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Temporary Investment Allowance For Business 2009

Beware the Merchants of Doom

Craig James – Chief Equities Economist CommSec (Author)

Job Market Forecasts

There are a number of doom and gloom scenarios being painted for the job market. CommSec assesses
how the scenarios stack up.

What does it all mean?

While it’s easy to make doom and gloom predictions on the economy, the hard part is making the figures stack
up. For instance there are suggestions that unemployment may rise from current levels near 4 per cent to
10 percent by the end of next year. But it is actually extraordinarily difficult to replicate this forecast in economic models.
To achieve 10 per cent unemployment by the end of 2009/early 2010, the economy would need to lose a record 400,000 jobs.
And the annual rate of job decline would have to be the biggest the economy has ever faced. Not only is the scenario
mathematically difficult, it is unrealistic given that many businesses are still experiencing an unsatisfied demand for staff.
Only three months ago, the common complaint by business was that it was difficult to attract and retain staff. It is difficult
to believe that staff so keenly sought would be let go so quickly.
The real risk for Australia is that the hysterical talk of job losses and recession becomes self-fulfilling. In an environment
characterised by fear and uncertainty what is required is well-justified and reasoned analysis. Therhetoric of recession is
actually far different from the reality because Australia’s economic fundamentals are just so positive.
CommSec expects a modest lift in the jobless rate to around 5 per cent, a similar result to the economic slowdowns experienced
in 1986,1996 and 2001.
f the job market holds up as we expect, then so will the housing market. Gloom and doom projections for thehousing market
are dependent on gloom and doom forecasts for unemployment.

Slowdowns, recessions and jobs

There have been five periods over the past 30 years when the unemployment rate rose by more than half a percent.
In the two recessions, 1982/83 and 1991, unemployment rose by around 5 percentage points. In the other slowdowns,
the jobless rate rose by between 0.6-1.2 percentage points.

What happened in the 1982-83 recession?

Interest rates were lifted from around 10 per cent in early 1980 to 21.4 per cent in April 1982 (up almost 7 percentage
points from November 1981). A severe drought also impacted the economy over 1982.
The economy contracted from September quarter 1982 to June quarter 1983. The 3.4 per cent contraction of
the economy over 1982/83 was the most severe downturn since the Depression of the 1930s.
The unemployment rate rose from 5.4 percent in June 1981 to 10.3 per cent in May 1983. The participation rate fell
from 61.4 per cent in September 1981 to 60.4 per cent in May 1983.
Over 220,000 jobs were lost in the year to April 1983, a decline of 3.4 per cent.

Over 1984 and 1985 interest rates were lifted from around 10.5 per cent to 19.5 per cent.
The job market slowed over 1986. The unemployment rate rose from 7.5 per cent in June 1986 to 8.2 per cent in December
1986. Annual employment growth slowed from an unsustainable rate of 373,800 or 5.6 per cent in April1986 to 107,800 or
1.5 per cent in April 1987. The participation rate remained around 62.0 per cent.

What happened in the 1991 recession?

Basically it was a typical boom and bust. Interest rates were slashed after the 1987 sharemarket crash. But the economy
didn’t collapse, rather a property boom developed.
Over 1988 and 1989, economic growth rates consistently hit 5-6 per cent. In response, the Reserve Bank was forced to lift
the cash rate to the extraordinary highs of 18 per cent in order to slow the economy and constrain inflationary pressures.
The cash rate fell from 18 per cent to 8.5 per cent over 1990 and 1991.
The sharp lift in cash rates was successful in slowing the economy – the problem is that it was too successful.
The economy contracted in the June and September quarters of 1990, was flat in the December quarter, then fell
in the March and June quarters of 1991. In the year to June 1991, the economy contracted by 1.6 per cent.
The unemployment rate rose from lows of 5.6 per cent in December 1989 to 10.1 per cent in December 1991
before ultimately hitting 10.9 per cent In December 1992. Annual job losses peaked at 339,000 in the year to July1991.
The labour force participation rate fell from 64.1 per cent to 62.4 per cent.
The Australian dollar didn’t fall to support the export sector, averaging US78 cents over 1990 and 1991.

