Provision Newsletter

With the ATO keeping a close eye on deductions, make sure you’re across what you can and can’t claim.

If you’re claiming back some of the money you’ve spent as part of your job this year, it’s a good idea to ensure you’ve kept the appropriate records that may be required ahead of lodging your tax return.

The Australian Taxation Office (ATO) said recently Aussies needed to keep the necessary records, adding that it would be paying close attention to claims made for certain work-related expenses¹.

If you’re not really sure what you should be claiming, here’s a rundown on what you should know.

What is a legitimate deduction?

When completing your tax return for the financial year (1 July 2017 to 30 June 2018), you’re able to claim deductions for some expenses, most of which will be directly related to you earning an income.

The main thing to remember is a work-related expense is only deductible if²:

• you paid for it and were not reimbursed by your employer

• it relates to you earning an income and was not for personal use

• you have a record, such as a receipt.

Note, if the total amount you’re claiming is $300 or less, you generally won’t need receipts, unless your claim relates to car expenses, meal allowances, award transport payments, or travel³.

However, you may be asked to tell the ATO how your claim was worked out and explain why the claim is reasonable, based on the requirements of your occupation.

What if expenses are related to work and personal use?

If your expenses are for both work and personal use, you can only claim a deduction for the work-related portion, which could for instance be 50% of your phone and internet bundle.

Another example is say you go on an overseas study trip, but are taking a holiday at the same time, you wouldn’t be able to claim the entire trip as a work-related expense.

What are some typical examples of things you can claim?

Below are some common examples of tax-deductible work expenses and for more information, including deductions for specific industries and occupations, check out the ATO website.

• Vehicle and travel expenses (which generally won’t include travel between work and home)

• Clothing, laundry and dry-cleaning expenses (which typically only applies if you wear occupation-specific clothing or a uniform)

• Home office expenses (such as computer, phone and internet costs, but only the proportion that relates to work and not your own personal use)

• Self-education expenses relevant to your job (such as course fees, textbooks and journals)

• Tools and equipment (such as sunscreen and sunglasses if you work outside, or laptop and relevant software if you work in an office)

• Other deductions (which might include things like union fees).

Meanwhile, remember there are other things outside of work that you may be able to claim, such as personal super contributions, interest, dividend and other investment-related income deductions, as well as gifts and donations to deductible gift recipients.

Is there any help to make tax time easier?

You can use the myDeductions tool in the ATO app to save a record of your deductions throughout the financial year, which you can upload when you do your tax return or provide to your tax agent, who may be able to provide you with additional tips if your tax situation is a bit more complex.

To ensure you’ve got all the relevant information you need ahead of filing your tax return, check out the ATO’s tax time checklist. And, keep in mind, if you’re lodging your own tax return, you have until 31 October 2018 to lodge it, or potentially longer if you’re using a registered tax agent.

Please contact us on |PHONE| if you seek further assistance  

Source : AMP May 2018

1 ATO media release – Australians on notice to keep their receipts
2 ATO – Deductions you can claim paragraph 2
3 ATO – Work related expenses Rules for written evidence to substantiate deductions

So far this year geopolitical developments have been having a significant impact on investment markets. Most of these revolve in some way around President Trump and the US: with the threat of a trade war between the US and China (although “constructive” talks between the two add to confidence that a trade war will be averted); the Mueller inquiry concerning his campaign’s links to Russia (but like many such inquiries seems to be looking at other things too); the US decision to reimpose sanctions on Iran (and a resultant rise in oil prices); and recently (mostly) good news regarding North Korea.

Away from the US the other major geopolitical risk on investors’ radars at present concerns Italy. Last year the big concern was that the 2016 Brexit vote and Trump victory presaged a surge in support for populist Eurosceptic parties in elections in the Netherlands, France, Germany and Austria and that an independence vote in the Catalan region of Spain would also pose a threat, all contributing to increased risk of an eventual Eurozone break up. In the end no such thing happened. This year the concern is that the formation of a populist coalition government in Italy with Eurosceptic leanings will drive crisis in Italy and potentially threaten the Euro. I must admit that while I wasn’t worried about last year’s Eurozone elections the risks around Italy are greater. But a break up of the Euro triggered by Italy still looks very unlikely. And in the meantime, Eurozone shares remain attractive. This note looks at the main issues.

