February 2022 newsletter

It’s February and what a summer it’s been with success on the tennis court and the cricket pitch, & plenty of challenges due to Covid-19. Now that the kids are returning to school and we getting ready for the challenges ahead, the new year begins in earnest.

2022 will certainly provide a number of challenges & also many opportunities. Be prepared in advance to plan for potential challenges & take advantage of the opportunities. This will now be the 3rd year that we are faced with Covid-19. Utilize the knowledge & experience of the past 2 years to your benefit. The ability of customers, staff & suppliers to connect with your business may at times be restricted, plan for this so as to reduce the potential negative impact, then continue to adapt & improve your business.

Now is a good time to get your financials in order, build strong foundations & habits for the year ahead.

January is normally a quiet month on the economic scene, but not this year. Inflation and speculation about rising interest rates dominated the month, sending global shares tumbling. US stocks fell 6% in January while Australian shares fell 7%. After US inflation hit a 40-year high of 7%, the US Federal Reserve is tipped to start lifting rates as early as March.

In Australia, inflation is sitting at 3.5%, while underlying inflation (which excludes volatile items) is at a 7-year high of 2.6%, within the Reserve Bank’s target range of 2-3%. The Reserve has said it won’t lift rates until 2024, or unemployment is near 4% (it fell to a 13-year low of 4.2% in December) and annual wages growth is close to 3% (currently 2.2%). While wages are going backwards in real terms, one third of a panel of 23 economists interviewed by The Conversation expect the Reserve to start lifting rates this year.

One of the big influences on inflation is oil prices, with crude oil near 7-year highs. Brent Crude jumped 15% in January and 65% over the year to US$90.94 a barrel. Aussie motorists paid record prices for unleaded petrol in January, with a national average price of 170.4c a litre.

The ANZ-Roy Morgan consumer confidence index fell 8 points to 100.1 points in January, while the NAB business confidence survey fell to a 19-month low of -12.4 points in December on the back of COVID-induces supply chain issues and labour shortages.

The Aussie dollar fell US2.5c in January to close at US70c as the greenback strengthened on rate rise speculation.

2021 Year in Review

Two steps forward, one step back

For the second year running, the pandemic was the focus for policy makers, markets, businesses, and individuals alike.

The year began with hopes that the rollout of vaccines would stem the spread of COVID-19 and allow economies to reopen. Instead, most countries were hit by wave after wave of the virus, periodic lockdowns, and ongoing disruption to lives and livelihoods.

Yet there were also positives. Australia’s vaccination rate exceeded all expectations while property and share markets soared. Investors who stayed the course enjoyed double digit returns from their superannuation, with the median growth fund tipped to return more than 12 per cent for the year.ⁱ

The big picture

If the pandemic has taught us anything, it is to expect the unexpected as new variants of the coronavirus – first Delta and now Omicron – hampered plans to return to a ‘new normal’.

Yet through it all, the global economy picked up steam. In the year to September the two global powerhouses the US and China grew at an annual rate of 4.9 per cent, while the Australian economy grew by 3.9 per cent.

The Australian economy is estimated to have grown by more than 4 per cent in 2021, with unemployment falling to 4.6 per cent ahead of the Christmas rush.

But challenges remain. As global demand for goods and services picked up, ongoing shutdowns disrupted manufacturing and supply chains. The result was higher prices and emerging inflation.

Inflation and interest rates

Australia’s inflation rate jumped from less than one per cent to 3 per cent in 2021. This is lower than the US, where inflation hit 6.8 per cent, but it still led to speculation about interest rate hikes.

The Reserve Bank insists it won’t lift rates until inflation is sustainably between 2-3 per cent, unemployment is closer to 4 per cent and wages growth near 3 per cent. (Wages were up 2.2 per cent in the year to September.) The Reserve doesn’t expect to meet all these conditions until 2023 at the earliest, but many economists think it could be sooner.

While Australia’s cash rate remains at an historic low of 0.1 per cent, bond yields point to higher rates ahead. Australia’s 10-year government bond yields rose from 0.98 per cent to 1.67 per cent in 2021.

