Inflation Runs Hot with Further Rate Hikes In Sight
In a widely expected move, the Reserve Bank announced a Melbourne Cup rate hike of 0.25%, the seventh hike in a row, bringing the overnight cash rate to 2.85%, the highest level since April 2013.
Inflation in Australia remains high with September quarter CPI inflation rate hitting 7.3%, the highest it has been in more than three decades. Global factors contributed to much of this high inflation, but strong domestic demand also played a role. Returning inflation to target requires a more sustainable balance between demand and supply.
RBA expects a further increase in inflation over the months ahead, with inflation now forecasted to peak at around 8% later this year before declining next year due to the ongoing resolution of global supply-side problems, recent declines in some commodity prices and slower growth in demand. RBA’s central forecast is for CPI inflation to be around 4¾% over 2023 and a little above 3% over 2024.
The board noted that the Australian economy is continuing to grow solidly and national income is being boosted by a record level of the terms of trade. Economic growth is expected to moderate over the year ahead as the global economy slows and growth in household consumption slows due to tighter financial conditions. The Bank’s central forecast for GDP growth has been revised down a little, with growth of around 3% expected this year and 1½% in 2023 and 2024.
The labour market remains very tight, with the unemployment rate steady at 3.5% in September, around the lowest rate in almost 50 years. The central forecast is for the unemployment rate to remain around its current level over the months ahead, but to increase gradually to a little above 4% in 2024 as economic growth slows.
The outlook for the global economy is uncertain, having deteriorated over recent months. The Board recognises that monetary policy operates with a lag and that the full effect of the increase in interest rates is yet to be felt in mortgage payments and will closely monitor how household spending in Australia responds to the tighter financial conditions.
The Board expects to increase interest rates further over the period ahead as it is necessary to establish a more sustainable balance of demand and supply in the Australian economy to help return inflation to target. The size and timing of future interest rate increases will continue to be determined by the incoming data and the Board’s assessment of the outlook for inflation and the labour market.
Current Interest Rates (Big 4)
Investment loan, Principal & Interest up to LVR 80% (as at 31 October 2022)
What’s the outlook?
The rate hikes are expected to continue with the official inflation figures released by ABS on 26 October showing prices are up 7.3% over the past year, the steepest annual rise since 1990. The areas driving the increase this quarter were new dwellings (up 3.7%), gas (up 10.9%) and furniture (up 6.6%), the ABS said.
Consumer prices jumped 1.8% in the three months to September 30. The cost of building or buying a newly built home was up 20.7% over the past year due to labour shortages in the housing-construction industry, leading to rises in labour costs. Material shortages also added further pressures.
Australian bond yields immediately rose, 3-year bonds jumping 8bps to 3.58% and 10-year bonds rising by 3bps to 3.99% respectively, indicating the bond market is expecting a 0.5% rate hike from RBA in November.
It is a good thing that the 2022 Budget, with its lower deficits this year and next, won’t add to inflationary pressure in the near term. Treasurer Jim Chalmers has announced a series of reforms and initiatives with a significant focus on affordable housing and the rising cost of living.
Treasury forecasts inflation to reach 5.75% by mid-next year and a more difficult outlook for the Australian economy. It expects growth will be weaker into 2023/24 with GDP falling to only 1.5% and expect unemployment will be higher by 75bps. However, higher commodity prices are contributing to higher tax revenues which will help ease the deficit, provided they remain strong into a slowing global growth environment.
Various housing support measures were announced – setting up a new Housing Accord to build 1 million new homes over 5 years, a Help to Buy equity scheme for 10,000 first home buyers, super concessions for downsizers over 55, the establishment of a National Housing Supply and Affordability Council, $350m in Federal Funding to help incentivise institutional (including super fund) investment in delivering an extra 10,000 affordable homes.
After more than two years of strong momentum, Australia’s property market has seen its sales settlements fall quarter-on-quarter, with New South Wales experiencing the largest declines in both property sales volume and aggregate value, according to the PEXA Property Insights Report.
While some Aussies may still get a pay increase this year and next, real wages aren’t expected to rise until mid-2024, Treasury has estimated. Real wages is the term used to describe how much money we make, against the rising cost of living.
