Riding the waves of uncertainty in 2017
The election of Donald Trump as President of the United States has certainly been one of the big surprises of 2016. This has already had an impact on our region with the United States pulling out of the Trans-Pacific Partnership (TPP) which would have seen most tariffs and other restrictive policies on agricultural products and industrial goods eliminated or reduced. Australia, like many other Asian nations in the Trans-Pacific Partnership, have signalled that they would shift their attention to China’s Regional Comprehensive Economic Partnership (RCEP) that would include reducing tariffs, but which lacks the requirement for members to take steps to liberalise their economies, protect labor rights and intellectual property and to establish environmental standards.
While the status of our trade agreements with other nations remains in the air at the moment, it is definitely worth keeping in mind that our trade relationship with China is $150 billion in two-way trade, of which almost $86 billion is in exports. The United States is our second largest two-way trading partner at around $69 billion and our third largest export market at $22 billion. Even though TPP appears to be dead, there are obvious opportunities to pursue with China that can benefit Australian businesses.
However, the impacts of the Trump administration’s agenda on Australia do not end with trade. President Trump has stated his plan to cut the US Federal company tax rate from 35% to boost competitiveness. If the US drops its company tax rate below 30%, then Australia will be one of the most expensive countries in the region to do business. This would reduce our competitiveness on the global market. In the 2016-17 Federal Budget the government has announced their intention to progressively reduce Australia’s company tax rate to 25% for all businesses. Unfortunately, this measure has been stalled in Parliament due to Labor and other parties and shows little promise of proceeding.
There is also uncertainty nationally as well. Economists widely predict that residential construction and exports will slow in 2017.
The government has several measures to encourage businesses to increase productivity through innovation, which include:
- Small business rollover relief that removes the tax impediments associated with changing your business structure
- Tax incentives for investors in early stage innovation companies
- Tax incentives for early stage venture capital limited partnerships
- More generous employee share scheme arrangements, particularly for high growth start-ups
- Immediate deductions for start-up businesses
- Reduced company tax rates for small businesses
- R & D incentives for innovative companies
We suggest that you discuss any of these measures with your accountant to see if they can apply to your situation and to help you increase your business’ productivity.
Additionally, all business operators need to look at the trends in their industry. For example, advances in technology in particular will make some operators unsustainable and give others the capacity to change the nature of their sector. A prime example of this is Uber. The real estate agency industry may be next with companies like Purplebricks.
The take home message is that you cannot rely on the stability of your business model to sustain over time.
Another area that will see significant change and a measure of uncertainty relates to superannuation regulations with many of the reforms coming into effect on 1 July 2017.
The biggest impact of these reforms is likely to be on those with large super balances close to or exceeding $1.6 million. While specifically targeted at the wealthy, this measure can affect many SME business operators who utilise the business real property exemption to hold their business premises inside their SMSF, which can significantly increase the asset value of the fund. It is essential to have current valuations for your assets to know exactly where you stand if you are close to or exceed the $1.6 million cap.
It also remains unclear as to how capital gains tax will apply where assets supporting pension payments exceed the new $1.6 million pension transfer limits and need to be moved back into accumulation phase.
We advise against knee-jerk reactions in regards to the management of your fund’s assets, such as quickly selling assets pre-1 July, which may result in your fund being in a much worse position. It is always good to seek good advice from your accountant or financial adviser in relation to any concerns or plans that you have surrounding your superannuation fund.
Although 2017 is shaping up to have quite a bit of uncertainty in many areas of the global, national and regulatory environments, it also presents a time to think strategically and to take advantage of the opportunities that are available to you and that will arise throughout the year.