November 2021 Update

It’s November and we’re off with the race that stops a nation. While this is normally a given, the fact that the Spring Carnival went ahead, and overseas travel is back on the agenda, is a welcome sign that Australia is getting back to business.

It’s been a busy year for Australia’s two million plus directors dealing with the pandemic and lockdowns and there’s now an urgent new task on their to-do list. From 1 November 2021, if you’re a director or want to become one, you must apply for the new Director Identification Number (Director ID) being rolled out by the Federal Government. Our first article in this months newsletter will take you through the key details and dates you need to know.

Our second article this month covers the rise of responsible investing. For many people, there’s much more to choosing investments than focusing exclusively on financial returns. Returns are important, but a growing number of people also want to be assured that their investments align with their values.

With home prices soaring and the size of the average mortgage up $80,000 over the past year, housing affordability is back in the headlines. The current market conditions are particularly tough for first home buyers. Our third article looks at strategies to help first home buyers get a foot on the property ladder.

While the Pandora Papers revelations about international tax evasion grabbed headlines, the ATO is quietly tracking business activity for signs of tax avoidance. In our final article this month we take a look at how the ATO mines your data.

The new Director ID: Do you need one?

The new Director ID: Do you need one?

It’s been a busy year for Australia’s two million plus directors dealing with the pandemic and lockdowns and there’s now a new task on their to-do list.

From 1 November 2021, if you’re a director or want to become one, you will need to apply for the new Director Identification Number (Director ID) being rolled out by the Federal Government.

Directors of businesses and entities of all sizes – including directors and corporate trustees of self-managed super funds (SMSFs) – will all need to apply. If you run your business as a sole trader or partnership, however, you won’t need a Director ID.

Director ID: what is it?

The new Director ID is a unique 15-digit identifier most directors will need before they can take up a directorship.

Before you join a board, you will need to apply for your own Director ID which you will keep forever, even if you change boards, stop being a director, change your name or move interstate or overseas.

This new identifier is part of a broader registry modernisation project combining the Australian Business Registry Service (ABRS) with numerous ASIC registers to form a single system overseen by the ATO.

According to the government, unique director identifiers will create a fairer business environment by preventing the use of false and fraudulent director identities.

Who needs a Director ID?

The new regime casts a pretty wide net and will catch most business entities and organisations.

You will need a Director ID if you are an eligible officer of a company, Aboriginal and Torres Strait Islander corporation, corporate trustee, charity or not-for-profit organisations limited by guarantee, or a foreign company registered with ASIC and conducting business in Australia.

Directors of registered Australian bodies (such as incorporated associations registered with ASIC that trade outside the state or territory in which they are incorporated) also need to apply.

If your organisation has an Australian Business Number (ABN), you can use the ABRS LookUp tool to check whether it is registered with ASIC.

Officers outside the ID regime

Some company officers are not required to apply for the new identifier.

If you are a company secretary but not a director, act as an external administrator of a company, or are called a director but haven’t been appointed as a director under the Corporations Act, you won’t need a Director ID.

Neither will directors of charities not registered with ASIC to operate throughout Australia.

The officers of an unincorporated association, cooperative or incorporated association established under state or territory legislation (unless the organisation is also a registered Australian body), are also exempt.

Applying for your Director ID

From November 2021, you will need to apply for your Director ID on the ABRS website and log in using the myGovID app. The myGovID app is downloaded on your smart device to verify your digital identity and is different to your existing myGov account.

When applying for your Director ID, you are required to personally make the application so you can verify your identity.

There are varying application deadlines for the new identifier, with current directors (on or before 31 October 2021), having until 30 November 2022 to obtain their Director ID.

 Date you become a Director  Date you must apply for your Director ID
 On or before 31 October 2021  By 30 November 2022
 Between 1 November 2021 and 4 April 2022  Within 28 days of appointment
 From 5 April 2022  Before appointment

 

If you are unable to apply for your Director ID by the relevant deadline, you can apply for an extension. Please note there may be infringement notices or penalties applied to the Directors who fail to apply for Director ID by the required timeframes above.

Once you receive your new Director ID, you will need to pass it on to your company recordholder who is usually the company secretary or authorised agent. The ABRS is not permitted to disclose Director IDs to the public without consent and your details won’t be searchable on the register.

If you would like more information about Director IDs, whether you need one and how to go about applying, please get in touch.

Responsible investing on the rise

Responsible investing on the rise

For many people, there’s much more to choosing investments than focusing exclusively on financial returns. Returns are important, but a growing number of people also want to be assured that their investments align with their values.

Everyone’s values are different but given the choice most people would wish to make a positive difference to their community and/or the planet. Or at least to do no harm.