Christmas will be crunch time for the economy because the year end spending could fuel inflation further. So inflation was unlikely to flatten out until some time next year. For businesses, the squeeze on working capital, exacerbated by the ATO’s resumption of debt collection, would also become critical around December, when businesses had to pay these extra wages and holiday entitlements.
If you would like to discuss your working capital needs, give Darren a call on 0452 339 778 or email him at [email protected] to discuss what options you have available.
Legislation enabling the increase is before Parliament.
The Government will also freeze social security deeming rates at their current levels for a further two years until 30 June 2024.
Income support asset test extended on proceeds of sale of main residence
As previously announced, the Government is:
Extending the assets test exemption for principal home sale proceeds from 12 months to 24 months for income support recipients, and
Changing the income test, to apply only the lower deeming rate (0.25%) to principal home sale proceeds when calculating deemed income for 24 months after the sale of the principal home.
The exemptions apply until the income support recipient acquires another main residence or the 24-month period expires. The Bill enabling the extension is currently before Parliament.
Total and permanent incapacity payments to veterans
FROM 2022-23
The Special Rate of Disability Compensation Payment, Temporary Special Rate Payment, and the Special Rate Disability Pension for veterans will increase by $1,000 per year.
Community batteries for household solar
FROM 2022-23
The Government will provide $224.3m over 4 years from 2022-23 to deploy 400 community batteries across Australia.
A related solar initiative will see an additional $102m committed to establish a Community Solar Banks program for the deployment of community-scale solar and clean energy technologies. This initiative is aimed at regional communities, social housing, apartments, rental accommodation, and households that are traditionally unable to access rooftop solar.
Superannuation & investors
Change to taxation of off-market share buy-backs by listed companies
FROM 7:30pm AEDT, 25 October 2022
From Budget night, 7:30 pm AEDT, 25 October 2022, the Government intends to align the tax treatment of off-market share buy-backs undertaken by listed public companies with the treatment of on-market buy-backs. The result is expected to deliver a saving of $550m.
An on-market buy-back is when a listed company buys its shares back on the stock exchange. All other buy-backs are treated as off-market buy-backs.
Under the current rules, when a company undertakes an off-market buy-back it is necessary to consider which portion of the proceeds is taxed as a dividend and which portion is taxed under the CGT rules. Franking credits can potentially be attached to the dividend component.
On the other hand, when a listed company undertakes an on-market buy-back the full proceeds are generally taxed under the CGT rules and franking credits cannot be passed onto the shareholders.
Off-market buy-backs potentially offer a tax advantage to low-taxed shareholders such as superannuation funds. It appears that the Government has become concerned that the difference in the tax treatment between on-market and off-market buy-backs has been exploited inappropriately.
The Budget measure only refers to listed public companies which presumably means that the current tax treatment for off-market buy-backs undertaken by private companies and public companies that are not listed will continue to apply.
While this measure is yet to legislated, with a Budget night implementation date, this could have an immediate tax impact on the treatment of new off-market share buy-backs.
‘Downsizer’ eligibility reduced to 55
FROM: First quarter after Royal Assent
As previously announced, the Government will reduce the age an individual can make a ‘downsizer’ contribution to superannuation from the current 60 years to 55 years of age.
Currently, eligible individuals aged 60 years or older can choose to make a ‘downsizer contribution’ into their superannuation of up to $300,000 per person ($600,000 per couple) from the proceeds of selling their home.
Downsizer contributions can be made from the sale of your principal residence in Australia that you have owned for the past ten or more years. These contributions are excluded from the age test, work test, and your total superannuation balance (but not exempt from your transfer balance cap).
Legislation enabling the expanding eligibility for downsizer contributions is currently before Parliament.
Delayed Relaxation of SMSF residency requirements
The 2021-22 Budget announced that the residency rules for Self-Managed Superannuation Funds (SMSFs) and small APRA regulated funds (SAFs) will be relaxed by extending the central control and management test safe harbour from two to five years for SMSFs, and removing the active member test for both fund types.
This measure was due to commence from 1 July 2022. The Government has announced that it will defer the start date to the income year commencing on or after the date of Royal Assent of the enabling legislation.
Scrapped 3 year SMSF audit requirement
Back in the 2018-19 Budget the Government announced that SMSFs with a history of good record-keeping and compliance – that is, three consecutive years of clear audit reports and annual returns lodged on time, will only be required to have their fund audited every three years.