Another slowdown in 1996
The US and many parts of Europe experienced recession in the technology boom/bust period of 2001, but
Australia didn’t. One reason was that Australia was less exposed to the technology sector. In addition, the falling
Australian dollar supported the export sector while the Reserve Bank was also quick to cut interest rates.
From November 1999 to August 2000 the Reserve Bank lifted interest rates from 4.75 per cent to 6.25 per cent.
Over 2001 the Reserve Bank cut the cash rate from 6.25 per cent to 4.25 per cent. The Aussie dollar fell from
US65 cents in December 1999 to US51 cents in October 2000. The Aussie dollar consistently hovered near
US48-51 cents in 2001, hitting a record low of US47.75c in April 2001.
The unemployment rate rose from lows of 6 per cent in October 2000 to 7.2 per cent in October 2001. But the
jobless rate quickly fell to 6.2 per cent in July 2002
The cash rate was lifted from 4.75 per cent in August 1994 to 7.50 per cent in December 1994 and then left at
that level until July 1996. The sustained high level of interest rates slowed the economy over 1996.
The unemployment rate hit a low of 7.9 per cent in December 1995, lifting to 8.5 per cent in February 1997.
Employment growth slowed from an annual pace of 4.9 per cent or 386,000 in the year to April 1995 to –0.1 per cent
or loss of 10,200 jobs in the year to August 1997. The participation rate eased from 63.8 per cent to 63.0 per cent.

And Australia slowed again in 2001 but didn’t go into recession?
The US and many parts of Europe experienced recession in the technology boom/bust period of 2001, but Australia didn’t.
One reason was that Australia was less exposed to the technology sector. In addition, the falling Australian dollar supported
the export sector while the Reserve Bank was also quick to cut interest rates.
From November 1999 to August 2000 the Reserve Bank lifted interest rates from 4.75 per cent to 6.25 per cent.
Over 2001 the Reserve Bank cut the cash rate from 6.25 per cent to 4.25 per cent. The Aussie dollar fell from US65 cents in
December 1999 to US51 cents in October 2000. The Aussie dollar consistently hovered near US48-51 cents in 2001, hitting
a record low of US47.75c in April 2001.
The unemployment rate rose from lows of 6 per cent in October 2000 to 7.2 per cent in October 2001. But the
jobless rate quickly fell to 6.2 per cent in July 2002.

What is the current state of the job market?
The unemployment rate stood at 4.3 per cent in September, just up from the 34-year low of 3.9 per cent set inFebruary 2008.
The participation rate is hovering near record highs, currently standing at 65.1 per cent, down from the record high of 65.5 per
cent in April 2008. Annual employment growth stands at 1.9 per cent, below the decade average of 2.2 per cent.
Over the past year, just over 200,000 jobs were created. The working age population grew by 1.86 per cent in the year to September,
the highest in 19 years.
The unemployment rate was lowest in the Northern Territory (2.6 per cent), ACT (2.9 per cent), Western Australia (3.0 per cent),
Queensland (3.7 per cent) and Tasmania (3.8 per cent).

Job market scenarios
If annual job growth were to slow from the current annual average of 2.6 per cent to around 1.5 per cent over 2009, the
unemployment rate would gently edge higher to 4.6 per cent by the end of 2009.
If annual job growth were to slow from the current annual average of 2.6 per cent to around 1.0 per cent over 2009, the unemployment
rate would lift to 5.2 per cent by the end of 2009.
If annual job growth were to slow from the current annual average of 2.6 per cent to around 0.0 per cent over 2009, the
unemployment rate would lift to 6.0 per cent by the end of 2009. This scenario involves sharper job losses so it is assumed
that the participation rate would also ease 0.5 percentage points.
To achieve an unemployment rate of 10 per cent by late 2009/early 2010 would require monthly job losses averaging 35,000
over the next 16 months. Employment would need to fall by over 400,000 in the period with annual job contractions averaging
3.5 per cent over the six months from August 2009. The participation rate would fall 1 percentage point – similar to past recessions.

Implications
If young people weren’t in such demand, if immigration wasn’t being fuelled by labour demand and if businesses hadn’t been
actively seeking staff in recent months, it may have been possible to believe scenarios projecting a sharp rise in the jobless rate.
But these factors have indeed been in operation. In addition, employment hasn’t been growing at unsustainable rates, prompting a
need for a correction.
The domestic and global economies are slowing, so it is reasonable to assume a modest lift in the jobless rate.But a deterioration
in the job market similar to that experienced in the recessions of 1982-83 and 1991 is not expected.
Businesses are expected to hoard the workers that they have actively sought over the past year. If businesses let newly-acquired
workers go, they would have a lot of difficulty getting them back again in more buoyant times. However we do expect that
businesses will be more reluctant to take on additional staff in the current environment.
A modest lift in the jobless rate is not expected to have a material impact on either retail or housing demand.
The Reserve Bank is poised to slash the cash rate from 6.00 per cent to 4.50-5.00 per cent over the next six months to boost growth.
The government has already provided a stimulus package and is well placed to boost spending further if required. Monetary and
fiscal stimulus will support both the housing and job markets

Craig James – Chief Equities Economist CommSec (Author)

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KSG Secure Virtual Safe Deposit Box

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    confidential documents increasing ease of access to important information. You can also
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details against. You are able to code and return the transaction report to us online.

