Our Economic Outlook October 2013

Economics - Competent - 700 Words - Reading Time 5 minutes

Australia's economy is in transition. Mining investment has been powering the economy but is now in decline. For growth to continue at the same rate, there will need to be a pick up in the domestic economy. We are in a good position to be able to make that transition but the uncertainty about how this will play out has dampened business and consumer confidence and held back domestic demand. In this article we will look at the factors influencing our economy and what the outlook is. 

The Federal Election

Australian Elections do not usually have a major economic impact but this election took on more importance because of the difficult period with a minority government leading to an uncertain environment.

The policies of the coalition will to lead to smaller government and less regulation. This business friendly approach should improve productivity and economic growth. However, the effectiveness will depend on getting legislation past the Senate. 

The US Economy

While the US government shutdown and debt ceiling issues have been resolved for the moment, the US economy will continue to have an impact on the Global Economy. The International Monetary Fund (IMF) has reduced its forecast for US economic growth due to the impact of sharp spending cuts instituted by the government earlier this year. These were aimed at trimming the federal deficit.

China and the Emerging Market Economies

Global growth in recent years has been boosted by China and the emerging economies of Brazil, Russia, India, and South Africa. However, these economies are currently experiencing a slowdown and this is going to have an impact on our economy - particularly in the mining sector.

Mining Slowdown

Over the last decade, our economy has benefited from a large increase in investment in the mining sector that has gone from under 2 per cent of GDP to 8 percent of GDP. This has been fueled by global demand and a steep rise in commodity prices.

Those commodity prices have now come off from their high and according to Reserve Bank of Australia (RBA) governor Glenn Stevens on July 30 2013: "It is now well understood that the 'mining boom' is shifting gear, and that we are entering a new phase."

Shipments of iron ore are still rising by about 15per cent per year and GDP will get a lift from this increased activity. But the bigger impact will come from the slowdown in infrastructure investment. According to the Bureau of Resources and Energy Economics (BREE), the value of new resources projects at the committed stage declined by $799 million from October 2012 to April 2013 and further falls are expected. With the infrastructure already in place, the emphasis is now on shipping. The result will be fewer jobs in the mining sector and this will have a flow on effect.

Some positives

There are a number of factors that will help us make the transition from our heavy reliance on mining investment to drive the economy.

The Australian Dollar come down in value by around 15% from it's peak. This increases the price of imports and decreases the price of exports making Australian companies more competitive

In addition, the RBA has cut interest rates and created an environment to stimulate local levels of demand. Household savings have steadily increased over the last decade and are currently averaging around 10% of household disposable income. All this means that Australian Households are in a strong position to spend as consumer confidence grows.

In Summary

With a number of world economic factors impacting us and some concern about the slowdown in the mining sector we are likely to see moderate growth in the economy through 2014. The IMF outlook for Australia's growth rate is 3% this year and 3.3% next year. Our Reserve Bank has predicted growth of 2.25% this year. However, there seems to be an increase in confidence in the economy and some good signs that Australia is well placed to cope with the transition from our reliance on the mining boom.

Please Note: This document has been prepared for the purpose of providing general information only, without taking account of any particular investor's objectives, financial situation or needs. Before making any investment decisions, you will need to consider if the information in this document is suitable for you. You may want to ask a financial adviser to help you.

Avoid these common mistakes when you are buying a rental property

Property Investment - Competent - 700 Words - Reading Time 5 Minutes

When you own a rental property you will want to take advantage of the help you get from the tax deductions associated with negative gearing. And one of the biggest expenses to claim as a tax deduction is the interest on the property. However, over the years, I have seen a lot of investors get the structure and use of their loan wrong and as a result they end up with a loan and a big interest bill every year - but no tax deduction for it.

Over the next few blogs, I will explain some of these mistakes so you can ensure that you can avoid them and get the maximum tax advantage on your investment property. It is important to understand that it is how you use the proceeds of the loan that determines the tax deductibility. Keep this principal in mind and it will help you keep your loan interest deductible.

Mistake No 1: Using the funds to buy your own home.

This is a common mistake where people have paid off their own home and are going to move. In the process, they also decide to keep their existing home as a rental property. Many people assume that if they refinance their existing house and use it as the security for the loan, the interest will be deductible when they use it as a rental property. However, this is not the case. The security is not relevant - it is the use of the money that determines if the interest is tax deductible - and in this case they are going to use the money to buy their new house. This is not a tax deductible purpose and therefore the interest on the loan is not tax deductible.

For example, John owns his house in Melbourne and has paid off the mortgage. He gets a job transfer to Adelaide and decides he would like to keep his Melbourne home as a rental property. John gets a loan using his Melbourne home as security. However, he uses the proceeds of the loan to buy an Adelaide house to live in. Unfortunately, the interest on John’s loan will not be tax deductible, because he used the money to buy his new home. This leaves him in a difficult situation. On the one hand he is receiving rent on his Melbourne property and he will be paying tax on that income. On the other hand he is making repayments and paying interest on a home loan but not getting any tax deduction for it.

This situation is not always easy to solve, but you may be able to do something about it if you are careful in the planning stages. Sometimes, it can be better structured at the start of the loan by changing the ownership. For example, if John was married to Maree, and the Melbourne home was solely in her name, John could borrow to purchase the home from Maree and in that case would have a tax deductible loan. Maree could then use the proceeds from the sale of the Melbourne property to buy the new home in Adelaide.

This leaves John owning the Melbourne property with rent coming in but also deductible loan interest to offset the tax payable. The new home in Adelaide has no loan against it.

There may be some tax consequences in this type of restructure. However, if the Melbourne property has always been John and Maree’s  main residence, there will be no Capital Gains Tax and it will also be exempt from stamp duty as the property is in Victoria and the transfer is between spouses.

Please note: This document has been prepared for the purpose of providing general information, without taking account of any particular investor's objectives, financial situation or needs. It does takes into account Australian Taxation Law that was in place as at October 2013. Before making any investment decisions, you will need to consider if the information in this document is suitable for you. You may want to ask a financial adviser to help you.