beauty salons can no longer operate has required her to shut the business. As such she has been forced to stand down her three beauticians without pay.

Zahrah’s turnover will decline by more than 30 per cent, so she is eligible to apply for the JobKeeper Payment for each employee, and pass on $1,500 per fortnight before tax to each of her three beauticians for up to six months. Zahrah will maintain the connection to her employees, and be in a position to quickly resume her operations.

Zahrah is required to advise her employees that she has nominated them as eligible employees to receive the payment. It is up to Zahrah whether she wants to pay superannuation on the additional income paid because of the JobKeeper Payment.

If Zahrah’s employees have already started receiving income support payments like the JobSeeker Payment when they receive the JobKeeper Payment, they will need to advise Services Australia of their new income.