Indeed, four out of five Australians believe environmental issues are important when it comes to their investment decisions.i

As a result, there has been a surge in what is called responsible investing. Also known as ethical or sustainable investing, responsible investing is pretty much what it says on the label. That is, investments that support and benefit the environment and society more broadly, rather than those whose products or way of conducting business have a negative impact on the world.

Millennials driving growth in sustainability

The trend toward responsible investment has grown rapidly in recent times. According to the Responsible Investment Association of Australasia (RIAA), Australians invested $1.2 trillion in responsible assets in 2020, and we’re not alone.ii The global figure was $47.8 trillion in 2020.iii

The trend has accelerated in recent years, with money flowing into Australian sustainable investment funds up an estimated 66 per cent in the year to June 2021.iv

Responsible investing is particularly popular among millennials, now in their late 20s and 30s and beginning to get serious about building wealth. Many in this group are getting a foot on the investment ladder via exchange-traded funds (ETFs). A recent survey of the Australian ETF market found 28 per cent of younger investors had requested more ethical investments.v

More sustainable investment options

As awareness of responsible investing grows, so does the availability of sustainable investment options, beginning with your super fund.

Most large super funds these days offer a sustainable option on their investment menu. While relatively rare even 10 years ago, the availability and performance of sustainable options has grown strongly over the past three to five years.

According to independent research group, SuperRatings, the top performing sustainable options now surpass their typical balanced style counterparts in some cases.vi

If you run your own self-managed super fund (SMSF) or wish to invest outside super, there is a growing number of managed funds that actively select sustainable investments, or ETFs that passively track an index or sector.

There were 135 sustainable funds in Australia and New Zealand in 2021, so there is plenty of choice.iv

How to screen

But how do you find the ethical investments that best suit your values?

There are several methods used with the most common being negative screening where you exclude investments in companies engaged in unwelcomed activities.

The most common exclusions are companies involved in gambling, tobacco, firearms, animal cruelty, human rights abuses or fossil fuels industries.

Positive screening is the opposite, where you actively seek out investments in companies making a positive contribution to the planet. Some examples might be companies involved in renewable energy, health care or education.

Another criterion is to look at companies that monitor their environmental, social and governance risks as part of their existence. This cuts across all industries and is more about the way the company conducts its business.

Environmentally they may monitor their carbon emissions or pursue clean technology; socially they may be active in ensuring a safe workplace; and on the governance front they may pursue board diversity or anti-corruption policies.

Environmental themes the most common positive screens for investors

Source: RIAA

Climate plays a role

A survey by UBS found that four of the five top themes for responsible investing were related to climate with respondents citing such themes as renewable energy and efficiency, climate change mitigation and pollution prevention.vii

As the popularity of responsible investing grows, so do concerns about the practice of so-called greenwashing. This is where a company or fund overrepresents the extent to which its practices live up to their promises. The Australian Securities and Investments Commission (ASIC) recently announced a review into the use of greenwashing in Australia, prompted in part by the demand for such funds.

Another trend is impact investing in companies or organisations helping to finance solutions to some of society’s biggest challenges. This might include investments in areas such as affordable housing or sustainable agriculture.

At the end of the day, each method can be used separately or in a more holistic approach.

Solid returns

While some investors are driven by their values alone, many more want value for their money. The good news is that it’s possible to have it both ways.

The RIAA survey found super funds that engage in responsible investments outperformed their peers over one, three and five years. While the top performing ethical ETF turned in an impressive return of almost 37 per cent in the 12 months to March 2021.i

Clearly responsible investing is a trend that is gaining momentum, with the financial performance of sustainable investments attracting a wider following.

If you would like to discuss your investment options and how they might fit within your overall portfolio, don’t hesitate to get in touch.

https://www.canstar.com.au/investor-hub/ethical-investing/

ii https://responsibleinvestment.org/resources/benchmark-report/

iii https://probonoaustralia.com.au/news/2021/07/sustainable-investing-thrives-amid-push-for-higher-standards/

iv https://www.morningstar.com.au/funds/article/australias-sustainable-funds-market-is-growin/214505

https://www.betashares.com.au/insights/millennials-on-top-betashares-investment-trends-etf-report-2020/

vi https://www.lonsec.com.au/2021/07/21/media-release-stellar-fy21-returns-as-super-funds-deliver-for-their-members/

vii https://www.ubs.com/sg/en/asset-management/insights/sustainable-and-impact-investing/2021/esg-investments-performing-better.html/

A helping hand onto the property ladder

A helping hand onto the property ladder

Buying your first home is always a big step, but with property prices rising faster than pay packets taking that first step seems more challenging than ever.