Secure Virtual Safe Features

Provides you with a secure area from wherever you have access to the internet.
Ability to share file with us e.g. your tax returns, BAS statements and other financial documentation.
You can send files to us via your secure area - no worries about oversized emjails being blocked.
We are able to upload BankLink transactions so that you can enter details on line via CodeIT
and return to us.
You can schedule content to be automatically removed on a specific date.
Documents are categrised within a folder structure, making it easy for you to locate a specific document.
You are able to subscribe to specific topics of information which will be delivered to your Safe Deposit Box.
You will be notified of its existance via a nominated email account.

Multiple Safe Deposit Boxes

We are able to link you to multiple safe Deposit Boxes to meet your requirements for both business, personal
and other reasons.
You will be assigned anunique login and password which can be changed whenever you wish. KSG will propt you
to consider changing your password from time to time for tighter security.
You are able to authorise one user or a group of users to any individual Secure Safe Deposit Box.
Each user will have a unique Unser Name and Password and access can be limited to certain areas with your
secure area.
The facility has an extensive 'Search' enginge attached and is which allows you to search for a document by File Name,
Date, Document Type or just using a Key Word.
When you upload a document to your Secure Safe Deposit Box that you wish us to view, we will automatically sent an
email notifing us. If you wish to just place it within your unique filing system it can be stored securly and only accessed
by you or those authorised by you.

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TEMPORAY INVESTMENT ALLOWANCE FOR BUSINESS

(Care this legislation has not yet been passes by the Australian Government)

The tax initiative will be available to small business (annual turnover of $2m or less) for purchasing eligible assets of $1,000 or more. Other business can receive the same deductions for eligible assets with a cost greater than $10,000. The extra tax deduction is NOT available to small businesses entities or STS taxpayers that claim their depreciation deductions using the general STS pool or long life STS pool.

Eligible Assets are, All new tangible assets, and,

New expenditure on existing assets used in carrying on a business, whit the exception of the following.

- Land;

-Trading stock;

-Intangibles and rights;

-Computer software (as purchase is a right to use software);

-Capital works such as adding a new building, a room, a garage, patio, decking, gazebo, sealed driveway, retaining wall, fence, adding or removing internal walls, etc.

The threshold test ($1,000 or $10,000) must be met on a per asset basis – e.g. 10 computers costing $950 will not qualify despite total cost exceeding the threshold) after GST has been deducted from purchase price. The asset must also be NEW and this would seem to disallow demonstration assets (e.g. demonstration vehicle) being sold or leased acquiring the additional tax break. An asset purchased by HP is an asset owned by the entity.

Important Dates that affect rate.

Year

Acquired after

Acquired before end of

Installed before end of

Additional 30% deduction

13/12/2008

30/06/2009

30/06/2010

Additional 10% deduction

1/07/2009

31/12/2009

31/12/2010

Example

If you acquired and installed an eligible asset on 1 March 2009 which had a cost base of $20,000 that is fully used for a taxable purpose with an effective life of 5 years – the depreciation would be:-

Year

Standard Depreciation 20%
Prime Cost Methodology

Additional Depreciation

Total claimable Deprecation
PC methodology

1^st- (122 days)

1,337

6,000

7,337

2^nd

4,000

4,000

3^rd

4,000

4,000

4^th

4,000

4,000

5^th

4,000

4,000

Final year

2,663

2,663

Total

20,000

6,000

26,000

For further information or questions on individual cases please contact our offices and we will be able to assist you.

The Value of Advice: A Case study

Good financial advice can be as much about steering clear of disasters as it is about meeting goals.

Marina and Rick Carr aged in their 50's, don't consider themselves risk takers, so they were attracted by the ads
they saw in the newspapers for a new 'low-risk' investment in debentures.

"Earn up to 9.75% pa with certainty" the add exclaimed. Marina had just received a $100,000 inheritance and
thought the investment would be ideal.

But when she told her financial adviser, John Scully of KSG Financial Planners to go ahead and make the
investment, he strongly advised against it.

"I was very sceptical of the company" he says. "They were lending money to property developers who couldn't
obtain finance easily elsewhere.

Just over two years later, the company crashed and almost 9,000 investors lost around $200 million. Most of the
investors were older and retired or close to retirement, looking for a safe place for their savings.

"The Company's clever marketing campaign and dubious promises of safe returns misled many people" says John.

Marina acknowledges that without John's advice,her inheritance would be gone. "When the company collapsed, we
realised how much we could have lost. John saved us a great deal of money and heartache.

Instead of investing in speculative property developments, John invested Marina's inheritance in blue chip Australian
share based superannuating and allocated pension portfolio. During the time Marina would have been invested in the
failed investment company, her portfolio delivered very attractive returns.