The Post-Pandemic Boom

The Post-Pandemic Boom

    2021 is shaping up to be a year of strong economic growth, and, right now, the indicators are looking good for financial markets as well.

Australia

    • The government response to the COVID shutdowns  was swift and big. In total, the federal government is spending $272 billion, equivalent to 14% of GDP, and the states $122 billion. All that newly created money has to go nowhere.
    • Early on, households saved a lot of the extra cash. The June quarter savings rate hit 19.8%, 8x higher than the year before and only 0.5% below the 60-year peak set in 1974. The Commonwealth Bank estimates households will have about $100 billion of savings, or 5% of GDP, that has been accrued between the start of COVID and December.
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      • To that you can add $34 billion of super withdrawals so far, with Treasury estimating an eventual total of $44 billion.
      • After a record plunge to 76 in April, consumer confidence has now had 11 consecutive weekly gains to 108.
      • It now appears Australians are spending those gains. Commonwealth Bank reported credit card spending jumped 11% year on year in mid-November. Restaurants in New South Wales enjoyed seated dining numbers 55% higher than a year ago, while Queensland was a whopping 79% and even shellshocked Victoria was up 54%
      • Retailers have seen record spending in the Black Friday sales, prompting Gerry Harvey to say, “This is like the greatest boom I’ve ever seen in my lifetime”.

US

      • The US fiscal package injected 13% of GDP and pushed the personal savings rate to almost double what it was at the start of the year.
      • Low interest rates have ignited the US housing market, where prices are now 10% above the pre-GFC levels. Homeowners’ equity is at a record high and the increase in the pending sales index is parabolic.
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      • More than 80% of stocks in the S&P 500 are trading above their 200-day moving average, a sign of positive market breadth that has only been seen twice in the past 20 years.
      • We are seeing 52-week highs in share markets across the world, from China, to Japan, to Europe, to Australia.
      • Global equities have seen a record inflow post the COVID vaccine announcements.
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While the indicators are stacking up well, there are, of course, no guarantees that markets will play ball and they sure do have a way of wrong-footing us. However, it’s noteworthy that nothing in the economy was ‘broken’ going into the pandemic downturn; there was no particular sector on the cusp of being crushed by excessive debt and while valuations were not cheap, they were certainly defensible.

Now is not the time to be sitting on lots of cash.

The 2020 Federal Budget

The 2020 Federal Budget

 The 2020 Federal Budget (postponed from May), has been characterised by spending and bringing forward tax cuts to get the economy moving again. Make no mistake, the numbers are big! However, COVID has been seen as a great a threat to the global economy has faced in a very long time (many suggest since The Great Depression), and so requires equally strong and unprecedented measures.

The Treasurer, Josh Freydenberg has said that once the economy recovers and unemployment falls comfortably below 6%, he will then look to tackle the deficit. This is forecast to be in 2023-2024.

Unlike other budgets where we find major changes to superannuation requiring more strategic assessment and planning, this budget is relatively straight forward.

  • Personal tax cuts have been brought forward 2 years. This means many of you earning over $50,000 pa will have at least an additional $41 per week in your pockets. This will be back dated to 1st July 2020.
  • Further support for pensioners, low income earners and job seekers. This includes two cash payments and incentives for employers to hire unemployed workers.
  • Making it easier to choose a super fund. There will be an interactive online comparison to assist you in making a decision on where to invest your super, as well as making it easier to have your new employer contribute to your existing fund.
  • First home buyer purchase caps lifted to assist an additional 10,000 first home buyers.
  • Business tax changes for small business including immediate tax write-off, and applying tax losses from 2019 – 2022 against previously taxed profits.
  • Increased business investment with $1.3bn for initiatives in ‘modern manufacturing’ and $5.7bn for new and accelerated infrastructure projects.

 The attached article provides a comprehensive summary from Westpac Economics.

Massive international tax scam

Massive international tax scam

The ACCC recently told Google and Facebook they have to negotiate with Australian media sources to effectively pay them for their news. This has sparked a furious response from both companies because they are conscious governments all over the world are watching very carefully, and if they give in to Australia it could well open the proverbial floodgates – much like the fight over plain paper packaging for cigarettes.

As well as sucking a huge amount of advertising revenue out of domestic media franchises, these transnational companies are renowned for utilising every legal loophole they can to avoid paying tax, especially the tactic of attributing revenue to low tax, offshore locations like Ireland, the Netherlands or Cayman Islands.

According to Neil Chenoweth of the AFR, Google’s CY2019 Australian ‘customer receipts’ were reported as $5.2 billion, but ‘revenue’ was $1.2 billion, so $4 billion of sales made in this country were somehow attributed to offshore offices.

Google reported pre-tax earnings of $134 million and ended up paying tax of $49 million. Chenoweth writes that if its Australian division is as profitable as the rest of the company’s non-US businesses, pre-tax earnings would have been $2.2 billion, which means Australian tax should have been more like $660 million, or 13 times more than what it paid.

Facebook reported CY2019 Australian revenue of $167 million and paid tax of $14 million. Chenoweth calculates revenue was probably more like $2.2 billion. Again, using average non-US earnings rates, pre-tax profit should have been $1.1 billion, which should have resulted in tax of $330 million, or 24 times more than what it paid.

Massive international tax scam

Michael West compiles an annual list of the worst tax dodging companies, and interestingly neither Google nor Facebook make the top 40.

These are but two example of what is a farcical international tax regime. A classic example of just because it’s legal doesn’t mean it’s right.

P.S. For anyone curious about the ramifications of social media, The Social Dilemma on Netflix is an interesting take on it.

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.