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The Economy

It’s almost impossible to predict what the local and global economic environment has in store for us in 2015. The ‘who knows’ factor is adding to uncertainty and in general, business is not ramping up for growth but maintaining a ‘steady as she goes’ approach – meaning low investment and jobs growth.

The Reserve Bank of Australia (RBA) meets again in early February with economists torn on whether interest rates will fall at that point. Previously, the Reserve Bank Governor stated that inflation was an impediment to cutting interest rates. But back when he said this, the RBA was looking at a crude oil price of USD $86 (Brent crude), compared to current levels of around $50. For Australians, other than a general enthusiasm about filling up for around $1 a litre, oil prices have had a dramatic impact on inflation. The latest figures released late January put inflation at 1.7% – well below the RBAs target of between 2% and 3%. The markets have already factored in an 80% chance of an interest rate cut in 2015; it’s just a question of when.

In January, the Australian dollar slipped to its lowest point since July 2009 falling to under USD $0.80. This financial year, the dollar reached its highest point at USD $0.93 in early September 2014 and its lowest in late January 2015 with a difference between the two of just over 16%.

On top of that, commodity prices have dropped dramatically by around 20% and unemployment is edging up.

So, we have a low interest environment with a falling Australian dollar and stilted economic growth – Australian growth levels have been below trend for over 6 years and are likely to continue that way. The question is, what now?

Politics & Taxes

The last Federal Budget contained a series of severe cuts. Some of those have passed Parliament and become law while others are pending the outcome of negotiations with the minor parties, while others have died a slow and protracted death. Keeping track of what announcements are now law is difficult. Here’s a quick summary:

  • Carbon Tax – abolished.
  • Mining Tax – abolished along with the associated business initiatives such as the loss carry back rules, accelerated depreciation for motor vehicles and the instant asset write off.
  • Superannuation guarantee (SG) – rephased as part of the mining tax repeal. Now, the SG rate will remain at 9.5% until 1 July 2021.
  • School kids bonus – was to be abolished as part of the mining tax repeal but is now means tested until 31 December 2016, before being abolished.

However, an increase in the GST requires the agreement of the States and as a result, all parties involved will be savaged by voters for any increase. If the Government acts on the reform measures set out in the Tax White Paper they have until mid 2016 to sell the concept to voters (according to the ABC’s Antony Green, the first possible date for a normal House and half-Senate election is 6 August 2016).

So, what does all this mean to you?

What now for your business?

The key to survival and growth this year is constant monitoring and adjustment. The environment we started with on 1 July 2014 is already quite different. Keep an eye on top line growth as much as the growth of your bottom line. Keep your focus on increasing your market not just cost cutting to make the numbers look right.

Importers need to look at the price impact of the fluctuating currency on profit margins. Do you need to put your prices up or are there other strategies to mitigate the impact? It is important to understand that anything that impacts on your margins will have a magnified impact on net profit.

If you are not already doing it and your business is impacted by currency fluctuations – and this could be as simple as having all your software licensed from US providers, explore hedging options to protect against further falls in the dollar. If you are using debt, there are numerous products from offset accounts to local currency overdrafts. But, don’t try to be a currency trader. It’s unlikely you will win. Business is tough enough without trying to make decisions in areas you are not experienced in. Even the pros get it wrong.

Exporters also need to consider their pricing. Can you hold your price and maintain margins or should you move your price to attract volume? Price, volume and margin are critical to work through when the currency is volatile.

In general, if your business has debt, do your housekeeping and ensure you are getting the best available deal. The financiers are hungry for business right now so if you have not had your debt mix reviewed in a while, now is the time.

What now for your superannuation?

A positive this year is the reform of excess contributions tax that is currently before Parliament. If passed, the amendments will enable individuals the option of withdrawing contributions in excess of the non?concessional contributions cap and 85% of the earnings. If you choose this option, no excess contributions tax will be payable and any related earnings will be taxed at your marginal tax rate. That’s quite a difference to the current system that can apply a tax of up to 93%. And, the changes apply retrospectively to excess contributions from the 2013/2014 financial year.

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