Populists take over in Italy

While the populists did not fare as well as many predicted in Europe last year the populist left-leaning Five Star Movement (5SM) and populist far-right Northern League (NL) were the big winners in the Italian elections in March. While neither won a majority on their own and a coalition between them was seen as the worst possible scenario given their background of Euroscepticism and support for irrational economic policies, despite their political differences they have agreed to do just that. They are proposing amongst other things: big tax cuts (with just two rates of 15% and 20% for companies and individuals); a basic income for the less well off; a roll back of pension reforms; and a review of European Union budget rules.

The resultant budget deficit blow out will create tensions with the EU at a time when Italian public debt at around 130% of GDP is the second highest amongst Eurozone countries and its budget deficit at around 1.6% of GDP is the third highest.

Source: IMF, AMP Capital. Note: Greek public debt looks worse than it is as Eurozone assistance has lengthened its maturity at very low rates.

Which in turn risks significant upwards pressure on Italian bond yields. Northern League leader Matteo Salvini has naively bragged that “The spread [between Italian and German bond yields] is going up – do you remember the spread?”. Investors do and the gap between Italian and German bond yields has risen by 0.63% this month so Italy now pays 1.85% more than Germany to borrow for 10 years. This has put some upwards pressure on Spanish and Portuguese bond yields, although none are near the extremes of the 2011-2012 Eurozone crisis.

Source: Bloomberg, AMP Capital

This is also now weighting on Italian shares which after being outperformers over the last year as the Italian economy improved are now down 3.7% this month. Market and economic realities may eventually force 5SM and NL to water down their policies in government – which may explain why the leader of neither wants to be PM! In some ways this has echoes of Syriza in Greece that once promised extreme populist policies and an exit from the Euro but became just another centrist European political party. So it may turn out to be a non-event but it could still impose significant risk along the way (as the noise in Greece did) and suggests a cautious stance towards Italian assets – particularly shares and bonds.

Three reasons not to be too concerned about an Itexit

Given 5SM and NL’s background in Euroscepticism an Italian push for an exit from the Euro (Itexit) could emerge as an issue when Italy and the Eurozone next have an economic downturn. However, there are three reasons not to be too concerned about an Itexit and contagion to the rest of the Eurozone.

First, its not an imminent threat in Italy because while support for the Euro there is not as strong as it is elsewhere in the Eurozone, a majority of Italians support the Euro (with support actually rising from a year ago) and 5SM and NL only did well because they backed away from policies to exit the Euro.

Source: Eurobarometer, AMP Capital

Second, as Syriza and Greece have found exiting the Euro is easier said than done and would involve: currency redenomination; a probable sharp collapse in the value of the “new” Lira; a run on the banks, capital flight and a sharp rise in Italian bond yields as depositors, individuals, companies and investors try to move into harder currency; harsh fiscal austerity as funding for Italy’s 1.6% of GDP general budget deficit would evaporate; and a return to recession. This would likely see a 5SM/NL coalition government back away from an Itexit before it went too far – just as we saw Syriza do.

Third, the risk of contagion to the rest of the Eurozone is far less than it was earlier this decade:

• other vulnerable countries like Spain, Ireland, Portugal and even Greece are now in much better shape (with lower budget deficits, stronger growth and falling unemployment);

• more broadly, Eurozone break up risk may have peaked with the high point of the Eurozone debt crisis – when unemployment & fiscal austerity were at their peak in 2013. But unemployment has now fallen from 12% to 8.5% and fiscal austerity has ended. An end to the migration crisis may help too with sea arrivals collapsing since 2015; and

• popular support for the Euro is solid at around 70% across the Eurozone and various countries showed by their elections last year they aren’t interested in exiting the Euro.

​While a break up in the Euro is unlikely, a populist coalition in government in Italy, which is the Eurozone’s third largest country, along with a deterioration in its budgetary position will keep fears of a threat to it alive (after they subsided following last year’s elections) and this will weigh on the Euro. Particularly in the short term until investors get a clearer handle on what a 5SM/NL coalition government in Italy will do.

Eurozone shares remain attractive

While question marks remain over Italy and this will weigh on the Euro, there is good reason to be optimistic regarding Eurozone shares. First, Eurozone shares are not expensive. They are trading on a price to forward earnings multiple of 14 times which is around its long-term average. And their cyclically adjusted price to earnings ratio which compares share prices to a ten-year moving average of earnings (often called a Shiller PE) is around 17 times compared to 32 times in the US. This is largely because Eurozone shares underperformed US shares in the post GFC period. Adjusting for relatively lower bond yields in Europe makes Eurozone shares even more attractive.