National house prices rose 20 per cent in the year to September, the fastest growth since 1989. Higher prices have also fanned out from capital cities to the regions, as city folk discover the country lifestyle and cheaper housing during the pandemic.i

While this is great news for homeowners and investors, it’s putting home ownership further out of reach for many hopeful first home buyers. The combination of rapid price growth and weak wages growth have pushed up the cost of an average first home deposit from 70 per cent of income to more than 80 per cent.ii

Month-on-month change in dwelling values

Source: Core Logic: Hedonic Home Value Index October 2021

Tighter lending

A recent move by the banking regulator requiring banks to be more cautious in assessing new mortgage customers is unlikely to help.

The Australian Prudential Regulation Authority (APRA) has told lenders to assess whether new borrowers can afford their loan at an interest rate at least 3 percentage points higher than the current rate on their home loan. Previously, banks used a 2.5 per cent buffer.iii

So what strategies are available to help younger Australians get a foot on the property ladder?

Government supports

In recent years, the federal government has launched three schemes to close the deposit gap for first home buyers.

The First Home Loan Deposit Scheme (FHLDS) and the New Home Guarantee (NHG) allow eligible first home buyers to purchase a home with a deposit of as little as 5 per cent. The government guarantees lenders up to 15 per cent of the value of the property, allowing borrowers to avoid paying lenders mortgage insurance (LMI) which can add tens of thousands of dollars to the purchase price.

The Family Home Guarantee helps eligible single parents buy a home with an even lower deposit of at least two per cent. In 2020-21, more than one third of all guarantees were issued to single applicants earning less than $80,000. The schemes have helped almost 33,000 first home buyers since January 2020, bringing forward their purchase by about four years on average.

Another way for first home buyers to build a deposit is to contribute voluntary savings to your super account and withdraw up to $30,000 plus investment earnings when you are ready to buy. The First Home Super Saver scheme takes advantage of the low tax super environment and investment returns that have consistently outpaced bank savings accounts.

Rentvesting

If you can’t afford to buy your dream home in a suburb or location you like, “rentvesting” may be worth exploring.

Rentvesting is where you buy property in a location you can afford with good rental yields and capital growth prospects and lease it out, while renting in an area you prefer. Or live with your parents for minimal rent and pay off the mortgage on your rental property even faster.

You can also claim a tax deduction for allowable expenses, depreciation, and interest on the loan for your investment property. The downside is you will be liable for capital gains tax when you sell.

Alternatively, under the six-year rule if you buy and live in the property for at least six months before you rent it out, you will be exempt from capital gains tax on the growth of your investment for up to six years.

Bank of Mum and Dad

It’s not just younger Australians who worry about housing affordability. Their parents often worry just as much. So much so that recent research found the Bank of Mum and Dad is the nation’s ninth biggest mortgage lender.

According to research by Digital Finance Analytics (DFA), 60 per cent of first home buyers are getting help from their parents.iv Parents typically do this by giving their children cash towards the deposit or by going guarantor for the loan.

DFA found the average parental contribution was $92,000, indicating parents may be choosing to help with the deposit. Not only are banks reluctant to lend to first time buyers with less than a 20 per cent deposit, but any less means borrowers must pay lenders mortgage insurance.

Going guarantor

Parents without cash to spare sometimes agree to guarantee their child’s loan by using the equity in their own home as security. This can have the advantage of helping children get into the market sooner, but there are risks.

If the borrower can’t make repayments the guarantor is responsible for the debt, putting their home at risk. To limit this risk, you can choose to guarantee a portion of the loan, so you are only liable for that portion if the borrower defaults. You can also arrange to be released from the loan once the borrower builds up the same portion of equity in their home.

Saving for a first home is more of a challenge than ever in the current market, but there are strategies to help make your dream a reality. So get in touch if you would like to discuss your options.

https://www.corelogic.com.au/sites/default/files/2021-09/211001_CoreLogic_HomeValueIndex_Oct21_FINAL.pdf

ii https://theconversation.com/as-home-prices-soar-beyond-reach-we-have-a-government-inquiry-almost-designed-not-to-tell-us-why-168959

iii https://www.apra.gov.au/strengthening-residential-mortgage-lending-assessments

iv https://www.savings.com.au/home-loans/we-need-to-talk-about-the-rise-of-the-bank-of-mum-and-dad

How the ATO mines your data

How the ATO mines your data

It was hard to miss the media splash about international tax evasion when the Pandora Papers were released, with local interest focussing on what Australian tax authorities would do with this massive trove of information.

But it seems the ATO is relaxed. Deputy Commissioner and Serious Financial Crime Taskforce Chief Will Day responded that the tax man doesn’t “rely on data leaks to do our job. We detect, investigate and deal with offshore tax evasion year-round.”

So where does the ATO get its data from and how is it being used?