The Government has now officially announced that this measure will not be proceeding.
Cryptocurrency not a foreign currency
As previously flagged, the Government will legislate to clarify that digital currencies such as Bitcoin will continue to be excluded from the Australian income tax treatment of foreign currency. The exclusion does not apply to digital currencies issued by, or under the authority of, a government agency, which continues to be taxed as foreign currency
Resources
Media Release Crypto not taxed as foreign currency
Business & employers
Removed Self-assessment of intangible assets
Announced in the 2021-22 Budget and due to commence on 1 July 2023, the measure enabling taxpayers to self-assess the effective life of certain intangible assets, rather than being required to use the effective life currently prescribed by statute, has been removed.
The measure was to apply to assets acquired from 1 July 2023 including patents, registered designs, copyrights and in-house software.
Dramatic jump in penalties for competition and consumer law breaches
FROM 2022-23 financial year
From the 2022-23 year, the penalties for a corporation breaching competition and consumer laws will increase sharply from a maximum of $10m to a maximum of $50m per breach, and from 10% of annual turnover to 30% of turnover (whichever is greater) during the period the breach took place.
Energy efficiency grants for SMEs
FROM: 2022-23 financial year
The Government will provide $62.6m over 3 years from 2022-23 to help small and medium business fund energy efficient equipment upgrades. The funding will support studies, planning, equipment and facility upgrade projects that will improve energy efficiency, reduce emissions or improve the management of power demand. No details of the grants are currently available.
Delayed Ridesharing reporting requirements
In the 2019-20 Mid Year Economic and Fiscal Outlook (MYEFO), new reporting measures were announced requiring sharing economy online platforms to report identification and income information on participating sellers to the ATO for data matching purposes. These measures have now been delayed from:
1 July 2022 to 1 July 2023 for transactions relating to the supply of ride sourcing and short-term accommodation, and
· 1 July 2023 to 1 July 2024 for all other reportable transactions (including but not limited to asset sharing, food delivery and tasking-based services).
Thin cap rules introduce earnings based test
FROM: 1 July 2023
The thin capitalisation rules, which can potentially limit the amount that can be claimed for debt deductions such as interest, will be amended. The Government will replace the current safe harbour and worldwide gearing tests with earnings-based tests to limit debt deductions in line with an entity’s profits.
Applying to multinational entities operating in Australia and any inward or outward investor, in line with the existing thin capitalisation regime, the measures will:
Limit an entity’s debt-related deductions to 30 per cent of profits (using EBITDA as the measure of profit). This new earnings-based test will replace the safe harbour test.
Allow deductions denied under the entity-level EBITDA test (interest expense amounts exceeding the 3% EBITDA ratio) to be carried forward and claimed in a subsequent income year (up to 15 years).
Allow an entity in a group to claim debt-related deductions up to the level of the worldwide group’s net interest expense as a share of earnings (which may exceed the 30% EBITDA ratio). This new earnings-based group ratio will replace the worldwide gearing ratio.
Retain an arm’s length debt test as a substitute test which will apply only to an entity’s external (third party) debt, disallowing deductions for related party debt under this test.
Financial entities will continue to be subject to the existing thin capitalisation rules.
The current thin capitalisation regime limits debt deductions up to the maximum of three different tests:
A safe harbour (debt to asset ratio) test;
An arm’s length debt test; and
A worldwide gearing (debt to equity ratio) test.
Companies to declare their subsidiaries
FROM: 1 July 2023
New reporting requirements from 1 July 2023 will require:
Australian public companies (listed and unlisted) to disclose information on the number of subsidiaries and their country of tax domicile;
Tenderers for Australian Government contracts worth more than $200,000 to disclose their country of tax domicile (by supplying their ultimate head entity’s country of tax residence); and
Large multinationals, defined as significant global entities, to prepare for public release of certain tax information on a country by country (CbC) basis and a statement on their approach to taxation, for disclosure by the ATO.
Global entities denied deductions for intangibles
FROM: Payment made on or after 1 July 2023
Significant global entities (at least $1bn global revenue) will no longer be able to claim a tax deduction for payments made, directly or indirectly, to related parties for intangibles held in low or no tax jurisdictions. This could include royalties paid for the use of trademarks and other intellectual property items.
