Question:
Our View - More thoughts on China’s economy and its effect on Australia
Answer:
Recent changes are outlined below:
July 1, 2022
- Loss carry back for eligible companies extended to cover 2023 income year.
- Professional firm profits diverted to the professional's spouse or other associates to be reviewed under new Tax Office guidance.
- Corporate collective investment vehicle legislative regime introduced.
- Temporary full expensing of depreciating assets extended to include 2023 income year.
- Depreciable assets of a company joining a tax consolidation group have tax costs setting rules modified for assets depreciated under temporary full expensing rules.
December 9, 2021
- Reduced Pandemic leave disaster payment of $750 per week made available through to 30 June 2022.
August 5, 2021
- COVID-19 Disaster Payments are non-assessable non-exempt income in 2021 income year and later. Payments phasing out as vaccination rates increase.
July 1, 2021
- New Investment Engagement Service launched for businesses planning significant new investments in Australia.
- Tax Office small business independent review service made permanent for businesses with turnover < $10m, for income tax, GST, exercise, luxury car tax, wine equalisation tax and fuel tax credits. Requested before amended assessment issued.
- Small business income tax offset for individuals increased to provide a reduction of 16% for a tax payable up to $1,000.
- Self-managed superannuation funds can now have six members, increased from four members previously.
July 1, 2021
- Some COVID -19 state and territory business grants received by small and medium enterprises are non-assessable, non-exempt income for 2021 and 2022 income years.
- Certain state, territory and local government financial support for individuals and businesses suffering COVID-19 impacts made exempt where businesses have turnover less than $50 million and only in eligible programs.
March 31, 2021
- JobKeeper payments scheme ended.
October 5, 2020
- Boosting apprenticeship commencements subsidy (up to 50% of apprentice's wages) is assessable income.
June 4, 2020
- Homebuilder grant for new home or substantial renovation construction is not subject to income tax.
April 1, 2020
- COVID-19 cash flow boost payments are not subject to income tax
Commentators are suggesting an eventual decrease in demand for raw materials over coming years. Will this see a correction to the two speed economy?
In September taxInsight we discussed some possible challenges in China’s economy and a report in the Australian Financial Review about a possible impact on the Australian mining industry in the event of a significant tightening of credit in China.
Business borrowing from banks in China is excessive by world standards. Total borrowings from banks is about 170% of China’s annual GDP. This compares with borrowings in USA which stand at 100%.
Why so much borrowing? It’s mostly for investment – factories, offices, machinery and so on. In contrast, excessive borrowing in USA and Europe has been mostly for consumption – personal rather than business needs.
Is China likely to sneeze, thereby causing Australia to catch cold? Not in the immediate future say some experts.
China suffered substantial falls in exports during the Global Financial Crisis but suffered only a slight reduction in GDP growth – from 11.4% to a still world beating 9.6%.
At this time, Chinas exports dropped 50% - from 8% to 4% of GDP. A surge in debt fuelled investment took up the slack and will continue to do so for so long as banks, with official encouragement, continue their relaxed credit policies.This could represent a problem in the medium to long term. China’s current growth model is said to be distorted by:
- Repressed pricing signals – artificially low exchange rate;
- Investment incentives; and
- Excessive reliance on investment to generate growth.
Eventually, increasing debt levels will result in banks either choosing to strictly curtail lending or being forced to do so by increasing bad debts.
A similar situation occurred in Japan a generation ago. The result was 20 years of little or no growth.
Michael Pettis considers that investment led recessions usually take a very long time for recovery – particularly for semi-controlled economies such as Japan and China whereas consumption led recessions such as is currently occurring in USA and Europe, are brutal but recovery takes place over a shorter time span.
Importantly, businesses should be aware that Australia’s current export boom at favourable prices will not continue indefinitely. Yet we can look forward to substantial increases in tourism arrivals from China as individual living standards and disposable incomes increase. The coming years may see a reduction in investment as banks reign in lending but consumption increases as living standards improve.
Not a good long term scenario for the mining industry but something for our beleaguered tourism industry to look forward to.
Many other fears and anxieties, based on a perceived incompetency of the Federal Government and the Eurozone debacle, are applying psychological negative pressure to the spending habits of individuals.
Businesses must therefore continue to adopt a cautious approach in forward planning.
