Last chance! Tips to get this year’s tax right + Are interest rates on the rise?

Last chance! Tips to get this year’s tax right + Are interest rates on the rise?

Hi everyone,

Happy end of financial year. Stage 3 tax cuts kick in from Monday, which we may need to meet higher interest rates. In this week’s newsletter:

• Inflation shocker means the RBA is likely to raise interest rates at the August meeting.

• Last minute tax tips to get deductions in before Monday.

• The tax cuts will boost your borrowing power- just be careful not to over extend.

• How much has your house or home unit appreciated in the last year?

• Why some people are selling the shares in Nvidia after a stellar run up.

While the economy is slowing and interest rates biting, average Australians have never been wealthier. We’re asset rich and cash poor.

According to the Bureau of Statistics, household net wealth sat at a record $16.2 trillion in the March 2024 quarter - boosted by a record level of property assets of $11.0 trillion. As a proportion of net household wealth, residential property accounted for around 67.9 per cent, up from 61.7 per cent in December 2020.

Households also held $1.46 trillion directly in equities, $1.73 trillion in cash and deposits, and $3.88 trillion in superannuation. The key driver of household wealth gains in recent years has been rising property prices.

The recent boom in property prices has been a great wealth builder but as I always say, “The bigger the boom, the bigger the bust that follows”. Every asset class moves in cycles so it’s important to understand where you are in the cycle and have a diversified portfolio to protect against any downturns.

Property is flying at the moment and looks as though it will continue because of a chronic shortage in new properties being built. But the boom won’t last forever. Enjoy it while you can and make sure you don’t have all your eggs in the one basket.

Inflation setback, a big disappointment

Over the last couple of weeks, I’ve been saying not to expect any interest rate cuts until well into next year. Don’t be surprised if we get a rate hike before the end of the year. At last week’s RBA board meeting they discussed, but rejected, the need for a rate hike.

A rate hike will certainly be discussed at the next RBA board meeting after Wednesday’s shock rise in the annual CPI figure for May - from 3.6 per cent to 4 per cent. It was a lot stronger than most economists expected of around 3.8 per cent.

There is no sugar coating the fact it was a shocker. The next RBA board meeting is 5-6 August and the June CPI figure is due before then. So, hopefully, it will be better news on the inflation front. If it’s not, then the markets are expecting a rate rise in August.

So, what went wrong? What drove this inflation rate higher than expected? The surprising one was the 2 per cent rise in international travel and holidays. Most economists expected this to go down because international airfares seem to be dropping because of more competition coming into Australia.

The largest contributors to the annual rise in the CPI indicator were housing (+5.2 per cent), food (+3.3 per cent), transport (+4.9 per cent) and alcohol and tobacco (+6.7 per cent).

Food prices rose by 0.5 per cent for the month and 3.3 per cent for the year. The lift in the month was driven by fruit (+2.8 per cent) and veg (+2.1 per cent). The ABS noted that higher prices for grapes, strawberries, blueberries, tomatoes and capsicums drove the increase.

The cost of eating out, only measured once a quarter, rose by 0.8 per cent for the quarter for restaurant meals and 0.5 per cent for takeaway and fast foods. The annual rate continued to dip to 4.2 per cent and 4.3 per cent respectively ... well down from peaks of 7-9 per cent.

As well, there were further falls in annual inflation for hairdressing, and various recreational activities. Household furnishings are well down as is clothing and footwear.

It shows Australians are tightening their financial belts and cutting back on non-essentials, but inflation is being driven by factors outside their immediate control. That’s the frustrating part of this. Borrowers are doing the right thing but will still bear the brunt of higher interest rates.

Case in point is housing costs. They rose by 0.4 per cent for the month and 5.2 per cent over the year. As expected, rental inflation was high and new dwelling construction costs continued to rise at a very solid 5 per cent over the year. There has been no let up in the rising costs in this category over the past 10 months.

Fingers crossed for a better June CPI before the August RBA meeting to save us from another rate rise.

