Posted on April 3, 2020
There has been a lot of discussion about China lately – Free Trade Agreements, financial stability and growth and the impact on the Australian economy, and Chinese investment in Australia. With the help of our international contacts, we explore the impact of China on Australia and give some context to the debate.
According to Austrade, one in every three Australian export dollars earned is from sales of goods and services to China. On top of that, 80 per cent of the value of Australia’s export growth in 2013-14 was from trade with China. It’s not surprising then that we have a fixation with the welfare and continued consumption of Australian goods and services by China and China’s rising influence on the Australian economy.
Chinese growth – an insider’s view
China’s economic growth has been spectacular: until recently growing at around 10 per cent per annum from a low economic base to arguably the leading global economy. While construction and infrastructure projects were the primary drivers of growth, the opening of the Chinese economy to foreign investment in the late 1970s saw it become the ‘factory of the world.’ The fuel to drive this growth was a massive growth in Chinese consumption of resources – steel, iron ore, copper – you name it China needed it. You can see this consumption growth reflected in Australia’s export statistics.
With an increase in wealth came an increase in consumerism with a growing middle class. And, with a growing middle class came a property boom with many Chinese able to afford better housing.
Demand for housing escalated and development after development was launched, many snapped up within hours of launching.
The cost of this success was a rapid increase in the cost of living, high property prices fuelled by speculators, and corruption.
With the global financial crisis, demand for China’s goods started to decline creating excess capacity, factory and company closures, and staff lay-offs. Banks were then asked to reduce their loan exposure and Government projects scaled back. Starved of funds some companies sought funding from underground banks – shadow funding – paying extreme rates of interest that further aggravated the slow down and excess capacity.
The People’s Bank of China recently reported that it expects economic growth to be 6 – 7 per cent over the next three to five years – although businesses on the ground will tell you it’s lower than this at about 5.8 per cent. Interest rates were cut for the sixth time in 12 months in late October to try and hit growth targets.
To maintain growth, the Government is embarking on transformation programs focussed on austerity and knowledge technology and transfer.
We can see some of the fruits of this commitment to knowledge transfer with China now our largest export market for services representing 13 per cent of our global services exports.
On top of this investment program, China has eased restrictions on foreign owned investment firms, no longer requiring them to partner with local managers.
In terms of outbound investment, China’s State Council recently bolstered its offshore investment program – the Qualified Domestic Individual Investor program. Currently limited to a pilot program with the Shanghai Free Trade Zone, the program allows for an expanded range of offshore investments in greenfield and joint venture projects, real estate, and shares, bonds, insurance products, etc. You can expect to see the effects of this in Australian development projects.
Free Trade with China
The Free Trade Agreement with China is set to pass Parliament with the Labor Party negotiating a series of reforms to protect workers rights. The amendments put in place minimum wage safeguards for temporary skilled migration, new 457 visa conditions linked to relevant trade licenses, and the capacity to impose a ceiling on the number of new work agreements for 457 visa workers.
Australian expansion into Asia is increasing for businesses of all sizes. In a recent survey, the ANZ recently reported that the majority of Australian businesses that have expanded into Asia have experienced a substantial lift in profits, with almost 40 per cent of small businesses making a return on investment within 12 months. If your business is not already looking at its international potential, is it time to review the opportunities?
Posted on April 3, 2020
If you care about your loved ones it is important to keep your affairs in order. This will help your beneficiaries to easily establish what assets form part of your estate in order to distribute them in accordance with your wish.
One of the common problems our clients face when a parent passes away is to worry about the financial records evidencing the assets of the deceased.
Many Australians love investing in the share market and own a long list of investments acquired on floats more than 30 years ago. Many listed companies have undergone various share capital reconstructions since then or merged with other companies. Bonus share issue and dividend reinvestment plans are also commonly offered to investors.
Our clients hear us often talking about the “cost base” of their investments in shares or units in trusts. We always stress the importance of having a full record of when the investment was purchased and its cost base which includes the purchase price, additions through dividend reinvestment or bonus issues and reductions for buy backs and tax-deferred distributions.
Why is it so important top keep the cost base information?
One of the main reasons to update the documentation of your portfolio is to get the Capital Gains Tax (CGT) right and avoid triggering unnecessary tax liability. Not just for yourself but for your family when they inherit your assets on your passing.
The following scenario illustrates the importance of keeping accurate records of the cost base of your investments.
Scenario: Lisa owns a parcel of pre-CGT shares in Company X (acquired pre 20 September 1985), and a parcel of post-CGT shares in Company Y (acquired after 20 September 1985). Lisa passes away suddenly, and her son, David, is trying to get her tax affairs in order. David struggles to find documents in regards to the cost base of the shares.
Upon Lisa’s death, her shares form part of her estate which will be passed on to David as the beneficiary. David does not know when the shares were purchased or how much was paid. The pre-CGT shares will generally be deemed to have been acquired by David at the market value on the day Lisa died. If David sells these shares subsequently, his capital gain will be calculated as the difference between the proceeds and the market value. However, David will inherit the post-CGT shares at the cost base applicable to Lisa and will pay higher capital gains tax when he sells these shares. The pre-CGT shares may be treated as post-CGT assets due to lack of purchase substantiation. This means that unnecessary CGT will be paid by David on disposal.
Poor documentation can also lead to making estimates about the cost base of your investment. Understating your investment’s cost base can result in excess CGT that could have been avoided with a little documenting along the way.