A low or no tax jurisdiction is one with:
A tax rate of less than 15%, or
A tax preferential patent box regime without significant substance.
The measure is anticipated to apply to payments made on or after 1 July 2023. This measure could impact on Australian entities that are subsidiaries of a foreign parent entity where the global revenue of the consolidated group for accounting purposes is $1bn or more.
Government & regulators
ATO targets in sharp focus
Personal income tax deductions and incorrect reporting
The ATO will receive an additional $80.3 to crackdown on non-compliance including:
Overclaiming deductions; and
Incorrect reporting of income
The spend is expected to increase tax receipts by $674.4m and payment by $80.3m over 4 years.
Cash payments and tax evasion by business
The ‘shadow economy’, cash-in-hand payments including underpayment of wages, visa fraud, and other nefarious activity that deprives the economy of the income from tax receipts, will come under scrutiny with the extension of the ATO’s Shadow Economy Program for a further 3 years from 1 July 2023. Over this period, the program is estimated to increase tax receipts by $2.1bn and payments by $685.2m over the 4 years from 2022-23.
Multinational business and the Tax Avoidance Taskforce
The ATO’s Tax Avoidance Taskforce will receive an additional $200m over 4 years from 1 July 2022 primarily to pursue multinational enterprises and large public and private businesses. This taskforce is expected to deliver a whopping $2.8bn in additional tax receipts and $1.1bn in payments over the 4 year period.
$3.6bn cut from external labour, advertising, travel and legal expenses
The Government has committed to saving $3.6bn by cutting what it spends on external labour, advertising, travel and legal expenses.
Other
Working with our Pacific Neighbours
Australia’s relationship in the Pacific has come into sharp focus of late. The Budget implements a series of initiatives to support development and labour mobility in the region:
Additional infrastructure investment of $500m over 10 years in the Pacific and Timor-Leste will be provided through the Australian Infrastructure Financing Facility for the Pacific including an additional $50m for the establishment of a Pacific Climate Infrastructure Financing Partnership Facility.
As previously announced, the Pacific Australia Labour Mobility scheme will be expanded to improve the benefits of the program for employers and workers including:
underwriting employers’ investment in upfront travel costs for seasonal workers by covering costs that cannot be recouped from workers
improvements to workplace standards for PALM visa holders, including increased workplace compliance activities
allowing primary visa holders on long-term placements to bring partners and children to Australia, where sponsored by employers, with additional social support including providing relevant minimum family assistance payments, with an initial rollout of 200 families
o the expansion of the existing aged care skills pilot programs for aged care workers.
A new Pacific Engagement Visa for nationals of Pacific Island countries and Timor-Leste. Up to 3,000 additional places will be made available in addition to those provided through the existing permanent Migration Program.
Electric vehicle and hydrogen refuelling
As part of its Driving the Nation Fund, the Government will commit:
$146.1m over 5 years from 2023-24 for the Australian Renewable Energy Agency to co-invest in projects to reduce emissions from Australia’s road transport sector
$89.5m over 6 years from 2022-23 for the Hydrogen Highways initiative to fund the creation of hydrogen refuelling stations on Australia’s busiest freight routes, in partnership with states and territories, including $5.5m to LINE Hydrogen Pty Ltd for its George Town green hydrogen heavy transport project
$39.8m over 5 years from 2022-23 to establish a National Electric Vehicle Charging Network to deliver 117 fast charging stations on highways across Australia, in partnership with the NRMA.
Broadband & mobile improvements for regional Australia
Almost $758m will be spent improving mobile and broadband connectivity in rural and regional Australia.
Foreign investment review board fees increase
The Government has increased foreign investment fees and will increase financial penalties for breaches that relate to residential land. Fees doubled on 29 July 2022 for all applications made under the foreign investment framework. The maximum financial penalties that can be applied for breaches in relation to residential land will also double on 1 January 2023.
Community sector organisations funding boost
An additional $560m over 4 years will be provided to community sector organisations ($140m pa). 46% of the funding will come from the Department of Social Services and around 34% to the National Indigenous Australians Agency.
Extension of Tariffs on Russian goods
The Government has extended the temporary additional tariff on goods imported from Russia and Belarus until 24 October 2023. The additional 35% tariff applies to goods that are the produce or manufacture of Russia and Belarus shipped to Australia on or after 25 April 2022.
