Investors have been nervous leading up to the federal budget. Government policy has a tendency to affect investment portfolios, for better or worse. This could come from changes to investments through taxes and regulations. Or it could result from changes to spending in certain industries.
Now that the budget is here it’s much easier to assess what it could mean for your portfolio.
The biggest opportunity for investors looking ahead may lie in retail. That’s largely down to the government’s new tax break for small businesses. Let me explain why.
What the $20,000 tax break means for small businesses
To understand why retail stocks could rise, we first need to look at the new small business tax break.
The plan is to provide a $20,000 tax break for business with turnover of less than $2 million a year. The new law will take immediate effect, and will apply until June 30, 2017.
The government has pinned their hopes on entrepreneurs to stimulate the economy. They want them to start spending more. But the tax break indicates that it’s equipment — and not new staff — that the government wants businesses to focus on.
Small businesses can now buy equipment worth less than $20,000 — and relevant to their trade — to offset their tax bills. These purchase will be fully deductible.
And it doesn’t put a limit on how many items you can purchase either. All businesses need to ensure is that each individual item costs less than $20,000. If your business needs a computer, that’s now 100% fully tax deductible. What about a car? That’s also fully deductible.
It’s easy to see how this tax incentive will spur business spending on goods.
Why the tax break makes retail companies a good investment opportunity
The new law matters to investors because it opens up opportunities in retail stocks.
Just think about it. Any company selling whitegoods or furniture is set for an increased demand for their products. The Financial Review says a retailer like Harvey Norman [ASX:HVN] is one company that could benefit from this heightened demand. Their shares are up by $0.27 cents since last night (trading at $4.67 as of May 13).
Machinery and tools retailers could also see an increase in trade according to the AFR. They believe Wesfarmers [ASX:WES], which owns Bunnings, will see stocks appreciate in the future. Their shares are up by $0.40 cents overnight (trading at $43.90 as of May 13).
And that’s just scratching the surface. Many companies selling business-relevant equipment are likely to see increased trade as a result of the new tax break. The AFR says this is likely to result in higher share prices across the retail sector.
Investors will have the final say on how far retail stocks rise over the next few years. But it will depend on how successful the new tax break is in increasing spending.
Mat Spasic, Bernd Struben,
Contributor, The Daily Reckoning Managing Editor, The Daily Reckoning
PS: Every stock investment, no matter how good it looks, has an element of risk attached to it. As Daily Reckoning Managing Editor Bernd Struben would say, more risks equals…more risk.
That’s why he’s written a free report, ‘Three Essential Rules to Boost Your Profits and Lower Your Risks’, to help you understand the golden rules for creating wealth in the stock market. To find out how to download his report, click here.