If you would like to reconcile and update your investment portfolio and save the extra pain and cost your family may experience at a difficult time, we will be happy to assist.
Written by Grace Shideh
Posted on April 3, 2020
Sometimes the difference between a good business and a great business is simply having sufficient capital to execute your business plan. For many businesses, the owners have put everything they have into growing the business but there is still a gap. Investors offer an opportunity to close that gap but at what cost?
How do you know you need investors?
Unfortunately, most businesses seek investment funding at the point it is most critical or for the wrong reasons – seeking funding for a business when it is in financial distress is always going to be hard. Neediness is never a good negotiating position or very attractive. And, few will be prepared to invest to save you.
Funding from investors is used to fund growth where a major investment is required – where the business cannot service its growth or capital requirements and these requirements are greater than what the business can fund on its own.
On most occasions, investment is needed to build out scale and take advantage of the potential of the business. In many cases the owners can only afford to fund a portion of what is required but the scale they need will make the difference between an okay business and a great business.
What will investors expect?
Before seeking investors you need to get your house in order.
Every business operator knows that they should have a business plan in place. Most don’t. With a strategic business plan, you can track performance and growth, departures from the plan, etc., and this management information will tell you the point at which you need investment – either debt or another form. A strategic business plan will also inject reality into blue sky entrepreneurialism and flush out many of the issues that investors will inevitably question. It will shore up the business case and demonstrate that the growth path anticipated has been sufficiently thought through – a big issue for many entrepreneurs.
This planning stage is important because there are more ideas chasing capital than there is capital chasing ideas. You have one chance to pitch to investors and often you are competing with a range of unrelated or different opportunities.
Investment can be debt or equity investment. A debt investment is paid back in some form. There are many ways to structure debt investment from traditional interest payments to profit sharing.
Equity investment however is what most people think of when they think of investors. Equity investment is where the injection of capital buys equity in the business and often a degree of management participation or control. There are many ways of structuring these arrangements depending on the motivation of the parties involved – everything from a direct injection of cash to the provision of essential infrastructure and knowledge.
The most common investor for SMEs is family or friends investing out of loyalty and often a belief in the skill set of the business operators. The key problem with family and friends as investors is that often the details of the investment are loose. Trust is high and everyone has a belief, at the beginning, that the other party will act in their best interest. If family and friends are investing, you must put in place the same level of formality to the arrangement as if strangers were investing. It prevents confusion and upset.
Another reason for a high degree of formality is that on some occasions, the person looking to unwind or exit the arrangement in the future will not be the person who entered into it. It’s important to ensure that the exit provisions are clear in case someone dies.
Commercial investors come in many forms – angel investors, venture capitalists, private equity, or investment by associated parties. At the SME end of the market, angel and venture capitalists dominate.
Angel investors tend to operate at investment levels between $100k and $500k. Angels are generally individuals looking to for a great idea from a start up that they can capitalise on.
Private equity investors are at the other end of the scale and look to invest tens of millions – generally with established businesses reaching for another level and expectations of high growth. Private equity generally look for a compound internal rate of return on capital in excess of 30%. They look for high returns and an identified exit timeline. They want confidence in return on capital and ultimately, return of capital.
In general, commercial investors will seek a regimented approach – shareholders agreement, restrictions around what can be done without their consent, and a clear exit path. This is not an area you should approach without expert advice.
Some things to look out for
Insufficient formality around the agreement – misunderstandings and boardroom battles over direction take the focus off achieving growth
The wrong structure at the beginning – a bad deal won’t get better
Exit clauses – look at what the deal looks like at the end of the investment not just at the beginning
Not being able to fulfil the stated plan – be certain about what you’re offering
What are you giving away? Often business owners are so keen to secure the investment they forget about what they are giving away.
Control and how much the investor can achieve over time and the influence they have – you don’t want to be voted out of your own company once it’s successful
The level of management control and influence exerted – infighting and debates about direction will only take the focus off the big picture
(Courtesy of Knowledge Shop)
Posted on April 3, 2020
ATO amnesty for offshore investments
If you have not declared your offshore income or assets and wish to bring the cash or investments back to Australia now is the last chance! The ATO have unveiled a new offshore disclosure initiative named “Project DO IT.”
Anyone with unreported offshore income or assets would be wise to look at the details of this initiative and have their full disclosure accepted before 19 December 2014.
What are the ATO’s promises to eligible taxpayers:
- You are eligible to make a full disclosure. Some exclusions apply in exceptional circumstances. We can provide advice regarding these exclusions if necessary.
- If the ATO accepts the disclosure, it will not form an opinion of fraud or evasion. For most taxpayers this will mean assessment of undeclared income for the last four assessment years.
- ATO offers generous penalties –
10 % of the relevant tax shortfall with no penalties payable where the additional income disclosed in a given tax year is $20,000 or less.
- ATO confirms that they will not investigate the relevant disclosure for the purpose of prosecuting those taxpayers for a criminal offence.
The ATO seeks to highlight the increased chances of detection of foreign assets through increased access to information from foreign governments and financial institutions. Adverse consequences can flow when taxpayers are detected, rather than making a full voluntary disclosure within the allowed timeframe.
The ATO is also offering some concessions for taxpayers who wind up their offshore structures. This may present opportunities for individuals who are considering bringing assets back to Australia.