Shares continue to shine

Global sharemarkets made some big gains in 2021 on the back of economic recovery and strong corporate profits. The US market led the way, with the S&P500 index up 27 per cent to finish at near record highs.

European stocks also performed well while the Chinese market suffered from the government’s regulatory crackdown and the Evergrande property crisis.

In the middle of the pack, the Australian market rose a solid 13.5 per cent in 2021. The picture is even rosier when dividends are added, taking the total return to 17.7 per cent.ⁱⁱ

Volatile commodity prices

As the global economy geared up, so did demand for raw materials. Commodity prices were generally higher but with some wild swings along the way.

Oil prices rose around 53 per cent, thermal coal prices soared 111 per cent and coking coal rose 37 per cent. Australia’s biggest export, iron ore, fell 25 per cent but only after hitting a record high in May.

Despite demand for our raw materials and a sound economy, the Aussie dollar fell from US77c at the start of the year to finish at US72.5c, providing a welcome boost for Australian exporters.

Property boom

Australia’s residential property market had another bumper year, although the pace of growth shows signs of slowing. National home prices rose 22.1 per cent in 2021, according to CoreLogic. When rental income is included the total return from property was 25.7 per cent.ⁱⁱⁱ

Regional areas (up 25.9 per cent) outpaced capital cities (up 21.0 per cent), as people fled to the perceived safety and affordability of the country during the pandemic. Even so, prices were up in all major cities.

Looking ahead

The pandemic is likely to continue to dominate economic developments in 2022. Much will depend on the supply and efficacy of vaccines to protect against Omicron and any future variants of the coronavirus.

Financial markets will also keenly watch for signs of inflation and rising interest rate. In Australia, inflation is likely to be constrained while wages growth remains low, and the Reserve Bank keeps rates on hold.

The wild card is the looming federal election which must be held by May. Until the outcome is known, uncertainty may weigh on markets, households, and business.

i https://www.chantwest.com.au/resources/remarkable-a-10th-consecutive-positive-year

ii https://www.commsec.com.au/content/dam/EN/Campaigns_Native/yearahead/CommSec-Year-In-Review-2022-Report.pdf

iii https://www.corelogic.com.au/news/housing-values-end-year-221-higher-pace-gains-continuing-soften-multi-speed-conditions-emerge

Unless otherwise stated, figures were sourced from Trading Economics on 31/12/21

Market movements & review video – February 2022

Stay up to date with what’s happened in Australian markets over the past month.

January is normally a quiet month on the economic scene, but not this year. Inflation and speculation about rising interest rates dominated the month, sending global shares tumbling.

Please get in touch if you’d like assistance with your personal financial situation.

Tips to help you achieve your professional goals in 2022

As we ring in the New Year, you’ve probably set yourself a few personal new year resolutions. What is the likelihood of you sticking to them long-term? Interestingly, most of us will have failed to achieve these resolutions within a few months (if not sooner).

They’ve either become so onerous that we don’t care anymore, or we simply don’t have the time – life and work often get in the way.

How about professional targets, do you set yourself professional goals as well as personal? Do you consider how you’re going to work smarter this year, is work-life balance something you want to improve upon in 2022, or is your objective to spend more time focussing on your clients and less time doing admin?

Goal setting to achieve an objective

To be successful at setting goals and actually achieving them, you must be clear on what your objective is. Goals cannot be put in place until you’ve set your objective. Once this has been decided, only then can you put steps in place to achieve it.

For example, your main objective for 2022 might be to spend more face-to-face time with clients. Ask yourself the right questions – how you currently spend your day versus how you would like to spend your day. Look at areas where you could potentially create efficiencies within the business to free up your time.

Are you spending more time managing the business’s finances or working on the administration side of things as well as trying to market to your existing clients or reach potential clients each month?

That is a lot to juggle on any given day, so you should consider whether any of these tasks could be outsourced to people who can do it in half the time. Obviously, there will be costs associated with outsourcing these jobs, but you must weigh up the benefit to the business as well as your clients.

How to set attainable goals

The key to success here is to break down your goals so they are achievable. You could begin with a monthly goal, which is broken down to a weekly target and then into a daily task – what individual steps do you need to take to achieve your overall goal.