Top tax tips: here’s your last chance to get this year’s right

 It’s the end of the financial year this weekend which means it’s now or never to make those last minute deductable adjustments to get this year’s tax right. Remember the Stage Three tax cuts start on Monday 1 July so it won’t impact this current return.

Having said that, your deductions this year will give a bigger bang for your buck (because your tax rate hasn’t dropped yet) and, if you can, delay any last minute income until after Monday when your tax rate will be lower.

Good reminders from the Chartered Accountants Australia & NZ are that you have to incur any costs without being reimbursed by your employer to claim a deduction, you can only claim costs related to your work not your personal life, and you have to keep records so you have proof of what you’re claiming.

Their top tax tips for the next couple of days are:

• Purchase work expenses before Monday

Now is the time to make any last-minute work purchases to set yourselves up for the new financial year. Work-related expenses could include computers, subscriptions and membership fees.   

Importantly, make sure you need whatever you buy. Don’t just buy something because of the June 30 deadline. 

•   Understand the changes to electric vehicle claims

There are two ways of calculating deductions for car expenses, the fixed rate method (85 cents per kilometre) if you have travelled less than 5,000 business kilometres a year OR the actual cost method. 

The Australian Taxation Office (ATO) has issued a new guideline to calculate the cost of electricity when charging an electric vehicle (EV) at home for work if you use the actual cost method. The EV home charging rate is 4.2 cents per kilometre. This doesn’t extend to plug-in hybrid vehicles, electric motorcycles and electric scooters.  

You can claim the EV home charging rate and commercial charging station costs if your vehicle has the functionality to accurately report the percentage of a vehicle's total charge based on the type of charging location. If it does not have that functionality, you need to choose between using the EV home charging rate and commercial charging station costs. 

And of course, always keep a logbook and receipts in case the ATO comes knocking.  

•  Accurately calculate work-from-home deductions 

There are still two ways of calculating working from home deductions - claiming 67 cents per hour you worked from home OR claiming actual costs. 

Claiming 67 cents per hour covers running costs, such as phones, internet, heaters and electricity, and allows you to make a separate claim for tax depreciation on computers and furniture. If you have the time and the records, using the actual cost method may result in a larger tax deduction.  

Don’t forget, you need timesheets or a diary to support the hours you claim. 

• Know the difference between repair and capital claims for rental properties 

Rental property investments can be tricky and the ATO has rental owners in their sights this year. There is a difference between what can be claimed for repairs and maintenance versus capital expenses. 

A repair can be claimed straight away but capital items, like dishwashers, ovens, heaters and blinds, can only be claimed immediately if they cost less than $300, otherwise they must be claimed over multiple years. 

In general terms, a repair restores an item to its original state, and capital expenditure improves an item or replaces an item. If you have purchased a run-down investment property, your initial improvements to the property will not be deductible. 

• Declare all your income 

The ATO is cracking down on taxpayers who fail to include all their income when lodging their tax returns this year. If you have received income from multiple sources, you need to wait until it is pre-filled in your tax return before lodging. And remember to check it carefully.   

A lot of mistakes are made in July because people forget to include interest from banks, dividend income, cryptocurrency income, government payments and gig economy income. 

• Have the right documentation for your expenses 

If you’re thinking right now “I wish I’d kept my receipts”, make a commitment to starting the new financial year fresh. The ATO’s My Deductions app is an easy solution, or store copies on your computer or phone. There’s also the traditional shoe-box method but remember, receipts can fade. 

If you have kept your receipts, it’s time to dig them out and collate them for tax time.  

Tax cuts could boost your borrowing power by $47,000

Aspiring home buyer’s borrowing capacity has been slashed by rising interest rates but could increase by up to $47,000, thanks to next week’s incoming stage 3 tax cuts.

While this is great news for house hunter hopefuls, there may be some unintended consequences, including even higher property prices.

These tax cuts have the potential to boost borrowing power significantly, but rather than helping people reach their property goals faster they may just end up paying more as bigger deposits threaten to push up property prices.