Information from many sources

As some of the most powerful computers in the country are matching data from just about every facet of a taxpayer’s financial life, the ATO doesn’t miss much. Every year it receives reams of data from share registries, banks and financial institutions, allowing it to identify most of the financial transactions occurring in Australia. In 2020, more than 600 million transactions were reported to the ATO.

Property and lifestyle assets are also key areas of interest, with data from state and territory title offices and revenue agencies covering real property transactions, rental bond payments and property management all flowing to the ATO.

Data is also exchanged with tax agencies in other countries to ensure correct reporting of overseas income and income earned by foreign residents.

Current data-matching programs by the ATO cover credit and debit cards, ride-sourcing providers, sharing economy accommodation platforms and cryptocurrency service providers. Information on online sales over $12,000 also end up with the tax man.

Government departments data sharing

Government agencies are also a major source of data for the ATO, with detailed protocols on information sharing in place with the Australian Electoral Commission, Services Australia (Centrelink and the Child Support Program), and the Department of Home Affairs’ visa and passenger movement records.

Motor vehicle registrations from the states and territories provides data on all motor vehicles sold or registered where the value is over $10,000.

The new Single Touch Payroll (STP) system for businesses is also used to confirm employment income, deduction reporting, payments to contractors and superannuation contributions.

Even tips from other businesses and individual taxpayers can be used in specific data-matching activities.

Matching and analysing the data

Once all this information is received, it’s validated against the ATO’s internally collected data. Algorithms and other analytical tools are used to refine the data and match it against information reported in tax returns.

Although the ATO uses some of the data it receives to pre-fill sections of your tax return, much of it is used to identify discrepancies in taxpayers’ returns.

You are then contacted and provided with details of the discrepancy so you can check your records. Discrepancies can be as simple as omitted interest, employment income or government payments; CGT from the sale of an asset; payments to contractors in the building and construction industry; or distributions from partnerships, trusts and managed funds.

Data-matching is also undertaken on taxpayers purchasing expensive consumer items (such as boats, racehorses, antiques and luxury cars) to determine whether they can afford the items based on their declared income.

Helping businesses operate

Data-matching programs help the ATO identify businesses that may not be reporting all their income, operate outside the system, or operate but fail to lodge a tax return.

Careful analysis of financial data helps businesses to operate on a level playing field. Running part of a business ‘off the books’ and not reporting all the income received provides an unfair advantage.

By data-matching, the ATO can also better understand trends and patterns in specific industries. This is used to create performance benchmarks (or financial ranges) for each industry, particularly in relation to tax and activity statements. These benchmarks cover turnover comparisons with your cost of sales, total expenses, rent, labour and motor vehicle expenses.

The ATO also develops a key benchmark range for an industry. If data analysis shows your business operates outside this range, it’s a red flag raising the possibility that your business may be avoiding its tax obligations by not reporting some of its income. The benchmark range may also be used to determine how much tax a business should have paid if there are insufficient or no records available.

If you would like help with understanding your tax obligations and preparing your tax records, please contact our office today.

Market Update

Market Update

Market Update
All eyes were on the September quarter inflation figures in October, as speculation mounted that the Reserve Bank may be forced to raise interest rates sooner than planned. The Consumer Price Index (CPI) rose 0.8% in the September quarter while the annual rate eased from 3.8% to 3%, although this was distorted by the end of free childcare in the September quarter last year. A more accurate measure is underlying inflation, which rose to a 6-year high of 2.1% in the year to September.
Rising fuel and construction costs were the main culprits, as global supply chain disruptions pushed import prices up 6.4% over the year to September. Australia’s national average petrol price hit a record 169.5c a litre in October, as rising demand and supply constraints pushed the price of Brent Crude to a three year high. Inflation fears lifted the Australian dollar to US75.2c, up 4% over the month, while the interest rate on 3-year Australian government bonds lifted 82 basis points over the month to 1.14%.
Inflation fears also dented consumer confidence in the final week of October, but the ANZ-Roy Morgan rating still ended the month higher at 106.8. Rising business optimism saw the NAB business confidence index lift from -5.5 to +13 points in September.
We are unlikely to get a clear picture on inflation until supply pressures ease. The Reserve Bank has stated it won’t lift rates until inflation is ‘’sustainably” within its 2-3% target band and wages growth is above 3%.

The MWL Financial Group includes but is not limited to:
MWL Financial Group Pty Ltd (ABN 49 145 576 058)
MWL Financial Services Pty Ltd (ABN 22 095 907 574; AFSL/ACL 235096)
MWL Accounting Pty Ltd (ABN 25 005 965 597)
MW Planning Pty Ltd (ABN 18 117 913 550; AFSL 312489)
This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial advice prior to acting on this information. Investment Performance: Past performance is not a reliable guide to future returns as future returns may differ from and be more or less volatile than past returns.

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