Source: Global Financial Data, AMP Capital

Second, the European Central Bank is still pumping cash into the economy and is a long way from rate hikes. Italian risk may keep it easier for longer. This contrasts to the Fed which is engaging in quantitative tightening and raising interest rates.

Third, the Euro is now falling. A rise in the Euro through last year – as Eurozone growth surprise on the upside relative to the US and political risk declined in the Eurozone relative to the US – harmed Eurozone shares. This is now reversing as US growth has started to accelerate relative to the Eurozone.

Finally, while Eurozone growth has slowed a bit it’s still good and thanks to ongoing monetary stimulus and a now falling Euro is likely to remain so. In turn this is good for profit growth.

Source: Bloomberg, AMP Capital

Key implications for investors

There are several implications for investors. Firstly, a populist coalition government in Italy is negative for Italian assets.

Second, it’s another drag on the Euro which along with relatively easier monetary policy and slower growth compared to the US is likely to see more downside against the US dollar (which probably means it tracks sideways against the $A).

Finally, Eurozone shares are likely to be relative outperformers notably versus US shares thanks to more attractive valuations, easier monetary policy and a falling Euro.  

Source: AMP Capital 22 May 2018

Important note: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided.

Investing can be frustrating and depressing at times, particularly if you don’t understand how markets work and don’t have the right mindset. The good news is that the basics of investing are timeless, and some have a knack of encapsulating these in a sentence or two that is both insightful and easy to understand. In recent years I’ve written insights highlighting investment quotes that I find particularly useful. Here are some more.

Having a goal and a plan

“Financial peace isn’t the acquisition of stuff. It’s learning to live on less than you make, so you can give money back and have money to invest. You can’t win until you do this.” Dave Ramsey

The only way to be able to build wealth is to save and invest and you can only do this if you spend less than you earn. That is, you have to start with a savings plan.

“Put time on your side. Start saving early and save regularly. Live modestly and don’t touch the money that’s been set aside” Burton G Malkiel

In investing time is your friend and the earlier you start the better. This is the best way to take advantage of the magic of compound interest. The next chart – my favourite – shows the value of $1 invested in various Australian asset classes since 1900 allowing for the reinvestment of any income along the way. That $1 would have grown to just $234 if invested in cash, $866 in bonds but a whopping $529,293 if invested in shares.  

Source: Global Financial Data, AMP Capital

While the average share return since 1900 is only double that in bonds, the huge gap in the end result between the two owes to the magic of compounding returns on top of returns. A growth asset like property is similar to shares over long periods in this regard. Short-term share returns bounce all over the place and they can go through lengthy bear markets (shown with arrows on the chart). But the longer the time period you allow to build your savings the easier it is to look through short-term market fluctuations and the greater the time the compounding of higher returns from growth assets has to build on itself.

“If you fail to plan, you plan to fail.” Often attributed to Benjamin Franklin

Having a clear understanding of your investment goals – like saving for a home or retirement or generating income to live on – and a plan to get there is critical. If you don’t have a clear plan you will be subject to all sort of distractions which can blow you a long way from where you want to get with your investments.

The investment cycle

“Bull markets don’t die of old age but of exhaustion.” Anon

Bear markets are invariably preceded by excess in the economy – over investment, high levels of debt growth, high levels of inflation and tight monetary conditions – and excess in the share market in the form of overvaluation and investor euphoria. It’s this excess which drives exhaustion and hence the end of a bull market, not its age.

“The stock market has predicted 9 of the past 5 recessions.” Paul Samuelson

In the short term the share market moves all over the place with each significant plunge eliciting calls for an impending recession and a deep bear market. But most of the time it’s just noise providing an opportunity for investors before a rebound. For example, over the past 50 years in the US there has been 21 episodes of 10% or greater share market falls, but only seven saw recessions and bear markets.

Risk

“The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. Not only is the mere drop in stock prices not risk, but it is an opportunity.” Li Lu

Risk is often portrayed as market volatility when in reality it’s a whole lot more: the risk of capital loss; the risk of not having enough investment income; the risk of not having enough to last through retirement. It’s also perverse – the risk of capital loss is lowest after a period of high volatility and vice versa.

