October 2019

Towards Zero Interest Rates (and what it means to you)

The Reserve Bank of Australia is widely tipped to reduce interest rates again to historic lows. Easton Wealth economist Emmanuel Calligeris explores the impact.

Australia and world volatility

The ongoing trade war between the US and China has dominated financial market movements recently. The last two trading months have seen increased market volatility. In July, share markets moved higher because interest rate markets moved lower to reflect lower economic growth thanks to the trade war. There have however been other issues causing market volatility including a negative economic growth reading in Germany in the second quarter and the Bundesbank – the Central Bank - warning of a possible repeat in the third quarter. This is important because two quarters of negative growth in a row is how we define a recession.

Japan’s GDP growth is weak as export growth has slowed. In Hong Kong, the unrest has the potential to deteriorate further. The riots have dented consumer spending which is a large component of economic growth for developed countries like Hong Kong. In Australia, economic growth has slowed also as households struggling with record debt and weak wage growth cut back on spending. Two key supports have been high commodity prices and infrastructure investment. The iron ore price remained high because of supply disruptions caused by the tailings dam disaster in Brazil. However, that is now falling away as iron-ore supply disruptions end and the price returns to more normal levels. It means that our export income from iron ore will be less of a driver of growth next year and unless the drought breaks, the slack is unlikely to be picked up by rural exports.

In early August, the further escalation of the trade war saw share markets in Australia and the US weaken and the interest rate on Australian term deposits and bonds fall to their lowest level in history. If interest rates stay low, government spending will gain importance as the driver of future growth.

The slowdown in global growth saw US interest rates adjust quickly. Traditionally, a signal of a high probability of recession in the US occurs when the yield (interest rate) on the 10-year bond, falls below the yield on the 2-year bond. This is also known a negative yield curve. Whilst the probability of recession is not guaranteed, the negative yield curve does suggest that the US Federal Reserve are likely to reduce its interest rate substantially over the course of the next year. In Australia, the Reserve Bank eased the official cash rate twice to an historic low of 1%. The RBA believes that the level of wages growth does not threaten its inflation outlook and the economy can operate at a much lower rate of unemployment. This essentially means that monetary policy (interest rates) can be lower for longer without overheating the economy. That said, the outlook is for interest rates to move even lower in late 2019 and early 2020 with some forecasters suggesting that the rate will reach just 0.50% by that time. Term deposit rates have moved lower to reflect the low cash rate.

The real impact of low interest rates

Low rates have produced a dilemma for savers. As interest rates fall, more and more capital is required to sustain the same level of income. This is illustrated in the table below.

Capital prices and interest rates

Investment amount ($) Fixed income ($) Interest rate

500,000.00 50,000 10%

625,000.00 50,000 8%

833,333.33 50,000 6%

1,250,000.00 50,000 4%

2,500,000.00 50,000 2%

$30,000 instant asset write-off

The ATO is reminding businesses that are looking to expand or improve their business and thinking of buying new or second hand assets, that medium sized businesses with a turnover up to $50 million (but at least $10 million) are eligible for the instant asset write-off.

This now applies to assets that cost up to $30,000 and which were purchased and first used or installed ready for use from 7:30pm (AEDT) on 2 April 2019 to 30 June 2020.

Medium sized businesses may purchase and claim a deduction for each asset that costs less than the $30,000 threshold.

For assets over $30,000 the general depreciation rules apply (which may depend on the entity).

ATO impersonation scam update

According to the July 2019 ATO impersonation scam report:

• 6,179 online scam reports were received in the first month of their new online reporting form going live;

• 6,645 phone scam reports were officially recorded, and 465 phishing scam emails were reported to reportemailfraud@ato.gov.au;

• 520 taxpayers provided scammers with their personal identifying information including date of birth, tax file number, driver's licence number and notice of assessment details; and

• $197,057 was reported as being paid to scammers, mostly by iTunes and Google Play.

Big Four banks' clients are being targeted by phishing scams—have you received these emails?

Spot the Scam - Hackers will use official logos and convincing language, always hover and check the URL before clicking

Both the Commonwealth Bank of Australia and the National Australia Bank are warning against phishing emails sent by scammers to their customers. The emails are extremely convincing, and lead to sites that are near-perfect duplicates of the respective banking sites.

Unsuspecting receivers are then directed to enter their credentials, which the scammers harvest.

Spot the Scam—it's easy for hackers to change the from name, always check the sender email address

If you have received these emails, don't open any links inside them or fill out any forms that ask for your personal information.

Using the cents per kilometre method

The ‘cents per kilometre’ method broadly allows an individual taxpayer to claim up to a maximum of 5,000 business kilometres per car, per year without the need to keep any written evidence (e.g., receipts) of car expenses.

Importantly, taxpayers making a ‘cents per kilometre’ claim are required to demonstrate that they worked out the number of business kilometres they claimed on a reasonable basis.

Taxpayers claiming under this method will generally fall into one of two categories, being either those who undertake a regular or irregular pattern of work-related travel.

If a taxpayer has a regular pattern of work-related travel (e.g., a 60 kilometre round trip to the warehouse to pick up supplies twice a week, 40 weeks in the year), then this type of explanation would generally be sufficient to justify the claim.

However, if the taxpayer has an irregular pattern of work-related travel, then they would need to make a note (e.g., in a diary) of each trip.

Also, remember that, for the 2019 income year, the rate that is applied (up to the 5,000 business kilometre maximum) is 68 cents (up from 66 cents in 2018) per business kilometre travelled.

The material and contents provided in this publication are informative in nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone. If you have any queries please contact myself or a member of the Clear Accounting Solutions team