By breaking it down into individual tasks, you’ll take the pressure off, especially if you don’t manage to tick something off your daily ‘to do’ list. You can just move it to the following day.

Tips for success in 2022

• • Understand your overall objective (what does success look like?)

 

• • Develop a strategy

 

• • What tasks can be outsourced/delegated/or automated

 

• • Create a monthly and weekly schedule

 

• • Break it down and create a daily ‘To Do’ list

 

• • Stop multi-tasking – pay full attention to the task at hand

 

• Exercise and a good night’s sleep are also important!!

Another strategy you could implement is the SMART strategy. You must ensure the goals you set are specific, measurable, attainable, relevant, and timely.

Accomplishment

Imagine finishing your workday with a sense of accomplishment, knowing that you’ve been productive and ticked everything off your ‘to do’ list as well as continually working towards your main goal.

There will be occasions where something unexpected will pop up and interfere with your day, so you must allocate time in your day to be able to deal with these situations.

Here are some useful productivity apps to help with your ‘to do’ list:

• • Trello: Collaborate and manage projects in a very visual way.

 

• • Evernote: Record and remember everything to tackle projects with your notes, tasks and schedule all in one place.

 

• Friday: Plan your day, communicate as a team and to keep all your most important work together in one place.

We can help

If your objective is to work smarter this year, then we’re here to help. One of our objectives is to help our clients with their finances so they’re able to continue to do what they do best. Call us today to see if we can free up some of your time and assist you in achieving your goals in 2022.

SMSFs and property: What are the rules?

With the property market hitting all-time highs in 2021, interest in investing in direct property through your SMSF has never been higher.

In the September 2021 quarter, Australia’s SMSFs had almost $88 billion invested in non-residential real property, with another $47 billion in residential real property.

But before you add property investments to your SMSF, there are rules you need to be aware of.

Rules for SMSF property investments

All SMSF investments – not just property – must meet the sole purpose test. This means your SMSF must be maintained for the sole purpose of providing retirement benefits to fund members or their dependants.

Also keep in mind the related party rule, which prohibits SMSFs from buying real property from a related party. This means your relatives, business partners and their spouse or children, any company a fund member and their associates control or influence, or any trust a fund member or their associates control.

There are two exceptions. One is buying business real property like agricultural property, or a shop or office from which you operate your business. The other is if the value of the in-house asset is less than 5 per cent of your SMSF’s total assets.

Related parties and SMSF members can lease business and farming properties from your fund, but the arrangement must be at commercial rates and paid in full on the due date. Renting residential or holiday properties to related parties – even at market rent – is not permitted.

Borrowing the right way

Buying a property investment usually involves borrowing money. Again, strict rules apply.

SMSF loans are normally through a limited recourse borrowing arrangement (LRBA), although other structures such as tenants-in-common or related non-geared unit trusts may be acceptable. In the September 2021 quarter, SMSFs had almost $63 billion invested through LRBAs.

LRBAs prohibit lenders from seizing other assets in your SMSF if you default on your loan, so they tend to impose tougher loan conditions. Most lenders now require an SMSF to have a buffer of cash and/or shares equivalent to around 10 per cent of the property’s value.

You must also establish a bare trust (which is separate from the SMSF) to hold the property. And restrictions are imposed on the modifications you can made to your property, with significant changes requiring a new loan. Improvements must be paid for from cash already in the SMSF, not borrowed money.

Be mindful of diversification

Although including property in your SMSF can be a great idea, they are expensive assets. Unless the fund has a high balance, they can reduce diversification across asset classes. This can leave your SMSF exposed to investment risk and make it tricky to pay member benefits without needing to sell the property.

Adding an investment property must also fit the fund’s investment strategy in terms of diversification, liquidity and maximising returns to fund members. The ATO no longer automatically accepts buying an investment property is in the best interest of members, if it is the main asset and the fund’s total balance is low.

The fund’s trust deed must also provide the trustees with authority to implement a borrowing arrangement.