Contrarian investing

“The day after the market crashed on 19^th October 1987, people began to worry that the market was going to crash” Peter Lynch

This is perhaps a bit flippant, but it goes to the heart of crowd psychology and why it’s best to go against the crowd at extremes. When times are good the crowd is relaxed, happy and fully invested. So everyone who wants to buy has. This leaves the market vulnerable to bad news because there is no one left to buy should prices drop. Similarly, after a sharp fall the crowd gets negative, sells their investments to the point that everyone who wants to sell has and so the market sets up for a rally when some good or less bad news comes along. So the point of maximum risk is when most are euphoric, and the point of maximum opportunity is when most are pessimistic.

Pessimism

“It is easier being sceptical, than being right.” Benjamin Disraeli

The human brain evolved in a way that it leaves us hardwired to be on the lookout for risks. So a financial loss is felt more negatively than the beneficial impact of the same sized gain. Consequently, it seems easier to be sceptical and pessimistic. As a result, bad news sells and there seems to be a never-ending stream of warnings regarding the next disaster. But when it comes to investing, succumbing too much to scepticism and pessimism doesn’t pay. Historically, since 1900 shares have had positive returns seven years out of 10 in the US and eight years out of 10 in Australia.

“A pessimist sees the difficulty in every opportunity, an optimist sees the opportunity in every difficulty.” Winston Churchill

This is what stops many investing after big falls – all they see are the reasons the market fell. Not the opportunity it provides.
 

“Without a saving faith in the future, no one would ever invest at all. To be an investor, you must be a believer in a better tomorrow.” Jason Zweig

If you don’t believe your term deposit is safe, that borrowers will pay back their debts, that companies will see good profits and that properties will earn rents then there is no point in investing.

Psychology

“An investment said to have an 80% chance of success sounds far more attractive than one with a 20% chance of failure. The mind can’t easily recognise that they are the same.” Daniel Kahneman

Beware of tricks that your mind plays on you when investing. Numerous studies show that people suffer from lapses of logic – eg, assuming the current state of the world will continue, being overly confident and assessing the risk of certain events by how they are presented. The key for investors is to be aware of these biases and try to correct them.

Noise

“Stock market news has gone from hard to find (in the 1970s and early 1980s), then easy to find (in the late 1980s), then hard to get away from.” Peter Lynch

The information revolution has given us access to an abundance of information and opinion regarding investment markets. The danger is that it adds to the uncertainty around investing resulting in excessive caution, a short-term focus, a tendency to overreact to news and to focus on things that are of little relevance. The key is to recognise that much of the noise and opinion around investing is ill informed and of little value.

“The ability to focus is a competitive advantage in the world today.” Harvard Business Review

The key in the face of this information and opinion onslaught is to turn down the noise and focus.  

“If you can keep your head when all about you are losing theirs…If you can wait and not be tired by waiting… If you can trust yourself when all men doubt you…Yours is the Earth and everything that’s in it.” Rudyard Kipling, If, as quoted by Warren Buffett 

Keeping your head and remaining calm is critical in times of extreme – when the crowd is convinced the path to instant riches has been revealed or when the crowd is convinced that economic disaster is upon us. These periods throw up great temptation to buy when you should be selling and vice versa. But you will only get it right if you keep your head & stay calm.

Forecasting

“I believe that economists put decimal points in their forecasts to show that they have a sense of humour.” William Gillmore Simms

The dismal track record of precise forecasts regarding things like economic growth, share prices and currencies indicates that relying on them when investing can be dangerous. There is often a big difference between getting some forecasts right and making money. Good experts will help illuminate the way and put things in context, so you don’t jump at shadows but don’t over rely on expert forecasts – particularly the grandiose ones.

Having a process

“I am going to reveal the grand secret to getting rich by investing. It’s a simple formula that has worked for Warren Buffett, Carl Icahn and the greatest investment gurus over the years. Ready? Buy low, sell high.” Larry Kudlow

Yep it’s that simple. Or it should be, but many do the exact opposite and buy high after a lengthy period of strong returns convinces people it’s a great investment (but the risks point down), and then sell low after fall in the price of an asset leads people to believe that it’s a bad investment (but that’s when the risks point up). The key to is do the opposite – buy low, sell high and it’s very helpful to have an investment process to do that.