I really encourage people to run a mortgage stress test before making use of their improved borrowing capacity. If you max out on your loan, you could find yourself in a difficult situation, should your circumstances change down the track. Or we get a rate rise in August.

The tax cut changes due to come into effect on July 1 include lowering the bottom marginal tax rate from 19 per cent to 16 per cent.

Compare The Market crunched the numbers and found a couple with no dependents on a combined $200,000 income could see their borrowing increase from $877,000 to $924,000 – that’s a $47,000 boost.

It’s a similar story for a couple with two dependents on a combined $150,000, who will get a $39,000 increase in their borrowing power.

Meanwhile, a single with no dependents on an annual income of $100,000 will have their borrowing capacity lifted by $23,000.

It’s a difficult time for anyone trying to get their first foot on the property ladder. Ever-rising property prices and higher rents coupled with inflation mean that it’s taking people longer to save for a deposit. For some, these tax cuts may seem like the golden ticket.

But tax cuts aren’t the only way aspiring homeowners could boost their borrowing power.

• Reduce your credit card limits - or get rid of it

When lenders calculate borrowing power, they use the entire credit card limit, rather than the balance, as part of their serviceability calculations. Therefore, reducing your limit or closing your credit card may help boost your borrowing power.

For example, a $10,000 credit card limit held by someone earning $100,000 would reduce their borrowing capacity from $552,000 to $505,000 - a difference of $47,000.

• Know your credit score

Websites like Compare The Market provide free credit score checks to help you understand how strong your borrowing position is. Lenders use your credit score and credit history to calculate risk when assessing your application. Improving your credit score is one way to improve your chances of being approved.

•  Pay off any debt

Banks must consider all financial obligations when calculating your ability to repay debt including credit cards, car loans or personal loans. If you work to reduce or eliminate your high interest rate debts, you may be able to increase your borrowing capacity.

•  Consider a joint purchase

You could team up with a family member, partner or friend if your borrowing capacity isn’t high enough and you’re struggling to meet the lender’s income requirements.

Joint purchases have become a popular way for many to break into the property market. Two incomes are usually better than one – so you may find your borrowing power increases with an additional person on the loan. 

This is why Australians are building wealth through property

Earlier I talked about the huge increase in the wealth of Australian households which is largely being driven by the huge increase in property values.

This rundown from real estate giant Ray White puts it all in perspective. A 26.7 per cent average return for Perth house owners and 19 per cent for home unit owners is a fantastic return. Likewise, Adelaide and Brisbane are not far behind.

It may feel like a tough economy out there but your biggest asset is going along nicely.

6 reasons to sell Nvidia 

I know I’ve been fascinated with the performance of US AI computer chip maker, Nvidia, over the last few months as it briefly became the most valuable company in the world. If you don’t have shares in the company directly you’ve most likely indirectly benefited if you’re invested in the international share option of your superannuation fund, or hold a US share ETF.

It has been a great ride but over the last 10 days the Nvidia share price has fluctuated wildly and there was a fascinating interview on Bloomberg with veteran investor Ross Healy, Chairman of Strategic Analysis Corporation, who believes this is as good as it gets for Nvidia.

He has sold all his Nvidia shares and gave six reasons why:

1. By all standard measures, whether it is price/book, price/sales, or price/earnings ratio, the shares are valued at an extreme. Nvidia is not an investment, it is now a gamble.

2. A number of competitors (for example, Broadcom) are now producing much cheaper chips, and therefore appealing to the much broader market. Nvidia may be the Cadillac of chips, but most companies are content with driving Volkswagens.

3. The high-end market may be stalling out and having some issues. Both Alphabet and Microsoft are reducing staff at their data centres, cutting hundreds of jobs.

4. According to Sequoia Capital, actual AI business (not chip sales, but business related to the actual employment of the chips) is minuscule. From the $50 billion in chip sales they are able to identify only about $3 billion in incremental revenues. The ROI on those chips is awfully small.

5. The semiconductor business is very cyclical with huge demand swings historically.

6. His own proprietary valuation measures indicate that the critical valuation limit (peak) has been reached.