Tax benefits

A key benefit of using your SMSF to invest in property is the concessionally taxed super environment. Instead of paying your marginal rate, an SMSF only pays 15 per cent on investment income the property earns. Once fund members retire, rental income is tax-free.

There are also capital gains tax benefits. Properties held by an SMSF for more than 12 months pay a discounted rate of 10 per cent on any capital gain when sold.

Interest payments on borrowings are tax deductible and if your SMSF’s expenses exceed its income, a taxable loss can be carried forward to offset future income. Losses cannot, however, be offset against your personal income.

That said, not following the tax rules can be costly. If a property investment doesn’t meet the requirements of the sole purpose test for example, a SMSF becomes ineligible for the normal super tax concessions.

And if you finance an LRBA through a related-party loan, the loan must meet the ATO’s safe harbour guidelines. Otherwise, the income and capital gain from the asset will be taxed at the top marginal tax rate.

There’s a lot to think about, so if you would like to discuss property investments and your SMSF give us a call.

Investing in your health pays off

Investing the time, effort and the necessary expenses to maintain peak mental and physical health is one of the most significant investments you will ever make. And the good news is, any steps you take now, start to pay immediate dividends.

We encourage you to think about your financial investments in terms of working towards achieving your lifestyle goals, similarly it can help to think of an investment in your health as a means of further supporting those lifestyle goals so you can live your life to the fullest.

Of course before making an investment in anything, it’s important to know the facts.
It’s estimated that Australians spend over 29 billion in out-of-pocket medical expenses.ⁱ
And a recent study found that 36% of the health burden in Australia is attributable to modifiable risk factors, many of which are easily addressed by lifestyle changes.ⁱⁱ

One step at a time

Change is never easy. Making large changes to your habits all at once can seem rather daunting. Instead, pick one small thing you can do on a daily basis to start to form good habits. An example when it comes to your health could just be monitoring and increasing the amount of water you drink. While it’s a small change, the benefits to your health will really start to add up.

Compounding

Repeated actions get easier over time. When it comes to a routine you are establishing, you can invest the same effort on day 20 that you did on day 1 and you’ll go a little farther or find it a little easier. Take the ‘Couch to 5K’ app for example. Even if you’ve never been a runner or haven’t regularly exercised for some time, the app incrementally can take most people from being a ‘couch potato’ to being able to run 5 kilometres or for 30 minutes in 9 weeks.

View wellness costs as an investment

Gym memberships, fitness classes, exercise equipment, massages and wellness treatments can often be seen as expensive but costs associated with illness can be even more significant. Set aside room in your budget for those things that make you feel good and keep you in top shape.

It’s also important not to skip those check-ups. Many conditions are easily treated with early diagnoses and niggling things can be nipped in the bud before they get any worse.

Maintaining and improving your health also can potentially reduce your health insurance costs and save you money in the long run.

Invest in good fuel for your body

Eating well supports your body to feel, and perform at its best and can reduce the risk of heart disease, stroke, type 2 diabetes and obesity-related illnesses. Recent research reveals that ‘gut’ or intestinal health has a broad ranging impact including on our immune system as well as affecting mental health and mood.ⁱⁱⁱ

That’s not to say you have to only buy food from the health food isle at the supermarket or stick to organic produce, just that it can be worth paying attention to what’s going into your shopping basket and what you are putting in your mouth. Don’t try to overhaul your diet all at once, if you cut out all your favourite unhealthy foods you may be okay for a while but fall back into overindulging when the cravings get too much.

Again, small steps can make a big difference – think about adding a few more veggies into your diet – say a cupful at every meal, reducing your sugar intake or the amount of processed food or fizzy, sugary drinks you consume.

While spending time and money to improve your health will provide you with instant benefits, it will also set you up for your future to enjoy the fruits of your labours and live your best life. Investing in your health is one investment that keeps on giving.

i https://www.aihw.gov.au/getmedia/e8d37b7d-2b52-4662-a85f-01eb176f6844/aihw-hwe-74.pdf

ii https://pubmed.ncbi.nlm.nih.gov/28919119/

iii https://link.springer.com/article/10.1007/s42000-020-00236-4

Important Dates February 2022

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