“Three simple rules – pay less, diversify more and be contrarian – will serve almost everyone well.” John Kay

This helps bring the essentials of investing together. They stand to reason: the less you pay for an investment the greater the return potential; just having one or two shares leaves you very exposed should the news turn bad regarding those shares but if you diversify across a range of shares you can reduce the risk of a fall in your overall portfolio; and doing the opposite to the crowd means you can avoid the points of maximum risk in markets when most are fully invested and take advantage of periods of maximum opportunity when most have sold.

“Success consists of going from failure to failure without loss of enthusiasm.” Winston Churchill

As with all things we need to recognise that to learn we need to make mistakes and to be persistent.

Balance

“A calm and modest life brings more happiness than the pursuit of success combined with constant restlessness” Albert Einstein

This applies to life in general, but it also applies to investing – don’t jump around all over the place and keep it simple.

“A man should make all he can, and give all he can.” Nelson Rockefeller

It’s not financially possible for everyone but consider giving a bit away for good causes if you can – and not just for the tax deduction as you will feel good and it will bring good karma.

“The trouble with doing nothing is that you don’t know when you have finished.” Cafe blackboard in Byron Bay

…so it’s always good to do something and investing is something worth doing (and worth doing well)!

Source: AMP Capital 17 May 2018

Important note: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided.

Exchange traded products (ETPs) are traded on the stock exchange just like shares, which provide investors with benefits including ease of buying and selling, competitive cost, and diversification.

Investors now have access to a greater diversity of ETPs, with four major types of ETP structures now trading on the ASX.

Listed Investment Companies (LICs)

LICs have been trading on the ASX for almost 100 years, making them the oldest ETP category. Like other ETPs are traded on market on the stock exchange. They are similar to Active ETFs because they are actively managed: an internal or external investment manager is making buy and sell decisions.

But there are a number of elements that make them different. They are incorporated as companies (other ETPs have a regulated unit trust structure). They are only required to disclose net asset value (NAV) each month.

And they are closed-ended: they have a fixed number of shares and thus all trades on market are between buyers and existing shareholders (sellers). This closed-ended structure means LICs can trade at either a discount or premium to NAV because a new supply of shares can’t be created to meet demand. Like any company listed on the market, therefore, the price will oscillate based purely on demand. 

ETFs

Exchange traded funds (ETFs) are similar to traditional managed funds but are traded on the stock exchange. ETFs are passively managed – they track an index or asset class to replicate its performance.

Investors gain a number of benefits from ETFs. Like shares, they are easy to buy and sell and can be traded and held in a brokerage account. Because of their passive/rules-based strategies, ETFs are generally low cost.

And importantly, through just one trade, ETFs allow investors to access a broad range of a securities that help diversify their portfolio. Their ease of use, low cost and liquidity has made them one of the fastest growing financial instruments in the world in recent times.

Active ETFs

Active ETFs are like traditional ETFs in that they are similar to a traditional managed fund but traded on a stock exchange. Unlike ETFs, however, Active ETFs use an active investment strategy: the investment manager is proactively making buy and sell decisions to try and outperform an index or specific asset class.

Active ETFs provide the benefits of ETFs, including liquidity and ease of use, but with the potential for outperformance.

Active ETFs differ from traditional ETFs in some other ways. The managers of Active ETFs are only required to disclose their portfolio holdings quarterly, so they don’t lose a competitive advantage. Unlike ETFs which have regular ongoing disclosure, there is not enough information for market makers – third parties that help ensure a liquid market – to create a market for Active ETFs. Therefore, managers of active ETFs act as market makers themselves.

mFunds

mFunds offer a way to buy and sell unlisted managed funds and access a broad range of diversified strategies and instruments. Like traditional managed funds, mFunds are not traded on exchange via a live intraday price. Instead, they are bought and sold directly from issuers.

The trading is executed using the ASX’s electronic systems (the mFund Settlement Service), which streamlines the process and makes trading and record keeping easy. Investors can use brokers and advisers for mFund, and unlike traditional managed funds, they don’t have to fill in application forms.

mFunds are held electronically using the same Holder Identity Number (HIN) investors utilise for other ASX traded securities, which means they are consolidated in the same place as shares making portfolio management easy.

mFunds are bought and sold on an end of day basis. The price at which an investor buys and sells is therefore the same as the true value (the net asset value, NAV) of the underlying assets of the fund.

Source: AMP Capital 9 May 2018

Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) makes no representation or warranty as to the accuracy or completeness of any statement in it. 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.Before making any investment decisions you should consider the appropriateness of the information, and seek professional advice having regard to your own circumstances.