Note that Ukrainian goods have previously been exempted from import duty for 12 months until 4 July 2022.
Infrastructure projects
The Budget has reallocated infrastructure projects, “reprofiling” $6.5bn in funding for existing projects. An additional $8.1bn over the next 10 years has been earmarked for priority projects including:
ACT
$85.9m for the Canberra Light Rail Stage 2A project
New South Wales
$1.4bn including $500m for planning, corridor acquisition and early works for the Sydney to Newcastle High Speed Rail, $268.8m for the New England Highway - Muswellbrook Bypass and $110m for the Epping Bridge
Northern Territory
$550m including $350m to seal the Tanami Road and Central Arnhem Road
Queensland
$2.1bn including $866.4m for the Bruce Highway, $400.0m for the Inland Freight Route (Mungindi to Charters Towers) upgrades, $400.0m for Beef Corridors and $210.0m for the Kuranda Range Road upgrade
South Australia
$460m including $400m for the South Australian component of the Freight Highway Upgrade Program.
Tasmania
$78m for projects in Tasmania, including $48.0 million for the Tasmanian Roads Package
Victoria
$2.6bn including $2.2bn for the Suburban Rail Loop East
Western Australia
$634.8m including $400.0 million for the Alice Springs to Halls Creek Corridor upgrade and $125m for electric bus charging infrastructure in Perth
National
$18m to establish the High Speed Rail Authority to plan, develop, coordinate, oversee and monitor the construction and operation of the high speed rail network.
The economy
The Government appear keenly aware of the economic balancing act taking place, keeping the budget predominantly to election promises and redirecting existing initiatives to avoid exacerbating inflationary pressures. As the Treasurer said “Australians know this is a time of great challenge and change.”
The global economic environment has sharply deteriorated. Inflation has risen rapidly across
advanced economies. The Russian invasion of Ukraine has significantly driven up global energy costs and exacerbated the impact of poor weather on global food prices. All of this impacts on Australia. Here are the highlights:
GDP – Real GDP is forecast to grow by 3¼ per cent in 2022-23 before slowing to 1½ per cent in
2023-24, as cost of living pressures and rising interest rates increasingly weigh on household disposable income and consumption.
The Government warn that with the highly uncertain global economic outlook, there are significant risks that could cause a sharper slowdown in domestic activity. Globally, key risks include a ‘hard landing’ or recession across major advanced economies, a sharper-than-expected downturn in China due to COVID-19 outbreaks and the property market downturn, a sudden tightening in financial market conditions and further energy price shocks stemming from the Russian invasion of Ukraine, which could drive inflation even higher.
And domestically, the full impact of recent floods is highly uncertain as the situation continues to develop.
Inflation – forecast to peak at 7¾ per cent in the December quarter of 2022. Supply disruptions have resulted in large price increases in home building, fuel and energy. Food prices remain elevated and have been further exacerbated by recent floods. Some of these pressures are expected to persist into 2023. Inflation is expected to remain elevated at 5¾ per cent over
2022-23 and 3½ per cent over 2023–24 before gradually easing and returning to within the Reserve Bank’s inflation target by 2024-25.
Deficit – lower the originally estimated at $36.9bn. However, the deficit is expected to climb to over $51bn by 2024-25 with the impact of higher inflation on indexed payments for services, the NDIS in particular.
Gross debt – is close to one trillion dollars and is at the highest level as a share of GDP in over 70 years.
Tax receipts - revised up by $54.4bn in 2022-23 and $142.0 billion over the 4 years to 2025-26.
Unemployment and wages growth - labour market conditions are expected to remain tight. The unemployment rate is forecast to rise to 4½ per cent by the June quarter of 2024.
Tight labour market conditions are expected to see annual wage growth pick up to 3¾ per cent by June 2023. However, high inflation is expected to see real wages fall over 2022-23 before rising slightly over 2023-24.
Energy - Electricity and gas prices are expected to rise sharply over the next 2 years, as the cost of energy market disruptions are passed through to households. Treasury has assumed retail electricity prices will increase by an average of 20% nationally in late 2022. Retail electricity prices are expected to rise by a further 30% in 2023-24.
Domestic gas prices remain more than double their average prior to Russia’s invasion of Ukraine. Retail prices are expected to increase by up to 20% in 2022-23 and 2023-24.
